<PAGE>
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 FOR THIS FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 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 Identification No.)
incorporation or organization)
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 NO X
------- -------
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
-----------
As of November 28, 1997, 6,143,176 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 28,
1997, which was $25.875) was $106,086,672. 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, 1997, 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 20, 1998, 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.
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, 1997, approximately 63% of the
Company's total revenues were derived from its private client brokerage
activities, 22% from institutional brokerage activities and 15% 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 33 of the Company's 1997
Annual Report to Shareholders and this information is incorporated herein by
reference.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Individual Client Brokerage
IJL presently serves individual investors through its Private Client
Group which has 62 offices located in North Carolina (33), South Carolina (10),
Georgia (16), and Virginia (3). Revenues from private client 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 individual clients in lieu of
commissions or sales credits on each transaction. At September 30, 1997,
approximately 23% of the Company's Private Client Group's 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 Financial Advisors, LLC ("CaptTrust"), a NASD
registered broker-dealer, was formed to provide specialized financial consulting
and asset management services to both individual and institutional clients.
CapTrust's application for NASD membership was approved in November 1996.
Organized as a limited liability corporation, CapTrust has both voting and
non-voting member units. The strategy of CapTrust is to attract top producing
financial advisers who serve as members of the firm rather than employees.
Members purchase non-voting ownership interests in CapTrust upon joining and
thereinafter are entitled to a portion of the earnings of the firm. At September
30, 1997 all of CapTrust's voting units and 99.3% of its non-voting units are
owned by two wholly-owned subsidiaries of the Company. CapTrust earns a
majority of its revenues through asset-based wrap fees in addition to normal
transaction-based commissions from clients throughout the United States. IJL
clears trades for CapTrust on a fully-disclosed basis and receives certain
execution and clearance fees from CapTrust in that role. The Company contributed
$2 million of capital to this venture during the current fiscal year and expects
to contribute an additional $2 to $3 million within the next year. At September
30, 1997 CapTrust has 3 members and 2 offices.
Client Financing
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 individual and institutional commissions and sales credits in listed
and OTC stocks. IJL maintains a core staff of 14 professionals to provide
investment recommendations and market information on selected regional and
national companies. These analysts follow approximately 140 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 Client 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.
A significant portion of the commission revenues from transactions in
corporate securities are derived from institutional clients for whom IJL
provides independent research products and services, as well as brokerage
services. These products and services are procured from third parties to which
IJL may be contractually obligated, irrespective of whether it receives
commissions from the beneficiary clients. Commissions paid by clients and money
managers 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 200 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 individual 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 private client 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 26 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 four venture capital funds. Augmenting IJL's capital formation capabilities
in the public markets is a private finance group 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
In July 1997, the Company exited the individual managed portfolio
business previously effected through its subsidiary, Sovereign Capital
Management, Inc. d/b/a Sovereign Advisers, Inc. ("Sovereign"). Sovereign's
assets and management rights were sold, and a new subsidiary, IJL Capital
Management, Inc. ("IJL Capital"), was formed to house the advisory functions of
the Keen Vision Fund, LP ("Fund"), a "net hedge fund" investment partnership
introduced in January 1997. Aggregate net assets in the Fund approximated $34
million at September 30, 1997. In its capacity as investment adviser to the
Fund, IJL Capital receives quarterly management fees and an annual
performance-based distribution. IJL Capital will also serve as investment
adviser to a second hedge fund, Keen Vision Fund II, LP, which was formed in
October 1997 under a similar arrangement.
Real Estate
During the 1970s and 1980s, certain subsidiaries of the Company were
engaged in originating private placements and public offerings of limited
partnership interests in real estate programs for sale to clients as well as
holding proprietary interests in historical restoration projects of real estate
properties, principally office facilities. These subsidiaries are currently
involved in the oversight and disposition of these interests. The Company 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 firm's technology focus has shifted to
increased use of Internet technology and process reengineering. Major projects
completed during the 1997 fiscal year include the development of a firm-wide
intranet and an expansion of the image processing system. The major projects in
the coming year will continue to focus on providing more efficient and effective
information to financial consultants' desktops such as on-line order entry,
performance reporting, and product support information via the intranet.
Moreover, a new financial reporting system will be implemented in the 1998
fiscal year.
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, 1997, the Company had 1,320 employees, including
approximately 520 brokers engaged in sales to individual and institutional
investors, and approximately 225 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 $41.0 million
at September 30, 1997, was 14.3% of its aggregate debit balances and
approximately $35.3 million in excess of its minimum regulatory requirements, as
such excess capital and balances are computed under the Rule.
As a registered broker dealer and member of the NASD, CapTrust is also
subject to the SEC's Rule 15c3-1. Under Rule 15c3-1, CapTrust is prohibited from
engaging in any transactions when its "net capital" is less than $250,000 or
1/8th of its "aggregate indebtedness", whichever is greater, as these terms are
defined in the rule. As of September 30, 1997, CapTrust's net capital was
$695,000 and approximately $445,000 in excess of its minimum regulatory
requirement. Beginning in early fiscal 1998, CapTrust's net capital requirements
will ease to 1/15th of its aggregate indebtedness in accordance with Rule
15c3-1. As noted above, it is anticipated that the Company will provide
additional funding as needed during 1998.
PAGE 8
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
ITEM 2. PROPERTIES
The Company's headquarters are located in Charlotte, and it serves
individual and institutional clients through sales offices located in North
Carolina, South Carolina, Virginia, Georgia, Texas, California, Massachusetts,
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, 1997, which is incorporated
herein by reference. Capital assets include an investment property in Orlando,
Florida. It is anticipated that this property will be disposed of in fiscal
1998. In addition, the Company intends to purchase in fiscal year 1998 the
office building which is currently occupied by the back office and other support
functions of IJL. 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 35 of the 1997 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 October 1996, the Company's Board
of Directors declared a $.04 per share quarterly dividend and declared quarterly
dividends of the same amount through July 1997. In October 1997, the Company's
Board of Directors increased the quarterly dividend to $.05 per share. 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.
PAGE 9
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
As of November 28, 1997, the Company had approximately 930 shareholders of
record.
ITEM 6. SELECTED FINANCIAL DATA
The "Five Year Financial Summary" on page 19 of the 1997 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 1997 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 33 of the 1997 Annual Report to Shareholders, are incorporated herein by
reference.
Quarterly "Supplementary Financial Data" is presented on page 19 of the
1997 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 3
through 5 of the Proxy Statement, dated December 16, 1997, to be used in
connection with the Company's Annual Shareholders' Meeting to be held January
20, 1998, 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.
PAGE 10
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Douglas R. Aldridge, 43, is a Senior Managing Director of IJL and the
head of its Private Client Group. Mr. Aldridge joined IJL in 1988 and has served
as a retail financial consultant, branch manager of the Atlanta Resurgens branch
office, a regional manager and as Associate Director of the Private Client
Group. In 1996 he was named Managing Director of the Private Client Group and
was elected a Senior Managing Director in 1997.
Thomas A. Avery, 44, is a Senior Managing Director and co-heads the
Equity Capital Markets Group. Mr. Avery joined IJL in 1995 as head of the
Corporate Finance office in Atlanta, then became Senior Managing Director
overseeing Investment Banking in 1996. He added shared responsibility for the
Equity Capital Markets Group in 1997 and was elected to the board of IJL in
April 1997.
Edwin A. Dalrymple, Jr., 47, is a Senior Managing Director of IJL and
is an executive 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. In 1997, he was named President of CapTrust.
Harvey D. Harrelson, 48, 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 75 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, 49, is a Senior Managing Director of IJL and Director
of Operations. He joined the firm in 1973 as the manager of the Margin
Department, 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, 45, 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., 39, 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. In
those capacities, he had executive responsibility for information technology,
strategic planning, and several other administrative support functions. He was
elected a Senior Managing Director in 1996. In 1997, he began serving as Chief
Operating Officer of CapTrust. He was named Chief Financial Officer of the
Company in October 1997.
PAGE 11
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Gerald J. Simmons, 52, is a Senior Managing Director and co-heads the
Equity Capital Markets Group. Mr. Simmons joined IJL in 1991 as head of Equity
Trading. In 1997, he was elected a Senior Managing Director with responsibility
for the Institutional Equity Sales and Trading, NASDAQ/OTC Trading, Equity
Syndicate and Equity Research. He was elected to the board of IJL in April 1997.
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 9
through 13 of the Proxy Statement, dated December 16, 1997, to be used in
connection with the Company's Annual Shareholders' Meeting to be held January
20, 1998, 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 6 through 8 of the Proxy Statement,
dated December 16, 1997, to be used in connection with the Company's Annual
Shareholders' Meeting to be held January 20, 1998, is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Related Transactions" on page 12 of
the Proxy Statement, dated December 16, 1997, to be used in connection with the
Company's Annual Shareholders' Meeting to be held January 20, 1998, is
incorporated herein by reference.
PAGE 12
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
PART IV
<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(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 1997
Annual Report to Shareholders:
Consolidated Statements of Financial Condition as of
September 30, 1997 and 1996 24
Consolidated Statements of Operations for the years ended
September 30, 1997, 1996 and 1995 25
Consolidated Statements of Cash Flows for the years
ended September 30, 1997, 1996 and 1995 26
Consolidated Statements of Changes in Shareholders' Equity
for the years ended September 30, 1997, 1996 and 1995 27
Notes to Consolidated Financial Statements 28-33
Data submitted herewith:
Report of Independent Accountants 18
Financial Statement Schedule:
II - Valuation and Qualifying Accounts 19
</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 33, and page 35), the 1997 Annual Report to Shareholders is not deemed
filed as part of this report.
PAGE 13
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Exhibits:
(i) The following exhibits are filed as part of this report:
Exhibit
10 Material Contracts - Long-Term Incentive Plan
11 Statement Regarding Computation of Per Share Earnings
13 1997 Annual Report to Shareholders
21 Subsidiaries
23 Consent of Independent Accountants
(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 14
<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 15
<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
1997.
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 16
<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 17
<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, 1997 and
1996, and for each of the three years in the period ended September 30, 1997
which financial statements are included on pages 24 through 33 of the 1997
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 13 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, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1997, 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.
/s/ Coopers & Lybrand L.L.P.
Charlotte, North Carolina
October 21, 1997
PAGE 18
<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, 1997
Provision for real estate charges:
Asset valuation accounts $8,534,826 180,261 - $8,715,087
Reserves 101,886 - - 101,886
Reserves for uncollectible client
accounts: Asset valuation accounts 343,294 76,488 (102,836)B 316,946
Reserve for lease obligations 18,016 84,127 (93,209)A 8,934
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) B 101,886
(71,250) A
Reserves for uncollectible client
accounts: Asset valuation accounts 475,918 276,773 (409,397) B 343,294
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) B $7,433,789
Reserves 250,000 - - 250,000
Reserves for uncollectible client
accounts: Asset valuation accounts 262,235 308,477 (94,794) B 475,918
Reserve for lease obligations 109,504 57,697 (129,884) A 37,317
</TABLE>
A - Payments charged to reserve
B - Specific account charge-offs
PAGE 19
<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 23, 1997.
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>
Signature Title Date
<S> <C> <C>
/s/ James H. Morgan
________________________________ President, Chief Executive Officer
James H. Morgan and Director December 23, 1997
/s/ Edward C. Ruff
________________________________ Executive Vice President - Chief
Edward C. Ruff Operating Officer and Director December 23, 1997
/s/ Lewis F. Semones, Jr.
________________________________ Chief Financial Officer
Lewis F. Semones, Jr. (Principal Financial Officer) December 23, 1997
/s/ C. Fred Wagstaff, III
_________________________________ Assistant Vice President
C. Fred Wagstaff, III (Principal Accounting Officer) December 23, 1997
/s/ Parks H. Dalton
_________________________________ Chairman of the Board of Directors
Parks H. Dalton and Director December 23, 1997
/s/ Claude S. Abernethy, Jr.
_________________________________ Director December 23, 1997
Claude S. Abernethy, Jr.
/s/ Dudley G. Pearson
_________________________________ Director December 23, 1997
Dudley G. Pearson
/s/ Grady G. Thomas, Jr.
_________________________________ Director December 23, 1997
Grady G. Thomas, Jr.
</TABLE>
PAGE 20
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10 Material Contracts - Long-Term Incentive Plan
11 Statement Regarding Computation
of Per Share Earnings
13 1997 Annual Report to Shareholders
21 Subsidiaries
23 Consent of Independent Accountants
PAGE 21
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
LONG-TERM INCENTIVE PLAN
AS AMENDED AND RESTATED
EFFECTIVE OCTOBER 21, 1997
This document amends and restates the terms and conditions of the
Interstate/Johnson Lane, Inc., Long-Term Incentive Plan adopted July 16, 1996,
retroactive to October 1, 1995, and shall be referred to as the
"Interstate/Johnson Lane, Inc. Long-Term Incentive Plan as Amended and Restated
Effective October 21, 1997" (the "PLAN").
1. Purpose. The purpose of the Plan is to reward and retain certain senior
executives of Interstate/Johnson Lane, Inc. (the "CORPORATION"), and its
subsidiaries who are largely responsible for the Corporation's growth and
financial success and to increase those persons' proprietary interest in
the Corporation, giving them a greater opportunity to share in the
Corporation's future success through the ownership of shares of the
Corporation's common stock.
2. Administration. The Plan shall be administered by the Compensation and
Plans Committee (the "COMMITTEE") of the Corporation's Board of Directors
(the "BOARD"). A majority of the entire Committee shall constitute a quorum
and the action of a majority of the members present at any meeting at which
a quorum is present shall be deemed the action of the Committee. In
addition, any decision or determination reduced to writing and signed by
all of the members of the Committee shall be as effective as if it had been
made by a majority vote at a meeting duly called and held. Subject to the
provisions of the Plan, to the provisions of the Corporation's by-laws, and
to any terms and conditions prescribed by the Board, the Committee may make
such rules and regulations for the conduct of its business as it shall deem
advisable. The Committee shall hold meetings at such times and places as it
may determine. The interpretation and construction by the Committee of any
provisions of the Plan, with respect to grants and awards to employees
hereunder, or of any benefit granted under it shall be final unless
otherwise determined by the Board.
3. Eligible Persons. Up to fifteen senior executives of the Corporation and
its subsidiaries, including the Chief Executive Officer of the Corporation,
shall be eligible to receive grants under the Plan. Those persons (the
"RECIPIENTS") shall be designated by the Committee prior to September 30,
1998 and the number of shares of the Corporation's common stock granted to
each of them shall be determined by the Committee not later than thirty
(30) days following the Corporation's fiscal year ending September 30,
1998. In making such designations and grants, the Committee shall take into
account such factors as the Committee, in its sole discretion, shall deem
appropriate, including, among other things,
<PAGE>
recommendations of the Chief Executive Officer of the Corporation regarding
grants to persons other than himself. The Committee in its sole discretion
may include among the Recipients otherwise eligible executives (or the
estate, beneficiary or legal representative of any such executive) who die
or become disabled prior to September 30, 1998.
4. Grants. All grants to Recipients shall be made in the form of shares of the
Corporation's treasury common stock and, except as provided in Section 7,
all such shares shall be unrestricted. No grant to any one individual shall
be more than the lesser of 50% of the total number of shares granted, or
325,000 shares.
5. Number of Shares of Stock to be Granted. The total number of shares to be
granted by the Committee shall be based on the Corporation's consolidated
aggregate earnings per share ("EPS") over the October 1, 1995, through
September 30, 1998, period (the "MEASUREMENT PERIOD") in accordance with
the following schedule without interpolation:
Aggregate Primary EPS Shares to
for the Measurement Period be Granted
-------------------------- ----------
$3.51 100,000
$3.84 150,000
$4.20 200,000
$4.56 250,000
$4.89 300,000
$5.25 350,000
$5.61 450,000
$5.94 550,000
$6.30 650,000
Aggregate EPS over the Measurement Period shall be determined in accordance
with generally accepted accounting principles applied on a consistent basis
("GAAP"), provided that the expense accruals required under GAAP during the
Measurement Period for the potential shares issuable under the Plan shall
not be considered in calculating the aggregate EPS which will determine the
total number of shares to be granted under the Plan.
6. Cash Election. At the time of any initial grant of unrestricted shares,
each Recipient shall have the opportunity to elect in writing, on a form
provided by the Committee, to receive up to fifty percent (50%) of the
grant of unrestricted shares in cash in lieu of shares. For the purpose of
the cash election, the shares shall be valued at the average New York Stock
Exchange ("NYSE") closing price for the Corporation's common stock during
the last ten trading days in September 1998. Each Recipient shall have
until the later of (a) October 31, 1998, or (b) thirty (30) days from the
date he receives notice of his grant to make the election to receive cash
in lieu of shares. For the purpose of any cash election made by a Recipient
pursuant to Section 8(a)
2
<PAGE>
or 8(b), the shares shall be valued at the average NYSE closing price of
the Corporation's common stock for the ten trading days immediately
preceding the date of the notice of grant by the Committee.
7. Restricted Shares. (a) Designation. If, during the Measurement Period, the
Company determines that, upon application of GAAP, the prospective grants
of unrestricted shares as of the end of the Measurement Period will require
a pre-tax charge for any fiscal quarter in excess of twelve percent (12%)
of the pretax profits before such charge, the Committee and management may
reduce those charges to a level deemed appropriate to the Committee, but
not below twelve percent (12%), by designating an appropriate number of the
shares that may be granted under the Plan as restricted, rather than
unrestricted, shares. The number of restricted shares so calculated shall
be allocated among the Recipients by the Committee at the time grants are
made by the Committee, taking into account such factors as the Committee,
in its sole discretion, shall deem appropriate, including, among other
things, recommendations of the Chief Executive Officer of the Corporation
regarding grants to persons other than himself.
(b) Restrictions. The grant agreement pertaining to restricted
shares granted to a Recipient shall provide that, except as provided in
this Section hereafter, the shares shall be forfeited if the Recipient is
not employed by the Corporation or a subsidiary thereof for the duration of
the period ending September 30, 2001. No grant of restricted shares shall
be effective until the Recipient thereof has acknowledged in writing, in a
grant agreement form provided by the Committee for that purpose, his
understanding and acceptance of the terms and conditions of that grant.
(c) Special Circumstances. The restricted shares shall not be
forfeited to the Corporation in these cases:
(i) DEATH OR DISABILITY. If the Recipient dies or
becomes disabled prior to September 30, 2001, the restricted shares shall
become unrestricted shares and certificates therefor shall be delivered to
the Recipient's beneficiary or to the Recipient or his legal
representative, as the case may be. A Recipient's beneficiary or
beneficiaries shall be the person or persons or trust designated by the
Recipient on a form provided for that purpose by the Committee and
delivered to and accepted by the Committee or, in the absence of a valid
designation or if the designated beneficiary does not survive the
Recipient, the Recipient's estate. A Recipient shall be deemed "disabled"
for this purpose if the Recipient has been determined as eligible for
disability payments under the terms of the Corporation's long-term
disability plan applicable to that Recipient.
(ii) RETIREMENT. A Recipient retires (regardless of
his age) by terminating his employment with the Corporation and its
subsidiaries and by not becoming employed in the securities or investment
advisory industry for one year
3
<PAGE>
thereafter. The Committee shall determine if a Recipient has retired and,
if the Committee so determines, the shares shall be issuable thereafter to
the Recipient as unrestricted shares only if the Recipient does not, within
the period of one year following the date he leaves the employ of the
Corporation and its subsidiaries (or, if the Recipient retires after
September 30, 2000, within the period ending September 30, 2001), become
employed in the securities or investment advisory industry. If the
Recipient becomes employed in the securities or investment advisory
industry within that period, his shares shall be permanently forfeited.
(iii) OTHER TERMINATION OF EMPLOYMENT. If the
Recipient leaves employment with the Corporation and its subsidiaries for a
reason other than death, disability, or retirement prior to September 30,
2001, his restricted shares shall be forfeited to the Corporation unless
the Committee, in its sole discretion, elects to waive the forfeiture as to
all or any portion of those shares. The Committee may not waive the
forfeiture if the Committee determines that termination of Recipient's
employment was for Cause. "CAUSE" means the Recipient's employment
terminates on account of conduct that involves dishonesty or action that is
detrimental to the best interests of the Corporation.
(d) No Cash Election. A Recipient shall have no cash election
with respect to shares originally issued as restricted shares hereunder.
(e) Holding of Certificates; Dividends and Voting Rights.
Restricted shares shall be held by the Corporation, and certificates
therefor shall not be delivered to the Recipient until such time as the
shares become unrestricted. While the shares are held by the Corporation,
the Recipient shall have voting rights with respect to those shares and
shall be entitled to receive any cash dividends payable thereon or other
distributions by the Corporation with respect to such shares.
8. Change in Control. (a) Prior to September 30, 1998. In the event a Change
in Control occurs prior to September 30, 1998, the number of shares to be
granted hereunder by the Committee shall be determined as if the aggregate
EPS were $5.48 (that is, the aggregate EPS for the two fiscal years ended
September 30, 1997, multiplied by 1.5). The number of shares so determined,
if the Committee has not yet designated Recipients and allocated shares
among them, shall be granted to such Recipients in such allocation of
shares as the Committee shall determine in its discretion as described in
Section 3. All of the shares so granted by the Committee shall be issued as
unrestricted shares, and fifty percent (50%) of the shares granted to each
Recipient shall be eligible for the cash election provided for in Section
6, which must be made by each Recipient within 30 days following receipt of
notice of the grant.
(b) After September 30, 1998. In the event a Change in Control
occurs after September 30, 1998, but prior to a determination by the
Committee of the Recipients and the grants thereto, the Committee shall
designate the Recipients
4
<PAGE>
and the number of shares to be granted to each Recipient as described in
Section 3. All of the shares shall be issued as unrestricted shares, and
fifty percent (50%) of the shares granted shall be eligible for the cash
election provided for in Section 6, which must be made by each Recipient
within 30 days following receipt of notice of the grant. If a Change in
Control occurs after September 30, 1998, and after the grant of shares to
Recipients as restricted shares, all restricted shares shall be delivered
to the Recipients thereof as unrestricted shares.
(c) Change in Control. "CHANGE IN CONTROL" is defined
as follows:
(i) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT")) (a "PERSON") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 25% or more of either (x) the then outstanding shares
of common stock of the Corporation (the "OUTSTANDING CORPORATION COMMON
STOCK") or (y) the combined voting power of the then outstanding voting
securities of the Corporation entitled to vote generally in the election of
directors (the "OUTSTANDING CORPORATION VOTING SECURITIES"); provided,
however, that the following acquisitions shall not constitute a Change in
Control: (A) any acquisition directly from the Corporation (excluding an
acquisition by virtue of the exercise of a conversion privilege), (B) any
acquisition by the Corporation, (C) any acquisition by an employee benefit
plan (or related trust) sponsored or maintained by the Corporation or any
corporation controlled by the Corporation or (D) any acquisition by any
corporation pursuant to a reorganization, merger or consolidation, if,
following such reorganization, merger or consolidation, the conditions
described in clauses (A), (B) and (C) of subsection (ii) of this Section
are satisfied; or
(ii) Approval by the shareholders of the Corporation
of a reorganization, merger or consolidation, in each case, unless
following such reorganization, merger or consolidation, (A) more than 60%
of, respectively, the then outstanding shares of common stock of the
corporation resulting from such reorganization, merger or consolidation and
the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively,
of the Outstanding Corporation Common Stock, and Outstanding Corporation
Voting Securities immediately prior to such reorganization, merger or
consolidation in substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or consolidation, of the
Outstanding Corporation Common Stock and Outstanding Corporation Voting
Securities, as the case may be, (B) no Person (excluding the Corporation,
any employee benefit plan (or related trust) of the Corporation or such
corporation resulting from such reorganization, merger or consolidation and
any person beneficially owning, immediately prior to such reorganization,
merger or consolidation, directly or indirectly, 25% or more of
5
<PAGE>
the Outstanding Corporation Common Stock or Outstanding Corporation Voting
Securities, as the case may be) beneficially owns, directly or indirectly,
25% or more of, respectively, the then outstanding shares of common stock
of the corporation resulting from such reorganization, merger or
consolidation or the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors, and (C) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were members of the Board at the time of the execution of the
initial agreement providing for such reorganization, merger or
consolidation; or
(iii) Approval by the shareholders of the Corporation
of (x) a complete liquidation or dissolution of the Corporation or (y) the
sale or other disposition of all or substantially all of the assets of the
Corporation, other than to a corporation, with respect to which following
such sale or other disposition, (A) more than 60% of, respectively, the
then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively,
of the Outstanding Corporation Common Stock and Outstanding Corporation
Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to
such sale or other disposition, of the Outstanding Corporation Common Stock
and Outstanding Corporation Voting Securities, as the case may be, (B) no
Person (excluding the Corporation and any employee benefit plan (or related
trust) of the Corporation or such corporation and any Person beneficially
owning, immediately prior to such sale or other disposition, directly or
indirectly, 25% or more of the Outstanding Corporation Common Stock or
Outstanding Corporation Voting Securities, as the case may be) beneficially
owns, directly or indirectly, 25% or more of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors and (C) at least a
majority of the members of the board of directors of such corporation were
members of the Board at the time of the execution of the initial agreement
or action of the Board providing for such sale or other disposition of
assets of the Corporation.
9. Miscellaneous. (a) Taxes. The Corporation shall be entitled to withhold
from a Recipient's salary, commissions, cash election payments or other
compensation (or secure payment from the Recipient in lieu of withholding)
the amount of any withholding or other tax required by law to be withheld
or paid by the Corporation with respect to any stock issuable under the
Plan, or with respect to any income recognized upon the lapse of
restrictions applicable to restricted shares, and the Corporation may defer
issuance of stock hereunder until and unless indemnified to its
satisfaction against any liability for any such tax. The amount of such
withholding or tax payment shall be determined by the Committee or its
delegate and shall be
6
<PAGE>
payable by the Recipient at such time as the Committee determines. The
Committee may prescribe one or more methods by which the Recipient will be
permitted to satisfy his withholding obligation, which methods may include,
without limitation, the payment of cash by the Recipient to the
Corporation, and the delivery or withholding, at the appropriate time, of
shares of stock otherwise held or issuable to the Recipient in a number
sufficient, based upon the fair market value of such stock, to satisfy such
tax withholding requirements. The Committee shall be authorized, in its
sole discretion, to establish such rules and procedures relating to any
such withholding methods as it deems necessary or appropriate, including,
without limitation, rules and procedures relating to elections by
Recipients who are subject to the provisions of Section 16 of the Exchange
Act to have stock withheld to meet such tax withholding obligations.
(b) Loans. The Committee, in its discretion, may authorize the
lending of funds by the Corporation to any Recipient solely for the purpose of
paying federal and state income taxes associated with unrestricted or restricted
shares issued to Recipients under the Plan, including federal and state income
tax obligations resulting from an election by a Recipient under Section 83(b) of
the Internal Revenue Code. Any such loans shall be made on terms respecting
amortization, maturity, interest rate and collateral (which may include shares
of the Corporation's common stock) as the Committee, in its discretion, may
determine, and may be fully or partially nonrecourse to the borrower during all,
none or any portion of the term of any loan authorized by the Committee. Any
loans authorized by the Committee shall be documented with such agreements and
instruments as the Committee, with the advice and assistance of the
Corporation's counsel, shall determine to be prudent and in the best interests
of the Corporation.
(c) Amendment and Termination. The Committee or the Board may
at any time terminate, suspend, or amend the Plan or the terms and conditions of
any restricted stock grant agreement; provided, however, that no such action
shall deprive any Recipient of any benefits to which he would have been entitled
under the Plan on the day prior to the date such action was taken, unless agreed
to by the Recipient or unless such action is required to comport with changes in
the Internal Revenue Code of 1986 ("INTERNAL REVENUE CODE"), as amended, Title I
of the Employee Retirement Income Securities Act of 1974 ("ERISA"), as amended,
or rules thereunder.
(d) Nonassignability. No right to receive shares or right to
receive cash payments hereunder shall be assignable or transferable by a
Recipient other than by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined by the Internal Revenue Code
or ERISA. The designation of a beneficiary by a Recipient pursuant to Section
7(c)(i) does not constitute a transfer.
(e) No Right to Grant; No Right to Employment. No employee or
other person shall have any claim of right to participate in or to receive a
grant under the Plan. Neither the Plan nor any action taken hereunder shall be
construed as giving any
7
<PAGE>
employee any right to be retained in the employ of the Corporation.
(f) Grants Not Includable for Benefit Purposes. Income
recognized by a Recipient pursuant to the provisions of the Plan shall not be
included in the determination of benefits under any employee pension benefit
plan (as such term is defined in Section 3(2) of ERISA) or group insurance or
other benefit plans applicable to the Recipient which are maintained by the
Corporation, except as may be provided under the terms of such plans or
determined by resolution of the Board.
(g) Governing Law. The Plan and all determinations made and
actions taken pursuant to the Plan shall be governed by the laws of the State of
North Carolina other than the choice or conflict of laws provisions of such
laws, and shall be construed in accordance therewith.
(h) Securities Law Compliance. Certificates representing
shares issued under the Plan may bear such legends and statements as the
Committee shall deem appropriate or advisable to assure, among other things,
compliance with applicable securities laws, rules and regulations.
(i) Reservation of Shares. The Corporation during the term of
the Plan shall reserve and keep available among its treasury shares, and will
seek or obtain from any regulatory body having jurisdiction any requisite
authority in order to issue such number of shares of its common stock as shall
be sufficient to satisfy this Restated Plan. If the Corporation is unable to
obtain any authority deemed by counsel for the Corporation necessary to lawful
issuance of any shares hereunder, the Corporation will be relieved of any
liability in respect of the nonissuance or sale of such stock as to which such
authority has not been obtained.
(j) Uncertificated Shares. Any restricted shares granted
hereunder may, but need not, be evidenced by a stock certificate in respect of
the shares awarded. A "book entry" (i.e., a computerized or manual entry) may be
made in the records of the Corporation to evidence the issuance of unrestricted
shares where no physical certificate is issued. The Corporation's records,
absent manifest error, shall be binding on all parties.
(k) Adjustments for Certain Changes in Capitalization. If the
Corporation at any time increases or decreases the number of its outstanding
shares of common stock or changes in any way the rights and privileges of such
shares by means of the payment of a stock dividend or any other distribution
upon such shares payable in common stock, or through a stock split, subdivision,
consolidation, combination, reclassification, or recapitalization involving the
common stock, then the numbers, rights, and privileges of the shares issuable
hereunder shall be increased, decreased, or changed in like manner as if such
shares had been issued and outstanding, fully paid, and nonassessable at the
time of such occurrence.
8
<PAGE>
(l) Indemnification of Committee. In addition to such other
rights of indemnification as they may have as directors or as members of the
Committee, the members of the Committee shall be indemnified by the Corporation
against the reasonable expenses, including attorneys' fees actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or
in connection with the Plan or any benefit granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Corporation) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Committee member is liable for negligence or misconduct in
the performance of his duties, provided that within 60 days after institution of
any such action, suit or proceeding, a Committee member shall in writing offer
the Corporation the opportunity, at its own expense, to handle and defend the
same.
9
<PAGE>
EXHIBIT 11
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Net income per share was computed as follows:
Primary:
1) Net income $ 10,900,323 $ 9,354,624 $ 5,928,392
============= ============= ============
2) Weighted average shares outstanding 6,072,136 6,040,349 6,304,415
3) Incremental shares under stock options
computed under the treasury stock method
using the average market price of issuer's
stock during the periods 305,504 35,005 83,103
4) Incremental shares related to long-term
incentive compensation plan 100,000 - -
------------- ------------- ------------
5) Weighted average shares and common
equivalent shares outstanding 6,477,640 6,075,354 6,387,518
============= ============= ============
6) Weighted average shares outstanding
which were used for calculation 6,477,640 6,040,349 (A) 6,304,415 (A)
============= ============= ============
7) Net income per share (item 1 divided
by item 6) $ 1.68 $ 1.55 $ 0.94
============= ============= ============
Fully Diluted:
1) Unadjusted net income $ 10,900,323 $ 9,354,624 $ 5,928,392
2) Interest on convertible subordinated
debentures, net of tax effect - 960,179 984,590
------------- ------------- ------------
3) Adjusted net income $ 10,900,323 $ 10,314,803 $ 6,912,982
============= ============= ============
4) Weighted average shares outstanding 6,072,136 6,040,349 6,304,415
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 523,275 40,553 95,108
6) Incremental shares related to long-term
incentive compensation plan 350,000 300,000 -
7) Incremental shares relating to convertible
subordinated debentures - 1,183,042 1,183,042
------------- ------------- ------------
8) Weighted average shares and common
equivalent shares outstanding 6,945,411 7,563,944 7,582,565
============= ============= ============
9) Net income per share (item 3 divided
by item 8) $ 1.57 $ 1.36 $ 0.91
============= ============= ============
</TABLE>
(A) - Dilutive effect of common equivalent shares not included since dilution is
less than 3%.
<PAGE>
1997 Annual Report
(Photo of IJL building in Charlotte, NC)
IJL
Interstate/Johnson Lane
<PAGE>
(photo of an arial view of Charlotte, NC)
Table of Contents
Letter to Shareholders
3
A Portfolio of Financial Services
6
Management's Discussion & Analysis
20
Audited Financial Statements
24
Officers & Directors
34
Investor Information
35
<PAGE>
SUCCESS
RADIATING
FROM A STRONG
FINANCIAL
CENTER.
IJL
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 one of the largest independent brokerage firms
headquartered in the Southeast. -- IJL's portfolio of financial services is
designed to meet the needs of a broad range of clients. The company has nearly
1,400 employees, including approximately 440 financial consultants serving
individual investors through its network of 62 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 approximately 200
companies traded on NASDAQ. -- 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.
(background photo of a globe)
- --------------------------------------------------------------------------------
- --INTERSTATE/JOHNSON LANE IS COMMITTED TO BEING THE SOUTHEAST'S
- --------------------------------------------------------------------------------
<PAGE>
(Photo of Parks H. Dalton)
TO OUR SHAREHOLDERS
The first year I was in the securities industry, IBM was putting the
finishing touches on its first computer, the first commercial jetliner was
introduced, color was just starting to appear on television -- and the Dow Jones
Industrial Average closed at 291.90.
Forty-four years later, we think nothing of logging on to the computer,
checking in for a flight, surfing the TV channels -- or seeing the Dow top
7,000. It is fascinating to see how the unimaginable has become commonplace, how
we seem to take change in stride. Progress is not just achieved; it is assumed.
In these final months before I step down as chairman, I have reflected on
my four-plus decades in the securities industry -- first with Interstate
Securities, then as a leader of the merged Interstate/Johnson Lane. The years
have been a rich and varied mixture -- often exhilarating, sometimes exhausting,
always challenging and infinitely rewarding. The growth and success of IJL is a
great story, and I am proud to have played one small part in it.
At the close of the shareholders' meeting in January, I will turn the
chairman's gavel over to Jim Morgan, totally confident that he has the
intelligence, business acumen -- and most importantly, the character -- to take
IJL to new heights.
To our shareholders, I offer my thanks for allowing IJL the opportunity to
be part of your lives. You may be sure that Jim and his team will continue to
work on your behalf.
/s/ Parks H. Dalton
Parks H. Dalton
Chairman of the Board
2
- --------------------------------------------------------------------------------
LEADING INVESTMENT FIRM.--WE WILL ENHANCE CLIENTS' FINANCIAL SUCCESS BY
- --------------------------------------------------------------------------------
<PAGE>
------------------------
DEAR FELLOW SHAREHOLDERS
------------------------
Fiscal 1997 was an exceptional year for IJL and for the clients and shareholders
we serve. Revenues and earnings reached historic highs, and the investable
assets entrusted to our Private Client Group grew by 45 percent to nearly $15
billion. Several of our business units set new records, and two exciting new
initiatives were successfully launched. All of the above, combined with a
positive environment for financial services stocks, resulted in a doubling of
the price of our common stock.
By all of these short-term measures, the performance of your firm was
noteworthy. More significantly, we continued to make excellent progress in
positioning IJL for future success. Our core businesses are stronger today than
they have ever been, giving us the flexibility to explore new ideas and try new
approaches that will keep us at the forefront of our industry into the next
century.
For the fiscal year ended September 30, 1997, net income increased 16.0
percent to a record $10.9 million, or $1.68 per share, from $9.4 million, or
$1.55 per share, in fiscal 1996. Total revenues for fiscal 1997 rose to $233.5
million from last year's $208.8 million.
A strong economy and robust financial markets provided an excellent
investment climate, enabling us to achieve superior results and outperform our
industry peer group in several key measures.
The hard work of our veteran financial consultants, coupled with our
success in attracting seasoned producers and the development of new financial
consultants, gave the Private Client Group a starring role in fiscal 1997's
performance. In rising markets, it becomes easy for financial consultants to
take their clients' satisfaction for granted. At IJL, communication with clients
remains a high priority, and FCs have worked diligently through this market to
strengthen relationships. The numbers speak to their success, with assets under
supervision and individual productivity breaking records.
The Fixed Income Capital Markets Group, despite a volatile and sometimes
difficult bond market environment, achieved its goals of improving productivity
and operating profits. An aggressive recruiting program brought more quality
producers to the firm and helped increase revenue by 23 percent. Municipal
finance revenues increased by more than 30 percent, and the number of senior
managed financings doubled. In fiscal 1997, IJL participated in nearly 40
percent of all the negotiated municipal transactions originated in the Carolinas
and Georgia.
A restructuring of the Equity Capital Markets Group that began in 1996
continued in 1997 and resulted in an 11 percent rise in revenues. It is
gratifying to see a magazine page filled top to bottom with IJL "tombstones" --
notifications of our involvement as a manager or co-manager in a corporate
financing. During the past year, the investment banking, research, sales and
trading teams have sharpened their focus on companies in seven key business
sectors, each with a significant presence in the Southeast. We see this group
playing an increasingly larger role in the financial performance of IJL and feel
confident that the right team is in place to keep the revenue and profit lines
on a steady rise.
FOR HIS
LEADERSHIP,
FOR HIS
INTEGRITY,
FOR HIS
WISDOM,
FOR HIS
QUIET AND
SELFLESS
EFFORTS
ON BEHALF
OF OTHERS,
WE DEDICATE
THIS YEAR'S
ANNUAL
REPORT TO
PARKS
DALTON.
--
WHILE HIS
ACTIVE
MANAGEMENT ROLE WILL
CEASE, WE
ALL WILL
CONTINUE TO VALUE HIS
ADVICE AND
COUNSEL IN
THE YEARS
AHEAD AS A
PROFESSIONAL AND AS
A FRIEND.
(Photo of James H. Morgan)
James H. Morgan
President and
Chief Executive Officer
3
- --------------------------------------------------------------------------------
DELIVERING SUPERIOR IDEAS, PRODUCTS, AND SERVICE, AND OUR INVESTMENT ADVICE
- --------------------------------------------------------------------------------
<PAGE>
The Interstate Group offers third-party research and equity and options
execution to a nationwide client base of institutional investors and money
managers. While this business has experienced dramatic growth for most of this
decade, intensified regulatory focus on the activities of money managers slowed
the growth rate in fiscal 1997. Nevertheless, the Interstate Group continues to
be one of our major sources of revenues and profits.
In all of these principal businesses, we are committed to finding better
ways of doing what we do best -- building personal relationships with clients
and adding value to those relationships through sound financial advice that
successfully provides solutions and fills needs. In fiscal 1997, that commitment
drove us to travel two new paths, journeys that have brought us to new locations
and provided exciting new opportunities.
CapTrust Financial Advisors, LLC, our second broker-dealer, was in its
infancy at this time last year. Today, there are three CapTrust offices in
operation, two scheduled for opening shortly, and an impressive list of
potential candidates. CapTrust was created to meet the needs of
consulting-oriented financial advisors who want to have the freedom and
flexibility to make independent business decisions but still have access to the
highest quality research and support services. By leveraging our existing
services and selectively adding to them, we are providing quality advantages to
both the CapTrust and IJL professionals. We are convinced that CapTrust is the
premier business option for a select group of financial advisors around the
nation and remain confident that it will offer significant revenue and income
potential for your firm.
Fiscal 1997 also marked the launch of the Keen Vision Fund, an investment
limited partnership that provides investors with the opportunity to play both
offense and defense in the stock market by capitalizing on overvalued and
undervalued stocks. All 99 investor openings were quickly filled, and the Fund
commenced operation with a $23 million capital base. As the fiscal year ended,
Keen Vision Fund II was opened; we anticipate that it, too, will be appealing to
our clients as a tool for responding to volatility in the markets.
Recognizing the significant opportunities for IJL clients and shareholders
to benefit from the Keen Vision Funds, we made the decision to focus our
investment advisory efforts in that area by creating a new subsidiary, IJL
Capital Management, and exiting the individually managed portfolio business
through the sale of Sovereign Advisers.
In March, we announced the call for redemption of our $21 million outstanding
7-3/4% convertible subordinated debentures. The call was successfully completed
on April 17, with $16 million of the debentures redeemed for cash, and $5
million converted into approximately 283,000 shares of the company's common
stock. With our stock trading close to the conversion price, this action
eliminated the potential for significant dilution of earnings per share.
In April, B. Franklin Skinner, the retired CEO of BellSouth
Telecommunications and a highly respected civic and community leader in Atlanta,
joined our Board of Directors, and in October, Minor Mickel Shaw, a
distinguished business leader from Greenville, S.C.,
NET REVENUES
Dollars in Millions
1993-1997
(Bar graph appears here with the following plot points)
1993 1994 1995 1996 1997
151,342 147,880 151,458 187,649 213,701
PERMANENT CAPITAL
SHAREHOLDERS' EQUITY &
LONG-TERM DEBT
Dollars in Millions
1993-1997
(Bar graph appears here with the following plot points)
1993 1994 1995 1996 1997
81,362 88,969 90,370 97,626 104,813
PRIVATE CLIENT
GROUP PRODUCTION
Dollars in Millions
1993-1997
(Bar graph appears here with the following plot points)
1993 1994 1995 1996 1997
73,832 73,494 81,271 101,956 116,693
4
- --------------------------------------------------------------------------------
WILL STAND THE TEST OF TIME, THE BUILDING AND MAINTAINING OF LONG-TERM
- --------------------------------------------------------------------------------
<PAGE>
came on board. We are fortunate to be able to draw on the experience of such
outstanding individuals who share our values and understand our mission. Another
significant board change will take place in January, when Claude Abernethy steps
down. We thank Claude for his four decades of board service, and look forward to
his continued contributions as a valued member of the Private Client Group.
We ended the year, not at rest or on a coast, but with strong forward
momentum, and we expect 1998 to be another positive year. This optimism is
fueled by a full schedule of municipal bond financings, a wealth of investment
banking opportunities, and a growing list of talented professionals who are on,
or want to be part of, our team. We see the continued growth of our fee-based
products and services, which offer insulation against the vagaries of the
market, and plan the roll-out of a new generation of software embracing Internet
technology that will make it even easier for our employees and clients to gather
and access information. The move of our corporate headquarters to the new IJL
Financial Center this coming Spring will allow us to work together more
efficiently than ever before and will provide even greater visibility for the
"new IJL."
We are watching with interest the consolidation taking place in our
industry accompanied by the drumbeat of assertions that "bigger is better." One
of the great strengths of IJL is the intimate relationships we build with
clients -- and with each other as members of a closely knit team. We are not all
things to all people, nor do we wish to be.
Holding to our core values served our clients and shareholders
extraordinarily well in 1997 and gave IJL the financial results you see in this
report. We sincerely thank our employees, whose efforts to carry out the IJL
mission have contributed so much to our success as a firm.
Finally, when speaking about those who have made a difference, a special note
must be made of the contributions of Parks Dalton. He built this firm, branch by
branch, business by business, then built the team that will carry forward as he
steps down as chairman. His commitment to excellence set the standard for which
IJL is known today.
For his leadership, for his integrity, for his wisdom, for his quiet and
selfless efforts on behalf of others, we dedicate this year's annual report to
Parks Dalton. While his active management role will cease, we all will continue
to value his advice and counsel in the years ahead as a professional and as a
friend.
Parks, you embody all that is good about our industry and our firm. For 44
years of commitment and caring, on behalf of everyone involved with IJL, both
past and present, I thank you.
/s/ James H. Morgan
James H. Morgan
President and Chief Executive Officer
AVERAGE PRODUCTION
PER PRIVATE CLIENT
GROUP FC
Dollars in Thousands
1993-1997
(Bar graph appears here with the following plot points)
1993 1994 1995 1996 1997
200 185 201 244 274
PRIVATE CLIENT GROUP
ASSETS UNDER
MANAGEMENT
Dollars in Billions
1993-1997
(Bar graph appears here with the following plot points)
1993 1994 1995 1996 1997
5,594,957 6,269,415 8,327,979 10,568,347 14,659,534
BOOK VALUE
PER SHARE
1993-1997
(Bar graph appears here with the following plot points)
1993 1994 1995 1996 1997
9.13 10.74 11.67 13.00 14.56
5
- --------------------------------------------------------------------------------
RELATIONSHIPS WILL BE CENTRAL TO OUR DAILY LIVES.--WE WILL MAINTAIN A
- --------------------------------------------------------------------------------
<PAGE>
(Photo of IJL building in Charlotte, NC)
6
- --------------------------------------------------------------------------------
WORK ENVIRONMENT THAT IS EXCEPTIONAL IN ITS EMPHASIS ON PERSONAL EXCEL
- --------------------------------------------------------------------------------
<PAGE>
SUCCESS RADIATING
FROM A STRONG
FINANCIAL CENTER
Build a team of skilled and experienced professionals. Knit them tightly
together with a spirit of collaboration and a commitment to excellence. Give
them the technology and staff support they need to excel.
That is the core of IJL, and from that strong center, success radiates to
our clients across the Southeast and beyond. IJL's business groups stand tall on
their own, but when they come together into a single financial source, synergies
develop, the firm grows stronger and clients can draw on a much richer supply of
products and services.
We are a textbook study in the power of building relationships.
IJL financial consultants in branch offices in the Carolinas, Georgia and
Virginia work with individual clients and small businesses on a wide range of
portfolio management and financial planning needs. Municipalities and public
institutions know IJL's reputation for providing superior service, and they ask
for our help in underwriting debt financings -- issues that are especially
attractive to our clients. Fixed-income sales and trading desks help price and
distribute these issues to individual investors and to institutional clients
across the country.
Our research analysts focus on industries of strong importance to the
Southeast -- and to our clients, who use that research information to make
investment decisions. Word of our success grows, and businesses -- many led by
individuals who know and trust us with their personal finances -- look to IJL
for assistance in public offerings, private equity and debt placements, and
mergers and acquisitions. The confidence corporate clients have in IJL inspires
the confidence of their employees and their customers in us as well.
The circles grow ever wider.
Our new corporate headquarters, the IJL Financial Center, is aptly named,
for it has been designed to draw the business groups more closely together. From
the open floor plans to the meeting and teleconferencing centers to the design
of shared work space, it will encourage teamwork and enable employees to more
creatively work with one another. For our established businesses as well as our
newer ones, the IJL Financial Center will be the ideal center point, a base from
which to grow and explore.
IJL is an old, established and reliable firm with a time-honored commitment
to providing service of exceptional quality. While proud of our history, we know
that the solutions of the past will not solve the problems of tomorrow. The
people of IJL are on a continuous learning expedition, searching for better ways
to do what we do best.
Old values. New approaches. Fuse them together, and the opportunities for
success are unlimited.
- --------------------------------------------------------------------------------
LENCE, TEAMWORK AND COMMITMENT TO THE FIRM'S SUCCESS. OUR SUCCESS WILL BE
- --------------------------------------------------------------------------------
7
<PAGE>
--------------------
Private Client Group
--------------------
When markets are strong and assets are growing, there is a great temptation in
our industry to relax. The Private Client Group enjoyed just such a climate in
fiscal 1997, but there wasn't the slightest inclination to ease up. The PCG
enthusiastically seized the opportunity to gather new assets, enhance services,
improve skills and attract new talent.
During the past several years, IJL has focused its efforts on building a
team of experienced and resourceful investment professionals who embrace the
idea of total portfolio management. In fiscal 1997, we began to reap the rewards
of those efforts. The result was a record year in which the Private Client Group
grew, both in size and in strength. Total revenues were $118 million versus $103
million the prior year. Revenue per financial consultant continued its
impressive growth, rising by 11 percent. Most impressively, the total value of
assets entrusted to us increased by 44 percent, approaching $15 billion.
While it was an excellent year for our industry overall, IJL is pulling
ahead and gaining a strong competitive advantage. Independent industry
statistics show that IJL's growth trend in revenue and assets consistently has
exceeded those of our peers in the past several years.
(Two photos appear here)
During the year, we established Private Client Investment Services, placing
all the investment services under common leadership and giving our efforts a
higher level of coherence, consistency and coordination. This new infrastructure
already has resulted in significant improvements in our ability to communicate
with each other more effectively, to generate fresh ideas, and to recommend new
and successful strategies for our clients.
Our future growth is predicated on our ability to attract new talent into
the firm and to provide our seasoned FCs new tools to enhance client service. In
fiscal 1997, the PCG implemented the most extensive training curriculum in its
history -- a three-pronged effort targeted at new financial consultants,
experienced producers and branch managers. A record number of new FCs were
trained during the year, with even more graduates slated for fiscal 1998. In
addition, we are enhancing the professionalism and knowledge of our branch
office support staff to ensure that our clients receive the best possible
service.
Our experienced FCs had the opportunity to attend several continuing
education conferences as well as symposiums on a variety of topics, including
equity and fixed-income strategies, investment consulting services, IRA
rollovers, the Taxpayer Relief Act of 1997, and personal trusts. For our branch
managers we instituted three new management development programs and launched
the Branch Manager's Leadership Circle to recognize and reward superior
performance in the training and development of FCs, recruiting, asset growth and
client service.
We have been successful in attracting top financial consultants, and as
consolidations in our industry turn more and more firms into small pieces of
ever larger puzzles, the interest in what IJL has to offer as the leading
independent regional firm in the
8
- --------------------------------------------------------------------------------
MEASURED BY THE DEGREE TO WHICH INDIVIDUALS, INSTITUTIONS, CORPORATIONS,
- --------------------------------------------------------------------------------
<PAGE>
Southeast continues to grow. Our most enduring strength is the talented and
highly professional individuals who comprise our firm. Top financial consultants
in our industry understand the value that comes from a corporate culture built
on close personal relationships, both externally with clients and internally
with each other.
In many competitive firms, face-to-face communication has been replaced by
written manuals and punch-a-number recordings. While we recognize the potential
of technological advances such as our internal Intranet site, the PCG Infonet,
we value communication with each other on a personal level and working as a team
- -- qualities that seem to be growing more scarce in our business.
(Two photos appears here)
While we continue to expand our presence in the communities where we
already do business, we remain committed to selectively expanding into new
geographic markets throughout the Southeast. We are primed to take advantage of
opportunities to add consultants who share our values and embrace our vision of
the future.
We continue to view technology as a critical component in serving our
clients -- the technology our own team is using, as well as the technology
clients are using in their homes and offices. We have continued to upgrade
computer workstations, to increase the capabilities of the PCG Infonet, and to
introduce more sophisticated software to enable our FCs to manage client
relationships more efficiently. In addition, we expanded our Internet presence
[www.ijl.com] last year and enhanced our clients' ability to access their
accounts electronically.
IJL has built a loyal client base by providing exceptional service. With
each passing year, we continue to set ourselves apart from the competition --
not by adding glitter and drawing attention to ourselves, but by remaining
steadfast in our commitment to put clients first. It is what made us so
successful in the year just ended, and will take us to new heights in the years
to come.
--------------------------------------
Private Client
Group
Services
--
Common and Preferred Stocks
Corporate and Executive Services
Corporate and Municipal Bonds
Estate and Financial Planning
Government Securities
IJL Key Account
Individual Retirement Accounts
Investment Manager Research & Selection
Life Insurance and Annuities
Load and No-Load Mutual Funds
Managed Futures
Money Market Funds
Options
Personal and Corporate Trusts
Portfolio Evaluation
Qualified and Non-Qualified
Retirement Plans
Unit Investment Trusts
--------------------------------------
9
- --------------------------------------------------------------------------------
AND PUBLIC ENTITIES REGARD IJL AS THEIR PREMIER FINANCIAL ADVISOR. -- THE
- --------------------------------------------------------------------------------
<PAGE>
--------
CapTrust
--------
Last year, we introduced to you CapTrust Financial Advisors, LLC, a new
broker-dealer focused on investment consulting and portfolio management. Many of
the top consulting-oriented professionals in our industry are seeking an
environment in which to offer totally objective investment consulting advice. It
is clear to us that CapTrust offers a unique solution to that need. The first
year of operation has been an excellent one, with the young organization meeting
or exceeding every goal.
Many of the larger firms in our industry require every broker to travel the
same highway and follow the same traffic signs. CapTrust truly represents the
road less traveled. It was designed to give a select segment of the most
talented and experienced professionals the ability to choose their own
destinations. CapTrust advisors map out the routes for themselves, secure in the
knowledge that an experienced and stable partner is there to help at every turn.
(Three photos appear here)
The objectives of CapTrust are clear: Create a culture and infrastructure
unprecedented in our industry, and provide sophisticated technology and superior
investment counsel. We are accomplishing this by inviting successful
consulting-oriented advisors nationwide to join, and making available to them an
ownership stake in CapTrust. In addition to ensuring a smooth and efficient
transition for their clients, we provide CapTrust advisors with the freedom and
flexibility to accommodate specific client needs with sophisticated investment
manager databases, financial planning systems, manager research networks, and
consolidated reporting resources. A talented research team is also available to
help identify and track private investment managers and investment options with
complete objectivity.
There is no standard by which to judge CapTrust, because there is nothing
like it in our industry. Each CapTrust office has its own identity. Still, its
advisors share a common denominator: They are money management professionals who
combine an exemplary record of achievement with a belief that clients benefit
from a comprehensive needs-based asset management approach.
Three CapTrust offices opened in the first year of operation; several more
are scheduled to open shortly, and as word of CapTrust's unique benefits
spreads, more and more investment professionals are seeking membership in this
one-of-a-kind organization.
The ability of CapTrust to leverage upon the financial strength and
experience of IJL, as well as its administrative and operational resources,
provides a solid foundation for success. With each passing day, we grow more
excited about the potential of CapTrust to establish a new paradigm in our
industry, to make a positive impact on the lives of our clients and to
significantly augment the revenues and profits of IJL.
10
- --------------------------------------------------------------------------------
PEOPLE OF IJL ARE COMMITTED TO THE FINANCIAL SUCCESS OF OUR CLIENTS. WE
- --------------------------------------------------------------------------------
<PAGE>
(Two photos appear on this page)
-----------------------------------
CapTrust
Services
--
CapTrust Key Account
Common and Preferred Stocks
Corporate and Executive Services
Corporate and Municipal Bonds
Estate and Financial Planning
Government Securities
Individual Retirement Accounts
Investment Consulting Services
Life Insurance and Annuities
Load and No-Load Mutual Funds
Managed Futures
Money Market Funds
Options
Personal and Corporate Trusts
Portfolio Evaluation
Qualified and Non-Qualified
Retirement Plans
Unit Investment Trusts
-----------------------------------
11
- --------------------------------------------------------------------------------
WILL DELIVER SUPERIOR PRODUCTS, IDEAS AND SERVICES, AND OUR INVESTMENT
- --------------------------------------------------------------------------------
<PAGE>
----------------------
Equity Capital Markets
----------------------
The Equity Capital Markets Group combines investment banking, research,
institutional sales, equity syndicate and equity trading to form a strong,
experienced and growing division of IJL. The Group closed out the year with
record revenues, a healthy increase in equity underwritings and a strong base on
which to build an even larger presence in fiscal 1998.
We completed work in fiscal 1997 on an ambitious, two-year restructuring
plan that better integrates the business units and sharpens the focus on seven
industry sectors with a strong presence or influence in the Southeast. Those
sectors are financial institutions, real estate investment trusts, technology,
retailing, health care, business services and a manufacturing-focused group that
includes textiles, furniture and other Southeast-based industries.
IJL's Investment Banking Department offers clients a full array of products
and services, including underwriting public debt and equity financings,
providing financial advisory services, guiding mergers and acquisitions and
developing private financing alternatives for our clients.
Investment banking revenues soared 75 percent in 1997, compelling evidence
that our efforts to build this important business are paying off. Driving this
growth was a 144 percent increase in merger and acquisition advisory activity
and a seven-fold increase in fees generated from private financings. Both of
these areas were strengthened by new leadership during the past 18 months, and
the benefits of those changes are only beginning to be realized. In addition, we
increased our equity underwriting business, completing 11 equity offerings
during the year, including four IPOs, and raising almost $525 million for our
clients. Three business sectors -- financial institutions, technology and
retailing -- were particularly active for us.
(Photo appears here)
The investment banking professional staff now stands at 22, almost double
what it was two years ago. We are doing a greater volume of business, handling
more sophisticated financings and offering advisory services at a higher level
than ever before.
Research is the backbone of the decision-making process, and we were
pleased this year to add coverage of the business services industry. The
out-sourcing of non-core activities is a
12
- --------------------------------------------------------------------------------
ADVICE WILL BE DESIGNED TO STAND THE TEST OF TIME. NO PRODUCT OR SERVICE
- --------------------------------------------------------------------------------
<PAGE>
growing trend in business, and as this industry grows, we are well positioned to
be commenting and capitalizing on it. We also added coverage of integrated
health organizations, leaders in taking health care from a cottage environment
to a corporate environment. Early in 1998, we will be introducing coverage of
life sciences, another growing field that has developed a strong base in the
Southeast and offers significant investment banking opportunities for IJL and
our clients.
(Two photos appear here)
In July, we introduced a new ratings system with five performance ratings
and five suitability ratings to give both our institutional sales force and our
PCG financial consultants clearer pictures of the companies we follow. Research
analysts welcome the ability to be more precise in their recommendations, and
the change was particularly well received by our financial consultants.
IJL over-the-counter trading desks in Charlotte and Atlanta make markets in
approximately 200 NASDAQ stocks, specializing in the companies that we publish
research on, and for which we provide investment banking services. An automated,
paperless order management has greatly improved efficiency in these fast-paced
operations.
A new software package, the Institutional Equity Contact Management System,
greatly enhanced our sales force's ability to serve clients in a timely and
efficient manner, and we see it serving us well for several years to come. IJL
is known for building close relationships with both domestic and international
clients ranging from the smallest money managers to the largest mutual funds.
Personal service is an essential part of those relationships, and we are
committed to providing our sales force with the best tools available to keep
service levels high.
Boston has the highest concentration of institutional clients in the
nation, and IJL took advantage of the opportunities that exist in that city by
adding institutional equity sales to the fixed-income sales office there. Within
only a few months, IJL's visibility in that important marketplace has increased,
and business is brisk.
The International Institutional Sales department has expanded its cultural
diversity and is now doing business in three languages -- French and German as
well as English.
The Equity Capital Markets Group started the new fiscal year with sales
momentum and a healthy backlog of investment banking business. We will continue
to focus on small- to middle-market capitalization growth companies -- $50
million to $1 billion -- with a strong presence in the Southeast. The I-85
corridor from Georgia to Virginia is overflowing with opportunities, as is the
coastline from Virginia to Florida.
----------------------------------
Equity Capital
Markets
Services
--
Convertible Securities Trading
Equity Syndicate
Equity Trading
Financial Advisory Services
Institutional Equity Sales
Investment Strategy Portfolios
Merger and Acquisition Services
Model Stock Portfolios
Private Placement of Debt and Equity
Recapitalizations
Research
Underwriting of Public Offerings
of Equity and Debt
Valuation and Fairness Opinions
----------------------------------
13
- --------------------------------------------------------------------------------
WILL BE OFFERED SIMPLY TO ENHANCE CORPORATE REVENUES. -- WE ARE
- --------------------------------------------------------------------------------
<PAGE>
----------------------------
Fixed Income Capital Markets
----------------------------
The Fixed Income Capital Markets Group achieved success on a number of fronts in
1997 -- healthy increases in revenues, profits and productivity, and the
addition of quality producers in three new locations in addition to Atlanta and
Charlotte.
These achievements were especially noteworthy in a year marked by a
flattening of the yield curve and reduced volatility. This external environment
created a particular challenge for regional firms such as IJL that focus sales
and trading efforts on the secondary market.
(Photo appears here)
We experienced healthy growth in institutional sales of taxable and
tax-exempt bonds, with sales revenue up 18 percent. Credit for this performance
goes to a solid team of experienced salespeople and traders, and to the addition
of several top producers who share our commitment to develop and maintain close
relationships with our clients.
Revenues for the Group as a whole increased 23 percent -- a clear signal
that this team is effectively employing our significant capital and technology
to boost productivity. We remain committed to custom portfolio analytics that
assist our clients in their decision-making processes.
IJL focuses on individual investors in the Southeast; however, our
institutional sales efforts are nationwide in scope. We now have a presence in
strategic fixed-income business hubs throughout the country, thanks to our
ability to hire outstanding producers who were attracted to IJL by our people,
resources and strategic focus.
IJL increased its presence in the Southeast's municipal finance market, and
acted as co-senior manager on several of the largest negotiated issues in the
Southeast. The number of negotiated issues the firm senior managed rose from
eight to 13, with the total par value tripling from $113 million to $340
million. Combining negotiated and competitive issues, IJL acted as senior
manager or co-manager in 128 bond issues totaling $9.7 billion,
(Photo appears here)
14
- --------------------------------------------------------------------------------
COMMITTED TO ENSURING EACH OTHER'S SUCCESS. WE WILL WORK AS A TRULY
- --------------------------------------------------------------------------------
<PAGE>
(Three photos appear on this page)
compared with 61 issues totaling $3.5 billion in fiscal 1996.
The showcase effort of fiscal 1997 was a $267 million issuance of bonds for
the Atlanta Water and Sewer Authority. IJL acted as co-senior manager and proved
its mettle as a first-class creator and distributor of product. Client orders
from IJL's Private Client Group exceeded the individual client orders of any
other firm, and the institutional sales team's efforts were equally impressive.
The firm's performance on the Atlanta underwriting led directly to our
selection as co-senior managing underwriter in another $250 million-plus
financing, for water and sewer bonds in Fulton County, Georgia, scheduled for
this January. Additionally, the Municipal Finance Department has been chosen to
be involved in another 20 financings scheduled for the 1997-98 fiscal year.
We are committed to the municipal finance business for three reasons -- the
business offers IJL an excellent revenue source, our Private Client Group and
institutional clients benefit from access to proprietary tax-exempt products,
and our communities require assistance in financing public projects to keep pace
with the region's growth. While several Wall Street firms have pulled back from
or abandoned the municipal finance business, IJL has increased its efforts
within this sector. Our regional presence and unsurpassed distribution network
afford the firm a unique opportunity to build on its inherent strengths.
Looking forward, the Fixed Income Group will continue to seek out
individual targets of opportunity. We will continue to attract experienced
sales, trading, banking and support professionals who can capitalize on IJL's
resources in order to provide value-added service to our clients.
-------------------------------
Fixed-Income
Capital Markets
Services
--
Financial Advisory Services
Municipal Finance Services
Municipal Sales,
Underwriting and Trading
Portfolio Analytics
Taxable Sales,
Underwriting and Trading
-------------------------------
15
- --------------------------------------------------------------------------------
UNIFIED TEAM, COMMUNICATING HONESTLY, DIRECTLY, AND FREQUENTLY WITH ONE
- --------------------------------------------------------------------------------
<PAGE>
----------------
Interstate Group
----------------
The Interstate Group is one of the foremost providers of third-party research
products and services to institutional investors and portfolio managers
throughout the nation. More than 500 clients -- banks, money managers, insurance
companies, hedge funds, corporate retirement funds, endowment funds and other
types of institutional accounts -- look to the Group as their principal resource
for independently produced fundamental research, performance measurement
services and portfolio management and strategy services. Clients have access to
specialized research in areas such as asset allocation, economic and equity
analysis, or customized research to meet their singular needs.
In conjunction with its role as a provider of independent research, the
Interstate Group offers equity and options execution services to its nationwide
client base. For several years, we have been cited as one of the leading 50
firms in terms of block order executions on The New York Stock Exchange. This
recognition is a measure of the superior trading skills resident in our
experienced professionals on the trading desk and the Exchange floor.
The decade of the 90s has generally been a period of unparalleled growth
for the Interstate Group in both revenues and profits. However, during the past
year, regulators have focused their attention on the manner in which investors
and money managers utilize third-party research. While this uncertain
environment has challenged our ability to sustain historic growth rates, we are
diligently working in partnership with regulators and with our industry peers to
develop research policy guidelines that protect the interests of our clients.
(Four photos appear on this page)
--------------------
Interstate Group
Services
--
Equity and Options
Execution Services
Independent Research
--------------------
16
- --------------------------------------------------------------------------------
ANOTHER. RESPONSIBILITY WILL BE DELEGATED, AND DEPARTMENTAL BOUNDARIES
- --------------------------------------------------------------------------------
<PAGE>
----------------------
IJL Capital Management
----------------------
With an increasing number of clients concerned about the level of the market and
the sustainability of the remarkable returns of recent years, in 1997 IJL
Capital Management introduced the Keen Vision Fund. The Keen Vision Fund is a
limited partnership that provides investors with the opportunity to capitalize
both on what are judged to be overvalued and undervalued stocks. In essence, the
Fund is designed to play "offense" and "defense" at the same time.
The seeds of this exciting new venture were sown in the summer of 1995,
when IJL allocated $1 million of its capital to a proprietary investment account
that utilized the same investment process as the current Keen Vision Fund. The
proprietary account generated a total return in its first 18 months of 72
percent. That performance, and our conviction that the investment philosophy and
process of this fund were uniquely appropriate to the markets of tomorrow, led
us to create the Keen Vision Fund and open it to clients.
A consistent, disciplined stock selection process is used by the Fund,
which invests within a universe consisting of small- to medium-market
capitalization stocks and seeks to identify pricing inefficiencies that exist
within this universe. Portfolio managers have a bias toward long positions, but
also employ short trading strategies to benefit from securities judged to be
overvalued.
Evidence of our clients' desire for this type of product was borne out when
99 investor openings in the partnership were quickly filled, and the Fund
commenced operation in January with roughly a $23 million capital base. The
performance of the Fund in these early months has been gratifying.
As the fiscal year ended, Keen Vision Fund II, Limited Partnership, was
launched in response to the high interest generated by the original fund, and
the response was enthusiastic. In fact, aggregate assets in the two funds was
roughly $38 million as of October 1, when investment in Keen Vision Fund II
commenced. Both funds utilize the same investment process.
Given the success of the Keen Vision Fund and the opportunity to further
leverage the capabilities of its staff, we made a strategic decision at the end
of the fiscal year to exit the individual managed portfolio business. Therefore,
we sold the assets and management rights of Sovereign Advisers to a former
portfolio manager and formed a new subsidiary, IJL Capital Management, to house
the advisory functions for the hedge funds. For some limited time, we will
continue to provide advisory services to equity accounts of Sovereign on a
third-party consulting basis.
It is our belief that IJL Capital Management can become a significant
source of financial success -- for our clients, and for IJL -- in the coming
years.
(Three photos appear on this page)
17
- --------------------------------------------------------------------------------
WILL NEVER BE OBSTACLES TO TEAMWORK. MANAGERS AND OTHER KEY LEADERS
- --------------------------------------------------------------------------------
<PAGE>
(Photo and graphic design appear on this page)
- --------------------------------------------------------------------------------
WILL SERVE AS ROLE MODELS IN THEIR COMMITMENT TO THE SUCCESS OF EVERY
- --------------------------------------------------------------------------------
<PAGE>
Interstate / Johnson Lane
<TABLE>
<CAPTION>
- ---------------------------
Five Year Financial Summary (All dollars in millions except per share amounts)
- --------------------------- (Unaudited)
Years ended September 30
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Total Revenues $233.5 $208.8 $184.2 $166.6 $163.5
Net Revenues After Interest Expense 213.7 187.6 151.5 147.9 151.3
Income Before Taxes and
Non-Recurring Items 17.0 15.6 9.9 13.3 16.9
Operating Income 10.9 9.4 5.9 7.9 10.4
Non-Recurring Items -- -- -- 3.0 4.0
Net Income 10.9 9.4 5.9 10.9 14.4
Primary Earnings Per Share:
Operating $1.68 $1.55 $0.94 $1.20 $1.54
Net 1.68 1.55 0.94 1.67 2.14
Dividends Per Share $0.16 $0.12 $0.12 $0.09 --
Financial Condition:
Total Assets $626.7 $568.3 $616.5 $767.8 $675.0
Total Assets, Net of Matched
Securities Resale Agreements 614.3 562.5 486.9 428.6 434.1
Long-Term Debt 16.0 21.0 21.0 21.0 22.0
Shareholders' Equity 88.8 76.6 69.4 68.0 60.4
Book Value Per Share $14.56 $13.00 $11.67 $10.74 $9.13
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------
Supplementary Financial Data (All dollars in millions except per share amounts)
- ---------------------------- (Unaudited)
Total Net Income Net Earnings
Revenues Revenues Before Taxes Income Per Share
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1997
Fourth Quarter $66.7 $61.6 $4.7 $3.3 $0.50
Third Quarter 56.9 51.8 4.1 2.5 0.39
Second Quarter 57.6 52.7 4.1 2.5 0.40
First Quarter 52.3 47.5 4.1 2.5 0.42
Fiscal 1996
Fourth Quarter $50.2 $45.1 $3.6 $2.2 $0.37
Third Quarter 52.6 47.3 3.8 2.3 0.38
Second Quarter 55.5 50.3 4.8 2.8 0.46
First Quarter 50.5 45.0 3.5 2.1 0.34
</TABLE>
19
- --------------------------------------------------------------------------------
EMPLOYEE. --WE ARE COMMITTED TO PERSONAL EXCELLENCE. EACH OF US WILL
- --------------------------------------------------------------------------------
<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. Acquisitions of investment firms by
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, 1997, approximately 23% 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.
One technological challenge facing IJL and the financial services industry
is assuring that all electronic systems and programs continue to work correctly
as the year 2000 approaches. Software that recognizes the last two digits of the
year must be adjusted to recognize all four digits. While IJL has tested and
adjusted all its internal computer programs to accommodate the change, the real
challenge and risk for IJL and the industry lie in the dependence of all
financial service firms upon each other's systems and upon the third-party
vendors that provide services to the industry. IJL has been working with its
vendors and other industry members to test various systems that provide
order-routing and back-office services. While progress appears to be very good,
reprogramming and checking remain to be done. The interdependence of market and
clearing participants is such that the system may only be as good as its weakest
link. A "Year 2000" problem in the programs of one participant could possibly
cause business interruptions or disruptions of a significant nature to other
participants, including IJL.
-----------------------------
Liquidity & Capital Resources
-----------------------------
During the 1997 fiscal year, operating activities provided $17,000 of cash,
inclusive of $14.0 million of net income adjusted for depreciation and other
non-cash charges. However, financing activities and capital expenditures
consumed $12.6 million of cash. As a result, the Company's cash position
decreased $12.6 million to $24.7 million at September 30, 1997.
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,
1997, 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 clients 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, funding of new
business unit activities, payment of dividends, and litigation settlements
arising out of normal business operations. In addition, $1.5 million of capital
spending in fiscal 1997 reflects implementation of the third phase of a planned
$10 million program of technology improvements over a multi-year period.
At September 30, 1997, 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 client receivables with client payables for
many years. Management believes that these resources, funds provided by
operations, and permanent capital of shareholders' equity and long-term debt,
will satisfy normal financing needs for the foreseeable future.
The Company's principal broker-dealer subsidiary, Interstate/Johnson Lane
Corporation ("IJL"), is subject to liquidity and capital requirements of the
Securities and Exchange Commission ("SEC"), Commodity 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, 1997, IJL
had "net capital" of $41.0 million, excess net capital of $35.3 million, and a
net capital ratio of 14.3%.
The Company's other broker-dealer subsidiary, CapTrust Financial Advisors,
LLC ("CapTrust"), is also subject to the liquidity and capital requirements of
the SEC and the National Association of Securities Dealers ("NASD"). At
September 30, 1997, CapTrust had net capital of $695,000 and excess net capital
of $445,000.
20
- --------------------------------------------------------------------------------
STRIVE TO REACH EVER HIGHER GOALS AND WILL BE HELD FULLY ACCOUNTABLE
- --------------------------------------------------------------------------------
<PAGE>
--------------------------
Revenue & Expense Analysis
--------------------------
Distribution of Net Revenues
Years ended September 30 1997 1996 1995
- -------------------------------------------------------------
Agency commissions 48.1% 48.6% 48.0%
Prinicipal transactions:
Sales credits 27.2 28.9 28.6
Trading gains, net 3.7 3.8 4.5
Investment banking and
underwriting 3.2 2.8 2.2
Asset management and
advisory 6.5 5.1 4.9
Other 4.5 4.3 4.9
Net interest 6.8 6.5 6.9
- -------------------------------------------------------------
Net revenues 100.0% 100.0% 100.0%
=============================================================
Utilization of Net Revenues
Years ended September 30 1997 1996 1995
- ---------------------------------------------------------------
Compensation and benefits 65.6% 64.9% 63.4%
Technology and telephone 8.6 9.3 10.1
Occupancy 4.4 4.7 5.6
Execution, clearance and
depository 2.0 2.2 2.5
Promotion and development 3.9 3.5 3.9
Professional services 2.0 1.8 2.4
Printing, postage and
supplies 2.0 1.9 2.3
Other operating expenses 3.5 3.3 3.3
- ---------------------------------------------------------------
92.0 91.6 93.5
Income taxes 2.9 3.3 2.6
- ---------------------------------------------------------------
94.9% 94.9% 96.1%
===============================================================
-----------------------
1997 Compared with 1996
-----------------------
Net revenues increased $26.1 million, or 14%, from the previous year, while
expenses, other than interest, increased $24.6 million, also 14%. Net income of
$10.9 million was up $1.5 million from the results of a year ago. Overall,
agency commissions increased $11.4 million, or 13%. Increased sales of mutual
funds, annuity products, and listed equities in the retail sector accounted for
the majority of the increase, negating a modest decline in institutional listed
equities business.
In principal business, sales credits increased $3.9 million, or 7%, due to
strong growth in institutional fixed income transactions, primarily in
government securities, corporate bonds, and mortgage-backed securities; net
trading gains increased $800,000, or 11%, primarily from more profitable
corporate debt trading offset partly by a decline in profits from
mortgage-backed securities trading.
Investment banking fees and underwriting profits increased $1.6 million, or
30%, due to an increased level of managed underwritings in an improved equity
capital-raising environment. Asset management and advisory fees were up $4.4
million, or 46%, due to the continued growth of asset-based fees charged retail
clients in lieu of transaction-based commissions and to management and
performance fees associated with a newly organized "hedge" fund. Other income
was up $1.6 million, or 20%, largely attributable to an increase in money fund
distribution fees and in the value of proprietary investments.
Interest revenues were up about $1.0 million for the year while interest
expenses decreased $1.3 million. The resultant increase of $2.3 million in net
interest income for the year is due primarily to an increase in net earnings on
higher levels of client margin loans.
Compensation and benefits costs increased $18.4 million, or 15%, due
primarily to an increase in both revenue-based commissions and profit-driven
incentives, and to significant personnel investments in several
revenue-producing areas. Promotion and development costs increased $1.7 million,
or 26%, in connection with the continuing effort to build revenue. Professional
services costs increased $1.0 million, or 28%, due to an increase in consulting
services for technology projects and various reengineering efforts. Printing,
postage, and supplies costs increased $700,000, or 19%, due primarily to
increases in transaction volume and expenses for promotional literature. Other
operating expenses increased $1.2 million, or 21%, largely as a result of
increased provisions for legal reserves and the revaluation of deferred
compensation obligations to conform them to the underlying assets expected to
fund those obligations.
21
- --------------------------------------------------------------------------------
FOR OUR PERFORMANCE. WE WILL BRING A VISIBLE LEVEL OF ENERGY, A KEEN
- --------------------------------------------------------------------------------
<PAGE>
Management's Discussion & Analysis of
Financial Condition & Results of Operations
-----------------------
1996 Compared with 1995
-----------------------
Net revenues increased $36.2 million, or 24%, from the previous year, while
expenses, other than interest, 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 agency commissions of $18.6
million, or 26%. Increases in secondary market transactions in both exchange
listed and OTC equities contributed to the increase in both the retail and
institutional sectors. Retail sales of mutual funds and annuities improved as
well. Sales credits increased $10.9 million, or 25%, due mainly to an improved
new issue market and increased equity underwritings in both institutional and
retail business. Moreover, 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 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.
-----------------------------
New Accounting Pronouncements
-----------------------------
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," effective for transfers occurring after December
31, 1996. In December 1996, Statement No. 127 was issued which deferred the
effective date of certain provisions of Statement No. 125 for transactions
occurring after December 31, 1997. Adoption of this statement is not expected to
have a material impact on the Company's financial condition or results of
operations.
In February 1997, FASB issued Statement No. 128, "Earnings Per Share,"
which is effective for the Company's 1998 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 trading
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
- --------------------------------------------------------------------------------
SENSE OF URGENCY, A STRONG WORK ETHIC AND AN ABIDING COMMITMENT TO OUR
- --------------------------------------------------------------------------------
<PAGE>
Financial Reporting
Responsibility
The management of Interstate/Johnson Lane, Inc. 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. 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 Operating Officer
/s/ Lewis F. Semones, Jr.
Lewis F. Semones, Jr.
Chief Financial Officer
Charlotte, North Carolina
October 21, 1997
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, 1997 and
1996, 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, 1997. 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, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1997, in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Charlotte, North Carolina
October 21, 1997
23
- --------------------------------------------------------------------------------
WORK. -- WE ARE COMMITTED TO ATTRACTING AND RETAINING PEOPLE WHO MEET
- --------------------------------------------------------------------------------
<PAGE>
Consolidated Statements
of Financial Condition
<TABLE>
<CAPTION>
(All dollars in thousands except per share amounts) September 30
1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 24,685 $ 37,285
Cash and securities segregated for regulatory purposes 90,001 80,501
Loans under matched securities resale agreements 12,385 5,874
Receivables:
Financing resale agreements 64,644 63,801
Clients 271,102 234,779
Brokers, dealers and clearing agencies 19,798 31,406
Other 7,889 4,234
Trading securities owned 79,120 59,796
Land, buildings and improvements, net 4,185 5,574
Office facilities and equipment, net 7,391 9,236
Goodwill and intangible assets 12,910 13,076
Other assets 32,598 22,779
- ---------------------------------------------------------------------------------------------------------
$ 626,708 $ 568,341
=========================================================================================================
Liabilities and Shareholders' Equity
Short-term borrowings:
Checks payable $ 23,330 $ 16,561
Financing repurchase agreements 20,568 31,078
Borrowings under matched securities
repurchase agreements 12,535 5,983
Payables:
Clients 321,457 292,450
Brokers and dealers 6,793 7,375
Other 11,058 7,262
Accrued compensation and benefits 29,970 20,939
Securities sold but not yet purchased 67,330 65,784
Notes payable 5,270 6,208
Other liabilities and accrued expenses 23,376 16,875
- ---------------------------------------------------------------------------------------------------------
521,687 470,515
- ---------------------------------------------------------------------------------------------------------
Minority interests 208 200
- ---------------------------------------------------------------------------------------------------------
Long-term debt:
Subordinated convertible debentures 20,999
Senior secured note 16,000
- ---------------------------------------------------------------------------------------------------------
537,895 491,714
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
------- --------
Common stock, $.20 par value, 30,000,000 shares
authorized in 1997 and 1996, 7,165,847 shares
issued in 1997 and 6,883,105 shares issued in 1996 1,433 1,377
Additional paid-in capital 36,549 31,231
Retained earnings 63,595 53,670
- ---------------------------------------------------------------------------------------------------------
101,577 86,278
Less, treasury stock, at cost, 1,066,134 shares in 1997
and 986,530 shares in 1996 (12,764) (9,651)
- ---------------------------------------------------------------------------------------------------------
88,813 76,627
- ---------------------------------------------------------------------------------------------------------
$ 626,708 $ 568,341
=========================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
24
- --------------------------------------------------------------------------------
EXTRAORDINARILY HIGH STANDARDS OF PERSONAL INTEGRITY AND PROFESSIONAL
- --------------------------------------------------------------------------------
<PAGE>
Consolidated Statements
of Operations
<TABLE>
<CAPTION>
(All dollars in thousands except per share amounts) For the years ended September 30
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Agency commissions $ 102,740 $ 91,291 $ 72,722
Principal transactions:
Sales credits 58,104 54,155 43,281
Trading gains, net 7,880 7,078 6,839
Investment banking and underwriting 6,864 5,281 3,354
Asset management and advisory 13,881 9,511 7,334
Interest 34,320 33,332 43,261
Other 9,705 8,107 7,410
- -----------------------------------------------------------------------------------------------------------
Total revenues 233,494 208,755 184,201
Interest expense 19,793 21,106 32,743
- -----------------------------------------------------------------------------------------------------------
Net revenues 213,701 187,649 151,458
- -----------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 140,224 121,830 96,040
Technology and telephone 18,335 17,474 15,198
Occupancy 9,371 8,809 8,444
Execution, clearance and depository 4,267 4,098 3,809
Promotion and development 8,327 6,624 5,957
Professional services 4,334 3,376 3,611
Printing, postage and supplies 4,311 3,627 3,503
Other operating expenses 7,500 6,218 5,033
- -----------------------------------------------------------------------------------------------------------
Total expenses 196,669 172,056 141,595
- -----------------------------------------------------------------------------------------------------------
Income Before Income Taxes 17,032 15,593 9,863
Income tax expense 6,132 6,238 3,935
- -----------------------------------------------------------------------------------------------------------
Net Income $ 10,900 $ 9,355 $ 5,928
===========================================================================================================
Primary Earnings per Share $ 1.68 $ 1.55 $ 0.94
===========================================================================================================
Fully Diluted Earnings per Share $ 1.57 $ 1.36 $ 0.91
===========================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
25
- --------------------------------------------------------------------------------
ABILITY. OUR WORK ENVIRONMENT WILL BE EXCEPTIONAL IN ITS ABILITY TO BLEND
- --------------------------------------------------------------------------------
<PAGE>
Consolidated Statements
of Cash Flows
<TABLE>
<CAPTION>
(All dollars in thousands) For the years ended September 30
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 10,900 $ 9,355 $ 5,928
- ------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to cash
provided (used) by operating activities:
Depreciation and amortization 6,503 5,006 3,584
Deferred income taxes (4,785) (3,635) 1,413
Provision for real estate charges 850 1,250
Other non-cash items 1,388 1,008 222
- ------------------------------------------------------------------------------------------------------------
3,106 3,229 6,469
- ------------------------------------------------------------------------------------------------------------
Changes in operating assets and liabilities:
Cash and securities segregated for
regulatory purposes (9,500) 37,115 (33,633)
Loans under matched securities resale
and repurchase agreements, net 42 (721) 241
Net payables to clients (7,317) (34,715) 35,015
Net receivables from brokers, dealers
and clearing agencies 11,026 (12,602) (2,243)
Other receivables (3,655) 488 4,697
Trading securities owned, net (17,778) 56,432 (16,680)
Other assets (5,818) (4,040) (5,090)
Accrued compensation and benefits 9,030 6,959 1,128
Other liabilities and accrued expenses 9,981 1,250 (1,054)
- ------------------------------------------------------------------------------------------------------------
(13,989) 50,166 (17,619)
- ------------------------------------------------------------------------------------------------------------
Cash provided (used) by operating activities 17 62,750 (5,222)
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from (repayment of):
Short-term bank borrowings 6,769 4,689 (11,305)
Borrowings under financing repurchase
and resale agreements, net (11,353) (47,437) 23,767
Senior secured note 16,000
Subordinated convertible debentures (15,980)
Notes payable (938) (1,564) (715)
Stock options exercised 403 126 137
Sale of minority interest in consolidated subsidiary 8
Purchase of stock for treasury (4,729) (3,565) (5,026)
Dividends paid (975) (728) (756)
- ------------------------------------------------------------------------------------------------------------
Cash provided (used) by financing activities (10,795) (48,479) 6,102
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (1,822) (3,523) (4,536)
- ------------------------------------------------------------------------------------------------------------
Cash used by investing activities (1,822) (3,523) (4,536)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (12,600) 10,748 (3,656)
Cash and cash equivalents at beginning of year 37,285 26,537 30,193
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 24,685 $ 37,285 $ 26,537
============================================================================================================
Cash paid during the year for:
Interest $ 19,907 $ 21,595 $ 32,846
Income taxes $ 8,931 $ 9,119 $ 2,614
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
- -------------------------------------------------------------------------------
PERSONAL WARMTH WITH PROFESSIONALISM. WE WILL BE THE FIRM OF CHOICE FOR
- -------------------------------------------------------------------------------
26
<PAGE>
Consolidated Statements
of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
(All dollars in thousands except per share amounts)
Common Stock Additional Treasury Stock Total
-------------------- Paid-In Retained -------------------- Shareholders'
Shares Amount Capital Earnings Shares Amount Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 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
($.12 per share) (756) (756)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1995 6,883,105 1,377 31,510 45,043 936,783 (8,559) 69,371
Forfeiture of
restricted shares, net 40 4,750 (40)
Purchase of shares 319,600 (3,565) (3,565)
Issuance of restricted shares (434) (224,522) 2,051 1,617
Amortization of
restricted shares 377 377
Stock options exercised (336) (50,081) 462 126
Capital contribution 74 74
Net income 9,355 9,355
Dividends paid
($.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
Forfeiture of
restricted shares, net 189 13,691 (123) 66
Purchase of shares 240,934 (4,729) (4,729)
Issuance of restricted shares (284) (127,421) 1,225 941
Amortization of
restricted shares 562 562
Stock options exercised (111) (47,600) 514 403
Conversion of debentures 282,742 56 4,962 5,018
Net income 10,900 10,900
Dividends paid
($.16 per share) (975) (975)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1997 7,165,847 $ 1,433 $ 36,549 $ 63,595 1,066,134 $ (12,764) $ 88,813
===========================================================================================================================
</TABLE>
27
- --------------------------------------------------------------------------------
MANY OF THE MOST TALENTED PEOPLE IN OUR BUSINESS, HIGHLY SKILLED INDIVIDUALS
- --------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated
Financial Statements
--------
Note One
--------
Significant Accounting
Policies
The Company is a Charlotte, North Carolina-based holding company which,
through its principal subsidiary, 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. 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 $5.0 million
at September 30, 1997, and $4.4 million at September 30, 1996. 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
$21.0 million, respectively, at September 30, 1997, and $4.5 million and $16.9
million, respectively, at September 30, 1996. 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 includes equivalent shares
for the dilutive effect of stock options and contingent stock awards.
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 1996 and 1995 amounts have been reclassified for comparative
purposes in 1997.
--------
Note Two
--------
Cash and Securities Segregated
for Regulatory Purposes
Segregated for the exclusive benefit of clients at September 30, 1997,
under the provisions of Rule 15c3-3 of the SEC were cash and U.S. government
securities collateralizing approximately $90.0 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.
Trading Trading Securities
Securities Sold But Not Yet
Owned Purchased
(All dollars in thousands) ------------------- -------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------
U.S. government/
agency securities $ 3,785 $ 4,948 $65,353 $63,909
Mortgage-backed
securities 20,240 32,854 -- --
Corporate debt 18,645 2,643 293 231
Corporate stocks 3,222 2,849 1,638 1,594
State and
municipal debt 33,228 16,502 46 50
------ ------ -- --
$79,120 $59,796 $67,330 $65,784
======= ======= ======= =======
28
- --------------------------------------------------------------------------------
WHO BELIEVE IN BUILDING STRONG AND LASTING RELATIONSHIPS. -- WE ARE
- --------------------------------------------------------------------------------
<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, 1997, 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 1997 was 5.96% and for 1996 was 5.84%.
---------
Note Five
---------
Notes Payable
Notes payable to various entities at September 30, 1997 and 1996,
consisted of the following:
(All dollars in thousands) 1997 1996
- ------------------------------------------------------------------
Note, bearing interest at prime
plus 2%, with minimum monthly
payments of $75,000 and a balloon
payment due on January 31, 1998 $4,735 $5,334
Note, bearing interest at 30-day
adjusted LIBOR with monthly
payments of $33,000 and a
balloon payment due on
February 1, 1998 535 874
- ------------------------------------------------------------------
$5,270 $6,208
==================================================================
The net book value of buildings and improvements collateralizing $4.7
million of these notes was $4.2 million at September 30, 1997.
All notes payable will mature in the year ending September 30, 1998.
--------
Note Six
--------
Long-Term Debt
The Company's long-term borrowings are as follows:
(All dollars in thousands) 1997 1996
- ---------------------------------------------------------------
8.95% senior secured note,
due April 15, 2007 $16,000
7.75% subordinated convertible
debentures, due March 31, 2011 $20,999
During March 1997, the Company called for redemption of all its outstanding
7.75% subordinated convertible debentures. Prior to the redemption date of April
17, 1997, $5.0 million of the debentures were converted into common stock. To
fund the redemption of the remaining debentures, the Company borrowed $16.0
million from a financial institution to which it issued a senior secured note of
like amount. The note is collateralized by the capital stock of certain
subsidiaries of the Company and by a subordinated loan from the Company to IJL.
The fixed-rate note provides for semi-annual interest payments beginning October
15, 1997; principal is repayable over seven years in equal annual installments
beginning on April 15, 2001 as follows:
Year ending September 30 (All dollars in thousands)
- --------------------------------------------------------------------------
1998 ..........................................$ --
1999 .......................................... --
2000 .......................................... --
2001 .......................................... 2,286
2002 ............................................ 1,959
Thereafter ......................................$ 11,755
The terms of the senior secured note contain various covenants, the most
significant of which require the maintenance of minimum levels of shareholders'
equity and net capital and maximum levels of indebtedness as defined in the note
purchase agreement. At September 30, 1997, the Company was in compliance with
all such restrictive debt covenants.
29
- --------------------------------------------------------------------------------
COMMITTED TO ENSURING SUPERIOR FINANCIAL PERFORMANCE. OUR RESPONSIBILITY
- --------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated
Financial Statements
----------
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
- -----------------------------------------------------------------
1998 ............................................$ 6.7
1999 ............................................ 5.1
2000 ............................................ 2.9
2001 ............................................ 1.7
2002 ............................................ 1.5
Thereafter ........................................ 3.6
- -----------------------------------------------------------------
$ 21.5
==============
Lease expense was $7.7 million in 1997, $7.8 million in 1996, and $7.4
million in 1995.
In lieu of margin deposits with certain clearing agencies, IJL had $2.6
million outstanding at September 30, 1997, 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 than equities or options in periods of stable interest
rates.
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, 1997, IJL's commitments included forward purchase and sale
contracts, involving mortgage-backed securities with long market values of
approximately $173.2 million and short market values of approximately $165.7
million, and futures sales contracts with short values of $24.6 million used
primarily to hedge municipal bond trading inventories. While the Company may
from time to time participate in the trading of some derivative securities for
its clients, this activity 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 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, 1997, were made
to five 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.
30
- --------------------------------------------------------------------------------
TO OUR FELLOW EMPLOYEES AND OUR SHAREHOLDERS DEMANDS THAT THE FIRM
- --------------------------------------------------------------------------------
<PAGE>
--------
Note Ten
--------
Stock-Based Compensation
The Company has two stock option plans under which 370,000 shares with
tandem stock appreciation rights were reserved at September 30, 1997 and 1996.
The Company has a stock award plan under which 2,800,000 shares were reserved at
September 30, 1997, and 1,800,000 at September 30, 1996, for issuance of
restricted stock, contingent stock awards, or stock options. In addition, the
Company has a Long-Term Incentive Plan ("LTIP") under which 350,000 shares were
reserved at September 30, 1997, and 300,000 shares at September 30, 1996. The
Company's stock-based compensation plans are described as follows:
Stock Options
Under the Company's stock option plans, options may be granted to certain
employees and directors at or above the market value of the shares at the date
of grant. Prior to 1997, options granted generally became exercisable at the
rate of one-third each year as of one year after the date of grant, expiring 10
years thereafter. In 1997, the majority of the options granted were 100%
exercisable upon issuance and expire 10 years thereafter; the remaining options
were 100% exercisable upon meeting certain contingencies, and expire seven years
thereafter. All contingencies were met as of September 30, 1997.
Information with respect to the two plans follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- -------------------------
Wgt. Avg. Wgt. Avg.
Number Exercise Number Exercise
of shares Price of shares Price
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Beginning
of period 94,100 $ 6.97 186,433 $ 6.92
Granted 310,000 13.50 -- --
Exercised (47,600) 8.12 (59,833) 3.68
Forfeited /
reinstated - net 3,000 9.15 5,000 6.00
Expired -- -- (37,500) 12.75
------- --------- ------- -----
End of period 359,500 $ 12.47 94,100 $ 6.97
======= ========= ====== =========
Exercisable at
end of period 359,500 $ 12.47 94,100 $ 6.97
======= ========= ====== =========
</TABLE>
The following table sets forth information about options outstanding at
September 30, 1997:
Options Outstanding Options Exercisable
--------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise of Cont. Exercise of Exercise
Prices shares Life Price Shares Price
- -----------------------------------------------------------------
$6.00 49,500 1.33 $ 6.00 49,500 $ 6.00
$13.50 310,000 8.37 13.50 310,000 13.50
- -----------------------------------------------------------------
$6.00-
$13.50 359,500 7.40 $12.47 359,500 $12.47
=================================================================
The Company applies the intrinsic value method in accounting for its plans
and, accordingly, no compensation cost has been recognized for its options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options granted in 1997, the
Company's net income and earnings per share would have been as indicated below:
(All dollars in thousands except per share amounts)
1997 1996 1995
- -------------------------------------------------------------
Net income
As reported $10,900 $9,355 $5,928
Pro forma 10,039 9,355 5,928
Primary earnings per share
As reported $1.68 $1.55 $0.94
Pro forma 1.55 1.55 0.94
Fully diluted earnings per share
As reported $1.57 $1.36 $0.91
Pro forma 1.45 1.36 0.91
No options were granted in 1996 or 1995 and, pursuant to the disclosure
requirements of FASB Statement No. 123, pro forma net earnings reflect only
those options granted in 1997. Moreover, the initial impact of applying FASB
Statement No. 123 in 1997 is not representative of the potential impact on pro
forma net earnings for future years due to potential subsequent option grants
and to the vesting schedules of those grants.
The aggregate weighted average fair value of all options granted during
1997 was $1,345,723, determined as of the grant date. The fair values of options
granted were calculated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997: risk-free
interest rate of 6.61%; expected volatility of 27%; dividend yield of 1.9%
(10-year options) and 1.7% (7-year options); and expected lives of 6.1 years
(10-year options) and 4.6 years (7-year options).
31
- --------------------------------------------------------------------------------
FUNCTION AS PRODUCTIVELY AND COST-EFFECTIVELY AS POSSIBLE. WE WILL WORK TO
- --------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated
Financial Statements
Stock Award Program
From time to time, the Company may award shares of restricted stock to
certain key employees. The value of these awards is measured as the market value
of the Company's stock on the date of the grant and is amortized over the
restriction period as specified in the award. A total of 25,000 shares were
issued under this program in 1997 with an approximate market value of $341,000.
Performance-Based Stock Award Plan
In 1996, the Company adopted an equity-based Long-Term Incentive Plan
("LTIP") for executive officers and other senior executives. The LTIP provides
for awards of Company stock in October 1998, the amounts of which will depend on
the level of aggregate earnings per share (as defined in the Plan) attained
during the three-year period commencing October 1, 1995, and ending September
30, 1998.
Under the terms of the Plan, a portion of the award may be granted in
unrestricted shares and the remainder in restricted shares which vest on
September 30, 2001, subject to the recipients' continued employment to that
date, or his death, disability, or retirement. Each recipient may elect to
receive up to 50% of the grant of unrestricted shares in cash in lieu of shares.
Compensation expense is recognized according to the total anticipated value
of the award as of September 30, 1998, and the respective service periods during
which the unrestricted and restricted share portions of the award are considered
to be earned. Compensation expense under the Plan totaled $2.7 million in 1997
and $1.2 million in 1996.
Employee Discount Stock Purchase Program
IJL maintains an annual employee stock purchase program pursuant to which
selected employees may, under a deferred compensation plan, purchase shares of
the Company's stock through payroll deductions at a price equal to 80% of the
fair market value of the stock as calculated under the Plan. In 1997, a total of
98,000 shares were issued under this plan pursuant to the 1996 program, and
approximately 57,000 shares will be issued in 1998 pursuant to the 1997 program.
Compensation expense recognized for 1997 and 1996 was $318,000 and $116,000,
respectively. Shares purchased under annual programs are restricted for periods
from two to four years from the date of issue.
Key Employee Stock Purchase Program
In 1996, the Company adopted a program enabling certain key producers to
enter into agreements with the Company whereby they would subscribe for and
agree to purchase a specified number of shares of common stock over a five-year
period commencing January 1, 1997, and ending December 31, 2001. Shares were
offered at a price specified in the Plan which may or may not be less than their
fair market value on the various award dates during the period of the program.
Payment for the shares by the employee is effected through a combination of a
lump-sum balloon payment at the end of the period and periodic payroll
deductions, which may be used to purchase unrestricted shares on an after-tax
basis or restricted shares on a pre-tax basis.
A total of 476,000 shares have been reserved for future issuance, and
compensation expense of $171,000 was recognized in 1997 in connection with this
program. Compensation is based on the difference between the purchase price of
the shares and the fair market values on the award dates and is amortized over
the purchase period.
Deferred Compensation Plan
IJL maintains a non-qualified deferred compensation plan for certain of its
financial consultants in the Private Client Group. Eligible participants direct
the investment of their deferred compensation amounts into various investment
vehicles, including the common stock of the Company. Participants vest in the
deferred compensation accounts after four years, and forfeit their account
balance if they terminate their employment during the vesting period. The value
of the deferred compensation is recognized over the five-year period of employee
service. Compensation expense related to these plans totaled $2.7 million in
1997, $2.0 million in 1996, and $1.4 million in 1995.
-----------
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. 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 1997, $1.7 million in 1996, and
$1.2 million in 1995.
32
- --------------------------------------------------------------------------------
GROW REVENUES, STREAMLINE PROCEDURES AND TO BE INNOVATIVE AND UNBUREAU
- --------------------------------------------------------------------------------
<PAGE>
-----------
Note Twelve
-----------
Income Taxes
Income tax expense recorded for financial reporting purposes is comprised
of the following items:
(All dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Current:
Federal $8,939 $8,260 $1,524
State 1,978 1,613 998
- ----------------------------------------------------------------------
10,917 9,873 2,522
- ----------------------------------------------------------------------
Deferred:
Federal (3,999) (3,270) 1,611
State (786) (365) (198)
- ----------------------------------------------------------------------
(4,785) (3,635) 1,413
- ----------------------------------------------------------------------
Total tax expense $6,132 $6,238 $3,935
======================================================================
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:
(All dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Compensation and
benefits $ (2,516) $(1,201) $ (640)
Real estate, bad debt
and other expenses (760) (12) 846
Partnership tax losses 9 (745) 154
Other (1,518) (1,677) 1,053
- ----------------------------------------------------------------------
Deferred tax
expense (benefit) $ (4,785) $(3,635) $ 1,413
======================================================================
The principal differences between the federal statutory rate and the
effective income tax rate are as follows:
1997 1996 1995
- ----------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 34.0%
State taxes, less federal
benefit 4.5 5.2 5.4
Tax-exempt interest, net (3.9) (3.4) (4.8)
Goodwill amortization 1.2 1.3 2.0
Other (0.8) 1.9 3.3
- ----------------------------------------------------------------------
Effective tax rate 36.0% 40.0% 39.9%
======================================================================
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, 1997 and 1996, these were comprised of the following:
(All dollars in thousands) 1997 1996
- -----------------------------------------------------------------------
Deferred tax assets:
Compensation and benefits $6,761 $4,279
Real estate, bad debt and
other expenses 3,204 1,193
- -----------------------------------------------------------------------
9,965 5,472
- -----------------------------------------------------------------------
Deferred tax liabilities:
Partnership tax losses 179 171
Other -- 300
- -----------------------------------------------------------------------
179 471
- -----------------------------------------------------------------------
Net deferred tax assets $9,786 $5,001
=======================================================================
-------------
Note Thirteen
-------------
Net Capital Requirements
As a registered broker-dealer and member of the NYSE, 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 NYSE 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 CFTC minimum net capital requirement.
At September 30, 1997, IJL's net capital was $41.0 million, or 14.3%, of
its aggregate debit balances, and approximately $35.3 million in excess of its
minimum regulatory requirements.
As a registered broker-dealer and member of the NASD, CapTrust is also
subject to the SEC's uniform net capital rule. Under the rule, CapTrust is
prohibited from engaging in any transactions when its "net capital" is less than
$250,000 or 1/8th of its "aggregate indebtedness," whichever is greater, as
these terms are defined in the rule. As of September 30, 1997, CapTrust's net
capital was $695,000 and approximately $445,000 in excess of its minimum
regulatory requirements.
33
- --------------------------------------------------------------------------------
CRATIC. -- WE ARE COMMITTED TO IMPROVING THE COMMUNITIES IN WHICH WE
- --------------------------------------------------------------------------------
<PAGE>
--------------------
Officers & Directors
--------------------
Interstate / Johnson Lane,
Incorporated
Principal Officers
& Directors
Claude S. Abernethy, Jr.
Senior Vice President
Interstate/Johnson Lane Corporation
Newton, North Carolina
Parks H. Dalton(3)
Chairman of the Board
Charlotte, North Carolina
John B. Ellis(1)(2)
Private Investor
Atlanta, Georgia
Peter R. Kellogg(1)(3)
Senior Partner and Chief Executive Officer
Spear Leeds & Kellogg
New York, New York
The Hon. J. Alex McMillan, III(1)(2)
President
The McMillan Group
Charlotte, North Carolina
James H. Morgan
President and Chief Executive Officer
Charlotte, North Carolina
Dudley G. Pearson
Senior Vice President
Interstate/Johnson Lane Corporation
Atlanta, Georgia
Edward C. Ruff
Executive Vice President and
Chief Operating Officer
Charlotte, North Carolina
Lewis F. Semones, Jr.
Chief Financial Officer
Charlotte, North Carolina
Minor Mickel Shaw
President
Micco Investment Group
Greenville, South Carolina
B. Franklin Skinner(2)(3)
Private Investor
Atlanta, Georgia
Grady G. Thomas, Jr.
Senior Vice President
Interstate/Johnson Lane Corporation
Charlotte, North Carolina
--
J. David T. Johnson
Director Emeritus
Savannah, Georgia
(1)Audit Committee Member
(2)Compensation & Stock Plans Committee Member
(3)Nominating Committee Member
(graph appears here)
Interstate / Johnson Lane
Corporation
Executive Officers
& Directors
Douglas R. Aldridge(1)
Senior Managing Director
Private Client Group
Thomas A. Avery, Jr.
Senior Managing Director
Equity Capital Markets 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)
Executive Managing Director and
Chief Operating Officer
Lewis F. Semones, Jr.(1)(2)
Senior Managing Director and
Chief Financial Officer
Gerald J. Simmons
Senior Managing Director
Equity Capital Markets Group
(1)Management Committee
(2)Office of the President
34
- --------------------------------------------------------------------------------
LIVE AND WORK. WE WILL ENCOURAGE ALL EMPLOYEES TO BECOME ACTIVELY
- --------------------------------------------------------------------------------
<PAGE>
--------------------
Investor Information
--------------------
Office Locations
--
Private Client Group
Offices
Georgia
Albany LaGrange
Athens Macon
Atlanta (2) Marietta
Augusta (2) Rome
Brunswick Savannah (2)
Columbus Statesboro
Warner-Robins
North Carolina
Asheville Lenoir
Brevard Morehead City
Chapel Hill Morganton
Charlotte (3) Murphy
Clinton New Bern
Durham Newton
Fayetteville North Wilkesboro
Gastonia Pinehurst
Goldsboro Raleigh
Greensboro Roanoke Rapids
Greenville Salisbury
Hendersonville Sanford
Hickory Shelby
High Point Statesville
Kinston Wilmington
Winston-Salem
South Carolina
Anderson Greenwood
Charleston Kiawah Island
Columbia Myrtle Beach
Florence Rock Hill
Greenville Spartanburg
Virginia
Richmond Roanoke
Virginia Beach
--
Equity and
Fixed Income
Capital Markets
Offices
Atlanta, GA Charlotte, NC
Beaufort, SC Houston, TX
Boston, MA New York, NY
San Marino, CA
Operating
Subsidiaries
CapTrust Financial Advisors, LLC
IJL Capital Management, Inc.
Interstate/Johnson Lane Corporation
ISC Futures Corporation
ISC Realty Corporation
--
Common
Stock
Ticker Symbol: IJL
New York Stock Exchange
At November 28, 1997,
there were approximately
930 shareholders of record.
--
Registrar
and
Transfer Agent
First Union National Bank
Corporate Trust Client Services
NC-1153
1525 West W.T. Harris Blvd.(3C3)
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
Lewis F. Semones, Jr.,
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 1997 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 20, 1998, at the Radisson
Plaza Hotel, Two NationsBank
Plaza, Charlotte, North Carolina.
Shareholders of record as of
November 28, 1997, will be
entitled to vote at this meeting.
--
Common
Stock Price
Fiscal 1997
HIGH LOW
4th Quarter $ 32-1/4 $ 19-7/8
3rd Quarter 24-1/2 17
2nd Quarter 18-7/8 13-3/8
1st Quarter 13-3/4 12
Common
Stock Price
Fiscal 1996
HIGH LOW
4th Quarter $ 12-5/8 $11
3rd Quarter 12-1/4 10-5/8
2nd Quarter 11-3/4 10-3/4
1st Quarter 10-5/8 9-5/8
35
- --------------------------------------------------------------------------------
INVOLVED IN COMMUNITY SERVICE, ESPECIALLY IN EFFORTS TO IMPROVE EDUCATIONAL
- --------------------------------------------------------------------------------
<PAGE>
(Photo and graphic design apppear on this page)
- --------------------------------------------------------------------------------
OPPORTUNITIES FOR CHILDREN AND YOUTH, AND TO IMPROVE THEIR DAILY LIVES.--
- --------------------------------------------------------------------------------
<PAGE>
---------------------------
IJL
Financial
Center
201 North Tryon Street
P.O. Box 1012
Charlotte, NC 28201-1012
(704) 379-9000
http://www.ijl.com
Spring
1998
--
Corporate Headquarters
Prior to Spring 1998
Interstate Tower
121 West Trade Street
P.O. Box 1012
Charlotte, NC 28201-1012
(704) 379-9000
http://www.ijl.com
---------------------------
<PAGE>
graphic appears on outside back cover
<PAGE>
Exhibit 21
INTERSTATE/JOHNSON LANE, INC.
List of Subsidiaries
September 30, 1997
<TABLE>
<CAPTION>
Percentage of
State in voting securities
Name which Incorporated owned
<S> <C> <C>
Interstate/Johnson Lane Corporation North Carolina 100%
ISC Realty Corporation North Carolina 100
IJL 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
</TABLE>
<PAGE>
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, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Interstate/Johnson Lane, Inc. as
of September 30, 1997 and 1996, and for each of the three years in the period
ended September 30, 1997, which report is included in this Annual Report on Form
10-K.
/s/ Coopers & Lybrand L.L.P.
Charlotte, North Carolina
December 23, 1997
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 24,685
<RECEIVABLES> 286,799
<SECURITIES-RESALE> 77,029
<SECURITIES-BORROWED> 11,990
<INSTRUMENTS-OWNED> 79,120
<PP&E> 11,576
<TOTAL-ASSETS> 626,708
<SHORT-TERM> 23,330
<PAYABLES> 339,308
<REPOS-SOLD> 33,103
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 67,329
<LONG-TERM> 21,270
0
0
<COMMON> 1,433
<OTHER-SE> 87,380
<TOTAL-LIABILITY-AND-EQUITY> 626,708
<TRADING-REVENUE> 7,880
<INTEREST-DIVIDENDS> 34,320
<COMMISSIONS> 160,844
<INVESTMENT-BANKING-REVENUES> 6,864
<FEE-REVENUE> 13,881
<INTEREST-EXPENSE> 19,793
<COMPENSATION> 140,224
<INCOME-PRETAX> 17,032
<INCOME-PRE-EXTRAORDINARY> 17,032
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,900
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.57
</TABLE>
