UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-8952
INTERSTATE/JOHNSON LANE, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
56-1470946
(I.R.S. Employer Identification No.)
Interstate Tower, P.O. Box 1012, Charlotte, North Carolina 28201-1012
(Address of principal executive offices, zip code)
(704) 379-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
---------- ----------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at January 30, 1998
(Common stock, $.20 par value) 6,163,166
PAGE 1 0F 15
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
Index
Page Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of
Financial Condition--December 31, 1997 and
September 30, 1997 3
Condensed Consolidated Statements of
Operations--Three Months Ended
December, 1997 and 1996 4
Condensed Consolidated Statements of
Cash Flows--Three Months Ended
December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Page 2
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
(All dollars in thousands)
December 31, September 30,
1997 1997
------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 33,672 $ 24,685
Cash and securities segregated for
regulatory purposes 50,501 90,001
Loans under matched securities resale agreements 10,928 12,385
Receivables:
Securities resale agreements 30,697 64,644
Customers 302,276 271,102
Brokers, dealers and clearing agencies 25,213 19,798
Other 7,605 7,889
Trading securities owned 115,655 79,120
Land, buildings, and improvements, net 7,850 4,185
Office facilities and equipment, net 7,919 7,391
Goodwill and intangible assets 12,746 12,910
Other assets 37,601 32,598
------------- --------------
$ 642,663 $ 626,708
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings:
Checks payable $ 21,066 $ 23,330
Securities repurchase agreements 63,022 20,568
Borrowings under matched securities repurchase agreements 11,155 12,535
Payables:
Customers 332,943 321,457
Brokers and dealers 11,471 6,793
Other 9,201 11,058
Accrued compensation and benefits 20,275 29,970
Securities sold but not yet purchased 33,576 67,330
Notes payable 8,054 5,270
Other liabilities and accrued expenses 23,709 23,376
------------- --------------
534,472 521,687
------------- --------------
Minority interests 207 208
------------- --------------
Long-term debt:
Senior secured note 16,000 16,000
Common stock 1,433 1,433
Additional paid-in-capital 37,126 36,549
Retained earnings 66,238 63,595
------------- --------------
104,797 101,577
Less: treasury stock, at cost (12,813) (12,764)
------------- --------------
Total shareholders' equity 91,984 88,813
------------- --------------
$ 642,663 $ 626,708
============= ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 3
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months
Ended December 31,
(All dollars in thousands)
except per share amounts)
1997 1996
--------------- --------------
REVENUES:
Agency commissions $ 27,998 $ 22,258
Principal transactions:
Sales credits 17,787 13,392
Trading gains, net 1,670 1,976
Investment banking and underwriting 2,237 1,289
Asset management and advisory 4,358 2,799
Interest 9,132 8,113
Other 2,210 2,439
--------------- --------------
Total revenues 65,392 52,266
Interest expense 5,319 4,726
--------------- --------------
Net revenues 60,073 47,540
--------------- --------------
EXPENSES:
Compensation and benefits 40,775 30,119
Technology and telephone 4,744 4,473
Occupancy 2,444 2,310
Execution, clearance and depository 1,142 997
Promotion and development 2,230 2,012
Professional services 1,304 1,016
Printing, postage and supplies 1,281 961
Other operating expenses 1,475 1,542
--------------- --------------
Total expenses 55,395 43,430
--------------- --------------
Income before income taxes 4,678 4,110
Income tax expense 1,731 1,603
--------------- --------------
NET INCOME $ 2,947 $ 2,507
=============== ==============
Earnings per share: (See Note 6)
Basic $ 0.50 $ 0.44
=============== ==============
Diluted $ 0.45 $ 0.38
=============== ==============
Weighted average shares: (See Note 6)
Basic 5,939,523 5,731,091
=============== ==============
Diluted 6,565,615 7,183,774
=============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 4
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31,
(UNAUDITED)
<TABLE>
<CAPTION>
(All dollars in thousands)
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income $ 2,947 $ 2,507
-------- --------
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 1,427 1,463
Other non-cash items 354 230
-------- --------
1,781 1,693
-------- --------
Changes in operating assets and liabilities:
Cash and securities segregated for
regulatory purposes 39,500 (41,000)
Loans under matched securities resale and repurchase agreements, net 77 (23)
Net payables to customers (19,688) 39,439
Net receivables from brokers, dealers and clearing agencies (737) 14,219
Other receivables 284 (1,875)
Trading securities owned, net (70,289) (81,316)
Other assets (5,003) (64)
Accrued compensation and benefits (9,695) (8,678)
Other liabilities and accrued expenses (788) 1,784
-------- --------
(66,339) (77,514)
-------- --------
Cash used by operating activities (61,611) (73,314)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from (repayment of ):
Short-term bank borrowings (2,264) 12,820
Borrowings under securities repurchase and resale agreements, net 76,401 40,902
Notes payable 2,784 (211)
Stock options exercised (8) --
Purchase of stock for treasury (685) (1,102)
Dividends paid (305) (241)
-------- --------
Cash provided by financing activities 75,923 52,168
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Capital expenditures (5,325) (782)
-------- --------
Cash used by investing activities (5,325) (782)
-------- --------
Net increase (decrease) in cash and cash equivalents 8,987 (21,928)
Cash and cash equivalents at beginning of period 24,685 37,285
-------- --------
Cash and cash equivalents at end of period $ 33,672 $ 15,357
======== ========
Cash paid during the period for:
Interest $ 5,069 $ 8,187
Income taxes $ 4,778 $ 1,569
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 5
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The interim financial statements are unaudited; however, such information
reflects all normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the
period. The nature of the Company's business is such that the results of
any interim period are not necessarily indicative of results for a full
fiscal year.
2. NET CAPITAL REQUIREMENTS:
As a registered broker-dealer and member of the New York Stock Exchange
("NYSE"), Interstate/Johnson Lane Corporation ("IJL"), the principal
operating subsidiary of the Company, is subject to the Securities and
Exchange Commission's uniform net capital rule. IJL has elected to operate
under the alternative method of the rule, which prohibits a broker-dealer
from engaging in any transactions when its "net capital" is less than 2% of
its "aggregate debit balances" arising from customer transactions, as these
terms are defined in the rule. The 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 Commodity Futures
Trading Commission's minimum net capital requirement.
At December 31, 1997, IJL's net capital was 12% of its aggregate debit
balances and approximately $32.8 million in excess of its minimum
regulatory requirements.
Page 6
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES:
Leases for office space and equipment are accounted for as operating
leases. Approximate minimum rental commitments under noncancelable leases,
some of which contain escalation clauses and renewal options, are as
follows:
Millions
----------
For the nine months ended September 30, 1998 $6.8
For the fiscal year ended September 30,
1999 7.6
2000 6.9
2001 4.5
2002 4.2
Thereafter 37.5
-------
$ 67.5
=======
Of a $20 million irrevocable letter of credit available, the amount
outstanding at December 31, 1997 under this facility was $2.1 million.
4. LEGAL PROCEEDINGS:
The Company is involved in certain litigation arising in the ordinary
course of business. While some actions seek substantial damages, management
believes, based upon discussion with counsel, that the outcome of this
litigation will not have a material effect on the Company's financial
position. The materiality of these legal matters to the Company's future
operating results depends on the level of future results of operations as
well as the timing and ultimate resolution of such legal matters.
Page 7
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
IJL's business activities involve the execution, settlement and financing
of securities transactions generating accounts receivable, and thus may
expose IJL to financial risk in the event a customer or other counterparty
is unable to fulfill its contractual obligations. IJL controls the risk
associated with collateralized loans by revaluing collateral at current
prices, monitoring compliance with applicable credit limits and industry
regulations, and requiring the posting of additional collateral when
appropriate.
Obligations arising from financial instruments sold short in connection
with its normal trading activities expose IJL to risk in the event market
prices increase, since it may be obligated to repurchase those positions at
a greater price. IJL's short selling primarily involves debt securities,
which are typically less volatile than equities or options 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 December 31, 1997, IJL's commitments included forward purchase and sale
contracts involving mortgage-backed securities with long market values of
approximately $15.6 million and short market values of approximately $13.2
million, and futures sale contracts with short market values of $15.7
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 trading is not a significant
portion of the Company's business.
IJL enters into resale agreements, whereby it lends money by purchasing
U.S. government/agency or mortgage-backed securities from 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 creditworthiness of the
borrower. Approximately 94% of all loans under securities resale agreements
at December 31, 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.
Page 8
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. CHANGE IN ACCOUNTING PRINCIPLE:
On October 1, 1997, the Company adopted Financial Accounting Standards
Board ("FASB") Statement No. 128, "Earnings Per Share". FASB Statement No.
128 requires all public companies issuing financial statements for both
interim and annual periods ending after December 15, 1997 to report
per-share earnings in two redefined forms, "basic" and "diluted". Basic
earnings per share represent net income divided by weighted common shares
outstanding. Diluted earnings per share represent net income divided by
weighted common shares outstanding plus potential dilutive common shares
such as options and convertible securities that were outstanding during the
period. Prior periods presented have been restated to reflect the
requirements of FASB Statement No. 128.
Page 9
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Business Environment
The Company's principal activities -- securities brokerage for individual
(retail) and institutional investors, market-making in equity and fixed-income
securities, investment banking and underwriting, and investment management and
advisory services -- are highly competitive. 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.
At December 31, 1997, approximately 22% of the Company's retail financial
consultants had fewer than three years' industry experience. Notwithstanding the
energized securities markets of recent years, a prolonged slowdown in individual
investor activity could more severely reduce the revenue production of a less
seasoned sales force. In addition, the continuing trend of increased regulation
of the securities industry could create significant incremental costs and
indirectly stifle certain revenue streams.
Liquidity and Capital Resources
The Company's net cash position increased $9.0 million for the three months
ended December 31, 1997. Operating activities consumed $61.6 million of cash,
partly funded by $4.7 million of net income adjusted for depreciation and other
non-cash charges. Financing activities provided $75.9 million of cash while
capital expenditures used $5.3 million.
The Company's asset base consists primarily of cash, cash equivalents, and other
assets which can be converted to cash within one year; at December 31, 1997,
these assets comprised approximately 90% of the statement of financial
condition. Day-to-day financing requirements generally are influenced by the
level of securities inventories, net receivables from customers and
broker-dealers, and net receivables under resale agreements. Significant
incremental cash requirements also may occur from time to time in connection
with payments under deferred compensation plans, repurchase of the Company's
common stock, funding of new business unit activities, payment of dividends, and
litigation settlements arising from normal business operations. In addition,
$500,000 of capital spending in the first quarter of fiscal 1998 reflects
implementation of the third phase of a planned $10 million program of technology
improvements over a multi-year period.
Page 10
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Liquidity and Capital Resources, continued
At December 31, 1997, the Company had $155 million of unused call loan financing
available. In addition, the Company maintains credit lines of several hundred
million dollars for collateralizing repurchase agreements with other financial
institutions, and has financed its customer receivables with customer payables
for many years. Management believes that these resources, funds provided by
operations, and permanent capital of shareholders' equity and long-term 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, Commodity Futures Trading Commission, and
The New York Stock Exchange, and consistently has operated well in excess of the
minimum requirements. At December 31, 1997, IJL had net capital of $39.3
million, "excess net capital" of approximately $32.8 million, and a net capital
ratio of 12%.
Results of Operations
For the three months ended December 31, 1997, net revenues increased $12.5
million, or 26%, from the previous year, while expenses, other than interest,
increased $12.0 million, or 28%. Net income of $2.9 million was up $438,000 from
the results of the period of a year ago.
Overall, agency commissions increased $5.7 million, or 26% from the same
three-month period of a year ago. Increases in listed and over-the counter
("OTC") equity transactions, coupled with increased sales of mutual funds,
contributed to the majority of the increase in the retail sector. Increased
listed volume was the principal contributor to the growth in the institutional
sector.
In principal business, sales credits increased $4.4 million, or 33%, over the
same three month period of a year ago, due to strong growth in institutional
fixed income products, primarily corporate bonds and mortgage-backed securities.
Net trading gains decreased $306,000, or 16%, over the same three month period
last year primarily from a decline in OTC trading offset by increases in
government securities and listed equities trading.
Page 11
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations, continued
Investment banking fees and underwriting profits increased $947,000, or 73%, for
the same three month period due to an increased level of managed underwritings
in the quarter. Asset management and advisory fees were up $1.6 million, or 56%,
for the comparable three month period 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.
Interest revenues were up about $1.0 million, while interest expenses increased
$592,000, for the three months ended December 31, 1997 compared to the
corresponding period a year ago. The resultant increase of $427,000 in net
interest income is due primarily to an increase in net interest earned on higher
levels of client margin loans.
Compensation and benefits costs increased $10.7 million, or 35%, for the
three-month period ended December 31, 1997, due primarily to an increase in
both revenue-based commissions and profit-driven incentives, and to significant
personnel investments in several revenue-producing areas. Execution, clearance
and depository costs increased $145,000, or 15%, due primarily to the increase
in listed transactions. Promotion and development costs increased $218,000, or
11%, due to the continuing effort to build revenue. Professional services
increased $288,000, or 28%, due primarily to an increase in consulting services
for technology projects and various reengineering efforts as well as portfolio
supervision expenses paid to outside money managers. Printing, postage and
supplies costs increased $320,000 or 33%, due primarily to increases in
transaction volume and expenses for promotional literature.
Page 12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in certain litigation arising in the ordinary
course of business. While some actions seek substantial damages, management
believes, based upon discussion with counsel, that the outcome of this
litigation will not have a material effect on the Company's financial
position. The materiality of these legal matters 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 6. Exhibits and Reports on Form 8-K
a) Exhibits
Designation of Exhibit Sequential
in this Report Description Page Number
--------------------- ------------- ------------
11 Statement Regarding
Computation of Per
Share Earnings 15
b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended December 31, 1997.
Page 13
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERSTATE/JOHNSON LANE, INC.
Registrant
<TABLE>
<CAPTION>
Signature Title Date
---------- ------- -----
<S> <C> <C>
/s/ James H. Morgan
_________________________ President, Chief
James H. Morgan Executive Officer,
and Chairman of the
Board of Directors February 24, 1998
/s/ Lewis F. Semones, Jr.
_________________________ Chief Financial Officer
Lewis F. Semones, Jr. (Principal Financial
Officer) February 24, 1998
/s/ C. Fred Wagstaff, III
_________________________ Assistant Vice President
C. Fred Wagstaff, III (Principal Accounting
Officer) February 24, 1998
</TABLE>
Page 14
<PAGE>
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------------------
1997 1996 (A)
------------- ------------
<S> <C> <C>
Net income per share was computed as follows:
Basic:
Net income $ 2,947,492 $ 2,507,056
============= ============
1) Weighted average shares outstanding 5,939,523 5,731,091
============= ============
Net income per share $ 0.50 $ 0.44
============= ============
Diluted:
1) Unadjusted income $ 2,947,492 $ 2,507,056
2) Interest on convertible subordinated debentures - 248,182
------------- ------------
Adjusted net income $ 2,947,492 $ 2,755,238
============= ============
3) Weighted average shares outstanding 5,939,523 5,731,091
4) Incremental shares related to outstanding
stock options 306,693 30,879
5) Incremental shares related to
convertible subordinated debentures - 1,183,042
6) Incremental shares related to long-term
incentive compensation plan 150,000 -
7) Incremental shares related to issuance
of restricted stock 169,399 238,762
------------- ------------
8) Weighted average shares and common
equivalent shares outstanding 6,565,615 7,183,774
============= ============
Net income per share $ 0.45 $ 0.38
============= ============
</TABLE>
(A) Restated in accordance with FASB Statement No. 128, "Earnings Per Share",
implemented October 1, 1997.
Page 15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> BD
<CIK> 0000771296
<NAME> INTERSTATE-JOHNSON LANE
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 33,672
<RECEIVABLES> 315,334
<SECURITIES-RESALE> 41,625
<SECURITIES-BORROWED> 19,761
<INSTRUMENTS-OWNED> 115,656
<PP&E> 11,983
<TOTAL-ASSETS> 642,663
<SHORT-TERM> 21,066
<PAYABLES> 353,615
<REPOS-SOLD> 74,177
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 33,576
<LONG-TERM> 24,054
0
0
<COMMON> 1,433
<OTHER-SE> 90,551
<TOTAL-LIABILITY-AND-EQUITY> 642,663
<TRADING-REVENUE> 1,670
<INTEREST-DIVIDENDS> 9,132
<COMMISSIONS> 45,785
<INVESTMENT-BANKING-REVENUES> 2,237
<FEE-REVENUE> 4,358
<INTEREST-EXPENSE> 5,319
<COMPENSATION> 40,775
<INCOME-PRETAX> 4,678
<INCOME-PRE-EXTRAORDINARY> 4,678
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,947
<EPS-PRIMARY> .50
<EPS-DILUTED> .45
</TABLE>
