UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
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.)
IJL Financial Center, 201 North Tryon Street, Charlotte, North
Carolina 28202 (Address of principal executive offices, zip
code)
(704) 379-9000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at January 31, 1999
----- -------------------------------
(Common stock, $.20 par value) 6,619,597
Page 1 of 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, 1998
and September 30, 1998 3
Condensed Consolidated Statements of
Operations--Three Months Ended
December 31, 1998 and 1997 4
Condensed Consolidated Statements of
Cash Flows--Three Months Ended
December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Page 2
<PAGE>
<TABLE>
<CAPTION>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(All dollars in thousands)
December 31, September 30,
1998 1998
------------------- -------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 31,308 $ 34,307
Cash and securities segregated for
regulatory purposes 29,024 4,507
Loans under matched securities resale agreements 4,129 4,194
Receivables:
Financing resale agreements 9,536 38,178
Clients 353,043 350,478
Brokers, dealers and clearing agencies 20,575 23,289
Other 8,191 6,259
Trading securities owned 118,362 108,720
Related party secured demand note
collateralized by marketable securities 15,000 15,000
Land, buildings, and improvements, net 3,568 3,593
Office facilities and equipment, net 9,407 9,060
Goodwill and intangible assets 12,578 12,229
Other assets 48,005 42,477
------------- ------------
$ 662,726 $ 652,291
============= ============
Liabilities and Shareholders' Equity
Short-term borrowings:
Checks payable $ 26,463 $ 18,855
Financing repurchase agreements 51,505 50,975
Borrowings under matched securities repurchase agreements 4,050 4,085
Payables:
Clients 350,763 312,937
Brokers and dealers 13,137 10,916
Other 6,286 6,488
Accrued compensation and benefits 15,111 38,029
Securities sold but not yet purchased 10,814 41,787
Notes payable 3,250 3,295
Other liabilities and accrued expenses 36,860 30,352
------------- ------------
518,239 517,719
------------- ------------
Minority interests 1 12
------------- ------------
Long-term debt:
Senior secured note 16,000 16,000
Related party secured demand note 15,000 15,000
------------- ------------
31,000 31,000
------------- ------------
549,240 548,731
------------- ------------
Common stock 1,433 1,433
Additional paid-in-capital 39,317 37,550
Retained earnings 80,524 77,377
------------- ------------
121,274 116,360
Less: treasury stock, at cost (7,788) (12,800)
------------- ------------
Total shareholders' equity 113,486 103,560
------------- ------------
$ 662,726 $ 652,291
============= ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended December 31,
(All dollars in thousands)
1998 1997
------------------ ----------------------
<S> <C> <C>
Revenues:
Agency commissions $ 30,534 $ 27,998
Principal transactions:
Sales credits 16,693 17,787
Trading gains, net 851 1,670
Investment banking and underwriting 1,879 2,237
Asset management and advisory 5,818 4,358
Interest 11,401 9,132
Other 3,487 2,201
------------- --------------
Total revenues 70,663 65,383
Interest expense 5,807 5,319
------------- --------------
Net revenues 64,856 60,064
------------- --------------
Expenses:
Compensation and benefits 43,439 40,775
Technology and telephone 4,958 4,744
Occupancy 2,724 2,444
Execution, clearance and depository 1,318 1,142
Promotion and development 2,743 2,230
Professional services 1,407 1,304
Printing, postage and supplies 1,250 1,281
Other operating expenses 1,654 1,466
------------- --------------
Total expenses 59,493 55,386
------------- --------------
Income before income taxes 5,363 4,678
Income tax expense 1,823 1,731
------------- --------------
Net Income $ 3,540 $ 2,947
============= ==============
Earnings per share:
Basic $ 0.55 $ 0.50
============= ==============
Diluted $ 0.49 $ 0.45
============= ==============
Weighted average shares:
Basic 6,378,710 5,939,523
============= ==============
Diluted 7,266,908 6,565,615
============= ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31,
(Unaudited)
(All dollars in thousands)
1998 1997
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
- -------------------------------------
Net income $ 3,540 $ 2,947
----------- ---------
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 1,099 1,427
Other non-cash items 137 354
----------- ---------
1,236 1,781
----------- ---------
Changes in operating assets and liabilities:
Cash and securities segregated for
regulatory purposes (24,517) 39,500
Loans under matched securities resale and repurchase agreements, net 30 77
Client receivables and payables, net 35,261 (19,688)
Brokers, dealers and clearing receivables and payables, net 4,935 (737)
Other receivables (1,932) 284
Trading securities owned, net (40,615) (70,289)
Other assets (6,042) (5,003)
Accrued compensation and benefits (22,918) (9,695)
Other liabilities and accrued expenses 10,051 (788)
----------- ---------
(45,747) (66,339)
----------- ---------
Cash used by operating activities (40,971) (61,611)
----------- ---------
Cash flows from financing activities:
- -------------------------------------
Proceeds from (repayment of ):
Short-term bank borrowings 7,608 (2,264)
Borrowings under financing repurchase and resale agreements, net 29,172 76,401
Notes payable (45) 2,784
Stock options exercised 2,756 (8)
Purchase of stock for treasury - (685)
Dividends paid (392) (305)
----------- ---------
Cash provided by financing activities 39,099 75,923
----------- ---------
Cash flows from investing activities:
- -------------------------------------
Capital expenditures (1,127) (5,325)
----------- ---------
Cash used by investing activities (1,127) (5,325)
----------- ---------
Net increase (decrease) in cash and cash equivalents (2,999) 8,987
Cash and cash equivalents at beginning of period 34,307 24,685
----------- ---------
Cash and cash equivalents at end of period $ 31,308 $ 33,672
=========== =========
Cash paid during the period for:
Interest $ 6,109 $ 5,069
Income taxes $ 1,505 $ 4,778
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
Page 5
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
----------------------
The interim financial statements are unaudited; however, such information
reflects all normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the
period. The nature of the Company's business is such that the results of any
interim period are not necessarily indicative of results for a full fiscal
year.
Certain 1997 amounts have been reclassified for comparative purposes in
1998.
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. As of December 31, 1998, IJL's net capital
was 16% of its aggregate debit balances and approximately $51.4 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, 1999 $10.3
For the fiscal year ended September 30,
2000 7.1
2001 5.2
2002 4.8
2003 4.1
2004 3.7
Thereafter 20.6
-------
$ 55.8
4. Legal Proceedings:
------------------
The Company and subsidiaries are 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 consolidated
financial position. The materiality of these legal matters to the Company's
future consolidated operating results depends on the level of future
consolidated 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 credit risk in the event a client or other counterparty is unable to
fulfill its contractual obligations. It is IJL's policy to review, as
necessary, the credit standing of each counterparty. 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, 1998, IJL's commitments included forward purchase and sale
contracts involving mortgage-backed securities with long market values of
$37.3 million and short market values of $29.4 million, and futures purchase
and sale contracts with long markets values of $383,000 and short market
values of $12.0 million used primarily to hedge municipal bond trading
inventories. While IJL may from time to time participate in the trading of
some derivative securities for its clients, this trading is not a significant
portion of IJL'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
98% of all loans under securities resale agreements at December 31, 1998 were
made to two counterparties.
IJL incurs risk in underwriting public securities offerings to the extent
that prospective buyers fail to purchase the securities. The Company attempts
to mitigate this risk through due diligence carried out prior to undertaking
the contractual obligation.
Page 8
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Earnings Per Share:
-------------------
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
December 31,
-------------------------------------
1998 1997
Numerator:
Net income - numerator for
basic earnings per share -
income available to common
stockholders $3,539,726 $ 2,947,492
Numerator for diluted earnings
per share - income available to
common stockholders after
assumed conversions 3,539,726 2,947,492
Denominator:
Denominator for basic earnings
per share - weighted-average
shares 6,378,710 5,939,523
Effect of dilutive securities:
Employee stock options 212,636 306,693
Restricted common stock 138,282 169,399
Performance stock award 537,280 150,000
---------- -----------
Dilutive potential common shares 888,198 626,092
Denominator for diluted earnings
per share - adjusted weighted-
average shares and assumed
conversions 7,266,908 6,565,615
========== =========
Basic earnings per share $0.55 $0.50
========== =========
Diluted earnings per share $0.49 $0.45
========== =========
Page 9
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Subsequent Event:
-----------------
At a special meeting of the Company's shareholders on January 26, 1999, a
majority of the Company's shareholders approved the agreement and plan of
merger with Wachovia Corporation ("Wachovia") pursuant to which the Company
will be merged with Wachovia. The transaction which is subject to approval by
Board of Governors of the Federal Reserve System, as well as various other
regulatory authorities, is expected to close in fiscal 1999.
Page 10
<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.
The profitability of the Company is sensitive to many factors. Among the most
important factors is the level of securities trading volume and the volatility
and general level of market prices. The energized securities markets of recent
years have contributed substantially to the Company's success. A slowdown in
individual investor activity will have adverse effects upon profitability. The
probability and timing of such a slow down is impossible to predict.
Liquidity and Capital Resources
- -------------------------------
The Company's net cash position decreased $3.0 million for the quarter ended
December 31, 1998. Operating activities consumed $41.0 million of cash, partly
funded by $4.8 million of net income adjusted for depreciation and other
non-cash charges. Financing activities provided $39.1 million of cash while
capital expenditures used $1.1 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, 1998
these assets comprised approximately 87% 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.
Page 11
<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, 1998, the Company had $125 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, 1998, IJL had net capital of $58.7
million, "excess net capital" of approximately $51.4 million, and a net capital
ratio of 16%.
Results of Operations
- ---------------------
For the three months ended December 31, 1998, net revenues increased $4.8
million from the same quarter a year ago, while expenses, other than interest,
increased $4.1 million. Net income of $3.5 million was up $593,000 or 20% from
the results of the quarter ended December 31, 1997.
Overall, agency commissions increased $2.5 million, or 9% from the same quarter
a year ago. Increases in option and commodities transactions, coupled with
increased sales of annuities and life insurance products, contributed to the
majority of the increase in the Private Client Group ("PCG") sector. Increased
listed volume was the principal contributor to the growth in the institutional
sector for the same period.
Page 12
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Results of Operations, continued
- --------------------------------
In principal business, sales credits decreased $1.1 million, or 6%, over the
same period a year ago, due to a decline in sales of new equities and corporate
bonds in the PCG sector and a decrease in sales of institutional sector
mortgage-backed and government securities. Net trading gains decreased $819,000
or 49%, over the quarter last year primarily from a decline in profits from
corporate bonds, government securities and mortgage backed securities, offset
somewhat by increases in profits from tax exempt securities.
Investment banking fees and underwriting profits decreased $358,000, or 16% over
the same quarter a year ago due to decrease in corporate finance fees offset by
an increased level of managed underwritings and municipal syndicate trading.
Asset management and advisory fees were up $1.5 million or 34% for the three
month periods, due to the continued growth of asset-based fees charged retail
clients in lieu of transaction-based commissions. Other income increased $1.3
million or 59% over the comparable quarter a year ago primarily as the result of
the disposition of the Company's interest in certain real estate ventures and
gains in various firm investments.
Interest revenues were up about $2.3 million, while interest expense increased
$488,000, for the three month period ended December 31, 1998 compared to the
corresponding period a year ago. The resultant increase of $1.8 million in net
interest income for the three month period is due primarily to an increase in
net interest earned on higher levels of client margin loans.
Compensation and benefits costs increased $2.7 million or 7% for the quarter
December 31, 1998, due primarily to an increase in revenue-based commissions,
profit-driven incentives, and annual employee salary increases as well as
personnel investments in several revenue-producing areas. Occupancy increased
$280,000 or 12% due mainly to the relocation of corporate headquarters in the
third quarter of fiscal 1998. Execution, clearance and depository costs
increased $176,000 or 15% for the three-month period due primarily to the
increase in listed transactions. Promotion and development costs increased
$513,000 or 23% over the same three month period a year ago due to travel
related costs associated with the increased revenue and an increase in
charitable contributions. Other operating expenses were $188,000 or 13% higher
for the quarter due mainly to an increase in transaction processing costs.
Page 13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
The Company and subsidiaries are 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 consolidated
financial position. The materiality of these legal matters to the Company's
future consolidated operating results depends on the level of future
consolidated 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 - None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
December 31, 1998.
Page 14
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERSTATE/JOHNSON LANE, INC.
Registrant
Signature Title Date
/s/ JAMES H. MORGAN President, Chief
- ------------------------- Executive Officer,
James H. Morgan and Chairman of the
Board of Directors February 15, 1999
/s/ LEWIS F. SEMONES, JR. Chief Financial Officer
- -------------------------- (Principal Financial
Lewis F. Semones, Jr. Officer) February 15, 1999
/s/ C. FRED WAGSTAFF, III Assistant Vice President
- -------------------------- (Principal Accounting
C. Fred Wagstaff, III Officer) February 15, 1999
Page 15
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 31,308
<RECEIVABLES> 379,576
<SECURITIES-RESALE> 13,665
<SECURITIES-BORROWED> 2,234
<INSTRUMENTS-OWNED> 118,362
<PP&E> 12,975
<TOTAL-ASSETS> 662,726
<SHORT-TERM> 26,463
<PAYABLES> 370,186
<REPOS-SOLD> 55,555
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 10,814
<LONG-TERM> 34,250
1,433
0
<COMMON> 0
<OTHER-SE> 112,053
<TOTAL-LIABILITY-AND-EQUITY> 662,726
<TRADING-REVENUE> 851
<INTEREST-DIVIDENDS> 11,401
<COMMISSIONS> 47,227
<INVESTMENT-BANKING-REVENUES> 1,879
<FEE-REVENUE> 5,818
<INTEREST-EXPENSE> 5,807
<COMPENSATION> 43,439
<INCOME-PRETAX> 5,363
<INCOME-PRE-EXTRAORDINARY> 3,540
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,540
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.49
</TABLE>
