UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 28, 1996
Commission file number 0-15105
SCOTT & STRINGFELLOW FINANCIAL, INC.
(Exact name of Registrant as specified in its charter)
Virginia 54-1315256
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
909 East Main Street Richmond, Virginia 23219
(Address of principal executive offices) (zip code)
(804) 643-1811
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
none
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $0.10 per share
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 X No ....
Indicate by check mark if 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 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. [X]
On September 20, 1996, there were 1,999,247 shares of Scott & Stringfellow
Financial, Inc. Common Stock, par value $.10, issued and outstanding of which
1,217,355 shares were held by non-affiliates. The aggregate market value of such
Common Stock held by non-affiliates, based on the closing market price of $17.00
on September 20, 1996 was approximately $20,695,000.
DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Certain Portions of the 1996 Annual Report to Shareholders (in Parts I and II)
Notice of Annual Meeting and Proxy Statement Dated September 30, 1996 (in Part
III).
Exhibit Index Appears on Page 15
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SCOTT & STRINGFELLOW FINANCIAL, INC.
FORM 10-K
For the Year Ended June 28, 1996
TABLE OF CONTENTS
Page
Item Number
PART I
1. Business 3
2. Properties 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 12
PART II
5. Market for Registrant's Common Stock and Related Shareholder Matters 14
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
8. Financial Statements and Supplementary Data 14
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
10.Directors and Executive Officers of Registrant 14
11.Executive Compensation 14
12.Security Ownership of Certain Beneficial Owners and Management 14
13.Certain Relationships and Related Transactions 14
PART IV
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15
SIGNATURES 16
FINANCIAL STATEMENT SCHEDULES 19
EXHIBITS
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PART I
Item 1. BUSINESS
General
The Registrant, Scott & Stringfellow Financial, Inc., is a holding company
whose principal business activities are conducted through its wholly-owned
subsidiary, Scott & Stringfellow, Inc. ("Scott & Stringfellow"). Scott &
Stringfellow is a regional brokerage, investment banking, and financial services
firm headquartered in Richmond, Virginia. It operates 28 offices in communities
located across Virginia, North Carolina, West Virginia, and South Carolina.
Scott & Stringfellow began operations in South Carolina during the most recent
fiscal year. Its primary activity is retail securities brokerage. Other
significant activities include institutional securities brokerage, management of
and participation in the underwriting of corporate and municipal securities,
investment management services, corporate and municipal finance, trading of
taxable and tax-exempt fixed income and equity securities, equity research,
money market accounts, retirement accounts, and the distribution of mutual fund
and insurance products.
Scott & Stringfellow was originally founded as a partnership in 1893. The
firm has been a member of the New York Stock Exchange, Inc. ("NYSE") since
June 20, 1895. Scott & Stringfellow is believed to be the South's oldest
continuous member of the New York Stock Exchange and one of only three firms
outside of New York which have been members for at least 100 years. Scott &
Stringfellow was incorporated in 1974. In 1986, Scott & Stringfellow Financial,
Inc. conducted an initial public offering of its common stock, increasing its
capital in that year to approximately $14 million. Since 1986, Scott &
Stringfellow has pursued a growth strategy, increasing the number of its branch
offices from 14 to 28 through expansion into North Carolina and South Carolina
and a merger with Norfolk-based Investment Corporation of Virginia in 1989.
During this time, the Company has also increased the number of products and
services offered to clients.
For the fiscal year ended June 30, 1996, approximately 55% of total
revenues were derived from brokerage commissions, 15% from principal
transactions, 14% from investment banking, 9% from interest and dividends, and
7% from advisory and administrative fees and other sources. (See table entitled
"Revenues by Source" on page 5 of this report.)
In addition to its NYSE membership, Scott & Stringfellow has seats on the
American Stock Exchange, Inc. ("AMEX") and the Chicago Stock Exchange, and is a
member of the National Association of Securities Dealers ("NASD"), the
Securities Investor Protection Corporation ("SIPC"), the Securities Industry
Association, and the Public Securities Association. Scott & Stringfellow's two
NYSE seats are leased to third parties under one year agreements which may be
canceled by either party subject to 90 days' notice. The AMEX seat is leased to
a third party under three month agreements which may be canceled by either party
subject to 90 days' notice. SIPC provides protection for client accounts up to
$500,000 each, with a limitation of $100,000 for claims for cash balances. In
addition to the SIPC protection, Scott & Stringfellow has obtained a separate
excess SIPC bond issued by an insurance company which increases the protection
of client accounts by an additional $9.5 million. The combined insurance
coverage of client accounts is therefore $10 million, with a limitation of
$100,000 for cash balances.
The Registrant has 28 offices located in 4 states. Retail sales activities
are conducted through registered investment brokers in all of its offices. Most
of its other activities are conducted at its main office located in Richmond,
Virginia. On June 28, 1996, the Registrant had approximately 520 employees
including 223 employees with full-time investment broker responsibilities. The
following table reflects the location of the Registrant's offices, the year each
office opened, and the number of investment brokers in each office as of June
28, 1996:
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Calendar
Year Number of
Branch Investment
Location Opened Brokers
Virginia
Richmond 1893 46
Blacksburg 1988 5
Charlottesville 1982 9
Chesterfield 1987 6
Culpepper 1971 3
Danville 1986 3
Harrisonburg 1991 4
Lexington 1986 3
Lynchburg 1984 10
Manassas 1987 6
Martinsville 1983 4
Norfolk 1978 25
Roanoke 1984 8
Staunton 1970 7
Tyson's Corner 1986 8
Virginia Beach 1995 1
Warrenton 1970 7
Williamsburg 1995 3
Winchester 1970 5
Total Virginia 163
North Carolina
Charlotte 1988 10
Greensboro 1988 16
Kinston 1988 2
North Wilkesboro 1988 2
Raleigh 1992 9
Wilmington 1990 5
Winston-Salem 1987 9
Total North Carolina 53
West Virginia
Bluefield 1971 3
South Carolina
Charleston 1996 4
Total Company 223
Revenues by Source
The following table sets forth the consolidated revenues of the
Registrant and its subsidiaries for the periods indicated in dollars and as a
percentage of total revenues.
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<TABLE>
<CAPTION>
Years Ended June 28, 1996 June 30, 1995 June 24, 1994
Amount % Amount % Amount %
<S> <C>
Commissions:
Listed $ 19,879,066 27.2 $ 15,055,569 27.8 $ 13,831,469 26.6
Over-the-Counter 8,549,871 11.7 5,220,192 9.7 4,379,746 8.4
Options 1,207,922 1.6 806,672 1.5 677,545 1.3
Mutual Funds 7,574,445 10.3 5,220,372 9.6 6,253,696 12.0
Other 2,691,119 3.7 1,997,878 3.7 1,509,726 2.9
Total Commissions 39,902,423 54.5 28,300,683 52.3 26,652,182 51.2
Principal Transactions:
Municipal Bonds 1,742,336 2.4 3,094,290 5.7 1,722,348 3.3
Over-the-Counter 7,764,215 10.6 5,676,936 10.5 4,865,408 9.3
Corporate and Govt.
Bonds and Other 1,652,883 2.3 1,953,794 3.6 1,511,122 2.9
Total Principal Transactions 11,159,434 15.3 10,725,020 19.8 8,098,878 15.5
Investment Banking 10,559,244 14.4 6,257,511 11.6 10,631,124 20.4
Interest and Dividends 6,621,355 9.1 5,852,740 10.8 4,015,629 7.7
Advisory and Administrative
Service Fees 4,677,522 6.4 2,781,944 5.1 2,419,646 4.6
Other 245,327 0.3 201,391 0.4 290,119 0.6
Total Revenues 73,165,305 100.0 $ 54,119,289 100.0 $ 52,107,578 100.0
</TABLE>
The percentage contribution to total revenues of each aspect of the
Registrant's operations does not necessarily reflect a corresponding percentage
contribution to net income. Because of the interdependence of various activities
and departments of the Registrant's business, and the assumptions which would be
involved in allocating overhead, including administrative, operations,
communications and data processing expenses, it is inappropriate to state a
percentage contribution to net income of each aspect of the Registrant's
operations.
Retail Markets
Retail investment brokerage is the Registrant's principal business activity
and is the largest contributor to the Registrant's revenues. During fiscal 1996,
revenues from the Registrant's retail brokerage activities are estimated to
represent approximately 92% of the Registrant's brokerage and investment banking
revenues and 78% of total revenues. Revenues from retail brokerage activities
are generated through customer purchases and sales of stocks, bonds, mutual
funds, and other securities. Commissions are charged on both listed and
over-the-counter agency transactions. When the Registrant executes
over-the-counter transactions as a dealer, it may charge mark-ups or mark-downs
in lieu of commissions. (See "Market-Making and Principal Transactions.")
Retail commissions are charged in accordance with a schedule which the
Registrant has formulated, and which may be changed from time to time. In many
cases, discounts from the schedule are granted to retail clients, generally on
large trades or to active customers. A significant portion of the Registrant's
retail clients are individuals who reside in the Southeastern United States. The
Registrant is not dependent on any single client or small number of clients.
However, the Registrant is heavily dependent on the continued services of its
investment broker employees to attract and retain clients. (See "Employees.")
The Registrant has recently introduced managed account services. Under this
client service arrangement, revenues are derived from a fee based on a
percentage of client account assets in lieu of a separate commission for each
securities transaction. Although this service is currently being provided only
in conjunction with professionally managed accounts, the service may be extended
to other client accounts in the future. For fiscal
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1996, revenues from managed account fees were less than 1% of total revenues.
However, providing clients with a fee-based alternative to the traditional
transaction commission is a significant emerging trend in the securities
industry. Therefore, the Registrant's success in designing and marketing a
managed accounts service may be increasingly important to the growth and
profitability of its retail brokerage revenues in the future.
In addition to brokerage revenues, the Registrant's client accounts are a
significant source of interest income. Approximately 88% of interest and
dividend income and 8% of total revenues is attributable to interest charged on
client margin accounts. Balances in client margin accounts increased by 21% from
1995 to 1996 to a total of approximately $79 million at year-end, following a 9%
increase from 1994 to 1995. As a service to its retail clients, the Registrant
provides margin accounts which allow the customer to pay less than the full cost
of a security purchased, with the balance of the purchase price being provided
by the Registrant as a loan secured by the securities purchased. Clients may
also borrow money from the Registrant for other purposes, provided the loan is
adequately secured by marketable securities held in a margin account. The amount
of such margin loans are subject to the margin requirements (Regulation T) of
the Board of Governors of the Federal Reserve System, NYSE margin requirements,
and the Registrant's internal policies, which in some instances are more, but in
no event less stringent than requirements set by Regulation T and the NYSE. In
permitting customers to purchase securities on margin or otherwise borrow money
through a margin account, the Registrant bears the risk of a market decline
which could reduce the value of its collateral below customers' indebtedness.
In addition to securities brokerage and margin lending services, the
Registrant also provides its retail clients specialized financial services
including equity and fixed income research, investment seminars, portfolio
evaluation, retirement planning, financial planning, individual retirement
account custodial services, money market services, managed account services and
other personal investment advisory services. Fees are charged for some, but not
all, of these services. Advisory and administrative service fees, which include
investment management fees, accounted for approximately 6% of the Registrant's
total revenues in 1996. (See also "Investment Management.")
Capital Markets
In an effort to coordinate the Registrant's capital markets initiatives, the
Registrant reorganized its Institutional Brokerage, Trading, Research, and
Corporate and Municipal Finance departments during 1996 under a Capital Markets
Group. While direct revenue gains from the capital markets are a desired result,
the Registrant also hopes to increase the number of quality investment
opportunities for its retail clients.
Institutional Brokerage
The Registrant executes securities transactions for institutional investors
such as banks, mutual funds, insurance companies, and pension and profit-sharing
plans. The 9 investment brokers in the institutional equity and municipal bond
sales departments account for a significant portion of these transactions.
Institutional investors normally purchase and sell securities in large
quantities which require special marketing and trading expertise. The Registrant
believes that a significant portion of its institutional brokerage commissions
are received as a consequence of providing institutions with research reports
and services regarding specific corporations and industries and securities
market information. The Registrant provides services to a nationwide
institutional client base as well as several institutional clients in Europe.
During fiscal 1996, revenues from institutional brokerage activities are
estimated to represent approximately 6% of the Registrant's brokerage and
investment banking revenues and 5% of total revenues.
Transactions for institutional investors are executed by the Registrant
acting as broker or as principal. The Company permits discounts from its
commission schedule to its institutional customers. The size of such discounts
varies with the size of particular transactions and other factors.
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Market-Making and Principal Transactions
The Registrant actively engages in trading as principal in various phases of
the over-the-counter securities business. To facilitate trading by its
customers, the Registrant buys, sells, and maintains inventories of municipal
and corporate bonds and common stocks in order to "make markets" in those
securities. Revenues from principal transactions, which include trading profits
or losses and sales credits, depend upon the general trend of prices, the level
of activity in the securities markets, the skill of employees engaged in
market-making, and the size of the inventories. The activities of the Registrant
in trading as principal require the commitment of capital and create an
opportunity for profit and risk of loss due to market fluctuations. As of June
28, 1996, Scott & Stringfellow made markets in the common stock or other equity
securities of approximately 131 NASDAQ listed corporations, emphasizing local
and regional companies, companies for which the Registrant has performed
investment banking services, or which are covered by the Registrant's research
department.
The following table shows, for the fiscal year ended June 28, 1996, the
highest, lowest, and average monthly inventories (based upon the aggregate,
rather than net, of both long and short positions) for securities in which the
Registrant trades as principal:
Highest Lowest Average
Inventory Inventory Inventory
Municipal Securities $ 9,450,402 $ 2,793,469 $ 5,776,548
Equity Securities (primarily
common stocks) 5,337,647 2,464,567 3,389,458
Corporate Debt Securities 1,830,413 410,664 802,556
Government and Other Securities 1,885,803 383,170 1,085,736
In executing customers' orders to buy or sell over-the-counter securities in
which it makes a market, the Registrant may sell to or purchase from its
customers at a price which is approximately equal to the current inter-dealer
market price, plus or minus a mark-up or mark-down. Alternatively, the
Registrant may act as an agent and execute a customer's purchase or sell order
with another broker-dealer which acts as a market- maker, at the best
inter-dealer market price, in which case a commission is charged.
Personnel engaged in market-making and principal transactions include 7
professionals involved in municipal bond trading, 6 professionals in
over-the-counter equity trading, and 4 professionals in taxable debt securities
trading. Each trading department is subject to internal position limits. The
Registrant has established a credit committee for the purpose of maintaining
policies with regard to position limits and other areas of financial risk.
Investment Banking
The Registrant participates in corporate and tax-exempt securities
distributions as a manager or as a member of an underwriting syndicate or
selling group. Corporate offerings involve common or preferred stock, debt
securities or other securities issued by corporations. Tax-exempt securities are
obligations issued by state and municipal governments, hospitals, educational
institutions, public utility systems, and industrial development authorities.
The following table sets forth corporate and tax-exempt underwriting
participations of the Registrant:
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Managed or Co-Managed Syndicate Participations
Fiscal Number of Amount of Number of Amount of
Years Issues Offering Issues Participations
Corporate Stock and Bond Offerings:
1996 10 $615,862,188 197 $214,542,845
1995 2 133,750,000 149 154,448,702
1994 9 430,922,500 274 301,812,330
1993 9 1,207,690,313 244 268,304,018
1992 2 108,939,263 236 268,485,438
Tax-Exempt Bond Offerings
1996 33 1,359,685,000 35 19,035,000
1995 12 326,308,000 29 22,110,000
1994 48 1,851,323,000 31 30,775,000
1993 42 2,719,273,000 22 22,915,000
1992 41 1,409,034,000 14 10,800,000
The Registrant's underwriting activities, together with its selling group
participations, are an important source of securities for distribution to its
clients. Managed or co-managed offerings, in particular, are an important source
of revenue because of the availability of a large amount of securities for
distribution and management fees earned in connection with such offerings. The
Registrant's underwriting business is very competitive and is expected to remain
so in the near future. In particular, increased competition has negatively
impacted the Registrant's tax-exempt underwriting activities resulting in
reduced management fees which make such underwritings increasingly less
profitable. Despite this trend, the Registrant continues its efforts to attract
tax-exempt underwriting business. It is management's opinion that these efforts
are necessary to supply the Registrant's client base with an adequate volume of
regional tax-exempt securities. The Registrant's corporate stock and bond
offerings are highly dependent on market conditions.
Participation in an underwriting syndicate or selling group involves both
economic and regulatory risks. An underwriting participant may incur losses if
it is unable to resell the securities it is committed to purchase, or if it is
forced to liquidate its commitment at less than the agreed purchase price. In
addition, under federal securities laws, other statutes and court decisions, an
underwriting participant or selling group member may be subject to substantial
liability for material misstatements or omissions in prospectuses and other
communications with respect to such offerings. Further, underwriting commitments
require a charge against net capital and the Registrant's ability to make
underwriting commitments may be limited by the requirement that it must at all
times be in compliance with the net capital rule. (See "Regulation".)
In addition to the underwriting and syndication activities described above,
the Registrant engages in other investment banking services such as structuring,
managing, and marketing private offerings of corporate and tax-exempt
securities, assisting in arranging mergers and acquisitions, and providing
valuation and financial consulting services for gift and estate tax purposes,
employee stock ownership plans, mergers, acquisitions, stock purchase
agreements, and other corporate purposes. Fees generated by these investment
banking services accounted for approximately 2% of the Registrant's total
revenues during 1996.
Research Services
The Registrant's research activities include reviewing and analyzing
general market conditions and specific industries and performing primary
research on individual companies, with particular emphasis on companies in the
Southeastern and Middle Atlantic United States; making investment
recommendations; reviewing client portfolios; publishing portfolio strategy
recommendations; providing investment seminars for
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the benefit of clients and investment brokers; providing market and investment
commentary through local media outlets; and responding to inquiries from clients
and investment brokers. The Registrant's primary research effort is provided by
ten in-house equity analysts and is supplemented by two New York correspondent
firms which cover over 1,100 companies worldwide and provide extensive coverage
on the economy and securities markets. The services provided by the Research
Department are critically important to virtually all revenue-generating
activities of the firm, including retail and institutional brokerage,
market-making, and investment banking. Research reports are made available
without charge to the Registrant's clients.
Investment Management
Scott & Stringfellow Capital Management, Inc. ("SSCM"), a subsidiary of the
Registrant, is a registered investment advisor which provides investment
management services for individuals and their estates and trusts, corporations,
charitable and educational foundations and employee benefit plans. As of
June 28, 1996, SSCM had approximately $311 million of assets under management.
Fee income charged on investment accounts managed by SSCM, which are included in
advisory and administrative service fees, represented approximately 2% of total
revenues in 1996. While comprising a relatively small portion of the
Registrant's total revenues, investment advisory fee income increased 64% from
the previous fiscal year and investment management services are an important
component of management's growth strategy.
Administration and Operations
The Registrant's operations and administrative personnel, which included 94
employees as of June 28, 1996, are responsible for the execution of orders;
processing of securities transactions; receipt, identification and delivery of
funds and securities; custody of clients' securities; cash management; credit;
internal financial control; accounting; human resources; purchasing;
telecommunications; technology; facilities; general office services; client
services; marketing; and compliance with regulatory requirements.
There is considerable fluctuation in the volume of transactions which a
securities firm must handle. In the past, when the volume of trading in
securities reached record levels, the securities industry experienced
significant operating problems. The Registrant has never experienced any
significant operating difficulties, even during periods of exceptionally heavy
trading. There is, however, no assurance that heavy trading volume in the future
will not result in clearing and processing difficulties. The following table
sets forth the high, low, and average number of monthly sale and purchase
transactions processed by the Registrant during the periods shown.
Monthly
Fiscal Years High Low Average
1996 42,272 25,281 32,048
1995 33,659 19,936 24,360
1994 25,141 18,857 21,485
1993 24,441 14,658 18,973
1992 22,696 14,627 18,341
The Registrant currently utilizes the services of SunGard Financial
Systems, Inc. for the electronic data processing related to recording all data
pertinent to security transactions. General accounting is performed through an
in-house general ledger system.
The Registrant believes that its internal controls and safeguards against
securities theft, including use of depositories and periodic securities counts,
are adequate. As required by the NYSE and other regulatory bodies, the
Registrant 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. Such bonds provide total coverage
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of $5,000,000 (subject to a $250,000 deductible per claim.)
All transactions are recorded and posted to the books daily; designated
personnel monitor them to ensure compliance with applicable laws, rules, and
regulations. Periodic reviews of certain controls are conducted, and
administrative and operations personnel meet frequently with management to
review operational conditions in the firm. The Registrant has an internal
auditor who has direct access to the Audit Committee of the Board of Directors,
which includes three outside directors.
During 1996, the Registrant began implementation of a technology plan for
the purpose of improving computer and communications technology to better serve
its clients. Included in this plan is the provision for new computerized broker
workstations, featuring desktop integration of quote services, contact
management, portfolio management, and word processing software. The plan also
includes the creation of a computerized administrative network, which
facilitates electronic mail and the sharing of computer files and resources
between employees.
Competition
The Registrant is engaged in the highly competitive securities brokerage
and financial services businesses. It competes directly with other regional
securities brokerage firms, large Wall Street securities firms, and discount
brokerage firms for a share of the retail brokerage business in its market area.
To an increasing degree, the Registrant also competes for various segments of
the retail financial service business with other institutions such as commercial
banks, savings institutions, mutual fund companies, life insurance companies and
financial planning firms. In particular, it is generally believed that legal and
regulatory changes will allow commercial banks and their holding companies to
compete more directly in the brokerage and investment banking businesses in the
near future.
In addition to the competition for retail investment business, there is
substantial competition among firms in the securities industry to attract and
retain experienced and productive investment brokers. (See "Employees.")
Many of these competitors have far greater personnel and financial
resources than the Registrant. Larger competitors are able to advertise their
products and services on a national or regional basis and have a far greater
number and variety of distribution outlets for their products. Discount
brokerage firms market their services through aggressive pricing and promotional
efforts. In addition, several regional competitors have much more extensive
investment banking activities than the Registrant and therefore possess a
relative advantage with regard to securities distribution.
Recent rapid advancements in computing and communications technology are
substantially changing the means by which financial services are delivered.
These changes are providing consumers with more direct access to a wide variety
of financial and investment services including market information and on-line
trading and account information. Advancements in technology also create demand
for more sophisticated levels of client services. Provision of these services
may entail considerable cost without an offsetting source of revenue. Although
management is committed to utilizing technological advancements to provide a
high level of client service, many of the Registrant's competitors have far
greater technological resources at their disposal.
The Registrant follows a strategy of attempting to offer superior service
and investment advice in order to differentiate itself from competitors.
Employees
As of June 28, 1996, the Registrant had 520 employees, of whom 223 had
full-time investment broker responsibilities. None of the Registrant's employees
are covered by a collective bargaining agreement.
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In large part, the Registrant's future success is dependent upon its
continuing ability to hire, train and retain qualified investment brokers.
During the fiscal year ended June 28, 1996, the Registrant hired 33 investment
brokers. The total number of investment brokers increased to 223 from 214 during
the fiscal year reflecting the aforementioned new hires offset by investment
brokers leaving the Registrant's employ and employees transferred to and from
investment broker and other positions. The Registrant trains new investment
brokers who are required to take examinations given by the NYSE, the NASD and
certain state securities regulators in order to be registered and qualified. The
Registrant also provides for continuing training programs for investment
brokers. Investment brokers are required to meet continuing education
requirements as promulgated by the industry. Competition is intense among
securities firms for investment brokers with good sales production records.
The Registrant considers its employee relations to be very good and
considers its compensation and employee benefits, which include medical, life,
accidental death and disability insurance, a profit sharing and 401(k) plan, an
employee stock purchase plan, educational assistance, as well as a flexible
benefits plan which allows pre-tax contributions for medical insurance premiums,
out-of-pocket medical expenses, and dependent care expenses, to be competitive
with those offered by other securities firms. In addition to the benefits
offered to all eligible employees, the Registrant maintains a stock option plan,
a non-qualified deferred compensation plan, and a management stock purchase loan
plan to attract and retain executive personnel and investment brokers with
outstanding sales production records.
Regulation
The securities industry in the United States is subject to extensive
regulation under federal and state laws. The Securities and Exchange Commission
("SEC") is the federal agency charged with administration of the federal
securities laws. Much of the regulation of broker-dealers, however, has been
delegated to self-regulatory organizations, principally the NASD and the
national securities exchanges. These self-regulatory organizations adopt rules
(which are subject to approval by the SEC) which govern the industry and conduct
periodic examinations of member broker-dealers. Securities firms are also
subject to regulation by state securities commissions in the states in which
they are registered. Scott & Stringfellow is currently registered in 41 states
and the District of Columbia.
The regulations to which broker-dealers are subject cover all aspects of
the securities business, including sales practices, trade practices among
broker-dealers, capital structure of securities firms, uses and safekeeping of
clients' funds and securities, record keeping, and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and by self-regulatory organizations, or changes in interpretations or
enforcement of existing laws and rules, often affect directly the method of
operation and profitability of broker-dealers. The SEC and the self-regulatory
organizations may conduct administrative proceedings which can result in
censure, fines, 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 market rather than the
protection of creditors or stockholders of broker-dealers.
One of the most important regulations with which the Registrant's
broker-dealer subsidiary must continually comply is SEC Rule 15c3-1 and a
similar rule of the NYSE which require the Registrant's broker-dealer subsidiary
to maintain a minimum amount of net capital, as defined. These rules, under the
alternative method, prohibit a broker or dealer from engaging in any securities
transactions at a time when its net capital is less than 2% of aggregate debit
items arising from customer transactions; in addition, restrictions may be
imposed on the operations of a broker or dealer if its net capital is less than
5% of aggregate debit items. At June 28, 1996, the Registrant's broker-dealer
subsidiary's net capital was 19% of aggregate debit items. (See note 6 of Notes
to Consolidated Financial Statements for fiscal 1996 incorporated herein by
reference.)
The laws, rules and regulations of the various federal, state and other
regulatory bodies of which the business of the Registrant is subject are
constantly changing. While the management believes that it is currently in
compliance in all material respects with all laws, rules and regulations
applicable to its business, it
11
<PAGE>
cannot predict what effect any such changes might have.
Item 2. PROPERTIES
The Registrant uses general office space for the conduct of its business.
The Registrant's main office is located in the Mutual Building, 909 East Main
Street, Richmond, Virginia, and its branch operations are conducted in various
office buildings located in 27 other municipalities in which it does business.
All of the Registrant's offices are leased. (See note 11 of Notes to
Consolidated Financial Statements for fiscal 1996 incorporated herein by
reference.) The Registrant is completing the renovation of its main office
space, which includes a modern, efficient trading floor and an auditorium for
sales meetings and training. The Registrant renovates and relocates its retail
branch offices as needed to accommodate additional investment brokers and
improve client service. Although the Registrant's offices are leased,
relocations and renovations often require capital expenditures for leasehold
improvements, furniture and equipment. In addition, implementation of the
technology plan (see "Administration and Operations" ) has required significant
capital expenditures for computer hardware and software beginning in 1996. The
technology-related capital expenditure requirements are expected to continue
into fiscal year 1997.
Item 3. LEGAL PROCEEDINGS
The Registrant has been named in legal actions relating to its securities
business. Management of the Registrant, after consultation with legal counsel,
believes the resolution of these various lawsuits and claims will have no
material adverse effect on the financial position of the Registrant.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Registrant as of June 28, 1996, are as
follows:
<TABLE>
<CAPTION>
Name Age Positions with the Registrant
<S> <C>
S. Buford Scott 63 Chairman of the Board
Frederic Scott Bocock 64 Vice Chairman of the Board
John Sherman, Jr. 50 Director, President and Chief Executive Officer
Steven C. DeLaney 41 Director, Senior Vice President and Director of Capital Markets
John K. Thurston 49 Senior Vice President and Director of Retail Markets
Charles E. Mintz 41 Senior Vice President and Chief Financial Officer
Sandra D. Glass 57 Senior Vice President and Director of Operations
Norman L. Hancock 58 Senior Vice President and Chief Compliance Officer
Victor L. Harper 55 Senior Vice President
</TABLE>
S. Buford Scott has served as Chairman of the Board of Directors of the
Registrant and Scott & Stringfellow since 1974. He also served as its Chief
Executive Officer from 1974 until 1984. Mr. Scott is a member of the Boards of
Directors of Ethyl Corporation and Great Eastern Energy and Development
Corporation. He is also a Director of Sheltering Arms Hospital, a Director of
the Virginia Council on Economic Education, a Director of the National Council
on Economic Education, a Director of Richmond Renaissance, a Director of the
Atlantic Rural Exposition (State Fair of Virginia), a Director of the Hollywood
Cemetery Association, a Trustee of the Securities Industry Foundation for
Economic Education, and Chairman of Elk Hill Farm, Inc.
12
<PAGE>
Frederic Scott Bocock has served as Vice Chairman of the Board of Directors
of the Registrant and Scott & Stringfellow since 1984, and served as President
of Scott & Stringfellow from 1974 until 1984. Mr. Bocock is President of the
Men's Board of the Virginia Home. Mr. Bocock, S. Buford Scott and R. Strother
Scott, a First Vice President - Corporate Finance, are first cousins and
grandsons of Frederic William Scott, co-founder of Scott & Stringfellow.
John Sherman, Jr. was elected President and Chief Executive Officer
effective January 1, 1996. Prior to that he was Executive Vice President and
Chief Operating Officer from August 1995 to January 1996. From 1993 until 1995
he served as Senior Vice President for Branch Administration and Retail Sales of
Scott & Stringfellow. Mr. Sherman joined Scott & Stringfellow in October 1988 as
Vice President and manager of the Kinston, North Carolina branch office. Prior
to joining Scott & Stringfellow, Mr. Sherman served as President of Shurgard
Capital Investments located in Seattle, Washington from January 1988 to October
1988. Prior to January 1988, Mr. Sherman held the position of Vice President and
Kinston branch manager of Wheat, First Securities, Inc.
Steven C. DeLaney, was elected to the Board of Directors of the Registrant
in October 1995. Mr. DeLaney currently serves as Senior Vice President and
Director of Capital Markets with overall responsibility for the investment
banking, research, trading, and institutional sales functions of the Company.
Mr. DeLaney served as Chief Financial Officer of the Company from 1992 to 1995.
Prior to joining the Registrant, Mr. DeLaney was employed from 1976 to 1991 by a
Virginia-based, diversified financial services holding company during which time
he held various financial and executive positions including President and Chief
Operating Officer and Chief Financial Officer.
John K. Thurston started his career in the investment industry in 1975 as a
broker with Bach & Co. in Ft. Lauderdale, Florida. He transferred to Dean Witter
in 1976 and stayed with that firm until 1980, when he opened an office for
PaineWebber in Stuart, Florida, building that office to ten brokers while
continuing in production and also serving as Regional Insurance Coordinator for
200 PaineWebber branches. In 1985, he was named Branch Manager for the firm's
flagship Palm Beach, Florida office and in 1989 became Division Sales Manager
for PaineWebber's 50 Southeast Division offices representing over 800 brokers.
Mr. Thurston later served PaineWebber as Associate Southeast Division Manager
and National Sales Manager for Managed Accounts. In late 1995 he became Senior
Vice President and Director of Retail Markets for Scott & Stringfellow. "I saw
this as an opportunity to become affiliated with a great brokerage firm with a
rich 103-year history, that was of a size where I could make a difference and
have some impact. I'm excited by the future that I see for Scott &
Stringfellow."
Charles E. Mintz was named Senior Vice President and Chief Financial
Officer in January 1996 after serving as First Vice President and Chief
Administrative Officer since May 1995. Mr. Mintz joined Scott & Stringfellow in
August 1990 as manager of the Wilmington, North Carolina branch office. Prior to
joining Scott & Stringfellow, Mr. Mintz served as President of Fox, Graham &
Mintz Securities, Inc. from 1985 until its 1990 acquisition by Scott &
Stringfellow. Prior to 1985, Mr. Mintz was the Myrtle Beach, South Carolina
branch manager of Wheat, First Securities, Inc.
Sandra D. Glass joined the Registrant in 1986 as Director of Operations.
Previously, she was a Senior Vice President and Director of Operations for
Schneider, Bernet & Hickman, Inc., a regional brokerage firm in Dallas, Texas
where she was employed from 1965 to 1985.
Norman L. Hancock joined Scott & Stringfellow in October 1992 as Chief
Compliance Officer. Prior to joining Scott & Stringfellow, Mr. Hancock was with
Wheat, First Securities, Inc. for 35 years, where he was Senior Vice President
and Compliance Director for 18 years. He served as cashier and personnel
director in earlier years. Mr. Hancock was named Senior Vice President in 1996.
Victor L. Harper was a Senior Vice President and has served as a Director
of Scott & Stringfellow, Inc. since 1984. Before joining Scott & Stringfellow
in 1984, Mr. Harper served as a Vice President and Director
13
<PAGE>
of Davenport and Co. Of Virginia, Inc. He served with Davenport in various
capacities from 1968 to 1984. Mr. Harper is also a Trustee and Vice Chairman for
the Securities Industry and Foundation for Economic Education.
All officers serve at the discretion of the Board of Directors.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated herein by reference
to the Corporate Information on exhibit page 13.40 of the Annual Report to
Shareholders for fiscal 1996. The computation of the approximate number of
holders of the Registrant's common stock is based on the number of holders of
record as of June 28, 1996. Information on the holders of record of the
Registrant's common stock is maintained and produced by the Registrant's
transfer agent, Mellon Securities Transfer Company.
Item 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference
to exhibit page 13.1 of the Annual Report to Shareholders for fiscal 1996.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by reference
to exhibit pages 13.2 to 13.9 of the Annual Report to Shareholders for fiscal
1996.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item, except for the required financial
statement schedules, is incorporated herein by reference to exhibit pages 13.10
to 13.23 of the Annual Report to Shareholders for fiscal 1996. The financial
statement schedules, which include the Parent-only Condensed Financial
Statements of the Registrant, are included on pages 18 to 20 of this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants or disagreements on accounting and
financial disclosure.
PART III
The information required by Items 10, 11, 12, and 13, except for the
information regarding Executive Officers called for by Item 10, is incorporated
by reference to the Registrant's definitive Proxy Statement to be used in
connection with the solicitation of proxies to be voted at the Registrant's
Annual Meeting of Shareholders to be held October 22, 1996, which was filed with
the Commission pursuant to Regulation 240.14a(6)(c) on September 25, 1996.
14
<PAGE>
The information regarding Executive Officers required by Item 10 is shown
on page 12 of this Form 10-K.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of Financial Statements, Financial Statement Schedules, and
Exhibits
(1) The following consolidated financial statements of the Registrant
and its subsidiaries, included on exhibit pages 13.10 to 13.23 of the
Annual Report to Stockholders for fiscal 1996, are incorporated herein
by reference:
Consolidated Statements of Financial Condition - June 28, 1996 and June
30, 1995. Consolidated Statements of Income - Fiscal years ended June
28, 1996, June 30, 1995 and June 24, 1994.
Consolidated Statements of Changes in Stockholders' Equity - Fiscal
years ended June 28, 1996, June 30, 1995 and June 24, 1994.
Consolidated Statements of Cash Flows - Fiscal years ended June 28,
1996, June 30, 1995 and June 24, 1994.
Notes to Consolidated Financial Statements.
Report of Independent Auditors
(2) The following financial statement schedules of Scott & Stringfellow
Financial, Inc. are required by Section 210.5-04 of Regulation S-X:
Independent Auditors' Report on Financial Statement Schedules pg. 18
Schedule I - Condensed Financial Statements of Registrant pg. 19
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions, or are inapplicable, or
the required information is included in the consolidated financial
statements or notes thereto and therefore have been omitted.
(3) The following exhibits are filed herewith or incorporated by
reference as indicated. Exhibit number refers to Item 601 of Regulation
S-K:
EXHIBIT NUMBER PAGE
3. Articles of Incorporation Filed as Exhibits 3.1 through 3.4
to Form S-18 Registration Statement
#33-8967 and incorporated herein
by reference
4. Material Contracts -
Other Material Contracts Filed as Exhibits 10.1 through 10.5
in Form S-18 Registration Statement
#33-8967 and incorporated herein
by reference
Master Borrowing Note
agreement with Crestar Bank Filed as Exhibit 10 with the
Registrant's Annual Report on
Form 10-K for the fiscal year
ended June 24, 1994 and
incorporated by reference
15
<PAGE>
Broker Loan Agreement
with Crestar Bank Filed as Exhibit 10 with the
Registrant's Annual Report on Form
10-K for the fiscal year ended June
24, 1994 and incorporated by
reference
Broker Loan Agreement
with NationsBank of Filed as Exhibit 10 with the
Virginia, N.A. Registrant's Annual Report on Form
10-K for the fiscal year ended June
24, 1994 and incorporated by
reference
11. Statement re: Computation of
Earnings per Share Exhibit 11
13. Certain portions of the
Annual Report to Shareholders
for the year ended June 28,
1996, to the extent
specifically incorporated
by reference herein Exhibit 13
22. List of Subsidiaries of
Registrant Filed as Exhibit 22 with the
Registrant's Annual Report on
Form 10-K for the fiscal
year ended June 24, 1994 and
incorporated by reference
23. Consent of Independent
Auditors Exhibit 23
27. Financial Data Schedule Exhibit 27
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K for the fiscal year ended
June 28, 1996.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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, in the City of
Richmond, State of Virginia, on the 25th day of September, 1996.
SCOTT & STRINGFELLOW FINANCIAL, INC. (REGISTRANT)
BY /s/ John Sherman, Jr. September 25, 1996
--------------------- Date
John Sherman, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
16
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ John Sherman, Jr. President and Director September 25, 1996
- --------------------- (Principal Executive Officer)
John Sherman, Jr.
/s/ Charles E. Mintz Senior Vice President and September 25, 1996
- -------------------- Chief Financial Officer
Charles E. Mintz (Principal Financial/
Accounting Officer)
_________________ Director September 25, 1996
S. Buford Scott
/s/ Frederic S. Bocock Director September 25, 1996
- ----------------------
Frederic S. Bocock
/s/ William F. Calliott Director September 25, 1996
- -----------------------
William F. Calliott
/s/ David Plageman Director September 25, 1996
- ------------------
David Plageman
/s/ John. J. Muldowney Director September 25, 1996
- ----------------------
John. J. Muldowney
/s/ R. Bruce Campbell Director September 25, 1996
- ---------------------
R. Bruce Campbell
/s/ William P. Schubmehl Director September 25, 1996
- ------------------------
William P. Schubmehl
/s/ Steven C. DeLaney Director September 25, 1996
- ---------------------
Steven C. DeLaney
/s/ William W. Berry Director September 25, 1996
- --------------------
William W. Berry
/s/ R. Gordon Smith Director September 25, 1996
- -------------------
R. Gordon Smith
/s/ Robert L. Hintz Director September 25, 1996
- -------------------
Robert L. Hintz
</TABLE>
17
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Scott & Stringfellow Financial, Inc.
Under date of July 29, 1996, we reported on the consolidated statements of
financial condition of Scott & Stringfellow Financial, Inc. and subsidiaries as
of June 28, 1996 and June 30, 1995 and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the years ended June
28, 1996, June 30, 1995 and June 24, 1994, as contained in the 1996 annual
report to stockholders. These consolidated financial statements and our report
thereon are incorporated by reference in the 1996 annual report on Form 10- K.
In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement Schedule I.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedules based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Richmond, Virginia
July 29, 1996
18
<PAGE>
Schedule I - Condensed Financial Statements of Registrant
Scott & Stringfellow Financial, Inc. (Parent only)
Condensed Statements of Financial Condition
June 28, June 30,
1996 1995
ASSETS
Investments in not readily
marketable securities $ 167,831 $ 167,831
Investments in subsidiaries (a) 29,762,132 25,453,608
Total Assets $ 29,929,963 $ 25,621,439
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Intercompany (a) $ 172,831 $ 172,831
Dividends payable 266,697 210,762
Distributions payable to shareholders for
purchase and retirement of common stock 3,800,000 -
Total Liabilities 4,239,528 383,593
Stockholders' Equity:
Common stock, $0.10 par value. Authorized
10,000,000 shares; issued and outstanding
2,022,475 in 1996 and 2,107,620 shares
in 1995 202,247 210,762
Additional paid-in capital 10,426,723 9,964,773
Retained earnings 15,537,305 15,062,311
Less: Subscriptions Receivable -475,840 -
Total Stockholders' Equity 25,690,435 25,237,846
Total Liabilities and Stockholders' Equity $ 29,929,963 $ 25,621,439
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended
June 28, 1996 June 30, 1995 June 24, 1994
<S> <C>
Equity in undistributed net income
from subsidiaries (a) $ 3,318,073 $ 1,278,649 $ 1,633,204
Cash dividends (a) 857,640 822,766 1,325,147
Net income $ 4,175,713 $ 2,101,415 $ 2,958,351
</TABLE>
(a) Eliminated in consolidation
See Notes to Consolidated Financial Statements contained in the 1996 Annual
Report to Shareholders and incorporated herein by reference.
See accompanying independent auditors' report.
19
<PAGE>
Schedule I
Condensed Financial Statements of Registrant
Scott & Stringfellow Financial, Inc. (Parent only)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended
June 28, 1996 June 30, 1995 June 24, 1994
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,175,713 $ 2,101,415 $ 2,958,351
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income
of subsidiaries -3,318,073 -1,278,649 -1,633,204
Changes in assets and liabilities:
Inter-company payable - 5,000 -
Net cash provided by operating activities 857,640 827,766 1,325,147
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid -857,640 -822,766 -1,325,147
Purchase and retirement of common stock -19,140 -564,151 -825,752
Issuance of common stock 1,009,250 519,158 450,429
Net cash provided by (used in) financing activities 132,470 -867,759 -1,700,470
CASH FLOWS FROM INVESTING ACTIVITIES
Distributions from subsidiary 19,140 564,151 825,752
Contributions to subsidiaries -1,009,250 -524,158 -450,429
Net cash provided by (used in) investing activities -990,110 39,993 375,323
Net change in cash and cash equivalents - - -
Cash and cash equivalents at beginning of year - - -
Cash and cash equivalents at end of year - - -
</TABLE>
See Notes to Consolidated Financial Statements contained in the 1996 Annual
Report to Shareholders and incorporated herein by reference.
See accompanying independent auditors' report.
20
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Years Ended
June 28, 1996 June 30, 1995
Primary Fully Diluted Primary Fully Diluted
<S> <C>
Weighted average shares
outstanding:
Common shares 2,149,326 2,419,326 2,097,533 2,097,533
Dilutive shares available
under stock options 21,404 29,852 11,382 12,029
Weighted average common
shares and common stock
equivalents outstanding 2,170,730 2,179,178 2,108,915 2,109,562
Net earnings applicable to
common shares 4,175,713 4,175,713 2,101,415 2,101,415
Earnings per share 1.92 1.92 $ 1.00 $ 1.00
</TABLE>
The computation of per share earnings for the year ended June 24, 1994 was
filed on Exhibit 11 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 and is hereby incorporated by reference.
Exhibit 13
SELECTED FINANCIAL DATA
(In thousands except per share amounts and Other Company Data)
<TABLE>
<CAPTION>
Year Ended
June 28, June 30, June 24, June 25, June 26,
1996 1995 1994 1993 1992
<S> <C>
Results of Operations
Total Revenues $ 73,165 $ 54,119 $ 52,108 $ 48,146 $ 46,240
Income before income taxes 6,568 3,288 4,665 5,375 5,174
Net income 4,176 2,101 2,958 3,482 3,289
Per Share Data
Earnings per share $ 1.92 $ 1.00 $ 1.40 $ 1.65 $ 1.53
Cash dividends per share (1) 0.42 0.40 0.35 0.58 0.68
Book value per share 12.70 11.97 11.42 10.42 9.37
Weighted average common shares
and equivalents outstanding 2,171 2,109 2,115 2,115 2,150
Financial Condition
Total assets $114,249 $ 93,266 $ 80,702 $ 79,484 $ 58,975
Total liabilities 88,558 68,028 56,680 57,307 39,225
Total stockholders' equity 25,690 25,238 24,022 22,177 19,750
Other Financial Data
Profit margin:
Pre-tax 9.0% 6.1% 9.0% 11.2% 11.2%
After-tax 5.7% 3.9% 5.7% 7.2% 7.1%
Return on average equity:
Pre-tax 24.1% 13.3% 20.2% 25.5% 26.3%
After-tax 15.3% 8.5% 12.8% 16.5% 16.7%
Other Company Data
Total employees 520 479 458 418 387
Investment brokers 223 214 205 181 170
Branch offices 28 26 25 26 26
</TABLE>
(1) Includes $.29 special dividend in 1993 and $.43 special dividend in
1992.
13.1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
General
The Company is the holding company for Scott & Stringfellow, Inc., a
regional brokerage, investment banking, and financial services firm
headquartered in Richmond, Virginia. Scott & Stringfellow operated as a
partnership from its founding in 1893 until its incorporation in 1974. The firm
has been a member of the New York Stock Exchange since June 20, 1895. The
holding company was established in 1986 in connection with an initial public
offering of common stock. Since 1986, the Company has experienced moderate
growth through strategic acquisitions, the opening of new branch offices in
communities within its market area, and the hiring of additional investment
brokers. The Company now operates 28 offices in communities located across
Virginia, North Carolina, West Virginia, and South Carolina and has
approximately 520 employees including 223 Investment Brokers.
As a full-service firm, Scott & Stringfellow's securities brokerage
activities include retail and institutional brokerage and the distribution of
mutual funds, money market funds, and insurance products; and specialized
financial services including individual retirement account custodial services,
portfolio evaluation, financial planning, and managed account services. Scott &
Stringfellow also provides loans to clients which are secured by marketable
securities held in margin accounts. These brokerage activities are supported by
an in-house equity research department and trading desks for over-the-counter
equities, municipal bonds and taxable fixed income securities. The Company's
investment banking activities include the management of and participation in
underwritings of corporate and municipal securities and financial advisory
services to public and private companies and municipalities. Additionally, Scott
& Stringfellow Capital Management, a wholly owned subsidiary, provides
fee-based, investment advisory services to both individual and institutional
clients.
During fiscal 1996, approximately 84% of the Company's total revenues were
derived from brokerage and investment banking including 77% from retail
brokerage, 5% from institutional brokerage, and 2% from investment banking fees.
Of the Company's remaining revenues, dividends and interest income provided 9%
and investment advisory and administrative service fees and other income
provided provided 7%. Because of the interdependence of various activities and
departments of the Company's business, and the arbitrary assumptions which would
be involved in allocating overhead, including administrative, operations,
communications and data processing expenses, it is not appropriate to state a
percentage contribution to net income of each aspect of the Company's
operations.
The Company's profitability is largely sensitive to the market volume of
trading in securities and the relative level and volatility of market prices for
equity and fixed income securities. Many of the Company's activities have high
operating costs which do not decrease proportionately with reduced levels of
activity and may even increase during such periods. Moreover, many of these
operating costs may increase at a proportionately greater rate than revenues
during periods of increased activity. While the Company attempts to develop
revenue sources which are less sensitive to financial market conditions, its
profitability is adversely affected by sustained periods of reduced transaction
volume or loss of brokerage clients. The Company's profitability is also
adversely affected when it is unable to compensate for increases in fixed costs
through increased transaction volume or the pricing of its services.
Scott & Stringfellow is registered with the Securities and Exchange
Commission ("SEC") as a broker-dealer and Scott & Stringfellow Capital
Management is registered with the SEC as an investment advisor. Accordingly, the
Company is subject to SEC rules applicable to broker-dealers and investment
advisors and to rules promulgated by securities industry self-regulatory
agencies, such as the National Association of Securities Dealers, Inc. ("NASD")
and the Municipal Securities Rulemaking Board ("MSRB"). As a member of the New
York Stock Exchange, the Company is also subject to its rules and to a periodic
examination of the Company's broker-dealer operations. Scott & Stringfellow is a
member of the Securities Investor Protection Corporation ("SIPC") which insures
customer accounts of member broker-dealers.
13.2
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds include its net income adjusted for
non-cash items, cash balances payable to clients, broker-dealers, and others,
and short-term bank financing. As set forth in the Consolidated Statement of
Cash Flows for the year ended June 28, 1996, presented in the financial
statements which follow, cash provided by operations was $4.2 million, of which
$3.1 million was used for investing activities and $0.2 million was used for
financing activities, resulting in an increase in cash and cash equivalents of
$0.8 million. Of particular note, purchases of equipment and leasehold
improvements totaled $1.7 million, an increase of $1.0 million from the amount
expended in the previous fiscal year, which was partially attributable to
implementation of the Company's technology plan as well as renovation and
relocation of offices.
During fiscal 1996, the Company's total assets increased by 22% to $114.2
million from $93.3, primarily as a result of increases in receivables from
customers, representing higher loan balances to finance clients' purchases or
carrying of securities on margin. Receivables from customers represent 69% of
the Company's total assets and have increased by an average of 17% over the past
three fiscal years. Approximately 88% of the Company's total assets, including
receivables from customers, are liquid, consisting of cash or assets convertible
into cash.
The Company has historically funded its assets with equity capital,
customer credit balances, and short-term bank loans. At June 28, 1996, total
stockholders' equity was $25.7 million, or 23% of total assets. The Company's
largest liability, payable to customers, amounted to $60.6 million, or 53% of
total assets at June 28, 1996, an increase of 19% from June 30, 1995 to June 28,
1996. The remaining funding was provided primarily by short-term liabilities
arising in the ordinary course of the Company's business and by short-term bank
loans. Short-term bank loans are used from time to time to finance periodic
increases in receivables from customers and trading securities. Such loans are
secured by either customer-owned securities held in margin accounts or
firm-owned securities held in inventory accounts. The Company maintains lines of
credit from established financial institutions totaling $58.0 million, of which
$3.6 million was outstanding as of June 28, 1996. Additional bank lines of
credit are available on a short-term basis for the purpose of financing new
underwritings.
During the last month of the fiscal year, the Company repurchased 200,000
of its common shares through a "Dutch Auction" tender offer. The shares were
purchased at a price of $19.00 per share for a total cost of $3.8 million. The
Company made this offer because management believes that, given the Company's
business, assets and prospects and the current market price of its shares, the
purchase of the shares is an attractive use of the Company's funds. In addition
to the tender offer, 1,392 shares were repurchased through the open market. The
Company plans to continue repurchasing its shares from time to time as
conditions warrant. The company also declared cash dividends of $0.9 million
during the year.
The Company issued 116,247 shares of stock during the fiscal year. Of this
total, 67,675 shares were issued to the Company's employee stock purchase plan
for proceeds of $0.9 million. This source of equity financing is expected to
increase in future years as participation in this plan and the balance of its
holdings increases.
Scott & Stringfellow is subject to the net capital requirements of the
Securities and Exchange Commission and the New York Stock Exchange, which are
designed to measure the general financial soundness and liquidity of
broker-dealers. The Company has consistently operated well in excess of the
minimum regulatory net capital requirements and believes that it ranks among the
best capitalized firms in the brokerage industry relative to its size. At June
28, 1996, Scott & Stringfellow's net capital of $15.1 million exceeded the
minimum requirement by approximately $13.5 million.
Management believes that funds provided by earnings, combined with its
liquid capital base and its present lines of credit, will be fully adequate to
meet the Company's financing needs for the foreseeable future.
13.3
<PAGE>
RESULTS OF OPERATIONS
The results of the Company's operations over the three year period covered
by fiscal years 1996, 1995, and 1994 reflect increasing levels of both revenues
and expenses, as the Company attempts to maintain adequate profit margins during
a period of generally favorable financial market conditions and competitive
conditions within its industry.
The following table provides a summary of the changes in the major
categories of revenues and expenses in both dollar amounts and percentage terms
for the years ended June 28, 1996, June 30, 1995, and June 24, 1994, and serves
as a basis for the comparative discussion of the results of operations for the
last three fiscal years which follows. In this discussion, these three fiscal
years are referred to as 1996, 1995, and 1994, respectively. Because the
Company's fiscal periods end with the last Friday of each month, the results of
operations for fiscal year 1995 include 53 weeks of activity while the results
of operations for fiscal years 1996 and 1994 include 52 weeks of activity.
CHANGES IN RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands) 1996 vs. 1995 1995 vs. 1994
Increase (decrease) Increase (decrease)
Amount Percent Amount Percent
<S> <C>
Revenues
Commissions $ 11,602 41% $ 1,649 6%
Principal transactions 434 4% 2,626 32%
Investment banking 4,302 69% -4,373 -41%
Interest and dividends 769 13% 1,837 46%
Advisory and administrative fees 1,895 68% 362 15%
Other 44 22% -89 -30%
Total revenues 19,046 35% 2,012 4%
Expenses
Employee compensation
and benefits 12,799 37% 510 2%
Communications 320 11% 424 17%
Occupancy and equipment 614 25% 342 16%
Advertising and sales promotion 96 6% 311 22%
Postage, stationery and supplies 387 22% 194 13%
Brokerage, clearing and
exchange fees 302 30% 58 6%
Data processing 260 28% 62 7%
Interest 379 20% 959 102%
Other operating expenses 610 16% 528 16%
Total expenses 15,767 31% 3,388 7%
Income before income taxes 3,279 100% -1,376 -30%
Income taxes 1,205 102% -519 -30%
Net income 2,074 99% - 857 -29%
</TABLE>
13.4
<PAGE>
1996 Compared With 1995
The Company enjoyed record revenues and profits in 1996 as a result of
generally favorable equity market conditions, the completion of 10 managed
equity offerings, and healthy increases in advisory and administrative fees. Net
income was a record $4.2 million, an increase of 99% from the previous year.
Earnings per share of $1.92 represented an increase of 92% from the previous
year as weighted average outstanding common shares and equivalents increased by
3%.
Total revenues increased by $19.0 million, or 35%, in 1996 to a record
$73.2 million. Revenues increased in each revenue category, led by an $11.6
million, or 41%, increase in commissions and a $4.3 million, or 69% increase in
revenues from investment banking activities. Increased levels of revenue from
advisory and administrative fees also contributed significantly to the Company's
growth and profitability.
The increase in commissions revenue was concentrated in equity and
mutual fund securities. Commissions on equity securities transactions accounted
for $7.9 million of the overall $11.6 million increase in commissions. Mutual
funds commissions increased by $2.4 million. Together, these categories
represented 88% of the total increase in commissions revenue. Commissions from
the sale of annuity products increased by $0.7 million, or 42%, and now account
for 6% of total commissions revenue. An increase in commissions on option
transactions of $0.4 million, or 50%, also contributed to the overall increase.
Revenues from principal transactions include sales credits or "mark-ups"
on most fixed income security transactions as well as over-the-counter equity
securities. Principal transactions revenue also reflects the trading profits or
losses as the Company buys and sells these securities. Principal transactions
revenues were up only $0.4 million, or 4%, from the previous fiscal year as
higher transaction volumes in equity securities offset sharply lower volumes, as
well as trading losses, in fixed income securities. Sales credits from
over-the-counter equity securities increased by $2.0 million, or 38%, reflecting
the on-going favorable equity market conditions. However, sales credits from
fixed income securities declined markedly, reflecting a recent lack of investor
enthusiasm for these securities. In particular, sales credits from municipal
bond transactions declined by $0.9 million, or 32%. In addition, municipal bond
trading losses of $0.2 million were incurred in 1996, compared with profits of
$0.3 million in 1995.
The $4.3 million increase in revenues from investment banking activities
reflected a sharp increase in the number of managed equity offerings during
1996. Following a very poor year for equity underwritings in 1995, selling
concessions on underwritten equity securities increased by $3.0 million, or
108%, principally due to an increase in the number of managed equity offerings
to 10 from 2 in the previous year. The number of equity syndicate participations
increased to 197 from 149. The increase in the number of managed equity
offerings also contributed to a $1.8 million increase in underwriting profits
and management fees, an important and profitable source of revenue for the
Company. Despite the general decline in commissions on fixed income securities,
underwriting activity for municipal bonds increased from the depressed level of
1995 as selling concessions on managed underwritten municipal bond offerings
increased by $0.4 million. Fee income from corporate finance services declined
by $0.7 million, or 36%, in 1996 as compared to 1995, during which revenue from
corporate finance engagements was very strong.
Interest and dividend income increased by $0.8 million, or 13%, from
1995 to 1996. Interest income received from clients on margin account borrowings
increased by $0.6 million, or 10%. The average balances of client margin
borrowings increased by approximately 16% from 1995 to 1996, offsetting a
decline in the average margin interest rate of approximately 40 basis points
from 1995 to 1996.
The increase in revenue from advisory and administrative fees reflects
growth from three distinct sources: the investment advisory services provided by
Scott & Stringfellow Capital Management, Inc., the introduction of a new managed
account service, and fees charged for administrative services provided by the
Company. Investment advisory fees increased by $0.5 million, or 64%, as assets
under management grew from $164 million at the end of 1995 to $311 million at
the end of 1996. Managed account services, which entail a fee based on a
percentage of the client's managed
13.5
<PAGE>
assets in lieu of charging standard brokerage commissions, provided revenue of
$0.3 million in its first full year under the current marketing program. Fees
from administrative services, which include money market services, IRA custodial
services, and postage and handling services, accounted for the remaining $1.1
million increase in revenue from investment and advisory fees.
Total expenses increased by $15.8 million, or 31%, reflecting the
variable nature of a large portion of the Company's expenses, principally
compensation. In addition, the average number of personnel employed during 1996
increased by approximately 7% over 1995, contributing to increases in both
compensation and non-compensation expenses. Implementation of a new technology
plan and continued improvements to office space also contributed to increased
expenses.
Employee compensation and benefits increased by $12.8 million, or 37%,
from 1995 to 1996. As the largest category of expense, the increase in
compensation expense represented 81% of the total increase in expenses.
Commission and performance-based compensation paid to investment brokers
increased by $7.0 million, or 40%, as a result of the higher level of sales
production. Other performance-based compensation, based upon departmental and
product revenues and profitability, increased by $2.2 million, or 76%.
Administrative and professional salaries increased by $0.9 million, or 11%, as
the average number of support personnel employed during 1996 increased by 8%
over 1995. The support-to-broker personnel ratio increased to 1.33 at June 28,
1996 from 1.24 at June 30, 1995. The Company believes its support-to-broker
personnel ratio is appropriate by industry standards considering the Company's
size and its emphasis on retail client service. Discretionary compensation
expense, which includes Company profit sharing contributions and bonuses paid to
employees based on calendar year profitability, increased by $2.0 million, or
140%, as a result of the Company's much higher level of profitability in 1996 as
compared to 1995. The remaining increase in employee compensation and benefits
was due primarily to higher payroll taxes and employee benefits, caused by the
higher employee count and compensation expense.
Communications expense, primarily comprised of telephone and market
quote services, increased by $0.3 million, or 11%, due primarily to higher long
distance telephone charges.
Occupancy and equipment expense increased by $0.6 million, or 25%, as a
result of higher rent expense on the Company's office spaces related to new
offices, expansions, relocations and renovations and higher depreciation expense
because of equipment placed in service during 1996 pursuant to the Company's
technology plan and the office improvements. Capital expenditures were $1.7
million in 1996, an increase of 142% from the previous year.
Advertising and sales promotion increased by $0.1 million, or 6%, due to
modest increases in advertising and travel and entertainment expenditures.
Postage, stationery and supplies increased by $0.4 million, or 22%, due
to the ongoing increase in the volume of client statements and higher general
office expenses, in part related to the increase in employee headcount.
The increased expenses for brokerage, clearing and exchange fees (30%)
and data processing (28%) were due mainly to the increased volume of securities
transactions in 1996 compared to 1995.
Interest expense increased by $0.4 million, or 20%, as interest paid on
higher average interest-bearing customer credit balances offset a reduction in
interest expense on lower levels of bank borrowings to finance securities
inventory.
The $0.6 million increase in other operating expenses was due in part to
an increase in employment agency fees of $0.2 million, charitable contributions
of $0.1 million, and legal settlements of $0.1 million.
1995 Compared With 1994
Despite a 4% increase in total revenues, net income declined by 29% from
1994 to 1995 due to changes in the revenue mix and higher expenses. Earnings per
share also declined by 29% as average shares outstanding remained virtually
unchanged.
13.6
<PAGE>
Total revenues increased by $2.0 million, or 4%, in 1995 to a record
$54.1 million. The increase in revenues reflected continued growth in the
Company's core retail brokerage operations as commissions increased by 6% and
principal transactions by 32%. Interest and dividend income also increased,
principally due to higher levels of customer margin borrowings. Despite the
increase in total revenues, a decline in investment banking revenues of $4.4
million, or 41%, negatively impacted revenue growth and overall profitability.
Commission revenues rose 6% to $28.3 million, with commissions on
transactions in equity securities accounting for 125% of the $1.6 million net
increase. Commissions on exchange listed equities increased by $1.2 million, or
9%, and commissions on over-the-counter equities increased by $0.8 million, or
19%. Commissions on other securities increased by $0.1 million. These increases
were partially offset by a decline in commissions on sales of mutual funds,
annuities, and insurance products of $0.5 million, or 7%.
Revenues from principal transactions increased by 32% to $10.7 million
in 1995 from $8.1 million in 1994, as both sales credits on principal
transactions and trading profits posted increases from the prior year. Higher
transaction volume resulted in a $2.0 million, or 26%, increase in sales credits
on principal transactions. Sales credits on principal transactions increased for
all categories of securities, with equities increasing by 20%, municipals
increasing by 31%, and taxable fixed income securities increasing by 36%. A $0.6
million increase in trading profits accounted for the remainder of the overall
increase in revenue from principal transactions. In particular, municipal bond
trading profits of $0.3 million in 1995 partially reversed $0.4 million of
municipal trading losses posted in 1994.
Revenues from investment banking activities declined by $4.4 million, or
41%, as the number of both managed and syndicate underwriting participations
declined significantly in 1995. A trend of reduced underwriting activity began
in the second half of fiscal 1994 as interest rates began to rise. Rising
interest rates continued through the first half of fiscal 1995 before declining
again in the second half, yet underwriting activity failed to recover -
especially in the case of municipal bonds. Selling concessions on underwritten
equity securities declined by $2.3 million, or 45%, as the number of managed
offerings declined from 9 to 2 and the number of equity syndicate participations
declined from 274 to 149. The significant decline in new issues activity also
impacted tax-exempt bond offerings, as selling concessions on municipal bond
underwritings declined by $1.4 million, or 83%. In addition, underwriting
profits and management fees declined by 65% to $1.0 million from $2.9 million in
1994. The overall reduction in the volume of underwriting transactions was only
partially offset by an increase of $1.1 million, or 118%, in fee-based income
from corporate and municipal finance services.
Interest and dividend income grew significantly to $5.9 million in 1995
from $4.0 million in 1994, an increase of 46%. The Company's largest source of
interest income is interest received from clients on margin account borrowings,
which increased by $1.9 million, or 56%. The average balances of client margin
borrowings increased by approximately 14% from 1994 to 1995. Higher market
interest rates during the first six months of 1995 as compared to the first six
months of 1994 also contributed to the increase.
Revenues from advisory and administrative fees increased by $0.4
million, or 15%, attributable to the growth of revenue from investment advisory
services provided by Scott & Stringfellow Capital Management, as well as
increases in postage and handling and other administrative service fees.
While total revenues increased by $2.0 million, total expenses rose by
$3.4 million, or 7%, from $47.4 million in 1994 to $50.8 million in 1995. Of
particular significance was a 15% increase in total operating expenses excluding
compensation and interest, due in part to planned investments in new investment
brokers and support personnel, office facilities, and equipment needed to help
the Company grow and compete effectively in the future. The average number of
personnel employed during 1995 increased by approximately 7% over 1994. In
addition, cost increases in expense categories such as stationery and supplies
also contributed to the overall increase in operating expenses.
The Company's largest expense item, compensation, increased by $0.5
million, or 2%, from 1994 to 1995. Commissions and related performance-based
compensation paid to investment brokers increased by $0.6 million, or 3%, as a
result of higher commissions and related performance-based compensation paid to
Investment Brokers as a
13.7
<PAGE>
result of the higher level of sales production. Administrative and professional
salaries increased by $0.7 million, or 9%. The number of support personnel
increased to 265 at year-end from 253 at the beginning of the year, which was up
from 237 at the beginning of 1994 - resulting in a 6% increase in the average
number of support personnel employed during 1995 versus 1994. The
support-to-broker personnel ratio increased slightly from 1.23 at June 24, 1994
to 1.24 at June 30, 1995. Employee benefits expense and payroll taxes increased
by $0.4 million, or 14%, in 1995 which was a function of higher taxable
compensation paid relative to total compensation, higher employee count, and
increased health insurance expense under the Company's partially self-insured
medical plan. Discretionary compensation expense declined by $1.3 million, or
47%, as a result of the Company's lower level of profitability in 1995 as
compared to 1994.
An increase in the number of quote machines and enhanced service
features provided for the use of Investment Brokers and other employees
accounted for the $0.4 million, or 17%, increase in communications expense.
Occupancy and equipment expense increased by $0.3 million, or 16%, as a
result of increased rent expense on the Company's office spaces related to
relocations and renovations which have taken place over the last 2 years.
Advertising and sales promotion increased by $0.3 million, or 22%,
reflecting the qualification of a larger number of investment brokers for
incentive sales programs and a change in the method of estimation and accrual of
certain costs related to such programs.
Postage, stationery and supplies increased by $0.2 million, or 13%, due
to a combination of factors including high paper prices in effect for the full
year, an estimated 20% increase in the number of client statements being mailed,
and the 10% postage rate increase which took effect during 1995.
Interest expense increased by $1.0 million, or 102%, reflecting
increased borrowing levels for 1995 as compared to the previous year for the
purpose of financing higher levels of customer receivable balances, and higher
interest rates during the first half of 1995 relative to the first half of 1994.
The $0.5 million increase in other operating expenses is partially due
to a $0.3 million increase in the Company's provision for losses on certain
legal matters.
EFFECTS OF INFLATION
The Company's assets consist largely of liquid, financial assets such as
cash, trading and investment securities valued at current market prices, and
receivables from customers, and are not significantly affected by inflation. The
Company's investment in fixed assets such as furniture, equipment, and leasehold
improvements is not material relative to its total assets or equity capital, and
the impact of inflation on replacement cost of such assets should not materially
affect the Company's profitability or financial condition. The general rate of
inflation does, however, affect certain operating expenses such as compensation,
communications, occupancy, postage, stationery, supplies, and other general and
administrative expenses. Because of competitive factors in the securities
brokerage industry, increases in these costs resulting from inflation may not be
readily recoverable through increased fees for the Company's services and may
lead to adverse changes in results of operations and financial condition.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation. Effective for financial statements for fiscal years
beginning after December 15, 1995, SFAS 123 establishes a fair value-based
method of accounting for stock options and other equity instruments. While
permitting entities to continue to use the intrinsic value method included in
Accounting Principles Board No. 25 ("APB 25") (Accounting for Stock Issued to
Employees), it requires employers to disclose additional information including
disclosure of the pro forma amount of net income and earnings per share as if
the fair value-based method were used to account for stock-based compensation,
if the intrinsic value method of APB 25 is retained.
13.8
<PAGE>
The Company has yet to determine whether it will adopt the fair value
method or continue using the intrinsic value method. Therefore, the effect on
the Company's net earnings has yet to be determined.
13.9
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 28, June 30,
1996 1995
<S> <C>
ASSETS
Cash and cash equivalents $ 4,604,319 $ 3,761,381
Cash segregated under Federal regulations 627 5,803
Receivable from brokers, dealers and
clearing organizations (note 2) 4,773,883 2,325,615
Receivable from customers (note 3) 78,691,390 64,968,861
Trading and investment securities,
at market value (note 4) 12,940,722 13,366,267
Exchange memberships, at adjusted cost
(market value $3,097,000 in 1996 and $1,765,500 in 1995) 838,100 838,100
Equipment and leasehold improvements, at
cost (less accumulated depreciation and amortization of
$5,822,486 in 1996 and $4,926,656 in 1995) 2,973,023 2,162,680
Deferred income taxes (note 7) 639,429 325,429
Other assets (note 9) 8,787,079 5,511,907
Total Assets $114,248,572 $ 93,266,043
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Drafts payable $ 4,068,235 $ 1,425,385
Short term bank loans (note 5) 3,600,000 6,600,000
Payable to brokers, dealers and
clearing organizations (note 2) 2,227,376 892,994
Payable to customers (note 3) 60,577,764 50,782,579
Securities sold, but not yet purchased,
at market value (note 4) 2,372,116 570,788
Accounts payable, accrued compensation
and other liabilities (note 8) 11,912,646 7,756,451
Payable to shareholders for purchase and
retirement of common stock 3,800,000 -
Total Liabilities 88,558,137 68,028,197
Stockholders' Equity (notes 6, 8 and 10)
Common stock, $0.10 par value. Authorized
10,000,000 shares; issued and outstanding
2,022,475 in 1996 and 2,107,620 shares in 1995 202,247 210,762
Additional paid-in capital 10,426,723 9,964,773
Retained earnings 15,537,305 15,062,311
Subscriptions receivable (note 9) -475,840 -
Total Stockholders' Equity 25,690,435 25,237,846
Commitments and Contingencies (notes 11 and 12)
Total Liabilities and Stockholders' Equity $114,248,572 $ 93,266,043
</TABLE>
See notes to consolidated financial statements.
13.10
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended
June 28, June 30, June 24,
1996 1995 1994
<S> <C>
REVENUES
Commissions $39,902,423 $28,300,683 $26,652,182
Principal transactions 11,159,434 10,725,020 8,098,878
Investment banking 10,559,244 6,257,511 10,631,124
Interest and dividends 6,621,355 5,852,740 4,015,629
Advisory and administrative
service fees 4,677,522 2,781,944 2,419,646
Other income 245,327 201,391 290,119
Total Revenues 73,165,305 54,119,289 52,107,578
EXPENSES
Employee compensation and
benefits (note 8) 47,001,154 34,202,361 33,692,163
Communications 3,305,237 2,985,387 2,561,621
Occupancy and equipment 3,057,326 2,443,465 2,101,687
Advertising and sales promotion 1,841,300 1,745,289 1,433,942
Postage, stationery and supplies 2,128,837 1,741,974 1,548,291
Brokerage, clearing and
exchange fees 1,312,314 1,010,292 952,735
Data processing 1,180,086 920,506 858,559
Interest 2,280,110 1,900,923 941,721
Other operating expenses 4,491,128 3,880,677 3,352,264
Total Expenses 66,597,492 50,830,874 47,442,983
Income before income taxes 6,567,813 3,288,415 4,664,595
Income taxes (note 7) 2,392,100 1,187,000 1,706,244
Net income $ 4,175,713 $ 2,101,415 $ 2,958,351
Earnings per common share $1.92 $1.00 $1.40
</TABLE>
See notes to consolidated financial statements.
13.11
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 28, 1996, June 30, 1995, and June 24, 1994
<TABLE>
<CAPTION>
Common
Stock Common Additional Subscrip-
Number of Stock Paid-in Retained tions
Shares Amount Capital Earnings Receivable Total
<S> <C>
Balance at June 25, 1993 1,773,607 $ 177,360 $ 9,545,054 $ 12,454,270 $ 22,176,684
Issuance of common stock
(notes 8 and 10) 37,806 3,781 446,648 - 450,429
Purchase and retirement of
common stock (note 10) -59,000 -5,900 -319,843 -500,009 -825,752
Cash dividends
($0.35 per share) - - - -737,525 -737,525
Stock split effected as a
stock dividend 350,483 35,049 - -35,049 -
Net income - - - 2,958,351 2,958,351
Balance at June 24, 1994 2,102,896 210,290 9,671,859 14,140,038 24,022,187
Issuance of common stock
(notes 8 and 10) 52,407 5,240 513,918 - 519,158
Purchase and retirement of
common stock (note 10) -47,683 -4,768 -221,004 -338,379 -564,151
Cash dividends
($0.40 per share) - - - -840,763 -840,763
Net income - - - 2,101,415 2,101,415
Balance at June 30, 1995 2,107,620 210,762 9,964,773 15,062,311 - 25,237,846
Issuance of common stock
(notes 8, 9 and 10) 116,247 11,624 1,473,805 - $-475,840 1,009,589
Purchase and retirement of
common stock (note 10) -201,392 -20,139 -1,011,855 -2,787,144 -3,819,138
Cash dividends
($0.42 per share) - - - -913,575 -913,575
Net income - - - 4,175,713 4,175,713
Balance at June 28, 1996 2,022,475 $ 202,247 $ 10,426,723 $ 15,537,305 $-475,840 $ 25,690,435
</TABLE>
See notes to consolidated financial statements.
13.12
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
June 28, June 30, June 24,
1996 1995 1994
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,175,713 $ 2,101,415 $ 2,958,351
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 920,418 720,494 643,185
(Gains) losses on disposition of equipment 829 -1,712 -
Deferred income taxes -314,000 -199,000 19,000
Write down of exchange memberships - - 9,950
Allowance for doubtful accounts -24,497 87,000 -
Changes in assets and liabilities:
Cash segregated under Federal regulations 5,176 7,996 3,239,294
Receivable from brokers, dealers and
clearing organizations -2,448,268 -861,481 204,529
Receivable from customers -13,698,032 -5,355,587 -9,842,709
Trading securities 506,367 -4,938,079 3,095,131
Other assets -1,963,476 -154,458 1,838,187
Payable to brokers, dealers
and clearing organizations 1,334,382 -1,944,388 1,160,164
Payable to customers 9,795,185 12,597,018 -601,683
Securities sold, but not yet purchased 1,801,328 11,756 -63,532
Accounts payable, accrued compensation
and other liabilities 4,100,258 1,624,608 -123,341
Net cash provided by operating activities 4,191,383 3,695,582 2,536,526
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in drafts payable 2,642,850 -5,437,663 6,785,168
Net change in short term bank loans -3,000,000 4,500,000 -7,200,000
Net change in securities sold under
agreements to repurchase - -21,250 3,707
Cash dividends paid -857,641 -822,766 -1,325,147
Purchase and retirement of common stock -19,138 -564,151 -825,752
Issuance of common stock 1,009,589 519,158 450,429
Net cash used for financing activities -224,340 -1,826,672 -2,111,595
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of not readily
marketable securities 260,077 196,637 76,321
Purchases of not readily marketable securities -340,899 -205,438 -190,962
Proceeds from disposition of investment real estate - 804,638 -
Proceeds from disposition of equipment 911 13,474 7,500
Purchases of equipment and leasehold improvements -1,719,691 -721,384 -812,742
Repayments of loans receivable 81,018 314,678 159,430
Increase in loans receivable -1,405,521 -921,001 -811,442
Net cash used for investing activities -3,124,105 -518,396 -1,571,895
Net increase (decrease) in cash and cash equivalents 842,938 1,350,514 -1,146,964
13.13
<PAGE>
Cash and cash equivalents at beginning of year 3,761,381 2,410,867 3,557,831
Cash and cash equivalents at end of year $ 4,604,319 $ 3,761,381 $ 2,410,867
Cash paid during the year for interest $ 2,297,495 $ 1,905,064 $ 945,817
Cash paid during the year for income taxes $ 2,570,481 $ 1,231,106 $ 1,766,033
</TABLE>
See notes to consolidated financial statements.
13.14
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Scott & Stringfellow Financial, Inc. (the "Parent") is a holding company which
owns all of the outstanding capital stock of Scott & Stringfellow, Inc. ("Scott
& Stringfellow") and other diversified financial services subsidiaries.
Scott & Stringfellow, the Parent's principal subsidiary, is a broker-dealer
registered under the Securities Exchange Act of 1934. A summary of the
significant accounting policies of Scott & Stringfellow Financial, Inc. and
subsidiaries (collectively, the "Company") is presented below.
A. USE OF ESTIMATES. Management makes a number of estimates in preparing these
financial statements. Actual results may differ significantly from these
estimates.
B. FAIR VALUE OF FINANCIAL INSTRUMENTS. The value of all financial assets and
liabilities on the consolidated statements of financial condition approximate
their fair values.
C. PRINCIPLES OF CONSOLIDATION. The Company's consolidated financial statements
include all of the accounts of Scott & Stringfellow Financial, Inc. and its
subsidiaries, all of which are wholly owned. All material intercompany balances
and transactions have been eliminated in consolidation.
D. SECURITIES TRANSACTIONS. Securities transactions and related revenues and
expenses are recorded on settlement date (normally the third business day
following the transaction date), which is not materially different from a trade
date basis.
Trading and investment securities are valued at market except for not readily
marketable securities, which are valued at estimated fair value as determined by
management. Unrealized gains and losses are included in revenues from principal
transactions in the accompanying consolidated statements of income.
E. INVESTMENT BANKING. Management fees on investment banking transactions and
selling concessions are recorded on settlement date, which is not materially
different from a trade date basis. Underwriting fees, net of expenses, are
generally recorded on the date the underwriting syndicate is closed.
F. CONSOLIDATED STATEMENTS OF CASH FLOWS. For purposes of the consolidated
statements of cash flows, the Company considers cash and cash equivalents to be
comprised of cash on hand, cash on deposit with financial institutions, and
money market investments with original maturities of ninety days or less. At
June 28, 1996 and June 30, 1995, cash equivalents included $1,818,842 and
$1,301,212 of money market investments, respectively.
G. INCOME TAXES. The Parent and its subsidiaries file consolidated income tax
returns. Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial reporting and income tax bases
of assets and liabilities.
H. EQUIPMENT AND LEASEHOLD IMPROVEMENTS. The Company depreciates furniture and
equipment using straight-line and accelerated methods, based on estimated useful
lives of three to ten years. Leasehold improvements are amortized over the
lesser of the estimated useful lives of the improvements or the terms of the
related leases.
I. EARNINGS AND DIVIDENDS PER COMMON SHARE. Earnings and dividends per common
share are calculated by dividing net income and dividends, respectively, by the
weighted average shares of common stock and common stock equivalents outstanding
during the period. Common stock equivalents include unexercised stock options
and are determined using the treasury stock method.
The number of shares used in the earnings and dividends per common share
calculations are 2,170,730 for the year ended June 28, 1996, 2,108,915 for the
year ended June 30, 1995, and 2,115,393 for the year ended June 24, 1994.
13.15
<PAGE>
NOTE 2. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING
ORGANIZATIONS.
Receivable from and payable to brokers, dealers and clearing organizations
consist of the following:
<TABLE>
<CAPTION>
June 28, June 30,
1996 1995
<S> <C>
Receivable from brokers, dealers, and
clearing organizations:
Securities failed to deliver $ 259,607 $ 431,779
Deposits paid for securities borrowed 4,246,600 1,584,620
Receivable from clearing organizations 267,676 309,216
Total $4,773,883 $2,325,615
Payable to brokers, dealers, and
clearing organizations:
Securities failed to receive $1,580,908 $ 265,653
Deposits received for securities loaned 356,200 46,400
Payable to clearing organizations 290,268 580,941
Total $2,227,376 $ 892,994
</TABLE>
NOTE 3. RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
The balances represent the net amounts receivable from and payable to customers
in connection with normal cash and margin transactions. The amounts receivable
from customers are collateralized by securities held by the Company, the value
of which is not reflected in the accompanying consolidated financial statements.
A substantial portion of receivables from customers is due from customers
residing in the southeastern United States.
Included in receivable from and payable to customers are balances with officers
and directors of the Company as follows:
<TABLE>
<CAPTION>
June 28, June 30,
1996 1995
<S> <C>
Receivable from $ 3,805,115 $ 2,303,046
Payable to $ 210,656 $ 99,022
</TABLE>
NOTE 4. TRADING AND INVESTMENT SECURITIES
Trading and investment securities consist of the following:
<TABLE>
<CAPTION>
June 28, June 30,
1996 1995
<S> <C>
Owned:
U.S. government and government
agency obligations $ 490,628 $ 190,635
State and municipal obligations 7,496,724 10,159,029
Corporate bonds 1,380,440 280,260
Corporate stocks 3,011,271 2,215,813
Other 325,586 159,224
13.16
<PAGE>
Sub-total 12,704,649 13,004,961
Not readily marketable securities, at
estimated fair value 236,073 361,306
Total $12,940,722 $13,266,267
Sold, but not yet purchased, at market value:
State and municipal obligations $ 27,140 $ 86,239
Corporate bonds 5,100 88,303
Corporate stocks 2,326,376 351,332
Other 13,500 44,914
Total $ 2,372,116 $ 570,788
</TABLE>
NOTE 5. SHORT-TERM BANK LOANS
The Company maintains lines of credit from established financial institutions
totaling $58.0 million, of which $3.6 million was outstanding as of June 28,
1996. Additional bank lines of credit are available on a short-term basis for
the purpose of financing new underwritings. Short-term bank loans are secured by
customer-owned securities purchased on margin or firm-owned securities.
Short-term bank loans are generally made at the bank's broker call rate (7% at
June 28, 1996) and are payable on demand. The market value of customer-owned
securities pledged as collateral at June 28, 1996 was approximately $10,800,000.
Firm securities were not pledged as collateral for short-term bank loans at June
28, 1996.
NOTE 6. NET CAPITAL REQUIREMENTS
Scott & Stringfellow is subject to the net capital rules of the Securities and
Exchange Commission and the New York Stock Exchange, Inc. and elects to compute
its net capital requirements in accordance with the alternative method.
Under this method, Scott & Stringfellow is required to maintain minimum net
capital, as defined, equal to two percent of aggregate debit balances arising
from customer transactions, as defined. The net capital rules also provide that
equity capital may not be withdrawn or cash dividends paid if resulting net
capital would be less than five percent of aggregate debits. At June 28, 1996,
Scott & Stringfellow's net capital of $15,135,807 was 19% of aggregate debit
balances and was $13,532,493 in excess of the minimum net capital required.
NOTE 7. INCOME TAXES
The provision for income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year Ended
June 28, June 30, June 24,
1996 1995 1994
<S> <C>
Current:
Federal $ 2,301,100 $ 1,208,000 $ 1,502,924
State 405,000 178,000 184,320
Total current 2,706,100 1,386,000 1,687,244
Deferred:
Federal -261,000 -166,000 16,000
State -53,000 -33,000 3,000
Total deferred -314,000 -199,000 19,000
Total $ 2,392,100 $ 1,187,000 $ 1,706,244
</TABLE>
13.17
<PAGE>
Income tax expense differs from the amount computed by applying the 34%
statutory Federal income tax rate to income before income taxes for the
following reasons:
<TABLE>
<CAPTION>
Year Ended
June 28, June 30, June 24,
1996 1995 1994
<S> <C>
Federal tax, computed at
statutory rate $ 2,233,056 $ 1,116,000 $ 1,586,600
State income taxes, net of
Federal tax benefit 232,643 95,700 123,600
Tax-exempt interest and dividends,
net of non-deductible carrying
charges -94,105 -92,100 -69,500
Meals and entertainment 46,488 51,500 25,700
Other, net -25,982 15,900 40,444
Income tax expense $ 2,392,100 $ 1,187,000 $ 1,706,244
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
June 28, June 30,
1996 1995
<S> <C>
Deferred tax assets:
Deferred compensation $ 501,008 $ 274,762
Accrued expenses for financial reporting purposes 328,364 226,399
Loans receivable, principally due to allowance for
doubtful accounts 26,256 100,420
Total gross deferred tax assets 855,628 601,581
Less: valuation allowance - -
Deferred tax assets 855,628 601,581
Deferred tax liabilities:
Exchange seats, principally due to differences in
assigned values and tax bases -191,430 -191,430
Other, principally due to differences in assigned
values and tax bases of investments -24,769 -84,722
Total gross deferred tax liabilities -216,199 -276,152
Net deferred tax asset $ 639,429 $ 325,429
</TABLE>
The Company believes that a valuation allowance with respect to the realization
of the total gross deferred tax assets is not necessary. Based on the Company's
historical earnings, future expectations of taxable income and the reversing of
gross deferred tax liabilities and potential net operating loss carrybacks,
management believes it is more likely than not that the Company will realize the
gross deferred tax assets. However, there can be no assurances that the Company
will generate taxable income in any future period or that the reversal of timing
differences attributable to gross deferred tax liabilities will occur during the
future tax periods as currently expected.
NOTE 8. EMPLOYEE BENEFIT PLANS
The Company maintains an employee profit sharing plan which incorporates a
401(k) feature and covers substantially all employees. Employees may contribute
up to fifteen percent of their individual earnings to the plan each year,
subject to an annual limitation established by the Internal Revenue Code. In
addition to employee contributions, matching contributions and profit sharing
contributions may be made at the discretion of the Company. Under the plan,
matching contributions of $307,850, $280,143, and $257,483 were made in 1996,
1995, and 1994, respectively. Additional contributions, determined on the basis
of calendar year profitability, totaled $1,286,750 in 1996, $794,095 in 1995,
and $2,080,027 in 1994.
13.18
<PAGE>
The Company also maintains a non-qualified and unfunded deferred compensation
plan for the benefit of selected highly compensated employees. This plan allows
the participants to defer compensation and to receive discretionary profit
sharing contributions beyond the Internal Revenue Code limitations governing the
Company's profit sharing plan. Company expense pursuant to this plan amounted to
$413,289 in 1996, $120,065 in 1995, and $70,308 in 1994. At June 28, 1996 and
June 30, 1995, the Company's obligations under this plan amounted to $1,301,320
and $713,667, respectively, which are included in other liabilities in the
accompanying consolidated statements of financial condition.
The Company also maintains an employee stock purchase plan, which allows
substantially all employees to acquire shares of the Company's common stock
through a payroll deduction program. Shares are issued to the plan trust
quarterly at a price equal to 85% of the fair market value as defined in the
plan. During 1996, a total of 67,675 shares of common stock were issued to this
plan at an average price of $12.77 per share. During 1995, 43,066 shares were
issued at an average price of $10.34 per share. During 1994, 32,306 shares were
issued at an average price of $12.23 per share.
NOTE 9. TRANSACTIONS WITH RELATED PARTIES
Loans to related entities and directors and officers of the Company, exclusive
of amounts included in receivable from customers as discussed in note 3,
amounted to $460,522 and $306,316 at June 28, 1996 and June 30, 1995,
respectively. The loans are included in other assets in the accompanying
consolidated statements of financial condition. In addition, subscriptions
receivable for issuance of 33,440 shares of the Company's stock, in the amount
of $475,840, were receivable from directors and officers of the Company pursuant
to terms of the Management Stock Purchase Loan Plan. (See "Common Stock
Transactions.")
NOTE 10. COMMON STOCK TRANSACTIONS
During 1996, 1995, and 1994, the Company repurchased and retired 201,392,
47,683, and 59,000 shares, respectively, of its common stock. Of the shares
repurchased, 29,758 were repurchased from directors at a cost of $565,402 in
1996, 1,968 were repurchased from a director at a cost of $21,648 in 1995, and
4,000 were repurchased from a director at a cost of $57,000 in 1994.
The Company has a stock option plan pursuant to which options to purchase up to
480,000 shares of common stock may be granted to eligible employees. Stock
options granted under the plan will be either incentive stock options, as
defined by the Internal Revenue Code, or non-qualified stock options. Stock
appreciation rights may also be granted under the plan.
The following table summarizes stock option activity:
Outstanding June 25, 1993 154,152
Granted 80,400
Canceled -2,760
Exercised -6,600
Outstanding June 24, 1994 225,192
Granted 43,000
Canceled -12,247
Exercised -9,281
Outstanding June 30, 1995 246,664
Granted 54,850
Canceled -888
Exercised -15,132
Outstanding June 28, 1996 285,494
13.19
<PAGE>
These options become exercisable over periods ranging from 2 to 7 years from the
date of grant and expire 10 years from the date of grant (between July 1998 and
March 2006.) The outstanding options are exercisable at prices ranging from
$6.04 per share to $14.13 per share. Options representing 79,476 shares are
exercisable at June 28, 1996.
During 1996, the Company adopted a Management Stock Purchase Loan Plan, for the
purpose of issuing stock to selected management employees at fair market value,
as defined in the plan, in exchange for promissory notes. During 1996, 33,440
shares were issued under this plan to 5 management employees, including 4
executive officers, in exchange for notes totalling $475,840. The notes are
payable upon demand and bear interest at the short-term applicable federal rate,
which ranged from 5.05% to 5.88% during 1996. The notes are fully recourse and
are secured by a collateral pledge of the shares.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain data processing and communications
equipment under operating leases expiring at various dates to 2005. Minimum
future rental payments required under such leases that have initial or remaining
non-cancelable lease terms in excess of one year as of June 28, 1996 are as
follows:
<TABLE>
<CAPTION>
Year Minimum Rental Commitments
Office Space Equipment Total
<S> <C>
1997 $ 2,199,655 $ 487,282 $ 2,686,937
1998 2,004,761 390,410 2,395,171
1999 1,891,867 122,139 2,014,006
2000 1,684,012 57,257 1,741,269
2001 1,573,990 - 1,573,990
Thereafter 4,964,000 - 4,964,000
Total $ 14,318,285 $ 1,057,088 $ 15,375,373
</TABLE>
Some of the Company's leases contain escalation clauses and renewal options.
Total rent expense under operating leases approximated $2,341,000 in 1996,
$1,885,000 in 1995, and $1,631,000 in 1994.
As of June 28, 1996, the Company had a $1.5 million irrevocable letter of credit
available for the purpose of collateralizing certain customer option positions.
No amounts were outstanding with respect to this letter of credit at June 28,
1996 or June 30, 1995.
The Company has been named in legal actions relating to its securities business.
In the opinion of management, based upon consultation with legal counsel
handling such matters, the resolution of open litigation is not expected to have
a material adverse effect on the financial position of the Company.
NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company records securities transactions on a settlement date basis,
generally the third business day following the transaction. The risk of loss on
unsettled transactions is identical to settled transactions and relates to the
customers' or brokers' inability to meet the terms and conditions of their
contracts. Credit risk is reduced by the industry policy of obtaining and
maintaining adequate collateral until the commitment is completed.
The Company executes and clears customers transactions involving the sale of
securities not yet purchased as well as the writing or sale of option contracts.
Substantially all of these transactions, with the exception of the writing of
fully covered option contracts, are effected on a margin basis subject to
individual exchange regulations. These transactions may expose the Company to
significant off-balance-sheet risk in the event margin requirements are not
sufficient to fully cover losses that customers may incur. In the event the
customer fails to satisfy its obligations, the Company may be required to
purchase or sell financial instruments at prevailing market prices in order to
fulfill the customer's obligations.
13.20
<PAGE>
The Company's customer financing and securities settlement activities require
the Company to pledge customer securities as collateral in support of various
secured financing sources. In addition, the Company pledges customer securities
as collateral to satisfy margin deposits of various exchanges. Much of this
collateral is held by independent third parties, and if the third party is
unable to meet is contractual obligation to return customer securities pledged
as collateral, the Company may be exposed to the risk of acquiring these
securities at prevailing market prices in order to satisfy its customer
obligations.
13.21
<PAGE>
REPORT ON MANAGEMENT RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying Consolidated Financial Statements and related financial
information contained in this annual report have been prepared by and are the
responsibility of management. These statements have been prepared in accordance
with generally accepted accounting principles and necessarily include certain
amounts that are based upon the judgement and estimates of management.
Management maintains a system of internal accounting controls and internal
auditing procedures designed to provide reasonable assurance, at a reasonable
cost, of the accuracy and reliability of the Company's financial records and the
protection of its assets. The financial statements contained in this annual
report have been audited by KPMG Peat Marwick LLP, independent auditors, whose
report follows. This audit includes a review of the Company's internal
accounting controls and internal auditing procedures to the extent required by
generally accepted auditing standards.
The Audit Committee of the Board of Directors, which includes three outside
directors, meets periodically with the internal auditor, the independent
auditors, and management to discuss auditing, internal accounting, and financial
reporting matters and to insure that each is properly discharging its
responsibilities. Both the independent and internal auditors have access to the
Audit Committee without the presence of management.
Management believes that during fiscal 1996 its system of internal accounting
controls and internal auditing procedures were adequate to accomplish their
intended objectives of assuring the accuracy and reliability of the Company's
financial information and the protection and control of its assets.
Charles E. Mintz
Senior Vice President and Chief Financial Officer
C. Lewis Loth
Vice President and Controller
Mike D. Johnston
Vice President and Treasurer
13.22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Scott & Stringfellow Financial, Inc.
We have audited the accompanying consolidated statements of financial
condition of Scott & Stringfellow Financial, Inc. and subsidiaries as of June
28, 1996 and June 30, 1995 and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the years ended June 28,
1996, June 30, 1995 and June 24, 1994. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Scott &
Stringfellow Financial, Inc. and subsidiaries at June 28, 1996 and June 30, 1995
and the results of their operations and their cash flows for the years ended
June 28, 1996, June 30, 1995 and June 24, 1994 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Richmond, Virginia
July 29, 1996
13.23
<PAGE>
QUARTERLY RESULTS OF OPERATIONS - Unaudited
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
1996 June 28 March 29 December 31 September 29
<S> <C>
Revenues $ 20,473 $ 17,447 $ 17,591 $ 17,654
Expenses 18,670 16,307 15,872 15,748
Income before income taxes 1,803 1,140 1,719 1,906
Income taxes 654 412 640 685
Net income $ 1,149 $ 728 $ 1,079 $ 1,221
Earnings per common share $ 0.52 $ 0.33 $ 0.50 $ 0.57
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
1995 June 30 March 31 December 31 September 30
<S> <C>
Revenues $ 14,988 $ 13,304 $ 13,059 $ 12,768
Expenses 14,083 12,638 12,268 11,842
Income before income taxes 905 666 791 926
Income taxes 327 242 282 336
Net income $ 578 $ 424 $ 509 $ 590
Earnings per common share $ 0.28 $ 0.20 $ 0.24 $ 0.28
</TABLE>
13.30
<PAGE>
Common Stock Performance and Dividends
Scott & Stringfellow Financial, Inc. Common Stock is traded on the
NASDAQ National Market System under the symbol "SCOT." As of June 28, 1996,
there were 358 holders of record of the Company's Common Stock. The table below
provides a comparative summary of the prices for the Company's Common Stock and
cash dividends declared for the years ended June 28, 1996 and June 30, 1995.
<TABLE>
<CAPTION>
Common Stock Prices (1) Dividends Per Share (1)
1996 1995 1996 1995
High Low High Low
<S> <C>
First Quarter $ 14.50 $ 12.25 $ 12.40 $ 11.46 $ .10 $ .10
Second Quarter 14.75 13.50 12.00 11.00 .10 .10
Third Quarter 14.75 13.50 13.75 11.00 .10 .10
Fourth Quarter 18.50 13.75 13.50 12.09 .12 .10
</TABLE>
(1) All common stock prices and dividend per share amounts have been adjusted to
reflect a 6:5 stock split effected in the form of a 20% stock dividend declared
on May 18, 1994, and distributed on August 26, 1994, to shareholders of record
on August 5, 1994.
13.40
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Scott & Stringfellow Financial, Inc.
We consent to the incorporation by reference in the registration statements (No.
33-23535, No. 33-54700 and No. 333- 1881) on Form S-8 of Scott & Stringfellow
Financial, Inc. of our report dated July 29, 1996, relating to the consolidated
statements of financial condition of Scott & Stringfellow Financial, Inc. and
subsidiaries as of June 28, 1996 and June 30, 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years ended June 28, 1996, June 30, 1995 and June 24, 1994, and our report dated
July 29, 1996 on the financial statement schedule as of June 28, 1996 and June
30, 1995 and for the years ended June 28, 1996, June 30, 1995 and June 24, 1994,
which reports appear or are incorporated by reference in the June 28, 1996
annual report on Form 10-K of Scott & Stringfellow Financial, Inc.
KPMG Peat Marwick LLP
Richmond, Virginia
September 20, 1996
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-28-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-28-1996
<CASH> 4,604,946
<RECEIVABLES> 79,218,673
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 4,246,600
<INSTRUMENTS-OWNED> 12,940,722
<PP&E> 2,973,023
<TOTAL-ASSETS> 114,248,572
<SHORT-TERM> 3,600,000
<PAYABLES> 82,229,821
<REPOS-SOLD> 0
<SECURITIES-LOANED> 356,200
<INSTRUMENTS-SOLD> 2,372,116
<LONG-TERM> 0
0
0
<COMMON> 202,247
<OTHER-SE> 25,488,188
<TOTAL-LIABILITY-AND-EQUITY> 114,248,572
<TRADING-REVENUE> 11,159,434
<INTEREST-DIVIDENDS> 6,621,355
<COMMISSIONS> 39,902,423
<INVESTMENT-BANKING-REVENUES> 10,559,244
<FEE-REVENUE> 4,677,522
<INTEREST-EXPENSE> 2,280,110
<COMPENSATION> 47,001,154
<INCOME-PRETAX> 6,567,813
<INCOME-PRE-EXTRAORDINARY> 4,175,713
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,175,713
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.92
</TABLE>
