UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from....................to.....................
Commission file number 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 Identification No.
Incorporation or Organization
909 East Main Street Richmond, Virginia 23219
(Address of principal executive offices) (zip code)
(804) 643-1811
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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 ....
On February 13, 1996, there were 2,166,724 shares of Scott & Stringfellow
Financial, Inc. Common stock, par value $.10, issued and outstanding.
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
December 31, 1995 (unaudited) and June 30, 1995 3
Consolidated Statements of Income (unaudited) -
Three months ended December 31, 1995
and December 31, 1994 4
Consolidated Statements of Income (unaudited) -
Six months ended December 31, 1995
and December 31, 1994 5
Consolidated Statements of Cash Flows (unaudited) -
Six months ended December 31, 1995
and December 31, 1994 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of
Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBITS
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
December 31, June 30,
1995 1995
ASSETS
Cash and cash equivalents $ 6,145,572 $ 3,761,381
Cash segregated under Federal regulations 36 5,803
Receivable from brokers, dealers and
clearing organizations 4,392,567 2,325,615
Receivable from customers 69,778,380 64,968,861
Trading and investment securities,
at market value 14,819,738 13,366,267
Exchange memberships, at adjusted cost 838,100 838,100
Equipment and leasehold improvements,
less depreciation and amortization 2,263,923 2,162,680
Deferred income taxes 379,429 325,429
Other assets 7,064,172 5,511,907
Total Assets $ 105,681,917 $ 93,266,043
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Drafts payable $ 4,513,232 $ 1,425,385
Short term bank loans 3,000,000 6,600,000
Payable to brokers, dealers and clearing
organizations 1,190,156 892,994
Payable to customers 57,380,272 50,782,579
Securities sold, but not yet purchased,
at market value 713,935 570,788
Accounts payable, accrued compensation
and other liabilities 11,424,846 7,756,451
Total Liabilities 78,222,441 68,028,197
Stockholders' Equity
Common stock, $0.10 par value; Authorized
10,000,000 shares; Issued and outstanding
2,152,724 and 2,107,620 shares 215,272 210,762
Additional paid-in capital 10,522,099 9,964,773
Retained earnings 16,921,605 15,062,311
Less: Stock notes receivable -199,500 0
Total Stockholders' Equity 27,459,476 25,237,846
Total Liabilities and Stockholders' Equity $ 105,681,917 $ 93,266,043
See notes to consolidated financial statements.
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended December 31, 1995 and December 31, 1994
(Unaudited)
December 31, December 31,
1995 1994
REVENUES
Commissions $ 9,228,801 $ 6,474,740
Principal transactions 2,697,781 2,733,341
Investment banking 2,882,380 1,751,490
Interest and dividends 1,647,814 1,385,876
Advisory and administrative service fees 1,070,450 672,937
Other 64,012 41,231
Total Revenues 17,591,238 13,059,615
EXPENSES
Employee Compensation and benefits 11,219,662 8,183,002
Communications 794,208 712,921
Occupancy and equipment 746,269 594,867
Advertising and sales promotion 497,474 497,110
Postage, stationery and supplies 512,773 419,889
Brokerage, clearing and exchange fees 299,566 258,383
Data processing 281,234 228,272
Interest 560,270 418,289
Other operating expenses 961,009 955,616
Total Expenses 15,872,465 12,268,349
Income before income taxes 1,718,773 791,266
Income taxes 640,000 282,000
NET INCOME $ 1,078,773 $ 509,266
Earnings per share $0.50 $0.24
Dividends declared per share $0.10 $0.10
Weighted average common shares and
common stock equivalents outstanding 2,141,288 2,101,253
See notes to consolidated financial statements.
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended December 31, 1995 and December 31, 1994
(Unaudited)
December 31, December 31,
1995 1994
REVENUES
Commissions $ 18,690,783 $ 12,995,570
Principal transactions 5,308,029 5,589,487
Investment banking 5,880,866 3,123,935
Interest and dividends 3,249,820 2,687,586
Advisory and administrative service fees 1,981,543 1,317,743
Other 134,590 113,042
Total Revenues 35,245,631 25,827,363
EXPENSES
Employee Compensation and benefits 22,480,825 16,303,444
Communications 1,586,512 1,452,989
Occupancy and equipment 1,488,002 1,147,216
Advertising and sales promotion 854,010 841,773
Postage, stationery and supplies 1,001,578 824,758
Brokerage, clearing and exchange fees 612,527 498,843
Data processing 540,618 444,548
Interest 1,118,311 778,094
Other operating expenses 1,938,977 1,818,969
Total Expenses 31,621,360 24,110,634
Income before income taxes 3,624,271 1,716,729
Income taxes 1,325,000 618,000
NET INCOME $ 2,299,271 $ 1,098,729
Earnings per share $1.07 $0.52
Dividends declared per share $0.20 $0.10
Weighted average common shares and
common stock equivalents outstanding 2,131,675 2,101,732
See notes to consolidated financial statements.
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1995 and December 31, 1994
(Unaudited)
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,299,271 $ 1,098,729
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 410,246 319,041
Deferred income taxes -54,000 -21,000
Allowance for (recovery of) doubtful accounts 63,905
Changes in assets and liabilities:
Cash segregated under Federal regulations 5,767 8,077
Receivable from brokers, dealers and
clearing organizations -2,066,952 -670,719
Receivable from customers -4,809,519 -4,402,194
Trading securities -1,263,325 -5,961,862
Other assets -1,100,454 -435,918
Payable to brokers, dealers and clearing org. 297,162 -1,275,475
Payable to customers 6,597,693 6,001,505
Securities sold, but not yet purchased 143,147 89,520
Accounts payable, accrued compensation
and other liabilities 3,663,884 -228,027
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 4,122,920 -5,414,418
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in drafts payable 3,087,847 -4,385,979
Net change in short term bank loans -3,600,000 12,400,000
Net change in securities sold
under agreements to repurchase 0 -21,250
Cash dividends paid -423,124 -402,005
Purchase and retirement of common stock -19,140 -344,691
Issuance of common stock 369,130 236,584
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES -585,287 7,482,659
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of not readily
marketable securities 98,403 45,523
Purchases of not readily marketable securities -288,549 -112,310
Proceeds from disposition of investment real estate 0 804,638
Proceeds from disposition of equipment 0 2,170
Purchases of equipment and leasehold improvements -505,084 -307,008
Repayment of loans receivable 53,206 204,735
Increase in loans receivable -511,418 -576,516
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES -1,153,442 61,232
Net increase (decrease) in cash and cash equivalents 2,384,191 2,129,473
Cash and cash equivalents at beginning of period 3,761,381 2,410,867
Cash and cash equivalents at end of period $ 6,145,572 $ 4,540,340
Cash paid during the period for interest $ 1,135,696 $ 791,488
Cash paid during the period for income taxes 1,185,481 483,206
See notes to consolidated financial statements.
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31,1995
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Scott & Stringfellow Financial, Inc. and its subsidiaries (collectively the
"Company"), Scott & Stringfellow, Inc. ("S&S"), Scott & Stringfellow Capital
Management, Inc. ("SSCM"), and Scott & Stringfellow Realty, Inc. S&S, the
Company's principal subsidiary, is a broker-dealer registered under the
Securities Exchange Act of 1934. SSCM is an investment advisor registered
under the Investment Advisors Act of 1940.
These interim consolidated financial statements are unaudited; however, such
information reflects all normal recurring adjustments which, in the opinion
of management, are necessary for a fair presentation of the results for the
periods in accordance with generally accepted accounting principles. The
nature of the Company's business is such that the results of any interim
period are not necessarily indicative of the results which might be expected
for the full fiscal year. The notes included herein should be read in
conjunction with the notes to the consolidated financial statements included
in the Company's annual audited report for the fiscal year ended June 30,
1995.
2. NET CAPITAL REQUIREMENTS
As a registered broker-dealer and a member of the New York Stock Exchange
("NYSE"), the Company's wholly-owned subsidiary, S&S, is subject to the
Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1).
S&S has elected to utilize the alternative method of the Rule, which
prohibits a broker-dealer from engaging in any transactions which would
cause its "net capital" to be less than 2% of its "aggregate debit balances"
arising from customer transactions, as those terms are defined in the Rule.
The NYSE may also impose restrictions on S&S's business if its net capital
falls below 5% of aggregate debit balances. At December 31, 1995, S&S's net
capital of $17,401,679 was 24% of its aggregate debit balances and was
$15,930,096 in excess of its minimum regulatory requirement.
3. COMMON STOCK
During the quarter ended December 31, 1995, the Company issued 4,644 shares
of common stock pursuant to the exercise of employee stock options for net
proceeds of $32,351. The Company also issued 11,848 shares of common stock
to the Employee Stock Purchase Plan for net proceeds of $142,156. The
Company also issued 14,000 shares of common stock to management employees,
including 5,600 shares issued to directors, pursuant to the Management Stock
Purchase Loan Plan. This plan was approved by the Company's Board of
Directors on December 17, 1995. These shares were issued by the Company at
a price based upon fair market value, in exchange for fully recourse,
interest-bearing promissory notes which are payable on demand.
The Company repurchases its common shares in the open market under a plan
approved by the Board of Directors. During the quarter, 1,392 share were
repurchased at a cost of $19,140. The Company had remaining authority to
repurchase 313,419 shares at December 31, 1995. All per share items for the
comparative prior period have been adjusted to reflect the effect of a 6:5
stock split which was distributed as a 20% stock dividend to shareholders on
August 26, 1994.
4. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time named as defendants
in legal actions incidental to its securities brokerage and investment
banking activities. Management believes that all pending claims and
lawsuits of which it has knowledge will be resolved with no material adverse
effect on the overall financial condition of the Company, although the
resolution of such matters might have a material adverse impact on the
operating results for any given quarterly accounting period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's primary subsidiary, S&S, conducts a full-service, securities
brokerage and investment banking business through 28 branch offices located in
Virginia, North Carolina, West Virginia, and South Carolina, in which the
Company's first office was opened in February 1996. The Company's primary
business is retail securities brokerage with an emphasis on equity securities,
municipal bonds and mutual funds. Other significant activities and services
include institutional securities brokerage, management of and participation in
the underwriting of corporate and municipal securities, investment management
services through SSCM, corporate and municipal financial advisory services,
trading of fixed income and equity securities, primary investment research and
money market cash management services. As of December 31, 1995, the Company
employed 490 people including 213 employees with full-time Investment Broker
responsibilities.
The Company's profitability, to a large degree, is sensitive to the volume of
trading in securities and the volatility and general level of securities'
market prices. Approximately 79% of the Company's total revenue is generated
by commissions and sales credits, or mark-ups, on securities transactions.
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 build non-sales revenue and places
emphasis on control of fixed costs, 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 the pricing of its services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1995
The Company reported improved results for the second quarter of its 1996 fiscal
year. Net earnings were $1,078,773, 112% higher than the prior year's
quarter. Earnings per share increased 108% to $0.50 from $0.24.
Total revenues for the quarter were $17,591,238, an increase of 35% from
$13,059,615 reported for the first quarter of fiscal 1995. The increase in
total revenues was primarily attributable to increases in commissions revenues
from agency transactions of $2,754,061, or 43%, investment banking revenues of
$1,130,890, or 65%, and advisory and administrative fees of $397,513, or 59%.
These results were attributable to the continuing strength in the equity
markets and healthy increases in investment banking fees. In addition, the
Company co-managed one initial public offering of common stock during the
period. Interest and dividend income also increased during the period,
reflecting continuing increases in margin lending balances.
Total expenses increased by 29% to $15,872,465 from $12,268,349 in the
year-earlier period, primarily attributable to a 37% increase in employee
compensation and benefits, the Company's largest expense item. Higher
compensation expense resulted from increased commissions expense and other
forms of variable compensation associated with higher overall levels of revenue
and profitability. In addition, certain accruals of discretionary compensation
in the quarter were proportionately higher relative to revenues than during the
quarter ended December 31, 1994 because of compensation arrangements based upon
calendar year revenues and profitability, which were higher in calendar year
1995 than calendar year 1994. Another operating expense category which
increased significantly from the year-earlier quarter was occupancy and
equipment, which was up 25% due primarily to higher rent expense associated
with the Company's ongoing renovation of its Richmond headquarters building and
expansions and renovations within the branch office system. Overall, however,
non-compensation, non-interest expenses increased by 12%, which represents a
moderation of the trend of increasing operating expenses which the Company has
experienced in recent periods. Interest expense increased by 34%, reflecting
continuing strong increases in interest-bearing cash balances payable to
Individual Retirement Account customers.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1995
Net earnings for the six month period ended December 31, 1995 were $2,299,271,
up $1,200,542, or 109%, from the comparable period last year. Earnings per
share increased by 106% to $1.07 per share. Total revenues increased by 37%
to $35,245,631, while expenses increased by 31% to $31,621,360, reflecting the
variable nature of many of the Company's expenses.
The increase in total revenues for the six month period was due to increases
in commissions revenues of 44%, investment baking revenues of 88%, and advisory
and administrative fees of 50%. These results were attributable to favorable
equity market conditions as compared to last year. In addition, investment
banking activity increased over the depressed level of last year as the Company
completed three managed stock offerings during the period. The sharp increase
in revenue from investment and advisory fees was a result of growth in the
Company's money market product area, asset management business, and the
implementation of an enhanced postage and handling charge.
A significant portion of the overall increase in expenses was a result of a 38%
increase in employee compensation and benefits, the Company's largest expense
item. This increase was associated with increases in performance-based
compensation associated with the higher overall levels of revenue and
profitability. The growth in the Company's workforce moderated during the six
month period, however, as the overall employee count of 490 at December 31,
1995 represented a 3% increase over the preceding 12 months as compared to an
increase of 12% experienced during calendar year 1994. Non-compensation,
non-interest expense increased by $993,128, or 14%, during the six month period
due to higher transaction volumes, continued investments in occupancy and
equipment, and cost increases for postage, stationery and supplies. Interest
expense increased by 44% during the six month period, reflecting continuing
increases in interest-bearing cash balances payable to Individual Retirement
Account customers.
LIQUIDITY AND CAPITAL RESOURCES
As set forth in the Consolidated Statement of Cash Flows contained in this
report, the Company's primary sources of cash flow are the net cash provided
from the earnings of the Company and from increases in the amounts payable to
customers and other short-term indebtedness incurred in the normal course of
the Company's securities brokerage business.
For the six month period ended December 31, 1995, net cash from operations was
$4,122,920. In addition to earnings of $2,299,271, cash flow from operations
was also provided by an increase of $6,597,693 in amounts payable to customers,
representing a 7% increase in credit balances in customer brokerage accounts
during the period. Cash flow was also provided by increases in other
liabilities of $3,663,884, primarily a result of calendar year-end expense
accruals. The largest use of cash in operating activities was an increase of
$4,809,519 in customer receivable balances. Because of the nature of the
Company's business, the changes in operating asset and liability account
balances relative to net income for any particular accounting period can be
quite large and somewhat arbitrary and therefore not very useful indicators of
long-term trends in the Company's liquidity and capital resources.
Net cash flow of $585,287 was used by financing activities, principally
including a net repayment of short term bank loans of $3,600,000, partially
offset by a net increase in drafts payable of $3,087,847, which was a result
of year-end customer and employee payment transactions. Common stock
transactions used net cash of $73,134 as new issuances of stock partially
offset cash dividends and repurchases of common stock. Investing activities
during the period used net cash of $1,153,442, which included a $511,418
increase in loans receivable, primarily a result of the extension of new
forgivable loans associated with new Investment Broker recruiting during the
period, and $505,084 in purchases of fixed assets. Over the six month period,
the Company's overall net cash position improved by $2,384,191.
At December 31, 1995, approximately 91% of the Company's assets were liquid,
consisting mainly of cash or assets readily convertible into cash. The
Company's largest asset is its receivable from customers, representing loans
from the Company to customers to finance the purchase of securities on margin.
Such receivables from customers are substantially financed by customer credit
balances (excess funds kept by customers with the Company), short-term bank
loans and equity capital. The Company utilizes short-term bank loans under
established lines of credit with several banking institutions. A total of
$58,000,000 in approved lines of credit was available to the Company at
December 31, 1995, of which $3,000,000 was outstanding. The Company had no
other debt obligations outstanding at that date.
The Company is subject to the net capital requirements of the Securities and
Exchange Commission ("SEC") 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
requirements. At December 31, 1995, the Company's net capital of $17,401,679
exceeded the minimum requirement by $15,930,096. Net capital was comprised
entirely of stockholders' equity less certain regulatory adjustments.
Management believes that funds provided by earnings combined with its existing
liquid capital base and its present lines of credit, are fully adequate to meet
the Company's financing needs for the foreseeable future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None Reportable
Item 2. Changes in Securities - None Reportable
Item 3. Defaults upon Senior Securities - None Reportable
Item 4. Submission of Matters to a Vote of Security Holders - None
Reportable
Item 5. Other Information
John Sherman, Jr. was named President and Chief Executive Officer effective
as of January 1, 1996. Mr. Sherman previously served the Company as Chief
Operating Officer and Director of Branch Administration. Charles E. Mintz
was named Chief Financial Officer effective as of January 1, 1996. Mr.
Mintz previously served the Company as Chief Administrative Officer and
Branch Manager.
Item 6: Exhibits and Reports on 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule BD - See Separate Document
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCOTT & STRINGFELLOW FINANCIAL, INC.
(Registrant)
Signatures Date
/S/ John Sherman, Jr. February 14, 1996
- ------------------------------
John Sherman, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
/S/ Charles E. Mintz February 14, 1996
- ------------------------------
Charles E. Mintz
First Vice President and Chief Financial Officer
(Principal Financial Officer)
