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 September 27, 1996
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 November 6, 1996, there were 2,007,519 shares of Scott & Stringfellow
Financial, Inc. Common stock, par value $.10, issued and outstanding.
SCOTT & STRINGFELLOW FINANCIAL, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
September 27, 1996 (unaudited) and June 28, 1996 3
Consolidated Statements of Income (unaudited) -
Three months ended September 27, 1996
and September 29, 1995 4
Consolidated Statements of Cash Flows (unaudited) -
Three months ended September 27, 1996
and September 29, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults upon Senior Securities 9
Item 4. Submission of Matters to a Vote of
Security Holders 9
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 10
EXHIBITS
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 27, June 28,
1996 1996
ASSETS
Cash and cash equivalents $ 4,490,997 $ 4,604,319
Cash segregated under Federal regulations 633 627
Receivable from brokers, dealers and
clearing organizations 5,130,889 4,773,883
Receivable from customers 78,982,731 78,691,390
Trading and investment securities,
at market value 7,738,777 12,940,722
Exchange memberships, at adjusted cost 838,100 838,100
Equipment and leasehold improvements,
less depreciation and amortization 3,316,995 2,973,023
Deferred income taxes 639,429 639,429
Other assets 9,134,665 8,787,079
Total Assets $110,273,216 $114,248,572
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Drafts payable $ 5,348,544 $ 4,068,235
Short term bank loans 1,000,000 3,600,000
Payable to brokers, dealers and clearing
organizations 3,526,051 2,227,376
Payable to customers 61,385,638 60,577,764
Securities sold, but not yet purchased,
at market value 1,775,488 2,372,116
Accounts payable, accrued compensation
and other liabilities 11,232,553 11,912,646
Payable to shareholders for purchase and
retirement of common stock 0 3,800,000
Total Liabilities 84,268,274 88,558,137
Stockholders' Equity
Common stock, $0.10 par value; Authorized
10,000,000 shares; Issued and outstanding
2,007,569 and 2,022,475 shares 200,757 202,247
Additional paid-in capital 10,436,573 10,426,723
Retained earnings 15,843,452 15,537,305
Less: subscriptions receivable -475,840 -475,840
Total Stockholders' Equity 26,004,942 25,690,435
Total Liabilities and Stockholders' Equity $110,273,216 $114,248,572
See notes to consolidated financial statements.
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 27, 1996 and September 29, 1995
(Unaudited)
1996 1995
REVENUES
Commissions $ 9,382,056 $ 9,461,983
Principal transactions 3,151,263 2,610,248
Investment banking 2,029,813 2,998,486
Interest and dividends 1,761,347 1,602,005
Advisory and administrative service fees 1,555,140 911,094
Other 64,149 70,578
Total Revenues 17,943,768 17,654,394
EXPENSES
Employee compensation and benefits 11,150,587 11,261,163
Communications 929,506 792,303
Occupancy and equipment 984,895 741,733
Advertising and sales promotion 432,459 356,535
Postage, stationery and supplies 589,596 488,804
Brokerage, clearing and exchange fees 383,143 312,961
Data processing 346,470 259,384
Interest 627,833 558,041
Other operating expenses 1,154,882 977,969
Total Expenses 16,599,371 15,748,893
Income before income taxes 1,344,397 1,905,501
Income taxes 488,000 685,000
NET INCOME $ 856,397 $ 1,220,501
Earnings per share $0.42 $0.57
Dividends declared per share $0.12 $0.10
Weighted average common shares and
common stock equivalents outstanding 2,039,768 2,124,061
See notes to consolidated financial statements.
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 27, 1996 and September 29, 1995
(Unaudited)
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 856,397 $ 1,220,501
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 334,064 185,808
Deferred income taxes 0 -54,000
Changes in assets and liabilities:
Cash segregated under Federal regulations -6 1,984
Receivable from brokers, dealers and
clearing organizations -357,006 -1,386,173
Receivable from customers -291,341 -4,219,975
Trading securities 5,151,770 1,584,057
Other assets 934,560 -1,119,418
Payable to brokers, dealers and
clearing organizations 1,298,675 -27,157
Payable to customers 807,874 3,531,994
Securities sold, but not yet purchased -596,628 135,295
Accounts payable, accrued compensation
and other liabilities -654,303 2,472,209
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 7,484,056 2,325,125
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in drafts payable 1,280,309 1,020,629
Net change in short term bank loans -2,600,000 -1,500,000
Cash dividends paid -266,697 -210,762
Purchase and retirement of common stock -4,242,021 0
Issuance of common stock 141,038 190,153
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES -5,687,371 -499,980
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of not readily
marketable securities 51,125 29,166
Purchases of not readily marketable securities -950 -94,265
Purchases of equipment and leasehold improvements -674,833 -165,130
Repayment of loans receivable 8,113 46,532
Increase in loans receivable -1,293,462 -126,204
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES -1,910,007 -309,901
Net increase (decrease) in cash and cash equivalents -113,322 1,515,244
Cash and cash equivalents at beginning of period 4,604,319 3,761,381
Cash and cash equivalents at end of period $ 4,490,997 $ 5,276,625
Cash paid during the period for interest $ 617,130 $ 574,310
Cash paid during the period for income taxes 769,326 388,481
See notes to consolidated financial statements.
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 27, 1996
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
period 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 28,
1996.
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 September 27, 1996, S&S's
net capital of $14,123,160 was 17% of its aggregate debit balances and was
$12,509,732 in excess of its minimum regulatory requirement.
3. COMMON STOCK
During the quarter ended September 27, 1996, the Company issued 2,020 shares
of common stock pursuant to the exercise of employee stock options for net
proceeds of $19,729. The Company also issued 8,322 shares of common stock
to the Employee Stock Purchase Plan for net proceeds of $113,610. The
Company repurchases its common shares in the open market under a plan
approved by the Board of Directors. During the quarter, the Company
repurchased 25,248 shares for a total cost of $442,021. The Company had
remaining authority to repurchase 288,181 shares at September 27, 1996.
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, South Carolina, and West Virginia. Its primary
business is retail securities brokerage with an emphasis on equity securities
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,
individual retirement account custodial services, and money market cash
management services. As of September 27, 1996, the Company employed 532 people
including 227 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 78% 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 is currently attempting to build additional
fee-based revenue in an attempt to improve the stability of revenues and
earnings, 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 or increased
volume. In particular, competitive industry conditions necessitate the
incurrence of significant costs in the areas of technology, investment broker
recruiting, and continual improvement of the Company's investment research
capabilities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 27, 1996
The Company reported net income of $856,397 for the three months ended
September 27, 1996. Despite higher revenues, net income declined by 30% from
the record quarterly earnings of $1,220,501 reported for the first quarter of
fiscal 1996. Earnings per share of $0.42 represented a decline of 26% as
average common shares and equivalents outstanding were approximately 4% lower
than during the comparable period of the prior year.
Total revenues for the quarter were $17,943,768, an increase of 2% from the
first quarter of fiscal 1996 and the second highest level of quarterly revenues
in the Company's history. While commissions from agency transactions were
essentially unchanged from the prior period, revenue from principal
transactions increased by 21% to $3,151,263, due primarily to increased sales
credits, or mark-ups, on over-the-counter equity and corporate bond
transactions. Within the agency commission category, sales of mutual funds and
annuities increased significantly. Investment banking revenues declined by
$968,673, or 32%, from the first quarter of the prior year due primarily to the
completion of two large managed equity offerings in the prior period as
compared to one managed equity offering in the first quarter of the current
year. The decline in investment banking revenues contributed significantly to
the decline in overall net income; because of the positive effect on
profitability, the completion of managed equity offerings is an important
determinant of earnings levels from quarter to quarter. Revenue from advisory
and administrative service fees continued to increase sharply, continuing the
pattern of recent quarters. Due primarily to substantial increases in assets
under management within the Company's investment advisory and managed accounts
services, advisory and administrative fees were $1,555,140 as compared to
$911,094, an increase of 71% from the first quarter of fiscal 1996.
Total expenses increased by 5% to $16,599,371 from $15,748,893 in the
year-earlier period. Employee compensation and benefits, the Company's largest
expense item, declined by 1% as a result of somewhat lower variable
compensation expense associated with the change in composition of revenues and
the decline in net operating income as compared to the prior year. However,
some categories of other operating expenses increased significantly from the
year-earlier quarter. Occupancy and equipment increased by 33%, a result of
higher depreciation expense associated with computer systems installed as part
of the Company's technology plan and ongoing relocations and renovations of
office space. Communications expense increased by 17% as a result of higher
charges for telephone and quote services. The increase in data processing
expense of 33% was partially attributable to a rate increase from the Company's
transaction processing service bureau. In the other operating expense
category, increases in employment agency fees for recent recruiting efforts,
legal settlements, and computer consulting expense contributed to an increase
of 18%. Overall, non-compensation, non-interest expenses increased by 23% from
the year-earlier quarter, reflecting higher expenses associated with continuing
initiatives to improve the Company's capabilities, competitive position, and
quality of client service.
Interest and dividend revenues increased by 10% as a result of continue growth
in receivable balances from customer margin accounts, which were approximately
17% higher during the quarter ended September 27, 1996 than during the
comparable period one year ago. Interest expense increased by 13% as a result
of interest paid on higher levels of customer credit balances on IRA accounts.
Overall, interest and dividend income, net of interest expense, increased to
$1,133,514, or 9% higher than the year-earlier period.
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 three month period ended September 27, 1996, net cash provided by
operations was $7,484,056. In addition to net income of $856,397, cash flow
from operations was also provided by, among other items, a decline in trading
securities inventory of $5,151,770, an increase in payable to brokers, dealers
and clearing organizations of $1,298,675, and an increase in payable to
customers of $807,874. The largest use of cash in operating activities was
decline of $654,303 in the balance of accounts payable, accrued compensation
and other liabilities. 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 are not very useful indicators of long-term trends in
the Company's liquidity and capital resources.
Net cash flow of $5,687,371, was used by financing activities, principally
including the settlement of the Company's "Dutch Auction" tender offer. This
transaction, which involved the repurchase of 200,000 shares of common stock
for $3,800,000, was accrued as of June 28, 1996, but represented a cash outflow
for purchase and retirement of common stock during the quarter ended September
27, 1996. In addition to this transaction, there were open market purchases
and retirements of the Company's stock during the quarter which totaled
$442,021. The Company also repaid short term bank loans in the net amount of
$2,600,000 while outstanding drafts payable increased by $1,280,309. Investing
activities during the period used net cash of $1,910,007, which included
$674,833 in purchases of equipment and leasehold improvements, mainly
associated with implementation of the technology plan. In addition, $1,293,462
of loans receivable were extended, primarily due to investment broker
recruiting efforts during the period. Over the three month period, the
Company's overall net cash position declined by $113,322.
At September 27, 1996, approximately 87% 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
borrowings from the Company by 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 borrowings and equity capital. The Company utilizes short-term
bank borrowings 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 September 27, 1996, of which $1,000,000 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 September 27, 1996, the Company's net capital of $14,123,160
exceeded the minimum requirement by $12,509,732. 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
The Annual Meeting of Shareholders of Scott & Stringfellow Financial, Inc.
was held in Richmond, Virginia on October 22, 1996.
Four persons were nominated and elected to the Company's Board of Directors.
Sidney Buford Scott was elected to a three year term with 1,777,022 share
votes for and 1,340 share votes withheld. John J. Muldowney was elected to
a three year term with 1,777,022 share votes for and 1,340 share votes
withheld. William W. Berry was elected to a three year term with 1,773,962
share votes for and 4,400 share votes withheld. William F. Calliott was
elected to a three year term with 1,776,828 share votes for and 1,534 share
votes withheld.
A motion to approve the Scott & Stringfellow Financial, Inc. Management
Stock Purchase Loan Plan, solicited by proxy, was passed by a vote of
1,360,070 share votes for, 23,329 share votes against, and 4,340 share votes
abstaining.
A motion, solicited by proxy, was approved to ratify the selection of KPMG
Peat Marwick LLP as independent certified public accountants for the fiscal
year ending June 27, 1997 with 1,774,866 share votes for, 2,080 share votes
against, and 1,416 share votes abstaining.
Item 5. Other Information - None Reportable
Item 6: Exhibits and Reports on 8-K
(a) Exhibits
Exhibit 11 - Statement Re: Computation of Per Share Earnings - See
Separate Document
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
September 27, 1996.
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. November 11, 1996
John Sherman, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Charles E. Mintz November 11, 1996
Charles E. Mintz
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended September 27, 1996 September 29, 1995
Primary Fully Diluted Primary Fully Diluted
Weighted average shares
outstanding:
Common shares 2,009,088 2,009,088 2,109,345 2,109,345
Dilutive shares
available under
stock options 30,680 32,034 14,716 16,607
Weighted average common
shares and common
stock equivalents
outstanding 2,039,768 2,041,122 2,124,061 2,125,952
Net earnings applicable
to common shares $856,397 $856,39 $1,220,501 $1,220,501
Earnings per share $0.42 $0.42 $0.57 $0.57
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> QTR-1
<FISCAL-YEAR-END> JUN-27-1997
<PERIOD-START> JUN-29-1996
<PERIOD-END> SEP-27-1996
<CASH> 4,491,630
<RECEIVABLES> 79,420,870
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 4,692,750
<INSTRUMENTS-OWNED> 7,738,777
<PP&E> 3,316,995
<TOTAL-ASSETS> 110,273,216
<SHORT-TERM> 1,000,000
<PAYABLES> 78,870,686
<REPOS-SOLD> 0
<SECURITIES-LOANED> 2,622,100
<INSTRUMENTS-SOLD> 1,775,488
<LONG-TERM> 0
<COMMON> 200,757
0
0
<OTHER-SE> 25,804,185
<TOTAL-LIABILITY-AND-EQUITY> 110,273,216
<TRADING-REVENUE> 3,151,263
<INTEREST-DIVIDENDS> 1,761,347
<COMMISSIONS> 9,382,056
<INVESTMENT-BANKING-REVENUES> 2,029,813
<FEE-REVENUE> 1,555,140
<INTEREST-EXPENSE> 627,833
<COMPENSATION> 11,150,587
<INCOME-PRETAX> 1,344,397
<INCOME-PRE-EXTRAORDINARY> 856,397
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 856,397
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
