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 26, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from....................to.....................
Commission file number 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, 1997, there were 3,189,482 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 26, 1997 (unaudited) and June 27, 1997 3
Consolidated Statements of Income (unaudited) -
Three months ended September 26, 1997
and September 27, 1996 4
Consolidated Statements of Cash Flows (unaudited) -
Three months ended September 26, 1997
and September 27, 1996 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 10
Item 2. Changes in Securities 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to a Vote of
Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
EXHIBITS
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 26, June 27,
1997 1997
ASSETS
Cash and cash equivalents $ 13,609,691 $ 6,566,361
Cash segregated under Federal regulations 306,525 670,044
Receivable from brokers, dealers and
clearing organizations 6,104,259 2,256,973
Receivable from customers 92,434,414 90,404,457
Trading and investment securities,
at market value 12,939,915 13,548,274
Exchange memberships, at adjusted cost 838,100 838,100
Equipment and leasehold improvements,
less depreciation and amortization 4,107,682 4,075,051
Deferred income taxes 1,087,429 1,087,429
Other assets 11,958,094 10,406,848
Total Assets $143,386,109 $129,853,537
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Drafts payable $ 435,214 $ 0
Short term bank loans 0 4,950,000
Payable to brokers, dealers and clearing
organizations 5,216,247 4,714,494
Payable to customers 90,473,254 77,976,229
Securities sold, but not yet purchased,
at market value 905,582 545,978
Accounts payable, accrued compensation
and other liabilities 15,663,584 12,489,184
Total Liabilities 112,693,881 100,675,885
Stockholders' Equity
Common stock, $0.10 par value; Authorized
10,000,000 shares; Issued and outstanding
3,184,682 and 3,172,946 shares 318,469 317,295
Additional paid-in capital 13,293,559 12,540,734
Retained earnings 18,145,530 17,384,953
Less: subscriptions receivable -1,065,330 -1,065,330
Total Stockholders' Equity 30,692,228 29,177,652
Total Liabilities and Stockholders' Equity $143,386,109 $129,853,537
See notes to consolidated financial statements.
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 26, 1997 and September 27, 1996
(Unaudited)
September 26, September 27,
1997 1996
REVENUES
Commissions $ 13,092,403 $ 9,382,056
Principal transactions 3,937,695 3,151,263
Investment banking 3,284,357 2,029,813
Interest and dividends 2,266,577 1,761,347
Advisory and administrative service fees 2,692,741 1,555,140
Other 170,418 64,149
Total Revenues 25,444,191 17,943,768
EXPENSES
Employee compensation and benefits 16,331,921 11,150,587
Communications 1,033,227 929,506
Occupancy and equipment 1,225,729 984,895
Advertising and sales promotion 565,008 432,459
Postage, stationery and supplies 646,918 589,596
Brokerage, clearing and exchange fees 454,765 383,143
Data processing 455,752 346,470
Interest 915,322 627,833
Other operating expenses 1,241,085 1,154,882
Total Expenses 22,869,727 16,599,371
Income before income taxes 2,574,464 1,344,397
Income taxes 949,000 488,000
NET INCOME $ 1,625,464 $ 856,397
Earnings per share, primary $0.48 $0.28
Earnings per share, fully diluted $0.48 $0.28
Dividends declared per share $0.09 $0.08
Weighted average common shares and
common stock equivalents outstanding 3,363,933 3,059,652
See notes to consolidated financial statements.
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 26, 1997 and September 27, 1996
(Unaudited)
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,625,464 $ 856,397
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 418,148 334,064
Allowance for doubtful accounts 15,677 0
Losses on dispositions of fixed assets 13,718 0
Changes in assets and liabilities:
Cash segregated under Federal regulations 363,519 -6
Receivable from brokers, dealers and
clearing organizations -3,847,286 -357,006
Receivable from customers -2,030,605 -291,341
Trading securities 608,359 5,151,770
Other assets -729,203 934,560
Payable to brokers, dealers and
clearing organizations 501,753 1,298,675
Payable to customers 12,497,025 807,874
Securities sold, but not yet purchased 359,604 -596,628
Accounts payable, accrued compensation
and other liabilities 3,173,344 -654,303
NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES 12,969,517 7,484,056
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in drafts payable 435,214 1,280,309
Net change in short term bank loans -4,950,000 -2,600,000
Cash dividends paid -285,565 -266,697
Purchase and retirement of common stock -651,427 -4,242,021
Issuance of common stock 827,160 141,038
NET CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES -4,624,618 -5,687,371
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of not readily
marketable securities 0 51,125
Purchases of not readily marketable securities 0 -950
Proceeds from disposition of fixed assets 918 0
Purchases of fixed assets -462,210 -674,833
Repayment of loans receivable 42,848 8,113
Increase in loans receivable -883,125 -1,293,462
NET CASH PROVIDED BY (USED FOR) INVESTING
ACTIVITIES -1,301,569 -1,910,007
Net increase (decrease) in cash and cash equivalents 7,043,330 -113,322
Cash and cash equivalents at beginning of period 6,566,361 4,604,319
Cash and cash equivalents at end of period $13,609,691 $ 4,490,997
Cash paid during the period for interest $ 631,894 $ 617,130
Cash paid during the period for income taxes $ 640,925 $ 769,326
See notes to consolidated financial statements.
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 26, 1997
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 27,
1997.
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 26, 1997, S&S's
net capital of $15,043,324 was 15% of its aggregate debit balances and was
$13,035,470 in excess of its minimum regulatory requirement.
3. COMMON STOCK
During the quarter ended September 26, 1997, the Company issued 5,744 shares
of common stock pursuant to the exercise of employee stock options for net
proceeds of $43,082. The Company also issued 11,835 shares of common stock
to the Employee Stock Purchase Plan for net proceeds of $257,953. In
addition, the Company issued 25,000 shares of stock, under a private
placement exemption, to a newly hired employee in connection with
recruitment for net proceeds of $526,125. 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 30,843 shares for
a total cost of $651,427, which included purchases of 16,600 shares from
directors for a cost of $348,600. The Company had remaining authority to
repurchase 384,942 shares at September 26, 1997.
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 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 30 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 26, 1997, the Company employed 569 people
including 238 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 74% 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, some of these operating costs may increase at
a proportionately greater rate than revenues during periods of increased
activity. While the Company is increasing its sources of fee-based revenue 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 expenditure 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 26, 1997
The Company reported net income of $1,625,000 for the three months ended
September 26, 1997. Quarterly net income was an all time record and
represented an increase of 90% from the first quarter of fiscal 1997. Earnings
per share of $0.48 increased by 71% from the year-earlier period, as average
common shares and equivalents outstanding were approximately 10% higher than
during the comparable period of the prior year due to an increase of 156,569
in actual average shares outstanding as well as an increase in common stock
equivalents, due to the dilutive effect of outstanding stock options, of
147,712 shares.
Total revenues for the quarter were $25,444,000, an increase of 42% from the
first quarter of fiscal 1997 and the highest level of quarterly revenues in the
Company's history. With continued favorable conditions in the equity
securities markets, all major categories of revenue increased significantly.
Commissions on agency transactions increased by $3,710,000, or 40%, primarily
the result of increased transaction volume in listed and over-the-counter
equity securities, mutual funds, annuities, and equity options. Revenue from
principal transactions increased by 25%, which included a $626,000, or 33%,
increase in sales credits, or mark-ups, on equity securities in which the
company makes a market. In addition, trading profits on equity securities
increased by $306,000 from the year-earlier period. Declines in sales credits
on fixed income securities partially offset the overall increase in revenue
from principal transactions. Investment banking revenues were $3,284,000 as
compared to $2,030,000 for the first quarter of 1997, an increase of 62%. The
most significant factors were increases of $1,187,000 in sales credits and
$562,000 in management fees from on managed underwritten equity offerings, as
a total of 4 such offerings were completed during the quarter as compared to
1 offering during the first quarter of 1997. Advisory and administrative
service fees increased by $1,138,000, or 73%, primarily as a result of
increases in investment advisory fees of $578,000, managed account fees of
$193,000, and money market distribution fees of $313,000.
Total expenses increased by 38% to $22,870,000 from $16,599,000 in 1997.
Employee compensation and benefits, the Company's largest expense item,
increased by 47% as a result of significantly higher variable compensation
expense associated with the increase in revenues. Compensation expense, which
accounts for approximately 71% of total expenses, accounted for 83% of the
overall increase in expenses. Other categories of expenses which increased
primarily due to the increased volume of securities transactions included
brokerage, clearing and exchange fees, up 19%, and data processing, up 32%.
Special charges for custom computer programming projects also contributed to
the increase in data processing expense. Communications expense increased by
11% because of increased usage of quote and market information services, while
occupancy and equipment was 25% higher due to depreciation of computer
equipment, computer software maintenance fees, and increased office rent
expense. A variety of marketing programs and increased business travel
contributed to the increase in advertising and sales promotion of 31%.
Overall, non-compensation, non-interest expenses increased by 17% from the
year-earlier quarter, reflecting a moderation in the rate of increase in
operating expenses from recent quarterly periods, considering the overall
increase in revenues.
Interest and dividend revenues increased by $505,000, or 29%, as a result of
continued growth in receivable balances from customer margin accounts, which
were approximately 17% than during the comparable period one year ago. In
addition, bank interest income increased by $113,000 because of higher average
cash balances held in reserve bank accounts under federal regulations governing
the protection of customer balances. Interest expense increased by $287,000,
or 46%, primarily as a result of higher interest-bearing customer credit
balances in IRA accounts. Overall, interest and dividend income, net of
interest expense, increased by $218,000, or 19%, from 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 liabilities incurred in the normal course of the
Company's securities brokerage business.
For the three month period ended September 26, 1997, net cash provided by
operations was $12,970,000. In addition to net income of $1,625,000, cash flow
from operations was also provided by, among other items, an increase in payable
to customers of 12,497,000. 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 of limited value as indicators of long-term trends
in the Company's liquidity and capital resources. However, increases in
customer credit balances (excess funds kept by customers with the Company) have
been a significant source of cash in recent quarterly periods. From time to
time, a portion of these balances must be set aside in a special reserve bank
account under federal regulations. This reserve requirement is redetermined
on a weekly basis and any cash balances so segregated are not available to fund
the Company's working capital needs. Cash balances so segregated have averaged
approximately $3.8 million over the preceding 3 fiscal quarters as compared to
approximately $900,000 over the comparable period of the prior year.
Net cash flow of $4,625,000 was used by financing activities, principally
repayment of short term bank loans of $4,950,000. Purchases and retirements
of the Company's stock during the quarter totaled $651,000 while issuances of
common stock provided cash of $827,000.
Investing activities during the period used net cash of $1,302,000, which
included fixed asset purchases and the extension of loans, primarily related
to employee recruiting efforts during the period. Over the three month period,
the Company's overall net cash position increased by $7,043,000.
At September 26, 1997, 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, 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 $52,000,000 in approved lines
of credit was available to the Company at September 26, 1997, of which no
balances were 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 26, 1997, the Company's net capital of $15,043,324
exceeded the minimum requirement by $13,035,470. 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
On July 21, 1997, the Company issued 15,000 shares of common stock at a
price of $19.125 per share for net proceeds of $286,875, and on September
11, 1997 the Company issued an additional 10,000 shares at a price of
$23.925 per share for net proceeds of $239,250 to a newly hired employee in
connection with his recruitment. The form of consideration received was
cash, with the employee's source of funds derived from proceeds of
promissory notes issued to the employee by the Company pursuant to
employment agreements. In issuing these shares, the Company is relying on
the private offering exemption under section 4(2) of the Securities Act of
1933. There were no underwriters or placing agents in these transactions.
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 21, 1997.
Four persons were nominated and elected to the Company's Board of Directors.
Frederic Scott Bocock was elected to a three year term with 2,737,298 share
votes for and 23,365 share votes withheld. R. Bruce Campbell was elected to
a three year term with 2,744,672 share votes for and 15,991 share votes
withheld. R. Gordon Smith was elected to a three year term with 2,741,274
share votes for and 19,389 share votes withheld. Steven C. DeLaney was
elected to a three year term with 2,749,635 share votes for and 11,028 share
votes withheld.
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 26, 1998 with 2,754,253 share votes for, 4,810 share votes
against, and 1,600 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 26, 1997.
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 6, 1997
John Sherman, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Mike D.Johnston November 6, 1997
Mike D. Johnston
Vice President and Chief Financial Officer
(Principal Financial Officer)<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended
September 26, 1997 September 27, 1996
Primary Fully Diluted Primary Fully Diluted
Weighted average shares
outstanding:
Common shares 3,170,201 3,170,201 3,013,632 3,013,632
Dilutive shares
available under
stock options 193,732 219,446 46,020 48,051
Weighted average common
shares and common
stock equivalents
outstanding 3,363,933 3,389,647 3,059,652 3,061,683
Net earnings applicable
to common shares $1,625,464 $1,625,464 $856,397 $856,397
Earnings per share $0.48 $0.48 $0.28 $0.28
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