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 27, 1997
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 incorporation or organization I.R.S. Employer
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 12, 1997, there were 3,160,349 shares of Scott & Stringfellow
Financial, Inc. Common Stock, par value $.10, issued and outstanding of which
2,006,667 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 $26.00
on September 12, 1997 was approximately $52,173,000.
DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Certain Portions of the 1997 Annual Report to Shareholders (in Parts I and II)
Notice of Annual Meeting and Proxy Statement Dated September 23, 1997 (in Part
III).
Exhibit Index Appears on Page 15
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC.
FORM 10-K
For the Year Ended June 27, 1997
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 15
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III
10.Directors and Executive Officers of Registrant 15
11.Executive Compensation 15
12.Security Ownership of Certain Beneficial Owners
and Management 15
13.Certain Relationships and Related Transactions 15
PART IV
14.Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 15
SIGNATURES 17
FINANCIAL STATEMENT SCHEDULES 19
EXHIBITS
2
<PAGE>
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 29 offices in communities
located across Virginia, North Carolina, West Virginia, and South Carolina. 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 29
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 27, 1997, approximately 53% of total
revenues were derived from brokerage commissions on investments purchased and
sold on an agency basis, 17% from principal transactions, 10% from investment
banking, 10% from interest and dividends, and 10% 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 29 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 27, 1997, the Registrant had approximately 566 employees
including 237 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
27, 1997:
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Calendar
Year Number of
Branch Investment
Location Opened Brokers
Virginia
Richmond 1893 52
Blacksburg 1988 4
Chesapeake 1987 2
Charlottesville 1982 8
Chesterfield 1987 7
Culpepper 1971 3
Danville 1986 3
Harrisonburg 1991 5
Lexington 1986 2
Lynchburg 1984 9
Manassas 1987 6
Martinsville 1983 5
Norfolk 1978 23
Roanoke 1984 7
Staunton 1970 7
Tyson's Corner 1986 10
Virginia Beach 1995 1
Warrenton 1970 6
Williamsburg 1995 3
Winchester 1970 5
Total Virginia 168
North Carolina
Charlotte 1988 10
Greensboro 1988 19
Kinston 1988 3
North Wilkesboro 1988 2
Raleigh 1992 11
Wilmington 1990 4
Winston-Salem 1987 13
Total North Carolina 62
West Virginia
Bluefield 1971 3
South Carolina
Charleston 1996 4
Total Company 237
4
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended June 27, 1997 June 28, 1996 June 30, 1995
Amount % Amount % Amount %
<S> <C>
Commissions:
Exchange Listed Securities $ 21,384,632 26.4 $ 19,879,066 27.2 $ 15,055,569 27.8
Over-the-Counter Equities 7,801,982 9.6 8,549,871 11.7 5,220,192 9.7
Mutual Funds 9,113,106 11.3 7,574,445 10.3 5,220,372 9.6
Annuities 2,714,368 3.4 2,235,440 3.1 1,571,392 2.9
Options 1,410,963 1.7 1,207,922 1.6 806,672 1.5
Other 240,795 0.3 455,679 0.6 426,486 0.8
Total Commissions 42,665,846 52.7 39,902,423 54.5 28,300,683 52.3
Principal Transactions:
Municipal Bonds 1,633,679 2.0 1,742,336 2.4 3,094,290 5.7
Over-the-Counter Equities 10,185,985 12.6 7,764,215 10.6 5,676,936 10.5
Corporate and Govt.
Bonds and Other 2,067,174 2.6 1,652,883 2.3 1,953,794 3.6
Total Principal Transactions 13,886,838 17.2 11,159,434 15.3 10,725,020 19.8
Investment Banking 8,357,622 10.3 10,559,244 14.4 6,257,511 11.6
Interest and Dividends 7,856,697 9.7 6,621,355 9.1 5,852,740 10.8
Advisory and Administrative
Service Fees 7,651,131 9.5 4,677,522 6.4 2,781,944 5.1
Other 489,077 0.6 245,327 0.3 201,391 0.4
Total Revenues $ 80,907,211 100.0 $ 73,165,305 100.0 $ 54,119,289 100.0
</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 1997,
revenues from the Registrant's retail brokerage activities are estimated to
represent approximately 93% of the Registrant's brokerage and investment banking
revenues and 75% 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
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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
brokers 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. This service is provided for accounts managed by clients
and investment brokers as well as for professionally managed accounts. For
fiscal 1997, revenues from managed account fees approximated 1% of total
revenues. 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 marketing managed account
services may be increasingly important to the growth and profitability of its
retail brokerage revenues.
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 9% of total revenues is attributable to interest charged on
client margin accounts. Balances in client margin accounts increased by 15% from
1996 to 1997 to a total of approximately $90 million at year-end, following a
21% increase from 1995 to 1996. 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, portfolio evaluation, retirement
planning, financial planning, individual retirement account custodial services,
money market services, and other personal investment advisory services. Fees are
charged for some, but not all, of these services. Advisory and administrative
service fees, which also include investment management fees, accounted for
approximately 10% of the Registrant's total revenues in 1997. (See also
"Investment Management." )
During 1997, the Registrant installed new computerized workstations for the
primary benefit of its retail investment brokers. The workstations include
modern client contact and portfolio management software and are connected to the
Registrant's data processing and administrative network systems. (Also see
"Administration and Operations.")
Capital Markets
The Registrant's Capital Markets effort is coordinated through a Capital
Markets Group consisting of Institutional Brokerage, Trading, Research, and
Corporate and Municipal Finance departments. The Registrant's business strategy
for developing its Capital Markets business includes an emphasis on quality
investment research, with a primary focus on equity securities of companies
located within the Registrant's geographical region.
Institutional Brokerage
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The Registrant executes securities transactions for institutional investors
such as banks, mutual funds, insurance companies, and pension and profit-sharing
plans. The 11 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 1997, revenues from institutional brokerage activities are
estimated to represent approximately 5% of the Registrant's brokerage and
investment banking revenues and 4% 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.
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
27, 1997, Scott & Stringfellow made markets in the common stock or other equity
securities of approximately 147 NASDAQ listed corporations, emphasizing local
and regional 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 27, 1997, the
highest, lowest, and average monthly inventories (based upon the aggregate,
rather than the net, of both long and short positions) for securities in which
the Registrant trades as principal:
<TABLE>
<CAPTION>
Highest Lowest Average
Inventory Inventory Inventory
<S> <C>
Municipal Securities $ 8,694,168 $ 2,294,247 $ 4,785,532
Equity Securities (primarily common
stocks) 8,074,710 2,247,338 3,292,323
Corporate Debt Securities 3,468,082 809,193 1,653,990
U. S. Government Securities 1,809,924 276,036 1,019,889
Other Securities 1,413,739 270,768 552,650
</TABLE>
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 6
employees involved in municipal bond trading, 6 employees in over-the-counter
equity trading, and 4 employees in taxable debt securities trading. Each trading
department is subject to internal position limits. The Registrant has a credit
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<PAGE>
committee for the purpose of maintaining policies with regard to position limits
and other areas of financial risk.
During 1997, the Registrant effected a significant organizational
consolidation of its institutional municipal bond sales, trading and public
finance functions. The departments responsible for these functions previously
operated out of both the Richmond headquarters office and the Lynchburg,
Virginia office. To increase efficiency and administrative control, these
functions were consolidated in the Richmond office during December 1996. This
change also included a workforce reduction of approximately 6 employees.
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:
<TABLE>
<CAPTION>
Managed or Co-Managed Syndicate Participations
Fiscal Number of Amount of Number of Amount of
Years Issues Offering Issues Participations
<S> <C>
Corporate Stock and Bond Offerings:
1997 5 $ 292,171,623 138 $ 511,520,858
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
Tax-Exempt Bond Offerings
1997 26 1,017,250,000 44 26,100,000
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
</TABLE>
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 for both corporate and
tax-exempt offerings and is expected to remain so in the near future. 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
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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 finance purposes. Fees generated by corporate
and municipal finance fees accounted for approximately 2% of the Registrant's
total revenues during 1997.
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 equity securities
of companies in the Southeastern and Middle Atlantic United States; making
investment recommendations; reviewing client portfolios; publishing portfolio
strategy recommendations; providing investment seminars for 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 9
primary equity analysts, 4 junior analysts, a technical analyst and is
supplemented by two New York correspondent firms which cover approximately 2,500
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
27, 1997, SSCM had approximately $600 million of assets under management, an
increase of 93% from $311 million at June 28, 1996. Fee income charged on
investment accounts managed by SSCM, which are included in advisory and
administrative service fees, represented approximately 3% of total revenues in
1997. Investment advisory fee income increased 85% from the previous fiscal year
and investment management services are an important component of management's
business strategy.
Administration and Operations
The Registrant's operations and administrative personnel, which included 97
employees as of June 27, 1997, 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; finance; human resources; employee
benefits; 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,
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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
1997 41,858 28,036 35,332
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
The Registrant currently utilizes the services of SunGard Financial
Systems, Inc. for the electronic data processing of all data pertinent to
security transactions. General accounting is performed through an in-house
general ledger system. Other computerized systems are used in support of various
administrative, operations, and trading functions. During 1997, the Registrant
installed an administrative computer network ("intranet") to support electronic
mail and the sharing of computer files between employees which it believes will
improve productivity and communication between its various departments and
branches.
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 of $10,000,000 (subject
to a $250,000 deductible per claim.)
Customer transactions are recorded and posted to the books daily;
designated personnel monitor them to ensure compliance with applicable laws,
rules, and regulations. An Administration and Operations Committee meets
frequently to review operational conditions in the firm. In addition, the Chief
Operations Officer, Chief Financial Officer, Chief Compliance Officer, Director
of Human Resources, and Director of Administrative Services sit on the
Management Committee which normally meets weekly to discuss current issues
related to the overall day-to-day management of the firm. The Registrant has an
internal auditor who performs periodic reviews of controls and has direct access
to the Audit Committee of the Board of Directors, which includes three outside
directors.
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, legal and regulatory changes have
recently allowed commercial banks and their holding companies to compete more
directly in the brokerage and investment banking businesses.
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
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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 and financial 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 27, 1997, the Registrant had 566 employees, of whom 237 had
full-time investment broker responsibilities. None of the Registrant's employees
are covered by a collective bargaining agreement.
In large part, the Registrant's future success is dependent upon its
continuing ability to hire, train and retain qualified investment brokers. The
total number of investment brokers increased to 237 from 223 during the fiscal
year reflecting 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 42 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
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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 27, 1997, the Registrant's broker-dealer
subsidiary's net capital was 16% of aggregate debit items. (See note 6 of Notes
to Consolidated Financial Statements for fiscal 1997 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 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 28 other municipalities in which it does business.
All of the Registrant's offices are leased. (See note 12 of Notes to
Consolidated Financial Statements for fiscal 1997 incorporated herein by
reference.) The Registrant is currently in the final stages of 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, installation of
new computer hardware, software and supporting systems pursuant to the
Registrant's technology plan has required significant capital expenditures in
1996 and 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 27, 1997, are as
follows:
12
<PAGE>
<TABLE>
<CAPTION>
Name Age Positions with the Registrant
<S> <C>
S. Buford Scott 64 Chairman of the Board
Frederic Scott Bocock 65 Vice Chairman of the Board
John Sherman, Jr. 51 Director, President and Chief Executive Officer
Steven C. DeLaney 42 Director, Executive Vice President and Director of Capital Markets
Charles E. Mintz 42 Senior Vice President and Director of Retail Markets
Sandra D. Glass 58 Senior Vice President and Director of Operations
William F. Gunter 54 Senior Vice President and Director of Financial Products and Services
Norman L. Hancock 59 Senior Vice President and Chief Compliance Officer
Kenneth A. Thomas 49 Senior Vice President and Director of Administrative Services
Diann D. Fox 48 Senior Vice President and Director of Human Resources
Guy P. Chance 62 First Vice President and Director of Marketing
Mike D. Johnston 37 Vice President and Chief Financial Officer
</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 Board of
Directors of Ethyl 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.
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 Chairman of Scott &
Stringfellow Capital Management, Inc. and 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 Executive Vice President and
Director of Capital Markets with overall responsibility for the research,
investment banking, institutional sales, and trading 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 company where he held various
financial and executive positions including President and Chief Operating
Officer and Chief Financial Officer.
Charles E. Mintz was named Senior Vice President Director of Retail Markets
of Scott & Stringfellow in February 1997. From January 1996 to February 1997,
Mr. Mintz served as Chief Financial Officer after serving as First Vice
President and Chief Administrative Officer from May 1995 to January 1996. Mr.
Mintz joined Scott & Stringfellow in August 1990 as manager of the Wilmington,
North Carolina branch
13
<PAGE>
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. Ms. Glass was named Senior Vice
President in 1993 and elected to the Board of Directors of Scott & Stringfellow,
Inc. in 1996.
William F. Gunter was elected Senior Vice President in 1993 and a Director
of Scott & Stringfellow, Inc. in April 1996. Mr. Gunter joined Scott &
Stringfellow in 1981, and is currently Director of Financial Products and
Services with overall responsibility for mutual funds, annuities, insurance,
retirement plans, financial planning, money markets, and managed assets. Prior
to 1981, Mr. Gunter was a Vice President with Wheat First Securities and a trust
officer with First & Merchants National Bank.
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.
Kenneth A. Thomas is a Senior Vice President and Chief Administrative
Officer at Scott & Stringfellow. He also serves on the firm's Management and
Operations Committees. Mr. Thomas joined Scott & Stringfellow 4 years ago and is
responsible for the firm's technology, communications, facilities, and other
office support systems and services. Previously, he was a Senior Vice President
with another Richmond-based regional brokerage firm serving 21 years in various
administrative, systems, and operational management capacities.
Diann D. Fox was elected Senior Vice President of Human Resources in
January 1997. Ms. Fox joined Scott & Stringfellow in 1972 after being with Paine
Webber (formerly Abbot, Proctor and Payne) since 1968. Prior to accepting an
administrative position in Human Resources, Ms. Fox served in the research
department providing analytical support to the firm's investment advisory,
primary, and correspondent reserach functions. Ms. Fox has managed the Human
Resources function since 1987.
Guy P. Chance joined Scott & Stringfellow in 1985 and served as Director of
Research from 1987 to 1992. He then served as Director of National Research
until May 1996, when he was appointed Director of Marketing. Mr. Chance was
named First Vice President in 1987. Prior to joining Scott & Stringfellow, Mr.
Chance worked for several financial services firms in the Boston area in a
variety of institutional and retail marketing and research positions.
Mike D. Johnston joined Scott & Stringfellow in 1987 and was named Vice
President and Treasurer in 1995. In February 1997, Mr. Johnston was named Chief
Financial Officer. As Chief Financial Officer, Mr. Johnston is responsible for
accounting, finance, and client services functions. Prior to joining Scott &
Stringfellow, Mr. Johnston was a tax manager for KPMG Peat Marwick. Mr.
Johnston holds a CPA certificate and serves on the board of directors of NOVA of
Virginia Aquatics.
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
14
<PAGE>
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 1997. 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 27, 1997. Information on the holders of record of the
Registrant's common stock is maintained and produced by the Registrant's
transfer agent, ChaseMellon Shareholder Services.
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 1997.
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
1997.
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 13.24 of the Annual Report to Shareholders for fiscal 1997. 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 21, 1997, which was filed with
the Commission pursuant to Regulation 240.14a(6)(c) on September 22, 1997.
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 13.25 of the
Annual Report to Stockholders for fiscal 1997, are incorporated herein
by reference:
15
<PAGE>
Consolidated Statements of Financial Condition - June 27, 1997 and June
28, 1996. Consolidated Statements of Income - Fiscal years ended June
27, 1997, June 28, 1996, and June 30, 1995. Consolidated Statements of
Changes in Stockholders' Equity - Fiscal years ended June 27, 1997,
June 28, 1996, and June 30, 1995. Consolidated Statements of Cash Flows
- Fiscal years ended June 27, 1997, June 28, 1996 and June 30, 1995.
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. 19
Schedule I - Condensed Financial Statements of Registrant pg. 20
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:
<TABLE>
<CAPTION>
EXHIBIT NUMBER PAGE
<S> <C>
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
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
Commercial Note with Crestar Bank Exhibit 10
11. Statement re: Computation of Earnings per Share Exhibit 11
13. Certain portions of the Annual Report to Shareholders for
</TABLE>
16
<TABLE>
<CAPTION>
<S> <C>
the year ended June 27, 1997, 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
</TABLE>
(b) Reports on Form 8-K.
The Registrant filed a Current Report on Form 8-K on March 6, 1997 which
reported on the declaration of a 50% stock dividend by its board of directors on
February 25, 1997.
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 22nd day of September, 1997.
SCOTT & STRINGFELLOW FINANCIAL, INC. (REGISTRANT)
BY /s/ John Sherman, Jr. September 22, 1997
--------------------- 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.
<TABLE>
<CAPTION>
<S> <C>
/s/ John Sherman, Jr. President and Director September 22, 1997
- --------------------- (Principal Executive Officer)
John Sherman, Jr.
/s/ Mike D. Johnston Vice President and September 22, 1997
- -------------------- Chief Financial Officer
Mike D. Johnston (Principal Financial / Accounting Officer)
/s/ S. Buford Scott Director September 22, 1997
- -------------------
S. Buford Scott
/s/ Frederic S. Bocock Director September 22, 1997
- ----------------------
Frederic S. Bocock
/s/ William F. Calliott Director September 22, 1997
- -----------------------
William F. Calliott
</TABLE>
17
<PAGE>
Signature Title Date
/s/ David Plageman Director September 22, 1997
- ------------------
David Plageman
/s/ John J. Muldowney Director September 22, 1997
- ---------------------
John. J. Muldowney
/s/ R. Bruce Campbell Director September 22, 1997
- ---------------------
R. Bruce Campbell
/s/ William P. Schubmehl Director September 22, 1997
- ------------------------
William P. Schubmehl
/s/ Steven C. DeLaney Director September 22, 1997
- ---------------------
Steven C. DeLaney
/s/ William W. Berry Director September 22, 1997
- --------------------
William W. Berry
R. Gordon Smith Director September 22, 1997
/s/ Robert L. Hintz
- -------------------
Robert L. Hintz Director September 22, 1997
18
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Scott & Stringfellow Financial, Inc.
Under date of August 5, 1997, we reported on the consolidated statements of
financial condition of Scott & Stringfellow Financial, Inc. and subsidiaries as
of June 27, 1997 and June 28, 1996 and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the years ended June
27, 1997, June 28, 1996 and June 30, 1995, as contained in the 1997 annual
report to stockholders. These consolidated financial statements and our report
thereon are incorporated by reference in the 1997 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.
/s/KPMG Peat Marwick LLP
- ------------------------
Richmond, Virginia
August 5, 1997
19
<PAGE>
Schedule I - Condensed Financial Statements of Registrant
Scott & Stringfellow Financial, Inc. (Parent only)
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
June 27, June 28,
1997 1996
<S> <C>
ASSETS
Cash $ 65,385 -
Investments in not readily
marketable securities 77,831 77,831
Investments in subsidiaries (a) 29,486,822 29,852,132
Other assets 6,010 -
Total Assets $ 29,636,048 $ 29,929,963
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Intercompany (a) $ 172,831 $ 172,831
Dividends payable 285,565 266,697
Distributions payable to shareholders for
purchase and retirement of common stock - 3,800,000
Total Liabilities 458,396 4,239,528
Stockholders' Equity:
Common stock, $0.10 par value. Authorized
10,000,000 shares; issued and outstanding
3,172,946 in 1997 and 2,022,475 shares
in 1996 317,295 202,247
Additional paid-in capital 12,540,734 10,426,723
Retained earnings 17,384,953 15,537,305
Less: Subscriptions Receivable -1,065,330 -475,840
Total Stockholders' Equity 29,177,652 25,690,435
Total Liabilities and Stockholders' Equity 29,636,048 $ 29,929,963
Condensed Statements of Income
Year Ended
June 27, 1997 June 28, 1996 June 30, 1995
Equity in undistributed net income
from subsidiaries (a) $ 2,418,346 $ 3,318,073 $ 1,278,649
Cash dividends (a) 1,003,409 857,640 822,766
Interest income 35,824 - -
Net income $ 3,457,579 $ 4,175,713 $ 2,101,415
</TABLE>
(a) Eliminated in consolidation
See Notes to Consolidated Financial Statements contained in the 1997 Annual
Report to Shareholders and
20
<PAGE>
incorporated herein by reference.
See accompanying independent auditors' report.
Schedule I
Condensed Financial Statements of Registrant
Scott & Stringfellow Financial, Inc. (Parent only)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended
June 27, 1997 June 28, 1996 June 30, 1995
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,457,579 $ 4,175,713 $ 2,101,415
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income
of subsidiaries -2,418,346 -3,318,073 -1,278,649
Changes in assets and liabilities:
Inter-company payable - - 5,000
Other assets -6,010
Net cash provided by operating activities 1,033,223 857,640 827,766
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid -1,003,409 -857,640 -822,766
Purchase and retirement of common stock -4,296,161 -19,140 -564,151
Issuance of common stock 1,548,070 1,009,250 519,158
Net cash provided by (used in) financing activities -3,751,500 132,470 -867,759
CASH FLOWS FROM INVESTING ACTIVITIES
Distributions from subsidiary 4,296,161 19,140 564,151
Contributions to subsidiaries -1,512,499 -1,009,250 -524,158
Net cash provided by (used in) investing activities 2,783,662 -990,110 39,993
Net change in cash and cash equivalents 65,385 - -
Cash and cash equivalents at beginning of year - - -
Cash and cash equivalents at end of year 65,385 - -
</TABLE>
See Notes to Consolidated Financial Statements contained in the 1997 Annual
Report to Shareholders and incorporated herein by reference.
See accompanying independent auditors' report.
21
<PAGE>
Exhibit 10
[Crestar logo]
Commercial Note
(Virginia)
Scott & Stringfellow, Inc. June 13, 1997
- -------------------------- -------------
Borrower Date
Five Million===================================================== Dollars
- -----------------------------------------------------------------
Loan Amount
($ 5,000,000.00) David P. Butler #1332022
------------- --------------- -------- --------------------------------
Officer Account No. Note No. [X] Original [ ] Renewal
For Value Received, the undersigned (whether one or more) jointly and severally
promise to pay to the order of Crestar Bank (the "Bank") at any of its offices,
or at such place as the Bank may in writing designate, without offset and in
immediately available funds, the Loan Amount shown above, including or plus
interest, and any other amounts due, upon the terms specified below.
IMPORTANT NOTICE
THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH CONSTITUTES A
WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR AND ALLOWS THE CREDITOR TO
OBTAIN A JUDGMENT AGAINST YOU WITHOUT ANY FURTHER NOTICE.
Repayment Terms
[ ] Demand Principal on demand, plus interest as described below.
[ ] Time-- One payment due on , . The undersigned agree to
Discounted the deduction of interest from proceeds or to the payment
of interest in advance.
Net Proceeds: $ Interest Amount: $
[ ] Time-Not One payment due on , , plus interest
Discounted and any other amounts due.
[ ] Term--Fixed In consecutive instalments of principal
Payment and interest of $ each, payable on the
day of each , beginning , and a
final payment equal to the unpaid balance of principal plus
interest and any other amounts owed due on , .
[ ] Term-- In consecutive instalments of principal of
Variable $ each, plus interest, payable on the day of
Payment each , beginning , , and a
final payment of $ plus interest and any other amounts
owned due on , .
[X] Master This is: [ ] a closed end transaction; you may borrow up to
Borrowing the Loan Amount but may not reborrow amounts that have been
Note repaid.
[X] an open end revolving line of credit; you may
borrow an aggregate principal amount up to the Loan
Amount outstanding at any one time.
Principal on demand, plus interest as described below, but the
undersigned shall be liable for only so much of the Loan Amount
shown above as shall be equal to the total advanced to or for
the undersigned, or any of them, by the Bank from time to time,
less all payments made by or for the undersigned and applied by
the Bank to principal, plus interest on each such advance, and
any other amounts due all as shown on the Bank's books and
records, which shall be prima facie evidence of the amount owed.
This Master Borrowing arrangement will terminate upon written
notice from the Bank to the undersigned, or if such notice is
not sooner given, from the date of this Note,
unless an alternative termination date is indicated in the
Agreement, as defined below.
[X] Additional Terms And Conditions
This Note is governed by additional terms and conditions contained in a Letter
Agreement between the undersigned and the Bank dated June 13, 1997 and any
modifications, renewals, extensions or replacements thereof (the "Agreement"),
which is incorporated herein by reference. In the event of a conflict between
any term or condition contained in this Note and in the Agreement, such term or
condition of the Agreement shall control.
If this Note is payable on demand, the Bank shall have the right to demand
payment at any time even if an event of default (as identified herein) has not
occurred.
Interest
[X] Accrued interest will be payable on the last day of each month, beginning
on June 30, 1997. Interest on a Fixed Payment Term Loan will accrue on a 30/360
basis. On all other loan types, interest will accrue daily on an actual/360
basis (that is, on the actual number of days elapsed over a year of 360 days)
unless otherwise stated here:
Each scheduled payment made on this Note shall be applied to accrued interest
before it is applied to principal. Interest shall accrue from the date of this
Note on the unpaid balance and shall continue to accrue after maturity, whether
by acceleration or otherwise, until this Note is paid in full. If this is a
variable rate transaction, the interest rate is prospectively subject to
increase or decrease without prior notice, and if this is a Variable Payment
Term Loan, adjustments in the payment schedule will be made as necessary.
Subject to the above, interest per annum payable on this Note (the "Rate") shall
be:
[ ] % fixed for the term of the loan
[X] a variable rate based on the following Index:
[X] Prime Rate as established from time to time by Crestar Bank.
[ ] Prime Rate as published (lowest published if two) from time to time by
[ ]
------------------------------------------------------------------------
The "Prime Rate" is a reference for fixing the lending rate for commercial
loans. The Prime Rate is a reference rate only and does not necessarily
represent the lowest rate of interest charged for commercial borrowings. If the
Index is a Crestar Prime Rate, the Index rate is subject to increase or decrease
at the sole option of the Bank.
The Rate shall be [X] the Index
[ ] the Index plus %.
[ ] % of the Index plus %.
[ ]
----------------------------------------------------
Adjustments to the Rate shall be effective:
[X] as of the date the Index changes.
[ ]
--------------------------------------------------------
[ ] Rate Call Option: Notwithstanding any provision in this Note, the Bank
reserves the right to adjust the Rate on each annual anniversary
date of this Note and the undersigned agree to pay interest at such adjusted
interest rate.
Collateral
Unless otherwise agreed in writing, any collateral pledged to the Bank to secure
any of the undersigned's existing or future liabilities to the Bank shall
secure this Note. To the extent permitted by law, each of the undersigned grants
to the Bank a security interest in and a lien upon all deposits or investments
maintained by the undersigned with, and all indebtedness owed to the undersigned
by, the Bank.
This Note is also secured by the following collateral and proceeds thereof:
- ------------------------------------------------------------------------------
UNSECURED
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
All of the foregoing security is referred to collectively as the "Collateral".
The Collateral is security for the payment of this Note and any other liability
(including overdrafts and future advances) of the undersigned to the Bank,
however evidenced, now existing or hereafter incurred, matured or unmatured,
direct or indirect, absolute or contingent, several, joint, or joint and
several, including any extensions, modifications or renewals. The proceeds of
any Collateral may be applied against the liabilities of the undersigned to the
Bank in such order as the Bank deems proper.
CRE-0261 VA COR (11/96) (To be used for Virginia CL transactions only)
<PAGE>
Loan Purpose and Updated Financial Information Required
The undersigned warrant and represent that the loan evidenced by this Note is
being made solely for the purpose of acquiring or carrying on a business,
professional or commercial activity or acquiring real or personal property as an
investment (other than a personal investment) or for carrying on an investment
activity (other than a personal investment activity). The undersigned agree to
provide to the Bank updated financial information, including, but not limited
to, tax returns, current financial statements in form satisfactory to the Bank,
as well as additional information, reports or schedules (financial or
otherwise), all as the Bank may from time to time request.
Default, Accelaration and Setoff
Any one of the following shall constitute an event of default under the terms of
this Note: (1) the failure to make when due any instalment or other payment,
whether of principal, interest, late charges or other authorized charges due
under this Note, or the failure to pay the amount demanded by the Bank if this
Note is payable on demand; (2) the death, dissolution, merger, acquisition,
consolidation or termination of existence of the undersigned, any guarantor of
the indebtedness of any of the undersigned to the Bank, any endorser, or any
other party to this Note (collectively called a "Party"); (3) the insolvency or
inability to pay debts as they mature of any Party, or the application for the
appointment of a receiver for any Party or the filing of a petition under any
provision of the Bankruptcy Code or other insolvency law, statute or proceeding
by or against any Party or any assignment for the benefit of creditors by or
against any Party; (4) the entry of a judgment against any Party or the issuance
or service of any attachment, levy or garnishment against any Party or the
property of any Party, or the repossession or seizure of property of any Party;
(5) a determination by the Bank that it deems itself insecure or that a material
adverse change in the financial condition of any Party or decline or
depreciation in the value or market value of any Collateral has occurred since
the date of this Note or is reasonably anticipated; (6) the failure of any Party
to perform any other obligation to the Bank under this Note or under any other
agreement with the Bank; (7) the occurrence of an event of default with respect
to any existing or future indebtedness of any Party to the Bank or any other
creditor of the Party; (8) a material change in the ownership, control or
management of any Party that is an entity, unless such change is approved by the
Bank In its sole discretion; (9) if any Party gives notice to the Bank
purporting to terminate such Party's obligations under or with respect to this
Note; (10) the sale or transfer by a Party of all or substantially all of such
Party's assets other than in the ordinary course of business; or (11) any Party
commits fraud or makes a material misrepresentation at any time in connection
with this Note. If an event of default occurs, or in the event of non-payment of
this Note in full at maturity, the entire unpaid balance of this Note shall, at
the option of the Bank, become immediately due and payable, without notice or
demand. Upon the occurrence or an event of default, the Bank shall be entitled
to interest on the unpaid balance at the stated Rate plus 2.00% (the "Default
Rate"), unless otherwise required by law, until paid in full. To the extent
permitted by law, upon default, the Bank will have the right, in addition to all
other remedies permitted by law, to set off the amount due under this Note or
due under any other obligation to the Bank against any and all accounts, whether
checking or savings or otherwise credits, money, stocks, bonds or other security
or property of any nature whatsoever on deposit with, held by, owed by, or in
the possession of, the Bank or any of its affiliates to the credit of or for the
account of any Party, without notice to or consent by any Party. The remedies
provided in this Note and any other agreement between the Bank and any Party are
cumulative and not exclusive of any remedies provided by law.
Capital Adequacy
Should the Bank, after the date hereof, determine that the adoption of any law
or regulation regarding capital adequacy, or any change in the interpretation or
administration thereof, has or would have the effect of reducing the Bank's rate
of return hereunder to a level below that which the Bank could have achieved but
for such adoption or change, by an amount which the Bank considers to be
material, then, from time to time, 30 days after written demand by the Bank, the
undersigned shall pay to the Bank such additional amounts as will compensate the
Bank for such reduction. Each demand by the Bank shall be made in good faith and
shall be accompanied by a certificate claiming compensation under this paragraph
and stating the amounts to be paid to it hereunder and the basis therefor.
Late Charges And Other Authorized Charges
If this is an Instalment-Simple loan, if any portion of a payment is at least
seven (7) days past due, the undersigned agree to pay a late charge of 5% of the
amount which is past due. On all other loan types, the undersigned agree to pay
such late charge if any portion of a payment is at least ten (10) days past due.
Unless prohibited by applicable law, the undersigned agree to pay the fee
established by the Bank from time to time for returned checks if a payment is
made on this Note with a check and the check is dishonored for any reason after
the second presentment. In addition, as permitted by applicable law, the
undersigned agree to pay the following: (1) all expenses, including, without
limitation, any and all court or collection costs, and attorneys' fees of 25% of
the unpaid balance of this Note, or actual attorneys' fees if in excess of such
amount, whether suit be brought or not, incurred in collecting this Note; (2)
all costs incurred in evaluating, preserving or disposing of any Collateral
granted as security for the payment of this Note, including the cost of any
audits, appraisals, appraisal updates, reappraisals or environmental inspections
which the Bank from time to time in its sole discretion may deem necessary; (3)
any premiums for property insurance purchased on behalf of the undersigned or on
behalf of the owner(s) of the Collateral pursuant to any security instrument
relating to the Collateral; (4) any expenses or costs incurred in defending any
claim arising out of the execution of this Note or the obligation which it
evidences, or otherwise involving the employment by the Bank of attorneys with
respect to this Note and the obilgations it evidences; and (5) any other charges
permitted by applicable law. The undersigned agree to pay such authorized
charges on demand or, at the Bank's option, such charges may be added to the
unpaid balance of the Note and shall accrue interest at the stated Rate. Upon
the occurrence of an event of default, interest shall accrue at the Default
Rate.
Waivers
The undersigned and each other Party waive presentment, demand, protest, notice
of protest and notice of dishonor and waive all exemptions, whether homestead or
otherwise, as to the obligations evidenced by this Note. The undersigned and
each other Party waive any rights to require the Bank to proceed against any
other Party or person or any Collateral before proceeding against the
undersigned or any of them, or any other Party, and agree that without notice to
any Party and without affecting any Party's liability, the Bank, at any time or
times, may grant extensions of the time for payment or other indulgences to any
Party or permit the renewal or modification of this Note, or permit the
substitution, exchange or release of any Collateral for this Note and may add or
release any Party primarily or secondarily liable. The undersigned and each
other Party agree that the Bank may apply all monies made available to it
from any part of the proceeds of the disposition of any Collateral or by
exercise of the right of setoff either to the obligations under this Note or to
any other obligations of any Party to the Bank, as the Bank may elect from time
to time. The undersigned also waive any rights afforded to them by Sections
49-25 and 49-26 of the Code of Virginia of 1950 as amended.
TO THE EXTENT LEGALLY PERMISSIBLE, THE UNDERSIGNED WAIVE ANY RIGHT TO TRIAL BY
JURY IN ANY LITIGATION RELATING TO TRANSACTIONS UNDER THIS NOTE, WHETHER
SOUNDING IN CONTRACT, TORT OR OTHERWISE.
Judgment By Confession
The undersigned hereby duly constitute and appoint Joel W. Maddock or Donna R.
Norfleet as the true and lawful attorney-in-fact for them in any or all of their
names, place and stead, and upon the occurrence of an event of default, to
confess judgment against them, or any of them, in the Circuit Court for the City
or County of Richmond, Virginia, upon this Note and all amounts owed hereunder,
including all costs of collection, attorneys' fees equal to 25% of the unpaid
principal balance hereof and court costs, hereby ratifying and confirming the
acts of said attorney-in-fact as if done by themselves, expressly waiving
benefit of any homestead or other exemption laws.
Severability, Amendments And No Waiver By Bank
Any provision of this Note which is prohibited or unenforceable shall be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Note. No amendment, modification,
termination or waiver of any provision of this Note, nor consent to any
departure by the undersigned from any term of this Note, shall in any event be
effective unless it is in writing and signed by an authorized employee of the
Bank, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given. If the interest Rate is
tied to an external index and the index becomes unavailable during the term of
this loan, the Bank may designate a substitute index with notice to the
Borrower. No failure or delay on the part of the Bank to exercise any right,
power or remedy under this Note shall be construed as a waiver of the right to
exercise the same or any other right at any time.
Liability, Successors And Assigns And Choice of Law
Each of the undersigned shall be jointly and severally obligated and liable on
this Note. This Note shall apply to and bind each of the undersigned's heirs,
personal representatives, successors and assigns and shall inure to the benefit
of the Bank, its successors and assigns. This Note shall be governed by the
internal laws of the Commonwealth of Virginia and applicable federal law. The
undersigned agree that certain material events and occurrences relating to this
Note bear a reasonable relationship to the Commonwealth of Virginia. The
validity, terms, performance and enforcement of this Note shall be governed by
applicable federal law and the internal laws of the Commonwealth of Virginia
which are applicable to agreements which are negotiated, executed, delivered and
performed solely in the Commonwealth of Virginia.
By signing below, the undersigned agree to the terms of this Note.
Scott & Stringfellow, Inc.
- ----------------------------- --------------------------------
Borrower Signature Borrower
By /s/ Mike D. Johnston
- ----------------------------- -------------------------------
Borrower Signature Signature
Mike D. Johnston Vice President & CFO
- ----------------------------- -------------------------------------
Borrower Signature Name and Title
- -----------------------------
Borrower Signature -------------------------------------
Borrower
By
-------------------------------------
Signature
-------------------------------------
Name and Title
By signing below, the following Endorsers each agree to be bound by all the
terms of this Note.
- -------------------------------- --------------------------------
Endorser Name, Printed or Typed Endorser Signature
- -------------------------------- --------------------------------
Endorser Name, Printed or Typed Endorser Signature
- -------------------------------- --------------------------------
Endorser Name, Printed or Typed Endorser Signature
Disbursement of Proceeds - For Bank Use Only------------------------------
Master Note Borrowing Facility
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
(VA-2) Total $ 5,000,000.00
- -------------------------------------------------------------------------
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Years Ended
June 27, 1997 June 28, 1996
Primary Fully Diluted Primary Fully Diluted
<S> <C>
Weighted average shares
outstanding:
Common shares 3,079,290 3,079,290 3,223,989 3,223,989
Dilutive shares available
under stock options 66,010 80,611 32,106 44,778
Weighted average common
shares and common stock
equivalents outstanding 3,145,300 3,159,901 3,256,095 3,268,767
Net earnings applicable to
common shares 3,457,579 3,457,579 4,175,713 4,175,713
Earnings per share 1.10 1.09 1.28 1.28
</TABLE>
The computation of per share earnings for the year ended June 30, 1995 was
filed on Exhibit 11 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 28, 1996 and is hereby incorporated by reference.
<PAGE>
Exhibit 13
SELECTED FINANCIAL DATA
(In thousands except per share amounts and Other Company Data)
<TABLE>
<CAPTION>
Year Ended
June 27, June 28, June 30, June 24, June 25,
1997 1996 1995 1994 1993
<S> <C>
Results of Operations
Total Revenues $ 80,907 $ 73,165 $ 54,119 $ 52,108 $ 48,146
Income before income taxes 5,453 6,568 3,288 4,665 5,375
Net income 3,458 4,176 2,101 2,958 3,482
Per Share Data
Earnings per share - primary $1.10 $ 1.28 $ 0.66 $ 0.93 $ 1.10
Cash dividends per share (1) 0.33 0.28 0.27 0.23 0.39
Book value per share 9.20 8.47 7.98 7.61 6.95
Weighted average common shares
and equivalents outstanding 3,145 3,256 3,163 3,173 3,173
Financial Condition
Total assets $ 129,854 $ 114,249 $ 93,266 $ 80,702 $ 79,484
Total liabilities 100,676 88,558 68,028 56,680 57,307
Total stockholders' equity 29,178 25,690 25,238 24,022 22,177
Other Financial Data
Profit margin:
Pre-tax 6.7% 9.0% 6.1% 9.0% 11.2%
After-tax 4.3% 5.7% 3.9% 5.7% 7.2%
Return on average equity:
Pre-tax 19.7% 24.1% 13.3% 20.2% 25.5%
After-tax 12.5% 15.3% 8.5% 12.8% 16.5%
Other Company Data
Total employees 566 520 479 458 418
Investment brokers 237 223 214 205 181
Branch offices 29 28 26 25 26
</TABLE>
(1) Includes $.19 special dividend in 1993.
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. At June 27, 1997, the Company operated 29 offices in communities
located across Virginia, North Carolina, West Virginia, and South Carolina and
had approximately 566 employees including 237 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 1997, approximately 80% of the Company's total revenues were
derived from brokerage and investment banking including 74% from retail
brokerage, 4% from institutional brokerage, and 2% from investment banking fees.
Of the Company's remaining revenues, dividends and interest income provided 10%
and investment advisory and administrative service fees and other income
provided 10%.
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 27, 1997, presented in the financial
statements which follow, cash provided by operations was $13.9 million, of which
$6.5 million was used for financing activities and $5.4 million was used for
investing activities, resulting in an increase in cash and cash equivalents of
$2.0 million. Of particular note, $4.3 million of cash was used to repurchase
and retire the Company's common stock during the period. In addition, purchases
of equipment and leasehold improvements totaled $3.1 million, an increase of
$1.4 million from the amount expended in the previous fiscal year, which was
primarily attributable to implementation of the Company's technology plan.
During fiscal 1997, the Company's total assets increased by 14% to $129.9
million from $114.2 million, primarily as a result of higher loan balances to
finance clients' purchases or carrying of securities on margin. These balances,
which are classified as receivable from customers on the Consolidated Statements
of Financial Condition, represent 70% of the Company's total assets. Receivable
from customers has increased from $59.7 million to $90.4 million over the past
three fiscal years, representing an annual increase of approximately 15%.
Approximately 86% 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 27, 1997, total
stockholders' equity was $29.2 million, or 22% of total assets, compared to
$25.7 million, or 23% of total assets, at June 28, 1996. The Company's largest
liability, payable to customers, amounted to $78.0 million at June 27, 1997, an
increase of 29% from 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 $52.0
million, of which $5.0 million was outstanding as of June 27, 1997. Additional
bank lines of credit are available on a short-term basis for the purpose of
financing new underwritings.
The Company received cash proceeds from issuance of common stock totaling
$1.5 million during the year, compared to $1.0 million in 1996 and $0.5 million
in 1995. Common stock is issued primarily to participants in the Company's
employee stock purchase plan and pursuant to exercises of stock options granted
to employees. Fund inflows from these sources are expected to increase in future
years as participation in the employee stock purchase plan grows and the
exercisable number of stock options granted in 1988 and later years continues to
increase. ( See Note 11 to the accompanying consolidated financial statements.)
Of the $4.3 million cash used to purchase and retire common stock, $3.8 million
was a result of the repurchase of shares pursuant to a "Dutch Auction" tender
offer which was recorded in fiscal 1996 but not settled until 1997. The
remaining $0.5 million was pursuant to the Company's existing share repurchase
program, for which authorization to repurchase 415,785 shares remained at June
27, 1997.
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 in excess of the minimum
regulatory net capital requirements. At June 27, 1997, Scott & Stringfellow's
net capital of $14.9 million exceeded the minimum requirement by approximately
$13.0 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 1997, 1996, and 1995 reflect increasing levels of both revenues
and expenses. Although these periods have generally been marked by favorable
financial market conditions and expanding markets for the Company's services,
the financial services industry has been and continues to be in a period of
significant competitive change. The Company has made significant financial
commitments, especially in the areas of technology and recruitment of investment
brokers, over the past 3 years to execute a business strategy which it believes
will position it to grow profitably in future years. This strategy includes the
development of the Company's capital markets effort based upon regional equity
research capabilities, growth in customer assets under management, and
development of the retail branch system. During fiscal year 1997 these financial
commitments had some negative effect on profit margins despite increased
revenues.
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 27, 1997, June 28, 1996, and June 30, 1995, 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 1997, 1996, and 1995, 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 1997 and 1996 include 52 weeks of activity.
CHANGES IN RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands) 1997 vs. 1996 1996 vs. 1995
Increase (decrease) Increase (decrease)
Amount Percent Amount Percent
<S> <C>
Revenues
Commissions $ 2,763 7% $ 11,602 41%
Principal transactions 2,727 24% 434 4%
Investment banking -2,202 -21% 4,302 69%
Interest and dividends 1,236 19% 769 13%
Advisory and administrative fees 2,974 64% 1,895 68%
Other 244 99% 44 22%
Total revenues 7,742 11% 19,046 35%
Expenses
Employee compensation
and benefits 4,376 9% 12,799 37%
Communications 451 14% 320 11%
Occupancy and equipment 1,428 47% 614 25%
Advertising and sales promotion 399 22% 96 6%
Postage, stationery and supplies 158 7% 387 22%
Brokerage, clearing and
exchange fees 315 24% 302 30%
Data processing 260 22% 260 28%
Interest 733 32% 379 20%
Other operating expenses 737 16% 610 16%
Total expenses 8,857 13% 15,767 31%
Income before income taxes -1,115 -17% 3,279 100%
Income taxes -397 -17% 1,205 102%
Net income $ -718 -17% $ 2,074 99%
</TABLE>
13.4
<PAGE>
1997 Compared With 1996
Net income declined by 17% from 1997 to 1996 as the Company absorbed
cost increases and experienced a decline in investment banking revenues. The
Company's after-tax profit margin declined from 5.7% to 4.3% on net income of
$3.5 million . Primary earnings per share of $1.10 equaled the second highest
total in firm history.
Total revenues increased by $7.7 million, or 11%, in 1997 to a record
$80.9 million. Revenues increased in each revenue category with the significant
exception of investment banking revenues, which declined by $2.2 million, or
21%. The decline in investment banking revenues was significant because these
fees represent a profitable source of revenues for the Company.
Commissions revenues increased by $2.8 million, or 7%, from the prior
year. Commissions on listed equity securities, mutual funds, annuities, and
options increased by approximately $3.7 million in the aggregate. These
increases were partially offset by $0.9 million decline in commissions on
over-the-counter agency transactions. A greater portion of transactions in
over-the-counter equity securities were executed on a principal basis, rather
than an agency basis, in 1997 compared to 1996. (See following paragraph.)
Revenues from principal transactions include sales credits or "mark-ups"
on most fixed income security transactions as well as over-the-counter equity
securities in which the Company makes a market. Principal transactions revenue
also reflects the trading profits or losses as the Company buys and sells these
securities. Principal transactions revenues increased by $2.7 million, or 24%,
from the previous fiscal year. Sales credits from over-the-counter equity
securities increased by $1.7 million, or 23%. Sales credits from fixed income
securities declined by 1% reflecting continued investor demand in favor of
equity securities as opposed to fixed income securities. Equity trading profits,
aided by generally favorable market conditions, increased by $0.7 million
compared to the prior year. Municipal bond trading income approximated $0 in
1997 as compared to $0.2 million of trading losses incurred in 1996. Overall,
municipal bond trading activity declined as the Company closed its institutional
municipal trading desk located in Lynchburg in December 1996.
The $2.2 million decline in investment banking revenues reflected a
decline in the number of managed equity offerings from 10 in 1996 to 5 in 1997.
As a result, selling concessions on managed underwritten equity securities
declined by $2.0 million from the prior year and management fees declined by
$0.9 million. The number of equity syndicate participations also declined, from
197 in 1996 to 138 in 1997, as selling concessions on underwritten equity
securities declined by $0.3 million. However, underwriting profits increased by
$0.7 million. Also partially offsetting the decline in investment banking
revenues was a $0.2 million increase in corporate finance fees.
Interest and dividend income increased by $1.2 million, or 19%, from
1996 to 1997, which included a $1.1 million increase in interest received from
clients. This increase was primarily the result of an 18% increase in the
average balances of client margin borrowings.
Revenue from advisory and administrative fees increased by $3.0 million,
or 64%, from the prior year. Investment advisory fees from Scott & Stringfellow
Capital Management increased by $1.2 million, or 85%, as assets under management
grew from approximately $311 million at the end of 1996 to $600 million at the
end of 1997. The growth in assets under management was the result of recent
performance in portfolios managed by the Company as well as enhanced marketing
initiatives. Fees from money market distribution assistance increased by $0.7
million, or 44%, as the Company emphasized marketing its money market and
related cash services and
13.5
<PAGE>
changed the provider of its money market product during the year. Revenues from
managed account services, which entail a fee based on a percentage of the
client's managed assets in lieu of charging standard brokerage commissions,
increased by $0.7 million from 1996 to 1997.
Total expenses increased by $8.9 million, or 13%, from the prior year.
The overall increase was attributable to variable expenses associated with
revenue growth, implementation of a new technology plan, cost increases in
certain expense categories, and the hiring of additional personnel to increase
growth opportunities in both the retail and capital markets areas.
Employee compensation and benefits increased by $4.4 million, or 9%,
from the previous fiscal year. As the largest category of expense, the increase
in compensation expense represented 49% of the total increase in expenses.
Commissions and other compensation paid to investment brokers increased by $2.5
million, or 10%, as a result of increased commissions and sales credits as well
as higher fixed compensation related to the hiring of additional investment
brokers. Salaries expense increased by $1.1 million, or 12%, as the number of
support personnel employed during 1997 increased by 11% during the year. The
support-to- broker personnel ratio increased from an average of 1.33 during 1996
to 1.36 during 1997 as personnel were added in product support and
administrative areas. Other performance-based compensation, based upon
departmental and product revenues and profitability, increased by $0.8 million,
or 16%. However, discretionary compensation expense, which includes Company
profit sharing contributions and bonuses paid to employees in respect of
calendar year results, declined by $0.9 million, or 25%, as a result of the
Company's lower level of overall profitability in 1997 as compared to 1996. The
remaining increase in employee compensation and benefits was due primarily to
higher payroll taxes and employee benefits, reflecting the higher employee
count, higher compensation, and growth of participant earnings in the deferred
compensation plan.
Communications expense, primarily comprised of telephone and market
quote services, increased by $0.5 million, or 14%, due primarily to additional
leased equipment and service charges for the system supporting the Company's
administrative network ("intranet") which was placed in service during the year.
Expenses for market quote services also increased due to the higher number of
investment brokers and additional services purchased.
Occupancy and equipment expense increased by $1.4 million, or 47%, and
was an important factor in the Company's reduced level of profitability.
Depreciation on computer systems, which reflected the replacement of virtually
100% of investment broker workstations during the year, increased by $0.7
million. Maintenance contracts increased by $0.1 million as the result of new
portfolio and contact management software installed for the benefit of
investment brokers. In addition to these technology improvements, office rent
expense, combined with depreciation on furniture and equipment, increased by
$0.4 million with the addition of 2 new offices, relocations and renovations of
existing branch offices, and scheduled rent increases on leases in place.
Advertising and sales promotion increased by $0.4 million, or 22%, due
to higher expenditures for marketing brochures, special marketing programs, and
increased business travel and entertainment.
Postage, stationery and supplies increased by $0.2 million, or 7%.
Expenses associated with preparing and mailing monthly client statements
increased modestly, as did general postage and office supplies.
Brokerage, clearing and exchange fees increased by $0.3 million, or 24%,
due to higher transaction volumes and fee increases for clearing and depository
services.
Data processing costs increased by $0.3 million, or 22%, due to higher
transaction volumes as well as a per unit rate increase for the Company's
transaction processing service bureau.
Interest expense increased by $0.7 million, or 32%, reflecting higher
average interest-bearing customer credit balances as well as higher average
levels of bank borrowings to finance the Company's securities inventories.
Other operating expenses increased by $0.7 million, or 16%. Included in
this category are computer
13.6
<PAGE>
consulting fees, which increased by $0.3 million because of installation of
computer equipment and software associated with the Company's technology plan.
Other costs which increased included correspondent research, statistical
services, and business consulting fees. Legal fees, settlements, and provisions
for losses in connection with legal actions relating to the Company's securities
business increased by $0.2 million. Other operating expenses which declined
included employment agency fees, general legal fees, and charitable
contributions.
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 substantial 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 $1.28 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 $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 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 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%. However, sales credits from fixed income securities
declined markedly, reflecting a 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. 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 managed
account service, and fees charged for administrative services provided by the
Company. Investment
13.7
<PAGE>
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 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. 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 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. Discretionary compensation
expense 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. Higher payroll taxes
and employee benefits also contributed to the increase in 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.
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,
13.8
<PAGE>
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 PRONOUNCEMENTS
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. The Company will continue
using the intrinsic value method. As described in Note 11 to the accompanying
consolidated financial statements, the effect on pro forma net income as if the
Company had adopted the fair value-based method was a reduction in net earnings
of $206,134 for 1997 and $16,987 for 1996 and a reduction in primary earnings
per share of $0.07 for 1997 and no change in primary earnings per share for
1996.
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." Effective for financial statements for fiscal periods ending after
December 15, 1997, SFAS 128 establishes simplified new standards for computing
and presenting earnings per share. The new standard replaces the presentation of
primary and fully diluted earnings per share with a presentation of basic and
diluted earnings per share, respectively. Basic earnings per share is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding. Unlike primary earnings per share, basic
earnings per share does not include any dilutive effect of outstanding stock
options. Diluted earnings per share is computed similarly to fully diluted
earnings per share and does include the effect of dilutive outstanding stock
options. For the Company, the primary effect of this change will be the
exclusion of outstanding dilutive stock options from the computation of basic
earnings per share. This change will begin with the financial statements for the
quarterly period which will end on December 31, 1997. The presentation of
earnings per share for all prior periods will be restated beginning at that
time. If the Company had used the basic earnings per share computation in 1997,
1996, and 1995 it is estimated that basic earnings per share would have been
$1.12, $1.29, and $0.66 and diluted earnings per share would have been $1.09,
$1.28, and $0.66.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income", establishes standards for the reporting and
the presentation of comprehensive income, which is divided into net income and
other comprehensive income. Other comprehensive income items are to be
classified by their nature and by their related accumulated balances in the
appropriate financial statements of a company. Generally, other comprehensive
income includes transactions not typically recorded as a component of net income
such as foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain debt and equity securities. SFAS 130
requires that such items be presented with equal prominence on a comparative
basis in the appropriate financial statements for fiscal years beginning after
December 15, 1997. Accordingly, the Company intends to comply with SFAS 130
beginning with its 1999 fiscal year. If the Company had reported comprehensive
income for fiscal years 1997, 1996, and 1995, there would not have been a
material difference between net income and comprehensive income.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information",
establishes standards and disclosure requirements for the way companies report
information about operating segments, including related product information,
both in annual and interim reports issued to stockholders. Operating segments
are components of a company about which separate financial information is
available and which are used in determining resource allocations and performance
results. Information such as segment net earnings, appropriate revenue and
expense items and certain balance sheet items are required to be presented, and
such amounts are required to be reconciled to the company's combined financial
13.9
<PAGE>
information. This standard is effective for financial statements issued for
periods ending after December 31, 1997, including interim periods. The Company
will assess the methodologies and reporting for compliance with SFAS 131.
FORWARD-LOOKING STATEMENTS
Certain statements in this discussion may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks
including, but not limited to, changes in general economic and business
conditions, interest rate and securities market fluctuations, competition from
within and from outside the investment brokerage industry, new products and
services in the investment brokerage industry, changing trends in customer
profiles and changes in laws and regulations applicable to the Company. Although
the Company believes that its expectations with respect to the forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that the
actual results, performance or achievements of the Company will not differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements.
13.10
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 27, June 28,
1997 1996
<S> <C>
ASSETS
Cash and cash equivalents $ 6,566,361 $ 4,604,319
Cash segregated under Federal regulations 670,044 627
Receivable from brokers, dealers and
clearing organizations (note 2) 2,256,973 4,773,883
Receivable from customers (note 3) 90,404,457 78,691,390
Trading and investment securities,
at market value (note 4) 13,548,274 12,940,722
Exchange memberships, at adjusted cost
(market value $2,761,500 in 1997 and $3,097,000 in 1996) 838,100 838,100
Equipment and leasehold improvements, at
cost (less accumulated depreciation and amortization of
$6,240,658 in 1997 and $5,822,486 in 1996) 4,075,051 2,973,023
Deferred income taxes (note 7) 1,087,429 639,429
Other assets (note 9) 10,406,848 8,787,079
Total Assets $ 129,853,537 $ 114,248,572
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Drafts payable $ - $ 4,068,235
Short term bank loans (note 5) 4,950,000 3,600,000
Payable to brokers, dealers and
clearing organizations (note 2) 4,714,494 2,227,376
Payable to customers (note 3) 77,976,229 60,577,764
Securities sold, but not yet purchased,
at market value (note 4) 545,978 2,372,116
Accounts payable, accrued compensation
and other liabilities (note 8) 12,489,184 11,912,646
Payable to shareholders for purchase and
retirement of common stock - 3,800,000
Total Liabilities 100,675,885 88,558,137
Stockholders' Equity (notes 6, 8, 10 and 11)
Common stock, $0.10 par value. Authorized
10,000,000 shares; issued and outstanding
3,172,946 in 1997 and 2,022,475 in 1996 317,295 202,247
Additional paid-in capital 12,540,734 10,426,723
Retained earnings 17,384,953 15,537,305
Subscriptions receivable -1,065,330 -475,840
Total Stockholders' Equity 29,177,652 25,690,435
Commitments and Contingencies (notes 12 and 13)
Total Liabilities and Stockholders' Equity $ 129,853,537 $ 114,248,572
</TABLE>
See notes to consolidated financial statements.
13.11
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended
June 27, June 28, June 30,
1997 1996 1995
<S> <C>
REVENUES
Commissions $ 42,665,846 $ 39,902,423 $ 28,300,683
Principal transactions 13,886,838 11,159,434 10,725,020
Investment banking 8,357,622 10,559,244 6,257,511
Interest and dividends 7,856,697 6,621,355 5,852,740
Advisory and administrative
service fees 7,651,131 4,677,522 2,781,944
Other income 489,077 245,327 201,391
Total Revenues 80,907,211 73,165,305 54,119,289
EXPENSES
Employee compensation and
benefits (notes 8 and 11) 51,377,400 47,001,154 34,202,361
Communications 3,755,984 3,305,237 2,985,387
Occupancy and equipment 4,485,341 3,057,326 2,443,465
Advertising and sales promotion 2,240,461 1,841,300 1,745,289
Postage, stationery and supplies 2,287,018 2,128,837 1,741,974
Brokerage, clearing and
exchange fees 1,627,275 1,312,314 1,010,292
Data processing 1,440,231 1,180,086 920,506
Interest 3,012,398 2,280,110 1,900,923
Other operating expenses 5,228,124 4,491,128 3,880,677
Total Expenses 75,454,232 66,597,492 50,830,874
Income before income taxes 5,452,979 6,567,813 3,288,415
Income taxes (note 7) 1,995,400 2,392,100 1,187,000
Net income $ 3,457,579 $ 4,175,713 $ 2,101,415
Earnings per common share:
Primary $ 1.10 $ 1.28 $ 0.66
Fully Diluted $ 1.09 $ 1.28 $ 0.66
</TABLE>
See notes to consolidated financial statements.
13.12
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 27, 1997, June 28, 1996, and June 30, 1995
<TABLE>
<CAPTION>
Common Stock Additional Subscrip-
Number of Paid-in Retained tions
Shares Amount Capital Earnings Receivable Total
<S> <C>
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, 10 and 11) 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
($0.27 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, 10 and 11) 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
($0.28 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
Issuance of common stock
(notes 8, 10 and 11) 136,952 13,695 2,303,875 - -799,875 1,517,695
Purchase and retirement of
common stock (note 10) -36,239 -3,623 -189,864 -482,684 180,010 -496,161
Subscriptions received - - - - 30,375 30,375
Cash dividends
($0.33 per share) - - - -1,022,271 - -1,022,271
Stock split effected as a
stock dividend (note 8) 1,049,758 104,976 - -104,976 - -
Net income - - - 3,457,579 - 3,457,579
Balance at June 27, 1997 3,172,946 $ 317,295 $ 12,540,734 $ 17,384,953 $-1,065,330 $29,177,652
</TABLE>
See notes to consolidated financial statements.
13.13
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
June 27, June 28, June 30,
1997 1996 1995
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,457,579 $ 4,175,713 $ 2,101,415
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,767,026 920,418 720,494
(Gains) losses on disposition of equipment 173,326 829 -1,712
Deferred income taxes -448,000 -314,000 -199,000
Allowance for doubtful accounts -35,882 -24,497 87,000
Changes in assets and liabilities:
Cash segregated under Federal regulations -669,417 5,176 7,996
Receivable from brokers, dealers and
clearing organizations 2,516,910 -2,448,268 -861,481
Receivable from customers -11,742,050 -13,698,032 -5,355,587
Trading securities -594,510 506,367 -4,938,079
Other assets 761,671 -1,963,476 -154,458
Payable to brokers, dealers
and clearing organizations 2,487,118 1,334,382 -1,944,388
Payable to customers 17,398,465 9,795,185 12,597,018
Securities sold, but not yet purchased -1,826,138 1,801,328 11,756
Accounts payable, accrued compensation
and other liabilities 620,173 4,100,258 1,624,608
Net cash provided by operating activities 13,866,271 4,191,383 3,695,582
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in drafts payable -4,068,235 2,642,850 -5,437,663
Net change in short term bank loans 1,350,000 -3,000,000 4,500,000
Net change in securities sold under
agreements to repurchase - - -21,250
Cash dividends paid -1,003,409 -857,641 -822,766
Purchase and retirement of common stock -4,296,161 -19,138 -564,151
Issuance of common stock 1,548,070 1,009,589 519,158
Net cash used for financing activities -6,469,735 -224,340 -1,826,672
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of not readily
marketable securities 77,658 260,077 196,637
Purchases of not readily marketable securities -90,700 -340,899 -205,438
Proceeds from disposition of investment real estate - - 804,638
Proceeds from disposition of equipment 30,623 911 13,474
Purchases of equipment and leasehold improvements -3,060,192 -1,719,691 -721,384
Repayments of loans receivable 176,165 81,018 314,678
Increase in loans receivable -2,568,048 -1,405,521 -921,001
Net cash used for investing activities -5,434,494 -3,124,105 -518,396
Net increase in cash and cash equivalents 1,962,042 842,938 1,350,514
Cash and cash equivalents at beginning of year 4,604,319 3,761,381 2,410,867
Cash and cash equivalents at end of year $ 6,566,361 $ 4,604,319 $ 3,761,381
</TABLE>
13.14
<PAGE>
<TABLE>
<S> <C>
Cash paid during the year for interest $ 3,008,337 $ 2,297,495 $ 1,905,064
Cash paid during the year for income taxes $ 2,468,975 $ 2,570,481 $ 1,231,106
</TABLE>
See notes to consolidated financial statements.
13.15
<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 and it operates 29 offices
in communities located across Virginia, North Carolina, West Virginia, and South
Carolina. A summary of the significant accounting policies of Scott &
Stringfellow Financial, Inc. and subsidiaries (collectively, the "Company") is
presented below.
A. 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.
B. USE OF ESTIMATES. Management makes a number of estimates in preparing these
financial statements. Actual results may differ significantly from these
estimates.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS. The value of all financial assets and
liabilities on the consolidated statements of financial condition approximate
their fair values.
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 27, 1997 and June 28, 1996, cash equivalents included $778,134 and $723,358
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 seven years. Computer software is generally amortized on a
straight-line basis over three 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 common shares and common stock equivalents outstanding during
the period. Fully diluted earnings per share is computed using the weighted
average common shares outstanding during the period, including the maximum
dilutive effect of common stock equivalents. Common stock equivalents include
unexercised stock options and are determined using the treasury stock method.
13.16
<PAGE>
The number of shares used in the earnings and dividends per common share
calculations are 3,145,300 for the year ended June 27, 1997, 3,256,095 for the
year ended June 28, 1996, and 3,163,373 for the year ended June 30, 1995.
J. STOCK OPTION PLAN. Prior to June 29, 1996, the Company accounted for its
stock options in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On June 29, 1996, the Company adopted SFAS No. 123, ACCOUNTING
FOR STOCK BASED COMPENSATION, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
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:
June 27, June 28,
1997 1996
Receivable from brokers, dealers, and
clearing organizations:
Securities failed to deliver $ 264,793 $ 259,607
Deposits paid for securities borrowed 1,821,989 4,246,600
Receivable from clearing organizations 170,191 267,676
Total $ 2,256,973 $ 4,773,883
Payable to brokers, dealers, and
clearing organizations:
Securities failed to receive $ 580,238 $ 1,580,908
Deposits received for securities loaned 3,610,700 356,200
Payable to clearing organizations 523,556 290,268
Total $ 4,714,494 $ 2,227,376
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. A substantial portion of
receivables from customers is due from customers residing in the southeastern
United States. 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.
Included in receivable from and payable to customers are balances with officers
and directors of the Company as follows:
June 27, June 28,
1997 1996
Receivable from officers and directors $ 5,570,647 $ 3,805,115
Payable to officers and directors $ 1,009,238 $ 210,656
13.17
<PAGE>
NOTE 4. TRADING AND INVESTMENT SECURITIES
Trading and investment securities consist of the following:
<TABLE>
<CAPTION>
June 27, June 28,
1997 1996
<S> <C>
Owned:
Marketable securities, at market value:
U.S. government and government
agency obligations $ 420,896 $ 490,628
State and municipal obligations 8,694,168 7,496,724
Corporate bonds 806,508 1,380,440
Corporate stocks 2,248,043 3,011,271
Other 466,385 325,586
Sub-total 12,636,000 12,704,649
Not readily marketable securities, at
estimated fair value 912,974 236,073
Total $ 13,548,274 $ 12,940,722
Sold, but not yet purchased, at market value:
U. S. Government and government
agency obligations $ 28,727 -
State and municipal obligations - $ 27,140
Corporate bonds 2,685 5,100
Corporate stocks 479,486 2,326,376
Other 35,080 13,500
Total $ 545,978 $ 2,372,116
</TABLE>
NOTE 5. SHORT-TERM BANK LOANS
The Company maintains lines of credit from established financial institutions
totaling $52.0 million, of which $4,950,000 was outstanding as of June 27, 1997.
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 (7.25%
at June 27, 1997) and are payable on demand. The market value of firm-owned
securities pledged as collateral at June 27, 1997 was $6,153,467. Customer
securities were not pledged as collateral for short-term bank loans at June 27,
1997.
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 27, 1997,
Scott & Stringfellow's net capital of $14,863,886 was 16% of aggregate debit
balances and was $12,984,958 in excess of the minimum net capital required.
13.18
<PAGE>
NOTE 7. INCOME TAXES
The provision for income tax expense (benefit) consists of the following:
Year Ended
June 27, June 28, June 30,
1997 1996 1995
Current:
Federal $ 2,080,000 $ 2,301,100 $ 1,208,000
State 363,400 405,000 178,000
Total current 2,443,400 2,706,100 1,386,000
Deferred:
Federal -374,000 -261,000 -166,000
State -74,000 -53,000 -33,000
Total deferred -448,000 -314,000 -199,000
Total $ 1,995,400 $ 2,392,100 $ 1,187,000
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 27, June 28, June 30,
1997 1996 1995
<S> <C>
Federal tax, computed at
statutory rate $ 1,854,013 $ 2,233,056 $ 1,116,000
State income taxes, net of
Federal tax benefit 190,321 232,643 95,700
Tax-exempt interest and dividends,
net of non-deductible carrying
charges -37,142 -94,105 -92,100
Meals and entertainment 79,155 46,488 51,500
Increase in cash surrender value of
life insurance policies -112,776 -31,145 -
Other, net 21,829 5,163 15,900
Income tax expense $ 1,995,400 $ 2,392,100 $ 1,187,000
</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 27, June 28,
1997 1996
<S> <C>
Deferred tax assets:
Deferred compensation $ 953,712 $ 501,008
Accrued expenses for financial reporting purposes 284,165 328,364
Loans receivable, principally due to allowance for
doubtful accounts 1,283 26,256
Total gross deferred tax assets 1,239,160 855,628
Less: valuation allowance - -
Deferred tax assets 1,239,160 855,628
Deferred tax liabilities:
Exchange seats, principally due to differences in
assigned values and tax bases -142,084 -191,430
Other, principally due to differences in assigned
values and tax bases of investments -9,647 -24,769
Total gross deferred tax liabilities -151,731 -216,199
Net deferred tax asset $ 1,087,429 $ 639,429
</TABLE>
13.19
<PAGE>
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 of the Company. 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 $351,262, $307,850, and $280,143 were made in
1997, 1996, and 1995, respectively. Additional contributions, determined on the
basis of calendar year profitability, totaled $1,478,754 in 1997, $1,286,750 in
1996, and $794,095 in 1995.
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
$807,101 in 1997, $413,289 in 1996, and $120,065 in 1995. At June 27, 1997 and
June 28, 1996, the Company's obligations under this plan amounted to $2,380,921
and $1,301,320, 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 1997, a total of 60,340 shares of common stock were issued to this
plan at an average price of $12.61 per share. During 1996, a total of 101,512
shares of common stock were issued to this plan at an average price of $8.51 per
share. During 1995, 64,599 shares were issued at an average price of $6.89 per
share. The preceding description of shares issued and prices has been adjusted
for the 3 for 2 stock split effected in the form of a 50% stock dividend which
was distributed to shareholders on May 6, 1997.
NOTE 9. TRANSACTIONS WITH RELATED PARTIES
Loans to directors and executive officers of the Company, exclusive of amounts
included in receivable from customers as discussed in note 3, amounted to
$443,662 and $460,522 at June 27, 1997 and June 28, 1996, respectively. The
loans are included in other assets in the accompanying consolidated statements
of financial condition. In addition, promissory notes in the amount of
$1,065,330 and $475,840 at June 27, 1997 and June 28, 1996, respectively, were
receivable from directors and officers of the Company pursuant to terms of the
Management Stock Purchase Loan Plan. These amounts are included in subscriptions
receivable in the stockholders' equity section of the accompanying consolidated
statements of financial condition. (Also see "Common Stock Transactions.")
NOTE 10. COMMON STOCK TRANSACTIONS
During 1997, 1996, and 1995, the Company repurchased and retired 36,239,
201,392, and 47,683 shares, respectively, of its common stock. Of the shares
repurchased, 25,308 were repurchased from directors at a cost of $488,125 in
1997, 29,758 were repurchased from directors at a cost of $565,402 in 1996, and
1,968 were repurchased from a director at a cost of $21,648 in 1995.
During 1997 and 1996, the Company issued 39,500 and 33,440 shares, respectively,
of its common stock to management employees, including directors and executive
officers, pursuant to the terms of its Management Stock
13.20
<PAGE>
Purchase Loan plan in exchange for promissory notes with original face amounts
totaling $799,875 in 1997 and $475,840 in 1996. The purpose of this plan is to
issue stock to selected management employees at fair market value, as defined in
the plan, in exchange for promissory notes. The notes are payable upon demand
and bear interest at the short-term applicable federal rate, which ranged from
5.63% to 6.23% during 1997. The notes are fully recourse and are secured by a
collateral pledge of the shares.
NOTE 11. STOCK OPTION PLAN
In 1987, the Company adopted a stock option plan (the "Plan") pursuant to which
options to purchase up to 720,000 shares of common stock may be granted to
eligible employees. The Plan expired in October 1996. However, options
previously granted were outstanding at June 27, 1997. Stock options were granted
with an exercise price equal to the stock's fair market value at the date of
grant. Options may, but need not, qualify as "incentive stock options" under
Section 422 of the Internal Revenue Code. The options become exercisable over
periods ranging from 2 to 6 years from the date of grant and expire 10 years
from the date of grant.
The following table summarizes the Company's stock options as of June 27, 1997,
June 28, 1996, and June 30, 1995, and changes during the years then ended. All
amounts have been adjusted for the 3 for 2 stock split effected in the form of a
50% stock dividend which was distributed to shareholders on May 6, 1997.
Weighted
Average
Exercise
Shares Price
Outstanding June 24, 1994 337,788 $ 7.14
Granted 64,500 8.00
Canceled -18,371 7.57
Exercised -13,921 4.97
Outstanding June 30, 1995 369,996 7.35
Granted 82,275 9.61
Canceled -1,332 8.18
Exercised -22,698 6.06
Outstanding June 28, 1996 428,241 7.85
Granted 206,250 11.74
Canceled -13,314 9.81
Exercised -28,986 6.64
Outstanding June 27, 1997 592,191 9.22
The following table summarizes information about stock options outstanding at
June 27, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
<S> <C>
$4.03 - $6.00 22,878 2.4 years $ 4.37 22,878 $ 4.37
6.00 - 9.00 287,538 6.2 7.75 135,018 7.65
9.00 - 12.00 281,775 9.3 11.12 - -
</TABLE>
13.21
<PAGE>
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock options. Accordingly, no compensation cost has been recognized for
stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
1997 1996
Net Income As Reported $ 3,457,579 $ 4,175,713
Pro Forma 3,251,445 4,158,726
Primary earnings
per share As Reported $1.10 $1.28
Pro Forma 1.03 1.28
Fully diluted
earnings per share As Reported $1.09 $1.28
Pro Forma 1.03 1.27
Pro forma net income reflects only options granted in 1997 and 1996. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net income amounts presented above
because compensation cost is reflected over the options' vesting period of 6
years and compensation cost for options granted prior to August 1, 1995 is not
considered.
The per share weighted-average fair value of stock options granted during 1997
and 1996 was $5.56 and $3.80 on the date of grant using the binomial option
pricing model with the following weighted-average assumptions: 1997 expected
dividend yield 2.72%, risk-free interest rate of 6.56%, and an expected life of
7.3 years; 1996 - expected dividend yield of 2.88%, risk-free interest rate of
6.46%, expected volatility of 32.2%, and an expected life of 7.3 years.
NOTE 12. 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 27, 1997 are as
follows:
Year Minimum Rental Commitments
Office Space Equipment Total
1998 $ 2,477,538 $ 483,270 $ 2,960,808
1999 2,415,233 219,155 2,634,388
2000 2,128,824 114,417 2,243,241
2001 1,994,654 16,953 2,011,607
2002 1,657,258 4,482 1,661,740
Thereafter 3,772,655 - 3,772,655
Total $ 14,446,162 $ 838,277 $ 15,284,439
Some of the Company's leases contain escalation clauses and renewal options.
Total rent expense under operating leases approximated $2,660,000 in 1997,
$2,341,000 in 1996, and $1,885,000 in 1995.
13.22
<PAGE>
As of June 27, 1997, 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 27,
1997 or June 28, 1996.
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 or results of operations of
the Company.
NOTE 13. 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.
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.
13.23
<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 1997 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.
/s/ Mike D. Johnston
- --------------------
Mike D. Johnston
Vice President and Chief Financial Officer
/s/ C. Lewis Loth
- -----------------
C. Lewis Loth
Vice President and Treasurer
13.24
<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
27, 1997 and June 28, 1996 and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the years ended June 27,
1997, June 28, 1996, and June 30, 1995. 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 as of June 27, 1997 and June 28,
1996 and the results of their operations and their cash flows for the years
ended June 27, 1997, June 28, 1996, and June 30, 1995 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
-------------------------
Richmond, Virginia
August 5, 1997
13.25
<PAGE>
Exhibit 13
QUARTERLY RESULTS OF OPERATIONS - Unaudited
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
1997 June 27 March 27 December 31 September 29
<S> <C>
Revenues $ 22,169 $ 20,826 $ 19,968 $ 17,944
Expenses 20,471 19,862 18,521 16,600
Income before income taxes 1,698 964 1,447 1,344
Income taxes 625 351 531 488
Net income $ 1,073 $ 613 $ 916 $ 856
Earnings per common share $ 0.33 $ 0.19 $ 0.30 $ 0.28
Quarter Ended
1996 June 28 March 29 December 31 September 29
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 $ 0.34 $ 0.22 $ 0.34 $ 0.38
</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 27, 1997, there were
332 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 27, 1997 and June 28, 1996.
<TABLE>
<CAPTION>
Common Stock Prices (1) Dividends Per Share (1)
1997 1996 1997 1996
High Low High Low
<S> <C>
First Quarter $ 12.33 $ 11.33 $ 9.67 $ 8.17 $ .08 $ .07
Second Quarter 12.83 11.67 9.83 9.00 .08 .07
Third Quarter 17.33 12.83 9.83 9.00 .08 .07
Fourth Quarter 20.00 13.50 12.33 9.17 .09 .08
</TABLE>
(1) All common stock prices and dividend per share amounts have been adjusted to
reflect a 3:2 stock split effected in the form of a 50% stock dividend
distributed on May 6, 1997, to shareholders of record on April 18, 1997.
13.40
<PAGE>
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 and No. 33-54700) on Form S-8 of Scott & Stringfellow Financial, Inc.
of our report dated August 5, 1997, relating to the consolidated statements of
financial condition of Scott & Stringfellow Financial, Inc. and subsidiaries as
of June 27, 1997 and June 28, 1996, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the years ended June
27, 1997, June 28, 1996, and June 30, 1995, and our report dated August 5, 1997
on the financial statement Schedule I as of June 27, 1997 and June 28, 1996 and
for the years ended June 27, 1997, June 28, 1996, and June 30, 1995, which
reports appear or are incorporated by reference in the June 27, 1997 annual
report on Form 10-K of Scott & Stringfellow Financial, Inc.
/s/KPMG Peat Marwick LLP
- ------------------------
Richmond, Virginia
September 22, 1997
<TABLE> <S> <C>
<ARTICLE> BD
<CIK> 0000802555
<NAME> SCOTT STRINGFELLOW, INC. (FDS)
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-27-1997
<PERIOD-START> JUN-29-1996
<PERIOD-END> JUN-27-1997
<CASH> 7,236,405
<RECEIVABLES> 90,839,441
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 1,821,989
<INSTRUMENTS-OWNED> 13,548,274
<PP&E> 4,075,051
<TOTAL-ASSETS> 129,853,537
<SHORT-TERM> 4,950,000
<PAYABLES> 91,569,207
<REPOS-SOLD> 0
<SECURITIES-LOANED> 3,610,700
<INSTRUMENTS-SOLD> 545,978
<LONG-TERM> 0
0
0
<COMMON> 317,295
<OTHER-SE> 28,860,357
<TOTAL-LIABILITY-AND-EQUITY> 129,853,537
<TRADING-REVENUE> 13,886,838
<INTEREST-DIVIDENDS> 7,856,697
<COMMISSIONS> 42,665,846
<INVESTMENT-BANKING-REVENUES> 8,357,622
<FEE-REVENUE> 7,651,131
<INTEREST-EXPENSE> 3,012,398
<COMPENSATION> 51,377,400
<INCOME-PRETAX> 5,452,979
<INCOME-PRE-EXTRAORDINARY> 3,457,579
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,457,579
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.09
</TABLE>
