UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from....................to.....................
Commission file number 0-15105
SCOTT & STRINGFELLOW FINANCIAL, INC.
(Exact name of Registrant as specified in its charter)
Virginia 54-1315256
State or other jurisdiction of I.R.S. Employer Identification No.
Incorporation or Organization
909 East Main Street Richmond, Virginia 23219
(Address of principal executive offices) (zip code)
(804) 643-1811
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ....
On February 12, 1998, there were 3,157,901 shares of Scott & Stringfellow
Financial, Inc. Common stock, par value $.10, issued and outstanding.
SCOTT & STRINGFELLOW FINANCIAL, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
December 31, 1997 (unaudited) and June 27, 1997 3
Consolidated Statements of Income (unaudited) -
Three months ended December 31, 1997
and December 31, 1996 4
Consolidated Statements of Income (unaudited) -
Six months ended December 31, 1997
and December 31, 1996 5
Consolidated Statements of Cash Flows (unaudited) -
Six months ended December 31, 1997
and December 31, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of
Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBITS
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, June 27,
1997 1997
(Unaudited)
ASSETS
Cash and cash equivalents $ 5,708,805 $ 6,566,361
Cash segregated under Federal regulations 643 670,044
Receivable from brokers, dealers and
clearing organizations 3,909,895 2,256,973
Receivable from customers 102,442,820 90,404,457
Trading and investment securities,
at market value 17,556,711 13,548,274
Exchange memberships, at adjusted cost 838,100 838,100
Equipment and leasehold improvements,
less depreciation and amortization 4,826,603 4,075,051
Deferred income taxes 1,107,429 1,087,429
Other assets 12,495,542 10,406,848
Total Assets $ 148,886,548 $129,853,537
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Drafts payable $ 2,871,286 $ 0
Short term bank loans 9,100,000 4,950,000
Payable to brokers, dealers and clearing
organizations 2,636,916 4,714,494
Payable to customers 80,922,143 77,976,229
Securities sold, but not yet purchased,
at market value 2,183,797 545,978
Accounts payable, accrued compensation
and other liabilities 18,700,974 12,489,184
Total Liabilities 116,415,116 100,675,885
Stockholders' Equity
Common stock, $0.10 par value; Authorized
10,000,000 shares; Issued and outstanding
3,203,665 and 3,172,946 shares 320,367 317,295
Additional paid-in capital 13,643,586 12,540,734
Retained earnings 19,572,809 17,384,953
Less: subscriptions receivable -1,065,330 -1,065,330
Total Stockholders' Equity 32,471,432 29,177,652
Total Liabilities and Stockholders' Equity $ 148,886,548$ 129,853,537
See notes to consolidated financial statements.
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended December 31, 1997 and December 31, 1996
(Unaudited)
1997 1996
REVENUES
Commissions $ 13,190,859 $ 10,336,335
Principal transactions 4,022,449 3,534,498
Investment banking 4,247,155 2,151,180
Interest and dividends 2,441,550 2,020,108
Advisory and administrative service fees 3,287,741 1,804,600
Other 136,593 121,561
Total Revenues 27,326,347 19,968,282
EXPENSES
Employee compensation and benefits 17,051,587 12,536,229
Communications 912,516 892,414
Occupancy and equipment 1,377,961 1,052,499
Advertising and sales promotion 771,560 614,887
Postage, stationery and supplies 700,215 565,599
Brokerage, clearing and exchange fees 495,605 376,804
Data processing 497,393 341,599
Interest 919,126 761,654
Other operating expenses 1,889,775 1,379,182
Total Expenses 24,615,738 18,520,867
Income before income taxes 2,710,609 1,447,415
Income taxes 995,000 531,400
NET INCOME $ 1,715,609 $ 916,015
Earnings per share, basic $0.54 $0.30
Earnings per share, diluted $0.50 $0.30
Dividends declared per share $0.09 $0.08
Weighted average common shares outstanding 3,189,392 3,029,742
Weighted average common shares and
common stock equivalents outstanding 3,420,412 3,081,488
See notes to consolidated financial statements.
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended December 31, 1997 and December 31, 1996
(Unaudited)
1997 1996
REVENUES
Commissions $ 26,283,262 $ 19,718,391
Principal transactions 7,960,144 6,685,761
Investment banking 7,531,512 4,180,993
Interest and dividends 4,708,127 3,781,455
Advisory and administrative service fees 5,980,482 3,359,740
Other 307,011 185,710
Total Revenues 52,770,538 37,912,050
EXPENSES
Employee compensation and benefits 33,383,508 23,686,816
Communications 1,945,743 1,821,920
Occupancy and equipment 2,603,690 2,037,394
Advertising and sales promotion 1,336,568 1,047,346
Postage, stationery and supplies 1,347,133 1,155,195
Brokerage, clearing and exchange fees 950,370 759,947
Data processing 953,145 688,069
Interest 1,834,448 1,389,487
Other operating expenses 3,130,860 2,534,064
Total Expenses 47,485,465 35,120,238
Income before income taxes 5,285,073 2,791,812
Income taxes 1,944,000 1,019,400
NET INCOME $ 3,341,073 $ 1,772,412
Earnings per share, basic $1.05 $0.59
Earnings per share, diluted $0.98 $0.58
Dividends declared per share $0.18 $0.16
Weighted average common shares outstanding 3,180,053 3,021,687
Weighted average common shares and
common stock equivalents outstanding 3,399,514 3,071,235
See notes to consolidated financial statements.
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1997 and December 31, 1996
(Unaudited)
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,341,073 $ 1,772,412
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 935,339 751,094
Deferred income taxes -20,000 -22,000
Loss on disposition of fixed assets 22,863 143,043
Changes in assets and liabilities:
Cash segregated under Federal regulations 669,401 -2,245,286
Receivable from brokers, dealers and
clearing organizations -1,652,922 678,165
Receivable from customers -12,045,245 -4,740,189
Trading securities -4,053,915 -649,017
Other assets -783,372 543,720
Payable to brokers, dealers and
clearing organizations -2,077,578 1,040,665
Payable to customers 2,945,914 18,793,880
Securities sold, but not yet purchased 1,637,819 -1,016,611
Accounts payable, accrued compensation
and other liabilities 6,209,025 618,351
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES -4,871,598 15,668,227
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in drafts payable 2,871,286 -1,752,000
Net change in short term bank loans 4,150,000 -3,600,000
Cash dividends paid -572,186 -507,605
Purchase and retirement of common stock -651,427 -4,242,021
Issuance of common stock 1,179,085 872,143
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 6,976,758 -9,229,483
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of not readily
marketable securities 47,477 74,752
Purchases of not readily marketable securities -2,000 -50,950
Proceeds from disposition of fixed assets 1,963 4,545
Purchases of fixed assets -1,705,311 -1,957,456
Repayment of loans receivable 96,567 46,488
Increase in loans receivable -1,401,413 -2,087,618
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES -2,962,717 -3,970,239
Net increase (decrease) in cash and cash equivalents -857,556 2,468,505
Cash and cash equivalents at beginning of period 6,566,361 4,604,319
Cash and cash equivalents at end of period $ 5,708,805 $ 7,072,824
Cash paid during the period for interest $ 1,838,509 $ 1,318,517
Cash paid during the period for income taxes $ 1,854,925 1,271,675
See notes to consolidated financial statements.
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 1997
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Scott & Stringfellow Financial, Inc. and its subsidiaries (collectively the
"Company"), Scott & Stringfellow, Inc. ("S&S"), Scott & Stringfellow Capital
Management, Inc. ("SSCM"), and Scott & Stringfellow Realty, Inc. S&S, the
Company's principal subsidiary, is a broker-dealer registered under the
Securities Exchange Act of 1934. SSCM is an investment advisor registered
under the Investment Advisors Act of 1940.
These interim consolidated financial statements are unaudited; however, such
information reflects all normal recurring adjustments which, in the opinion
of management, are necessary for a fair presentation of the results for the
period in accordance with generally accepted accounting principles. The
nature of the Company's business is such that the results of any interim
period are not necessarily indicative of the results which might be expected
for the full fiscal year. The notes included herein should be read in
conjunction with the notes to the consolidated financial statements included
in the Company's annual report for the fiscal year ended June 27, 1997.
During the quarter, the Company adopted SFAS 128 for computing and
presenting earnings per share.The new standard replaces the presentation of
primary and fully diluted earnings per share with presentation of basic and
diluted earnings per share, respectively. 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 dilutive effect of
outstanding stock options. All current and prior period earnings per share
information has been stated in accordance with SFAS 128.
2. NET CAPITAL REQUIREMENTS
As a registered broker-dealer and a member of the New York Stock Exchange
("NYSE"), the Company's wholly-owned subsidiary, S&S, is subject to the
Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1).
S&S has elected to utilize the alternative method of the Rule, which
prohibits a broker-dealer from engaging in any transactions which would
cause its "net capital" to be less than 2% of its "aggregate debit balances"
arising from customer transactions, as those terms are defined in the Rule.
The NYSE may also impose restrictions on S&S's business if its net capital
falls below 5% of aggregate debit balances. At December 31, 1997, the
Company's net capital of $15,859,464 was 15% of its aggregate debit balances
and was $13,739,315 in excess of its minimum regulatory requirement.
3. COMMON STOCK
During the quarter ended December 31, 1997, the Company issued 6,264 shares
of common stock pursuant to the exercise of employee stock options for net
proceeds of $48,908. The Company also issued 12,719 shares of common stock
to the Employee Stock Purchase Plan for net proceeds of $278,659. The
Company repurchases its common shares in the open market under a plan
approved by the Board of Directors. During the quarter, the Company did not
repurchase any shares and had remaining authority to repurchase 384,932
shares at December 31, 1997.
4. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time named as defendants
in legal actions incidental to its securities brokerage and investment
banking activities. Management believes that all pending claims and
lawsuits of which it has knowledge will be resolved with no material adverse
effect on the overall financial condition of the Company, although the
resolution of such matters might have a material adverse impact on the
operating results for any given quarterly accounting period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's primary subsidiary, S&S, conducts a full-service, securities
brokerage and investment banking business through 30 branch offices located in
Virginia, North Carolina, South Carolina, and West Virginia. Its primary
business is retail securities brokerage with an emphasis on equity securities
and mutual funds. Other significant activities and services include
institutional securities brokerage, management of and participation in the
underwriting of corporate and municipal securities, investment management
services through SSCM, corporate and municipal financial advisory services,
trading of fixed income and equity securities, primary investment research,
individual retirement account custodial services, and money market cash
management services. As of December 31, 1997, the Company employed
approximately 585 people including 247 employees with full-time investment
broker responsibilities.
The Company's profitability, to a large degree, is sensitive to the volume of
trading in securities and the volatility and general level of securities'
market prices. Approximately 73% of the Company's total revenue is generated
by commissions and sales credits, or mark-ups, on securities transactions.
Many of the Company's activities have high operating costs which do not
decrease proportionately with reduced levels of activity and may even increase
during such periods. Moreover, some of these operating costs may increase at
a proportionately greater rate than revenues during periods of increased
activity. While the Company is increasing its sources of fee-based revenue to
improve the stability of revenues and earnings, its profitability is adversely
affected by sustained periods of reduced transaction volume or loss of
brokerage clients. The Company's profitability is also adversely affected when
it is unable to compensate for increases in fixed costs through the pricing of
its services or increased volume. In particular, competitive industry
conditions necessitate the expenditure of significant costs in the areas of
technology, investment broker recruiting, and continual improvement of the
Company's investment research capabilities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997
For the quarter ended December 31, 1997, net earnings were $1,715,609, an 87%
increase from $916,015 reported for the same period last year. Diluted
earnings per share for the second quarter increased by 67%, from $0.30 to
$0.50. Actual weighted average shares outstanding increased by 5% from the
prior period, while weighted average shares outstanding and common stock
equivalents increased by 11% due primarily to an increase in the Company's
stock price.
Total revenues for the second quarter of fiscal 1998 were $27,326,347, an
increase of 37% from $19,968,282 reported for the same period last year. In
terms of profitability impact, the most significant changes in revenue were
investment banking, which increased by $2,095,975, or 97%, and advisory and
administrative fees, which increased by $1,483,141. The increase in investment
banking fees was primarily attributable to higher underwriting profits and
management fees from managed equity offerings. The increase in advisory and
administrative service fees was attributable to increases in investment
advisory fees of SSCM, as well fee income from money markets and managed
accounts. Commissions from agency transactions increased by $2,854,524, or
28%, to $13,190,859, with commissions on mutual fund and equity trades
comprising most of the increase. Revenue from principal transactions increased
by 14%, with trading profits and sales credits on over-the-counter equity
transactions accounting for most of the increase.
Total expenses increased by 33% to $24,615,738 from $18,520,867 in the
year-earlier period. Employee compensation and benefits, the Company's largest
expense item, increased by 36% from the year-earlier period and accounted for
74% of the overall increase in operating expenses. The increase in
compensation included substantial increases in commissions and other incentive
compensation, which is variable with revenue and departmental profitability.
In addition, salaries and benefits associated with a higher employee headcount
contributed to the increase. Total employee headcount increased by
approximately 43, or 8% from one year ago. The ratio of support personnel to
investment brokers increased from 1.33 to 1.37 from one year ago, reflecting
increased support in research, product and administrative support areas. Other
categories of operating expenses also increased significantly from the
year-earlier quarter. Occupancy and equipment increased by 31%, primarily as a
result of increased rent expense for both corporate headquarters and branch
offices, as well as facilities moving expense and depreciation. Advertising
and sales promotion increased by 26% due to higher expenses for client
seminars, travel and marketing brochures. Data processing expense increased
by 46% due to increased transaction volumes as well as custom computer
programming expenses. Overall, non-compensation, non-interest expenses
increased by 27% from the year-earlier quarter.
Interest and dividend revenues increased by $421,442, or 21%, as a result of
continued growth in receivable balances from customer margin accounts.
Interest expense also increased by 21% as a result of interest paid on higher
levels of customer credit balances on IRA accounts as well as increased levels
of bank borrowing.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997
For the six month period ended December 31, 1997, net income was $3,431,073 or
$0.98 per diluted share as compared to $1,772,412 or $.58 per diluted share
reported last year.
Total revenues for the first half of fiscal 1998 were $52,770,538, an increase
of 39% from the first half of fiscal 1997. As with the quarterly comparison,
results for the period benefitted from significant increases in investment
banking and advisory revenues. Due primarily to increases in assets under
management within the Company's investment advisory and managed account
services, revenue from advisory and administrative services fees for the
comparative six month periods increased by 78%, from $3,359,740 to $5,980,482.
Revenues from investment banking activities increased by 80% due to increased
managed underwritten equity offerings.
Total expenses for the six month period increased by 35% from 1997. Employee
compensation and benefits expense increased by 41% from the previous period
primarily as a result of higher commissions and other variable compensation
associated with the higher levels of revenues. Overall, total operating
expenses excluding interest and compensation increased by 22%. Increased
transaction volume, as well as higher employee headcount and increasing
occupancy and technology expenditures accounted for this increase.
Interest income for the six month period, net of interest expense, increased
by 20% from the year-earlier period due to the same factors cited in the
discussion of results for the three month period ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As set forth in the Consolidated Statement of Cash Flows contained in this
report, the Company's primary sources of cash flow are the net cash provided
from the earnings of the Company and from increases in the amounts payable to
customers and other short-term indebtedness incurred in the normal course of
the Company's securities brokerage business.
For the six month period ended December 31, 1997, operating activities used net
cash of $4,871,598 as increases in customer receivable balances of $12,045,245
and trading securities inventories of $4,053,915 more than offset cash provided
by net income of $3,341,073 and other sources of operating cash from
depreciation and changes in current asset and liability account balances.
Because of the nature of the Company's business, the changes in operating asset
and liability account balances relative to net income for any particular
accounting period can be quite large and somewhat arbitrary. These changes are
normally short term in nature and therefore are not very useful indicators of
long-term trends in the Company's liquidity and capital resources. However,
the Company has generally experienced increases in balances payable to and
receivable from customers over recent fiscal periods.
Net cash flow of $6,976,758 was provided by financing activities, which
included an increase in drafts payable of $2,871,286 as well as a net increase
in $4,150,000 in short term bank loans. Issuances of the Company's common
stock during the period totaled $1,179,085, while open market purchases and
retirements of stock totaled $651,427. Investing activities during the period
used net cash of $2,962,717, which included $1,705,311 in purchases of fixed
assets and $1,401,413 of new loans, primarily to newly recruited investment
brokers and other employees. Over the six month period, the Company's overall
net cash position declined by $857,556.
At December 31, 1997, approximately 87% of the Company's assets were liquid,
consisting mainly of cash or assets readily convertible into cash. The
Company's largest asset is its receivable from customers, representing
borrowings from the Company by customers to finance the purchase of securities
on margin. Such receivables from customers are substantially financed by
customer credit balances (excess funds kept by customers with the Company),
short-term bank borrowings and equity capital. The Company utilizes short-term
bank borrowings under established lines of credit with several banking
institutions. A total of $62,000,000 in approved lines of credit was available
to the Company at December 31, 1997, with $9,100,000 outstanding. The Company
had no other debt obligations outstanding at that date.
The Company is subject to the net capital requirements of the Securities and
Exchange Commission ("SEC") and the New York Stock Exchange which are designed
to measure the general financial soundness and liquidity of broker-dealers.
The Company has consistently operated in excess of the minimum requirements.
At December 31, 1997, the Company's net capital of $15,859,464 exceeded the
minimum requirement by $13,739,315. Net capital was comprised entirely of
stockholders' equity less certain regulatory adjustments. The ratio of net
capital to aggregate debit items was 15% at December 31, 1997, as compared to
16% at December 31, 1996.
Management believes that funds provided by earnings combined with its existing
liquid capital base and its present lines of credit, are fully adequate to meet
the Company's financing needs for the foreseeable future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None Reportable
Item 2. Changes in Securities - None Reportable
Item 3. Defaults upon Senior Securities - None Reportable
Item 4. Submission of Matters to a Vote of Security Holders - None
Reportable
Item 5. Other Information - None Reportable
Item 6: Exhibits and Reports on 8-K
(a) Exhibits
Exhibit 11 - Statement Re: Computation of Per Share Earnings - See
Separate Document
Financial Data Schedule BD - See Separate Document
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCOTT & STRINGFELLOW FINANCIAL, INC. (Registrant)
Signatures Date
/s/John Sherman, Jr. February 13, 1998
John Sherman, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
/s/Mike D. Johnston February 13, 1998
Mike D. Johnston
Vice President and Chief Financial Officer
(Principal Financial Officer)<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended December 31, 1997 December 31, 1996
Basic Diluted Basic Diluted
Weighted average shares
outstanding:
Common shares 3,189,392 3,189,392 3,029,742 3,029,742
Dilutive shares
available under
stock options 0 231,020 0 51,746
Weighted average common
shares and common
stock equivalents
outstanding 3,189,392 3,420,412 3,029,742 3,081,488
Net earnings applicable
to common shares $1,715,609 $1,715,609 $916,015 $916,015
Earnings per share $0.54 $0.50 $0.30 $0.30
For the Six Months Ended
December 31, 1997 December 31, 1996
Basic Diluted Basic Diluted
Weighted average shares
outstanding:
Common shares 3,180,053 3,180,053 3,021,687 3,021,687
Dilutive shares
available under
stock options 0 219,461 0 49,548
Weighted average common
shares and common
stock equivalents
outstanding 3,180,053 3,180,053 3,021,687 3,071,235
Net earnings applicable
to common shares $3,341,073 $3,341,073 $1,772,412 $1,772,412
Earnings per share $1.05 $0.98 $0.59 $0.58
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