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 26, 1998
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 I.R.S. Employer
of incorporation or organization 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 17, 1998, there were 3,402,239 shares of Scott & Stringfellow
Financial, Inc. Common Stock, par value $.10, issued and outstanding of which
2,220,490 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 $28.25
on September 17, 1998 was approximately $62,729,000.
DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Certain Portions of the 1998 Annual Report to Shareholders (in Parts I and II)
Exhibit Index Appears on Page 18
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SCOTT & STRINGFELLOW FINANCIAL, INC.
FORM 10-K
For the Year Ended June 26, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
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 17
13. Certain Relationships and Related Transactions 18
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 19
SIGNATURES 21
FINANCIAL STATEMENT SCHEDULES 23
EXHIBITS
</TABLE>
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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 31 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, financial planning 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 31
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 26, 1998, approximately 51% of total
revenues were derived from brokerage commissions on investments purchased and
sold on an agency basis, 15% from principal transactions, 13% from investment
banking, 9% from interest and dividends, and 12% 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 31 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 26, 1998, the Registrant had approximately 616 employees
including 260 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
26, 1998:
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Calendar
Year Number of
Branch Investment
Location Opened Brokers
-------- --------- ----------
Virginia
Richmond 1893 54
Alexandria 1997 5
Blacksburg 1988 4
Chesapeake 1987 2
Charlottesville 1982 8
Chesterfield 1987 8
Culpepper 1971 3
Danville 1986 3
Harrisonburg 1991 6
Lexington 1986 2
Lynchburg 1984 8
Manassas 1987 7
Martinsville 1983 5
Norfolk 1978 25
Roanoke 1984 9
Staunton 1970 8
Tyson's Corner 1986 8
Virginia Beach 1995 1
Warrenton 1970 6
Williamsburg 1995 4
Winchester 1970 4
Total Virginia 180
North Carolina
Charlotte 1988 10
Greensboro 1988 21
Greenville 1998 2
Kinston 1988 3
North Wilkesboro 1988 2
Raleigh 1992 12
Wilmington 1990 6
Winston-Salem 1987 16
Total North Carolina 72
West Virginia
Bluefield 1971 5
South Carolina
Charleston 1996 3
Total Company 260
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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 26, 1998 June 27, 1997 June 28, 1996
Amount % Amount % Amount %
------------ ----- ------------ ---- ----------- -----
<S> <C>
Commissions:
Exchange Listed Securities $ 25,812,157 24.5 $ 21,384,632 26.4 $ 19,879,066 27.2
Over-the-Counter Equities 10,713,180 10.2 7,801,982 9.6 8,549,871 11.7
Mutual Funds 11,561,328 11.0 9,113,106 11.3 7,574,445 10.3
Annuities 3,247,242 3.1 2,714,368 3.4 2,235,440 3.1
Options 1,657,406 1.6 1,410,963 1.7 1,207,922 1.6
Other 332,089 0.3 240,795 0.3 455,679 0.6
Total Commissions 53,323,402 50.6 42,665,846 52.7 39,902,423 54.5
Principal Transactions:
Municipal Bonds 1,616,582 1.5 1,633,679 2.0 1,742,336 2.4
Over-the-Counter Equities 11,850,833 11.2 10,185,985 12.6 7,764,215 10.6
Corporate and Govt.
Bonds and Other 1,943,545 1.8 2,067,174 2.6 1,652,883 2.3
Total Principal Transactions 15,410,960 14.6 13,886,838 17.2 11,159,434 15.3
Investment Banking 14,228,186 13.5 8,357,622 10.3 10,559,244 14.4
Interest and Dividends 9,870,634 9.4 7,856,697 9.7 6,621,355 9.1
Advisory and Administrative
Service Fees 11,615,333 11.0 7,651,131 9.5 4,677,522 6.4
Other 915,487 0.9 489,077 0.6 245,327 0.3
Total Revenues $ 105,364,002 100.0 $ 80,907,211 100.0 $ 73,165,305 100.0
</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 subjective 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 1998,
revenues from the Registrant's retail brokerage activities are estimated to
represent approximately 89% of the Registrant's brokerage and investment banking
revenues and 70% 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.")
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Retail commissions are charged in accordance with a schedule which the
Registrant has formulated, and 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.")
In addition to providing transaction executions on a commission basis, the
Registrant also provides managed account services. Under this 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 1998, revenues from managed
account fees approximated 2% of total revenues.
In addition to brokerage revenues, the Registrant's client accounts are a
significant source of interest income. Approximately 89% of interest and
dividend income and 8% of total revenues is attributable to interest charged on
client margin accounts. Balances in client margin accounts increased by 37% from
1997 to 1998 to a total of approximately $124 million at year-end, following a
15% increase from 1996 to 1997. 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. The Registrant has a Credit Committee which
monitors compliance with margin policies, reviews large customer margin accounts
and securities concentrations within such accounts, and establishes and monitors
equity maintenance requirements.
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 11% of the Registrant's total revenues in 1998. (See also
"Investment Management." )
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
The Registrant executes securities transactions for institutional investors
such as banks, mutual funds, insurance companies, and pension and profit-sharing
plans. The 12 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
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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 1998, revenues from institutional brokerage
activities are estimated to represent approximately 8% of the Registrant's
brokerage and investment banking revenues and 7% of total revenues, up from 5%
and 4%, respectively, from the prior year. 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
26, 1998, Scott & Stringfellow made markets in the common stock or other equity
securities of approximately 157 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 26, 1998, 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> <C> <C>
Municipal Securities $ 10,698,709 $ 4,141,370 $ 7,212,382
Equity Securities (primarily common
stocks) 8,172,346 2,147,419 3,900,585
Corporate Debt Securities 3,852,830 517,737 1,417,040
U. S. Government Securities 3,856,551 273,973 2,191,906
Other Securities 2,732,058 1,867,329 2,165,459
</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 7
employees involved in municipal bond trading, 8 employees in over-the-counter
equity trading, and 4 employees in taxable debt securities trading. Each trading
department is subject to internal position limits.
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
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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:
1998 16 $ 746,085,060 114 $ 180,980,884
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
Tax-Exempt Bond Offerings
1998 27 985,100,000 17 13,250,000
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
</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 equity 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 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 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 1998.
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
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companies in the southeastern and Middle Atlantic United States and selected
industries; 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
ten senior primary analysts, nine associate analysts, a technical analyst and is
supplemented by two New York correspondent firms which cover over 2,000
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
although certain research is distributed by subscription.
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. Fees charged
on investment accounts managed by SSCM, which are included in advisory and
administrative service fees, represented approximately 4% of total revenues in
1998. As of June 26, 1998, SSCM had approximately $350 million of assets under
management, a decline of 42% from $600 million at June 27, 1997. The decline in
assets under management resulted from the formation of a new company, Atlantic
Capital Management, LLC ("ACM"), by former principals of SSCM, during the third
fiscal quarter of 1998. A significant number of SSCM's investment advisory
contracts, representing assets under management, were transferred to ACM. The
Registrant retains a 15% membership interest in ACM. Investment management
services are expected to continue as a significant and growing area of the
Registrant's business.
Administration and Operations
The Registrant's operations and administrative personnel, consisting of 93
employees as of June 26, 1998, 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, 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
- ------------ ------ ------ -------
1998 53,814 38,020 43,547
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
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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. The Registrant also maintains
an administrative computer network ("intranet") to support electronic mail, the
sharing of computer applications and data files between employees, and access to
the Internet.
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 monthly
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, discount
brokerage firms, and internet 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 and
internet brokerage firms market 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.
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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 26, 1998, the Registrant had 616 employees, of whom 260 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 260 from 237 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 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
11
<PAGE>
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 26, 1998, the Registrant's broker-dealer
subsidiary's net capital was 12% of aggregate debit items. (See note 6 of Notes
to Consolidated Financial Statements for fiscal 1998 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 30 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 1998 incorporated herein by
reference.) 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 requires
significant ongoing capital expenditures.
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 26, 1998, are as
follows:
<TABLE>
<CAPTION>
Name Age Positions with the Registrant
- ---- --- -----------------------------
<S> <C>
S. Buford Scott 65 Chairman of the Board
Frederic Scott Bocock 66 Vice Chairman of the Board
John Sherman, Jr. 52 Director, President and Chief Executive Officer
Steven C. DeLaney 44 Director, Executive Vice President and Director of Capital Markets
Charles E. Mintz 44 Director, Executive Vice President and Director of Retail Markets
Sandra D. Glass 59 Senior Vice President and Director of Operations
William F. Gunter 55 Senior Vice President and Director of Financial Products and Services
Norman L. Hancock 60 Senior Vice President and Chief Compliance Officer
Kenneth A. Thomas 50 Senior Vice President and Director of Administrative Services
Diann D. Fox 49 Senior Vice President and Director of Human Resources
Guy P. Chance 63 First Vice President and Director of Marketing
Mike D. Johnston 38 Senior Vice President and Chief Financial Officer
</TABLE>
12
<PAGE>
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 to one another 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 equity and fixed
income research, investment banking, institutional sales, and trading. 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 several
senior-level financial and executive positions. Mr. DeLaney is a financial and
operations principal (series 27) and general securities principal (series 24).
Charles E. Mintz was elected to the Board of Directors and named Executive
Vice President in January 1998. Mr. Mintz has served as Director of Retail
Markets of Scott & Stringfellow since 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 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 served on the Board of Directors of Scott & Stringfellow,
Inc. from 1996 to 1998.
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,
13
<PAGE>
financial planning, and money markets. 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 Wheat, First Securities, Inc., 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 research 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. Mr. Johnston is a financial and operations principal (series 27).
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
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 1998. 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 26, 1998. 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 1998.
14
<PAGE>
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 13.10 of the Annual Report to Shareholders for fiscal
1998.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item, except for the required financial
statement schedule, is incorporated herein by reference to exhibit pages 13.11
to 13.23 of the Annual Report to Shareholders for fiscal 1998. The financial
statement schedule, which includes the Parent-only Condensed Financial
Statements of the Registrant, is included on pages 22 to 24 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 II
Item 10. INFORMATION REGARDING EXECUTIVE OFFICERS
The information regarding Executive Officers required by Item 10 is shown
on page 12 of this Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The following table provides information concerning the compensation and
stock option grants received by the Company's Chief Executive Officer and each
of its four other most highly compensated executive officers for the fiscal year
ended June 26, 1998, and for each of the two previous fiscal years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation All Other
Name and Other Annual Options Compensation
Principal Position Year Salary Bonus (1) Compensation (2) Granted # (3)(4)(5)
- ------------------- ---- -------- -------- ---------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
John Sherman, Jr. 1998 $200,000 $337,000 $4,312 0 $42,296
President and 1997 184,769 163,731 3,889 0 42,453
Chief Executive Officer 1996 149,054 98,678 12,072 2,500 45,866
Sidney Buford Scott 1998 0 130,000 2,272 0 261,188
Chairman of the Board 1997 0 120,657 1,404 0 207,763
1996 0 120,000 1,404 0 250,380
Frederic Scott Bocock 1998 40,000 225,000 1,197 0 342,656
Vice Chairman 1997 40,000 207,357 2,810 0 285,205
1996 40,000 139,500 1,776 0 249,381
Steven C. DeLaney 1998 150,000 238,000 2,344 0 15,371
Executive Vice President 1997 139,259 134,640 2,128 0 13,141
1996 107,500 106,500 204 2,500 9,046
Charles E. Mintz 1998 150,000 240,000 10,712 0 18,601
Executive Vice President 1997 128,731 114,695 11,560 0 13,189
1996 94,382 57,849 9,918 2,500 16,050
</TABLE>
15
<PAGE>
(1) The Company pays discretionary cash bonuses to executive and management
personnel based on individual performance and Company financial results. See
Committee Report on Executive Compensation -- Cash Bonuses. Included in the
amounts shown as Bonus for 1998 are the following discretionary cash bonuses:
Mr. Sherman -- $337,000; Mr. Scott -- $130,000; Mr. Bocock -- $125,000; Mr.
DeLaney -- $238,000; and Mr. Mintz -- $240,000. The 1998 Bonus amounts also
include bonuses of $100,000 paid to Mr. Bocock based on departmental results.
(2) Included in Other Annual Compensation for 1998 are amounts representing
forgivable loan expense for Mr. Mintz in the amount of $6,944. Also included are
the following amounts representing non-cash awards and other miscellaneous
perquisites and benefits: Mr. Sherman -- $4,312; Mr. Scott -- $2,272; Mr. Bocock
- --$1,197; Mr. DeLaney -- $2,344; Mr. Mintz -- $3,768.
(3) Included in All Other Compensation for fiscal 1998, the following amounts of
commissions and incentives earned from securities brokerage activities: Mr.
Sherman -- $22,887; Mr. Scott -- $245,730; Mr. Bocock -- $323,247; Mr. DeLaney
- -- $492 and Mr. Mintz -- $4,092.
(4) The Company has a voluntary contributory profit sharing plan that covers
substantially all employees. See Committee Report on Executive Compensation --
Profit Sharing and Deferred Plans. Company contributions to the plan may be in
the form of either discretionary matching contributions or additional
discretionary contributions. Included in All Other Compensation for fiscal year
1998 are the following amounts representing Company contributions to the profit
sharing plan: Mr. Sherman -- $8,969; Mr. Scott -- $8,969; Mr. Bocock -- $8,969;
Mr. DeLaney -- $8,969; and Mr. Mintz -- $8,969.
(5) The Company has established a non-qualified deferred compensation plan for
selected highly- compensated employees. See Committee Report on Executive
Compensation -- Profit Sharing and Deferral Plans. Voluntary deferrals under the
deferred compensation plan during fiscal 1998 are included in the category of
compensation from which such deferrals were elected. Company contributions under
the deferred compensation plan for fiscal 1998 in the following amounts are
included in All Other Compensation: Mr. Sherman -- $10,440; Mr. Scott -- $6,489;
Mr. Bocock -- $10,440; Mr. DeLaney -- $5,909; and Mr. Mintz -- $5,450.
There were no stock options granted to the Company's five most
highly-compensated executive officers during the fiscal year ended June 26,
1998.
The following table provides information concerning any stock options exercised
during the fiscal year ended June 26, 1998 by the Company's five most highly
compensated executive officers and the value of their unexercised stock options
at June 26, 1998.
16
<PAGE>
AGGREGATE OPTION EXERCISES DURING FISCAL 1998
AND FISCAL YEAR END OPTION VALUE
<TABLE>
<CAPTION>
Number Of Value Of Unexercised
Unexercised Options At In-The-Money Options
Shares Acquired Value June 26, 1998 (#) At June 26, 1998 (1)(2)
Name On Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
------ --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
John Sherman, Jr. 5,670 $80,182 -- 6,870 $ -- $111,294
Sidney Buford Scott -- -- 6,660 540 116,685 9,202
Frederic Scott Bocock -- -- 9,360 540 172,883 9,202
Steven C. DeLaney 2,910 40,279 2,220 6,870 36,332 111,294
Charles E. Mintz -- -- 2,010 4,440 32,762 70,225
</TABLE>
(1) The closing price of the Company's Common Stock was $24.75 per share on June
26, 1998.
(2) The value of unexercised options is determined by the difference between the
fair market value of the option shares ($24.75 per share) and the exercise
prices of the options held at June 26, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding shares of Common Stock
beneficially owned as of September 17, 1998 by (i) each person who is known by
the Company to beneficially own more than 5% of the outstanding shares of Common
Stock; (ii) each director and nominee for director of the Company; and (iii) the
directors and executive officers as a group. Unless otherwise noted, each
individual has sole voting power and sole investment power with respect to the
number of shares set forth opposite his name. The address of Mr. Bocock and Mr.
Scott is 909 East Main Street, Richmond, Virginia 23219. The address of Mr.
Kellogg is c/o Spear, Leeds & Kellogg, 120 Broadway, New York, New York 10271.
<TABLE>
<CAPTION>
Percent of
Name Number of Shares (1) Outstanding Shares
<S> <C>
Peter R. Kellogg (2) 375,000 11.1%
Frederic Scott Bocock (3) 294,300 8.6
Sidney Buford Scott (4) 219,316 6.4
John J. Muldowney 129,600 3.8
John Sherman, Jr. (6) 56,941 1.7
R. Bruce Campbell (7) 53,795 1.6
William F. Calliott 50,434 1.5
David Plageman (5) 47,450 1.4
Steven C. DeLaney (6) 33,530 1.0
Charles E. Mintz (6) 33,495 1.0
Robert L. Hintz 9,569 0.3
R. Gordon Smith 7,769 0.2
William W. Berry 4,169 0.1
All directors and executive officers
as a group (19 persons) (6) 999,921 28.9
</TABLE>
17
<PAGE>
(1) Beneficial ownership shown for the following individuals and group includes
the indicated number of shares of Common Stock that may be purchased upon the
exercise of stock options which are exercisable within the next sixty days: Mr.
Bocock (9,900), Mr. Scott (7,200), Mr. Muldowney (3,600), Mr. Sherman (6,870),
Mr. Campbell (4,500), Mr. DeLaney (6,750), Mr. Mintz (6,450) and all directors
and executive officers as a group (62,280).
(2) Information concerning the shares owned by Mr. Kellogg was derived from a
Form 4 filed with the Securities and Exchange Commission on March 7, 1995.
According to this filing, Mr. Kellogg owns 90,000 shares directly. He also
indirectly controls: 142,500 shares owned by IAT Reinsurance Syndicate Ltd., a
Bermuda corporation of which he is the sole holder of voting stock; 90,000
shares owned by his wife; and 52,500 shares owned by a family trust of which he
is a trustee. Mr. Kellogg disclaims beneficial ownership of the shares owned by
the corporation, his wife, and the trust.
(3) Includes 222,800 shares owned by Mr. Bocock's children and trusts for his
children, as to which shares Mr. Bocock disclaims beneficial ownership.
(4) Includes 31,816 shares owned by Mr. Scott's wife, children, and
grandchildren, as to which shares Mr. Scott disclaims beneficial ownership.
(5) Includes 3,300 shares owned by Mr. Plageman's children as to which Mr.
Plageman shares voting and/or investment power.
(6) Includes shares purchased pursuant to the Management Stock Purchase Loan
Plan for the following individuals: Mr. Sherman -- 22,940 shares; Mr. DeLaney --
20,440 shares; Mr. Mintz -- 20,440; Mr. Campbell -- 1,500 shares; and all
directors and executive officers as a group -- 90,320 shares.
(7) Includes 19,500 shares owned by Mr. Campbell's wife, as to which shares Mr.
Campbell disclaims beneficial ownership.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the terms of the Management Stock Purchase Loan Plan, the
Company issues common stock to certain management employees, including some
directors and executive officers, in exchange for promissory notes. The stock
is issued at fair market value. The notes are payable on demand, full recourse,
secured by a collateral pledge of the common stock, and bear interest at the
short-term applicable federal rate. The following table lists directors and
executive officers with indebtedness in excess of $60,000 under this plan:
Largest Amount Balance Interest
Name Position of Indebtedness August 31, 1998 Rate
John Sherman, Jr. Director $304,635 $274,635 5.39% to 6.23%
Charles E. Mintz Director 262,510 242,510 5.39% to 6.23%
Steven C. DeLaney Director 267,010 242,510 5.39% to 6.23%
Kenneth A. Thomas Executive Officer 94,375 94,375 5.39% to 6.23%
William F. Gunter Executive Officer 83,438 83,438 5.39% to 6.23%
Mike D. Johnston Executive Officer 84,250 84,250 5.39% to 6.23%
Diann D. Fox Executive Officer 73,313 73,313 5.39% to 6.23%
Norman L. Hancock Executive Officer 73,313 73,313 5.39% to 6.23%
Certain directors and officers of the Registrant maintain margin accounts
with Scott & Stringfellow, Inc.. Such extensions of credit are made in the
18
<PAGE>
ordinary course of business on the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unaffiliated persons and do not involve more than the usual risk of
collectability or present other unfavorable terms.
McGuire, Woods, Battle & Boothe, LLP, of which R. Gordon Smith, a
director, is a partner, serves as General Counsel to the Registrant.
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 13.11 to 13.23 of the Annual
Report to Stockholders for fiscal 1998, are incorporated herein by
reference:
Consolidated Statements of Financial Condition - June 26, 1998 and June
27, 1997. Consolidated Statements of Income - Fiscal years ended June 26,
1998, June 27, 1997, and June 28, 1996.
Consolidated Statements of Changes in Stockholders' Equity - Fiscal years
ended June 26, 1998, June 27, 1997, and June 28, 1996.
Consolidated Statements of Cash Flows - Fiscal years ended June 26, 1998,
June 27, 1997 and June 28, 1996.
Notes to Consolidated Financial Statements.
Report of Independent Auditors
18
<PAGE>
(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 Schedule pg. 23
Schedule I - Condensed Financial Statements of Registrant pg. 24
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
Bank Loan Agreements with Crestar Bank Exhibit 10
Bank Loan Agreements with Branch Banking and
Trust Company Exhibit 10
13. Certain portions of the Annual Report to Shareholders for
the year ended June 26, 1998, 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>
19
<PAGE>
(b) Reports on Form 8-K.
The Registrant filed a Current Report on Form 8-K on August 10, 1998, which
reported the announcement of a plan to merge with BB&T Corporation.
20
<PAGE>
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 23rd day of September, 1998.
SCOTT & STRINGFELLOW FINANCIAL, INC. (REGISTRANT)
BY /s/John Sherman, Jr. September 23, 1998
John Sherman, Jr. Date
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>
Signature Title Date
<S> <C>
/s/John Sherman, Jr. President and Director September 23, 1998
John Sherman, Jr. (Principal Executive Officer)
/s/Mike D. Johnston Senior Vice President and September 23, 1998
Mike D. Johnston Chief Financial Officer
(Principal Financial / Accounting Officer)
/s/S. Buford Scott Director September 23, 1998
S. Buford Scott
__________________ Director September 23, 1998
Frederic S. Bocock
/s/William F. Calliott Director September 23, 1998
William F. Calliott
/s/David Plageman Director September 23, 1998
David Plageman
/s/John J. Muldowney Director September 23, 1998
John. J. Muldowney
/s/R. Bruce Campbell Director September 23, 1998
R. Bruce Campbell
/s/Charles E. Mintz Director September 23, 1998
Charles E. Mintz
/s/Steven C. DeLaney Director September 23, 1998
Steven C. DeLaney
/s/William W. Berry Director September 23, 1998
William W. Berry
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
/s/R. Gordon Smith Director September 23, 1998
R. Gordon Smith
__________________ Director September 23, 1998
Robert L. Hintz
</TABLE>
22
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Scott & Stringfellow Financial, Inc.
Under date of August 14 , 1998, we reported on the consolidated statements of
financial condition of Scott & Stringfellow Financial, Inc. and subsidiaries as
of June 26, 1998 and June 27, 1997 and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the years ended June
26, 1998, June 27, 1997 and June 28, 1996, as contained in the 1998 annual
report to shareholders. These consolidated financial statements and our report
thereon are incorporated by reference in the 1998 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 schedule 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 14, 1998
23
<PAGE>
Schedule I - Condensed Financial Statements of Registrant
Scott & Stringfellow Financial, Inc. (Parent only)
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
June 26, June 27,
1998 1997
<S> <C>
ASSETS
Cash $ 14,107 $ 65,385
Investments in not readily
marketable securities - 77,831
Investments in subsidiaries (a) 34,574,425 29,486,822
Other assets 35,111 6,010
Total Assets $34,623,643 $29,636,048
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Intercompany (a) $ 5,000 $ 172,831
Accounts payable and other liabilities 332,743 285,565
Total Liabilities 337,743 458,396
Stockholders' Equity:
Common stock, $0.10 par value. Authorized
10,000,000 shares; issued and outstanding
3,277,657 in 1998 and 3,172,946 shares
in 1997 327,767 317,295
Additional paid-in capital 15,430,595 12,540,734
Retained earnings 20,251,287 17,384,953
Less: Subscriptions Receivable -1,723,749 -1,065,330
Total Stockholders' Equity 34,285,900 29,177,652
Total Liabilities and Stockholders' Equity $34,623,643 $29,636,048
Condensed Statements of Income
Years Ended
June 26, 1998 June 27, 1997 June 28, 1996
Equity in undistributed net income
from subsidiaries (a) $ 4,511,991 $ 2,418,346 $ 3,318,072
Cash dividends (a) 1,146,720 1,003,409 857,641
Interest income 99,610 35,824 -
Income before income taxes 5,758,321 3,457,579 4,175,713
Income taxes 23,600 - -
Net income $ 5,781,921 $ 3,457,579 $ 4,175,713
</TABLE>
(a) Eliminated in consolidation. See Notes to Consolidated Financial Statements
contained in the 1998 Annual Report to Shareholders and incorporated herein by
reference. See accompanying auditors' report.
24
<PAGE>
Schedule I (continued)
Condensed Financial Statements of Registrant
Scott & Stringfellow Financial, Inc. (Parent only)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended
June 26, 1998 June 27, 1997 June 28, 1996
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,781,921 $ 3,457,579 $ 4,175,713
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income
of subsidiaries -4,511,991 -2,418,346 -3,318,072
Changes in assets and liabilities:
Inter-company payable -167,831 - -
Other assets -29,101 -6,010 -
Net cash provided by operating activities 1,072,998 1,033,223 857,641
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid -1,146,720 -1,003,409 -857,641
Purchase and retirement of common stock -2,048,653 -4,296,161 -19,140
Issuance of common stock 2,568,877 1,548,070 1,009,250
Net cash provided by (used for) financing activities -626,496 -3,751,500 132,469
CASH FLOWS FROM INVESTING ACTIVITIES
Distributions from subsidiaries 2,048,653 4,296,161 19,140
Contributions to subsidiaries -2,546,433 -1,512,499 -1,009,250
Net cash provided by (used for) investing activities -497,780 2,783,662 -990,110
Net change in cash and cash equivalents -51,278 65,385 -
Cash and cash equivalents at beginning of year 65,385 - -
Cash and cash equivalents at end of year 14,107 65,385 -
</TABLE>
See Notes to Consolidated Financial Statements contained in the 1998 Annual
Report to Shareholders and incorporated herein by reference.
See accompanying independent auditors' report.
25
Exhibit 10
October 31, 1997
Mr. Mike D. Johnston
Vice President and Chief Financial Officer
Scott & Stringfellow, Inc.
909 East Main Street
Richmond, Virginia 23219
Dear Mike:
It is a pleasure to advise you that Crestar Bank (the "Bank") has approved
$55,000,000 in guidance facilities for Scott & Stringfellow, Inc. (the
"Company") for its use to finance short-term working capital needs during the
period ending October 31, 1998. The Bank has approved $50,000,000 to be used for
secured borrowings and $5,000,000 for unsecured borrowing. The Bank and the
Company are parties to a Broker Loan and Security Agreement dated October 31,
1998, which is incorporated herein by reference. Borrowings under the
$50,000,000 guidance facility will be evidenced by the Bank's commercial note
and will accrue interest at the Broker Call Rate. Borrowings under the
$5,000,000 guidance facility will be evidenced by the Bank's commercial note and
will accrue interest at the Bank's prime rate. Changes in the rates will occur
the same day the rate changes. Accrued interest will be billed monthly. The Bank
will require CPA audited financial statements within 90 days of the Company's
fiscal year end and monthly FOCUS Reports. The advance rates for collateral
pledged to the Bank by the Company is as follows, based on the borrowing
purpose:
Loans to Purchase or Carry Inventory:
Equity securities 50%
Corporate Bonds 80%
State/Municipal Bonds 90%
U. S. Government Securities 95%
Loans to Support Customer Margin Borrowing:
Equity securities 85%
Corporate Bonds 85%
State/Municipal Bonds 85%
U. S. Government Securities 85%
<PAGE>
We appreciate this opportunity to work with you and wish you continued success.
Should you have any questions, please do not hesitate to call me at 782-5564.
Sincerely yours,
/s/ David P. Butler
David P. Butler
Vice President
Agreed and acknowledged as of the date first written above:
Scott & Stringfellow, Inc.
By: /s/ Mike D. Johnston Vice President and CFO
Name/Title
Broker Loan And Security Agreement
This Agreement made this 31st day of October, 1997 by and between Scott &
Stringfellow, Inc., a Virginia corporation (the "Borrower") and Crestar Bank, a
Virginia banking corporation (the "Bank"), provides:
The Borrower is a "securities intermediary" as defined in Section 8.8A-102(14)
of the Uniform Commercial Code, as adopted and in effect from time to time in
the Commonwealth of Virginia (the "UCC"), and has requested the Bank to make
loans and other extensions of credit to the Borrower from time to time. The Bank
is willing to make such loans on an uncommitted guidance line basis. Such loans
shall be secured by a security interest in certain "investment property" as
defined in Section 8.9-115(1)(f) of the UCC, including designated securities
which shall, except as hereinafter provided, (a) remain in the possession of the
Borrower, (b) be held at the Depository Trust Company in the street name of Cede
& Co. ("DTC") for the account of the Borrower or for the account of the Bank, or
(c) be held at such other "securities intermediaries" agreed upon from time to
time between the Borrower and the Bank for the account of the Borrower or for
the account of the Bank (DTC and such other securities intermediaries being
hereinafter referred to collectively as the "Designated Intermediaries"). The
Borrower and the Bank are entering into this Agreement to establish the terms
and conditions of such loans and security agreement.
<PAGE>
Accordingly, the Bank and the Borrower hereby agree as follows:
1. Guidance Loans. The parties agree that the Bank may, in its sole and
absolute discretion, make loans ("Loans") to the Borrower pursuant to
this Agreement. Such facility is an uncommitted guidance line facility.
The Borrower acknowledges that the Bank is not obligated to make any
Loans and that, whether or not any Loans are made hereunder, the Bank
shall be entitled to cease making Loans at any time.
2. Notes. The Loans made by the Bank and the Borrower's obligation to repay
the Loans shall be evidenced by this Agreement, the records of the Bank
and one or more promissory notes duly executed on behalf of the Borrower
in substantially the form attached hereto as Exhibit A, payable to the
order of the Bank (the "Notes"). The Loans shall bear interest from the
date thereof on the outstanding principal balance thereof as set forth in
the Notes. The outstanding aggregate unpaid amount of the Loans at any
time shall be the principal amount owing on the Notes at such time. The
records of the Bank shall be prima facie evidence of the Loans and
accrued interest thereon and of all payments made in respect thereof.
3. Payments. Unless otherwise agreed by the Bank in writing, (a) the
principal amount of the Loans shall be payable On Demand and (b) interest
shall accrue and be payable on the Loans at the rates and on the dates
set forth in the Notes.
4. Collateral. The Loans and all other obligations of the Borrower to the
Bank, whether now existing or hereafter arising, shall, unless otherwise
expressly provided in the instrument evidencing such obligation, be
secured by, and the Borrower hereby grants to the Bank a security
interest in, the collateral described in Exhibit B attached hereto, and
all and any substitutions and additions thereto or therefore and all
proceeds thereof together with all "security entitlements" (as defined in
Section 8.8A-102(17) of the UCC) and other rights to which the Borrower
is now or may hereafter become entitled by virtue of owning such
collateral, including, but not limited to, cash dividends, stock
dividends, and other distributions and all rights to subscribe to
securities incident to, declared, or granted in connection with such
collateral, all of which will be delivered to the Bank upon request, with
full authority to sell, transfer or rehypothecate. It is contemplated
that the Borrower will deliver to the Bank, on the date of each Loan
hereunder and on the date of any change in the collateral, an amended
schedule of the securities and other investment property included in the
collateral, which shall become incorporated herein by reference as
Exhibit B hereto and replace the Exhibit B most recently delivered prior
thereto. The most recent schedule delivered and incorporated as Exhibit
B, as from time to time amended, is hereinafter referred to as the
"Collateral Schedule". All of the above described collateral is
hereinafter referred to as the "Collateral".
5. Representations and Warranties. The Borrower hereby represents and
warrants to the Bank, effective as of the date hereof and as of the date
of delivery of each Collateral Schedule (except as otherwise disclosed to
the Bank and expressly agreed upon by the Bank at the time of delivery of
such Collateral Schedule), as follows:
<PAGE>
(a) It has, and has duly exercised, all requisite power and authority
to enter into this Agreement, to grant a security interest in the
Collateral for the purposes described herein, and to carry out the
transactions contemplated by this Agreement, and that the granting
of such security interest does not violate or contravene the terms
or conditions of its articles of incorporation or by laws, or any
contract, agreement, statute, rule or regulation to which the
Borrower is a party or by which the Borrower or its property is
bound;
(b) Immediately prior to the pledge thereof to the Bank hereunder and
at all times thereafter until the Bank's security interest is
released, it is the legal and beneficial owner of all of the
Collateral free of any pledge, mortgage, hypothecation, lien,
charge, encumbrance or security interest in or on such Collateral,
except for that granted hereunder;
(c) It has in its possession all of the securities and other
investment property described in the Collateral Schedule, or where
indicated on the schedule, such securities and other investment
property are held by the Designated Intermediaries indicated
thereon for the account of the Borrower;
(d) The chief executive offices of the Borrower are located in the
Commonwealth of Virginia;
(e) All of the securities included in the Collateral have been
registered pursuant to an effective registration statement in
accordance with the Securities Act of 1933, as amended, and are
freely transferable without any requirement of registration or
other restrictions (legal, contractual or otherwise) on transfer;
(f) All of the securities included in the Collateral are readily
marketable securities; and
(g) All of the securities included in the Collateral have been duly and
validly issued, are fully paid and non-assessable.
6. Covenants. The Borrower covenants and agrees that so long as the
indebtedness evidenced by any Note remains unpaid, and except as herein
provided or otherwise agreed to in writing by the Bank, it will keep all
of the Collateral in its physical possession at its office in Richmond,
Virginia, free and clear of any security interest or lien other than that
in favor of the Bank, or in the case of securities designated on the
Collateral Schedule as held by Designated Intermediaries, will cause such
Designated Intermediaries to hold them in their possession for the
account of the Borrower free and clear of any security interest or lien
other than that in favor of the Bank. So long as any Note remains unpaid,
the Bank may at any time during normal business hours and without notice
enter the office of the Borrower and at the Bank's expense inspect the
books and records of the Borrower and verify that it has physical
possession of the Collateral and may ask each of the Designated
Intermediaries to confirm directly to the Bank that it holds designated
securities for the account of the Borrower free and clear of any liens.
So long as any Note remains unpaid, (a) the Borrower shall not grant a
security interest to any other person in any investment property and
allow the secured party thereof to have "control" (as defined in Section
8.8A-106 of the UCC) of such investment property and (b) the Borrower
shall maintain its chief executive offices in the Commonwealth of
Virginia.
<PAGE>
7. Delivery of Collateral to the Bank. If the Borrower fails to pay any
amount due hereunder or under any Note or violates any obligation
provided herein, or a default occurs under the Note (each of the
foregoing, a "Default"), it shall immediately and without demand deliver
to the Bank all of the securities described on the Collateral Schedule
together with appropriate stock and bond powers. If the Bank shall
request at any time that such Collateral be delivered to it, the Borrower
will immediately deliver all such securities and appropriate stock and
bond powers to the Bank, regardless of whether or not any amount owing on
any Note shall then be due and payable. In the event the Collateral
Schedule indicates that any of the securities in which the Borrower is
granting the Bank a security interest are being held for the Borrower by
Designated Intermediaries, and a Default occurs, the Borrower will
immediately and without demand cause the Designated Intermediaries to
transfer such Collateral to an account maintained at such Designated
Intermediaries in the name of and for the benefit of the Bank. If the
Bank shall so request at any time, the Borrower shall immediately cause
the Designated Intermediaries to transfer such Collateral to an account
maintained at such Designated Intermediaries in the name of and for the
benefit of the Bank, regardless of whether or not any amount owing on any
Note shall then be due and payable.
8. Substitution of Collateral. The Borrower may from time to time make
substitutions to securities listed on the Collateral Schedule provided
(i) the quoted market value of the securities being substituted is not
less than the quoted market value of the securities being substituted
for, (ii) the Borrower shall have delivered to the Bank an executed
agreement of substitution in form satisfactory to the Bank, and (iii) the
Bank shall have consented to such substitution in writing.
9. Remedies.
(a) The Borrower agrees that the Bank shall have, but shall not be
limited to, the following rights, each of which may be exercised
at any time and from time to time: to transfer the whole or any
part of the Collateral into its name or that of its nominee; to
vote Collateral; to notify the obligors on any Collateral before
or after Default; and on the payment of all amounts due under the
Notes, including interest and any costs, to return to the Borrower
an equal amount of the same securities instead of the securities
deposited.
<PAGE>
(b) In the event the Bank obtains possession of the Collateral, it
shall exercise reasonable care in the custody and preservation of
the Collateral, and it shall be deemed to have exercised
reasonable care if it takes such care as the Borrower shall
reasonably request in writing. No failure to do any act not
requested by the Borrower shall be deemed a failure to exercise
reasonable care, and no failure to comply with any request of the
Borrower shall of itself be deemed a failure to exercise
reasonable care.
(c) Upon Default, the Bank shall have all of the rights and remedies
of a secured party under the Virginia Uniform Commercial Code,
including the right to deduct all expenses and attorney's fees
incurred in collecting the Note or enforcing its rights hereunder.
All rights and remedies, including those provided in any Note,
this Agreement and any other pledge agreements shall be
cumulative. Upon Default, the Bank may sell or otherwise dispose
of all or any part of the Collateral upon any exchange, or at
public or private sale, at any time or times without advertisement
or demand upon or notice to any party, all of which is waived,
except such notice as by statute cannot be waived. Any notice to
the Borrower when placed in the mail addressed to, or left upon
the premises of the Borrower at the address specified below, or at
such other address as may from time to time be shown on the
records of the Bank, at least five (5) days prior to such action,
shall constitute reasonable notice:
If to the Bank, at: Crestar Bank
P.O. Box 26665
Richmond, Virginia 23261
Attention: David P. Butler
If to the Borrower, at: Scott & Stringfellow, Inc.
909 East Main Street
Richmond, Virginia 23219
Attention: Mike D. Johnston
(d) Until Default, the Bank will vote any securities transferred into
its name or the name of its nominee pursuant to the terms hereof
in such fashion as the Borrower may request by timely writing.
Unless any Default has occurred and is continuing, the Bank will
promptly pay to the Borrower all interest, dividends or other cash
distributions received by it or its nominee as the registered
owner of any security in which it is granted a security interest
pursuant to the terms hereof by the Borrower.
(e) Nothing contained herein shall be deemed to authorize the Bank to
sell or otherwise dispose of any Collateral until such time as a
Default has occurred and the Borrower has failed to repay the
obligations secured by the Collateral after demand by the Bank.
<PAGE>
10. Special Agreement. This Agreement is subject to the Special Agreement
dated October 31, 1997, between the Bank and the Borrower regarding the
hypothecation of customer securities.
11. Successors and Assigns. This Agreement shall inure to the benefit of and
shall be binding upon the successors and assigns of the parties hereto.
This Agreement cannot be assigned without the written consent of the
parties hereto.
12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia.
In Witness Whereof, the undersigned, the Bank and the Borrower, have caused this
Agreement to be executed this 31st day of October, 1997, by its duly authorized
officers.
Crestar Bank Scott & Stringfellow, Inc.
By: /s/ David P. Butler By: /s/ Mike D. Johnston
Title: Vice President Title: Vice President and CFO
<TABLE>
<CAPTION>
Commercial Note Crestar Bank logo
<S> <C>
Borrower: Scott & Stringfellow, Inc.
Loan Amount: Fifty Million Dollars and no cents ($50,000,000.00)
Borrower's Address: P O Box 1575
Richmond, VA 23218-1575 Date: October 31, 1997
Officer: David P Butler ________ (initials)
Account No: 04300011332022 Note No: 2901 Note Type: Original Loan
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 designate in writing, 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.
Loan Type And Repayment Terms
Loan Type: Revolving Master Borrowing Line
This is an open end revolving line of credit. You may
borrow an aggregate principal amount up to the Loan Amount
shown above outstanding at any one time.
Repayment Terms: Principal on demand, plus interest, but the undersigned
shall be liable for only so much of the Loan Amount 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.
<PAGE>
This Master Borrowing arrangement will terminate upon
written notice from the Bank to the undersigned, or if
such notice is not sooner given, 60 months from the date
of this Note, unless an alternate termination date is
indicated in the "Agreement", as defined below.
The Bank shall have the right to demand payment at any
time even if an event of default (as identified in this
Note) has not occurred.
Additional Terms And Conditions:
This Note is governed by additional terms and conditions contained in a
Commitment Letter between the undersigned and the Bank dated October 31, 1997,
and any modifications, renewals, extensions or replacements thereof (the
"Agreement"), which is incorporated in this Note 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.
Interest
Accrued interest will be payable on the last day of each month beginning on
November 30, 1997.
Interest will accrue daily on an actual/360 basis (that is, on the actual number
of days elapsed over a year of 360 days).
Each scheduled payment made on this Note will be applied to accrued interest
before it is applied to principal. Interest will accrue from the date of this
Note on the unpaid balance and will 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 Term-Variable
Payment loan, adjustments in the payment schedule will be made as necessary. If
this is a variable transaction which uses a Crestar Prime Rate as the Index, the
Index is subject to increase or decrease at the sole option of the Bank.
Subject to the above, interest per annum payable on this Note (the "Rate") will
be the applicable rate as outlined in the Agreement incorporated herein by
reference. Adjustments to the Rate shall be in accordance with Agreement.
Collateral
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 or any of its
affiliates.
This Note is also secured by the following collateral and proceeds thereof:
Those marketable securities registered in the name of Scott & Stringfellow, Inc.
(street or other name in which margin securities are held) which have been
deposited or may hereafter be deposited with and held by Depository Trust
Company which have been or may hereafter be pledged to the holder of this Note
by the Borrower; all other collateral now or hereafter in the possession of the
Bank and/or referred to in any other security agreement between the Borrower and
the Bank; and Any other collateral now or hereafter pledged, hypothecated or
mortgaged with or to the Bank, or in which the Bank is granted a security
interest, for this or for any other indebtedness or liabilities of the Borrower.
All of this 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 any order at the option of the Bank.
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.
<PAGE>
Default, Acceleration And Setoff
Any one of the following will 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 its obligations under or with respect to this Note; (10)
the sale or transfer by a Party of all or substantially all of its 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 will, at the option of the
Bank, become immediately due and payable, without notice or demand. Upon the
occurrence of an event of default, the Bank will 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 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 of this Note, determine that the adoption of any
law or regulation regarding capital adequacy, or any change in its
interpretation or administration, has or would have the effect of reducing the
Bank's rate of return under this Note to a level below that which the Bank could
have achieved but for the 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 the reduction. Each demand by the Bank will be made
in good faith and accompanied by a certificate claiming compensation under this
paragraph and stating the amounts to be paid to it and the basis for the
payment.
Late Charges And Other Authorized Charges
If any portion of a payment is at least ten (10) days past due, the undersigned
agree to pay a late charge of 5.00% of the amount which is 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, 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 obligations it evidences; and (5) any other charges permitted by
applicable law. The undersigned agree to pay these authorized charges on demand
or, at the Bank's option, the charges may be added to the unpaid balance of the
Note and will accrue interest at the stated Rate. Upon the occurrence of an
event of default, interest will accrue at the Default Rate.
<PAGE>
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
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 will be
ineffective to the extent of the 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, will in any event be
effective unless it is in writing and signed by an authorized employee of the
Bank, and then the waiver or consent will 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 may be construed as a waiver of the right to
exercise the same or any other right at any time.
<PAGE>
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. 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 and
acknowledge receipt of a loan in the Loan Amount shown above.
Scott & Stringfellow, Inc.
/s/ Mike D. Johnston
By: (Seal)
---------------------------------------------------
Mike D. Johnston Vice President and CFO
Name and title printed or typed
<TABLE>
<CAPTION>
Commercial Note Crestar Bank logo
<S> <C>
Borrower: Scott & Stringfellow, Inc.
Loan Amount: Five Million Dollars and no cents ($5,000,000.00)
Borrower's Address: P. O. Box 1575
Richmond, VA 23218-1575
Officer: David P Butler ________ (initials)
Date: October 31, 1997
Account No: 04300011332022 Note No: 3103 Note Type: Renewal Loan
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 designate in writing, 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.
Loan Type And Repayment Terms
Loan Type: Revolving Master Borrowing Line
This is an open end revolving line of credit. You may
borrow an aggregate principal amount up to the Loan Amount
shown above outstanding at any one time.
Repayment Terms: Principal on demand, plus interest, but the undersigned
shall be liable for only so much of the Loan Amount 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, 60 months from the date
of this Note, unless an alternate termination date is
indicated in the "Agreement", as defined below.
The Bank shall have the right to demand payment at any
time even if an event of default (as identified in this
Note) has not occurred.
<PAGE>
Additional Terms And Conditions:
This Note is governed by additional terms and conditions contained in a
Commitment Letter between the undersigned and the Bank dated October 31, 1997,
and any modifications, renewals, extensions or replacements thereof (the
"Agreement"), which is incorporated in this Note 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.
Interest
Accrued interest will be payable on the last day of each month beginning on
November 30, 1997.
Interest will accrue daily on an actual/360 basis (that is, on the actual number
of days elapsed over a year of 360 days).
Each scheduled payment made on this Note will be applied to accrued interest
before it is applied to principal. Interest will accrue from the date of this
Note on the unpaid balance and will 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 Term-Variable
Payment loan, adjustments in the payment schedule will be made as necessary. If
this is a variable transaction which uses a Crestar Prime Rate as the Index, the
Index is subject to increase or decrease at the sole option of the Bank.
Subject to the above, interest per annum payable on this Note (the "Rate") will
be the "Index" (as defined in this Note). The "Index" shall be Crestar's Prime
Rate, which is the rate established from time to time by the Bank and recorded
in its Central Credit Administration Division as a reference for fixing the
lending rate on commercial loans. The Index is a reference rate only and does
not necessarily represent the lowest rate of interest charged for such
borrowings. Adjustments to the Rate shall be effective as of the date the Index
changes.
This Note represents a renewal and refinance of the balance owed on note number
043000113320223103 dated June 13, 1997, in the original principal amount of
$5,000,000.00.
Collateral
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 or any of its
affiliates.
All of this 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 any order at the option of the Bank.
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.
<PAGE>
Default, Acceleration And Setoff
Any one of the following will 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 its obligations under or with respect to this Note; (10)
the sale or transfer by a Party of all or substantially all of its 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 will, at the option of the
Bank, become immediately due and payable, without notice or demand. Upon the
occurrence of an event of default, the Bank will 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 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 of this Note, determine that the adoption of any
law or regulation regarding capital adequacy, or any change in its
interpretation or administration, has or would have the effect of reducing the
Bank's rate of return under this Note to a level below that which the Bank could
have achieved but for the 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 the reduction. Each demand by the Bank will be made
in good faith and accompanied by a certificate claiming compensation under this
paragraph and stating the amounts to be paid to it and the basis for the
payment.
Late Charges And Other Authorized Charges
If any portion of a payment is at least ten (10) days past due, the undersigned
agree to pay a late charge of 5.00% of the amount which is 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, 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 obligations it evidences; and (5) any other charges permitted by
applicable law. The undersigned agree to pay these authorized charges on demand
or, at the Bank's option, the charges may be added to the unpaid balance of the
Note and will accrue interest at the stated Rate. Upon the occurrence of an
event of default, interest will accrue at the Default Rate.
<PAGE>
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
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 will be
ineffective to the extent of the 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, will in any event be
effective unless it is in writing and signed by an authorized employee of the
Bank, and then the waiver or consent will 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 may 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. 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 and
acknowledge receipt of a loan in the Loan Amount shown above.
Scott & Stringfellow, Inc.
/s/ Mike D. Johnston
By: (Seal)
---------------------------------------
Mike D. Johnston Vice President and CFO
---------------------------------------
Name and title printed or typed
<PAGE>
BB&T
PROMISSORY NOTE
Borrower: Scott & Stringfellow, Inc.
Account Number: 499-0008839 Note Number: 00001
Address: 909 East Main Street Date: November 1, 1997
Richmond, Virginia
THE UNDERSIGNED REPRESENTS THAT THE LOAN EVIDENCED HEREBY IS BEING OBTAINED FOR
BUSINESS/COMMERCIAL OR AGRICULTURAL PURPOSES. For value received, the
undersigned, jointly and severally, if more than one, promises to pay to BRANCH
BANKING AND TRUST COMPANY, a North Carolina banking corporation (the "Bank"), or
order, at any of Bank's offices in the above referenced city (or such other
place or places that may be hereafter designated by Bank), the sum of Five
Million Dollars and no/100th ($5,000,000.00), in immediately available coin or
currency of the United States of America.
Interest shall accrue from the date hereof on the unpaid principal balance
outstanding from time to time at the:
- -> Variable rate of the Bank's Prime Rate minus 0.50% per annum to be
adjusted daily as the Bank's Prime Rate changes.
Principal and interest is payable as follows:
- -> Principal (plus any accrued interest not otherwise scheduled herein) is due
in full at maturity on November 1, 1998.
- -> Accrued interest is payable monthly commencing on December 1, 1997 and
continuing on the same day of each calendar period thereafter, with one
final payment of all remaining interest due on November 1, 1998.
- -> Prior to an event of default, Borrower may borrow, repay, and reborrow
hereunder pursuant to the terms of the Loan Agreement, hereinafter defined.
In addition, the undersigned promises to pay to Bank, or order, a late fee
in the amount of four percent (4%) of any installment past due for fifteen (15)
or more days. When any installment payment is past due for fifteen (15) or more
days, subsequent payments shall first be applied to the past due balance. All
interest shall be computed and charged for the actual number of days elapsed on
the basis of a year consisting of three hundred sixty (360) days. In the event
periodic accruals of interest shall exceed any periodic fixed payment amount
described above, the fixed payment amount shall be immediately increased, or
additional supplemental interest payments required on the same periodic basis as
specified above (increased fixed payments or supplemental payments to be
determined in the Bank's sole discretion), in such amounts and at such times as
shall be necessary to pay all accruals of interest for the period and all
accruals of unpaid interest from previous periods. Such adjustments to the fixed
payment amount or supplemental payments shall remain in effect for so long as
the interest accruals shall exceed the original fixed payment amount and shall
be further adjusted upward or downward to reflect changes in the variable
interest rate. In no event shall the fixed payment amount be reduced below the
original fixed payment amount specified above.
This note ("NOTE") is given by the undersigned in connection with the following
agreements (if any) between the undersigned and the Bank:
- -> Letter Loan Agreement dated November 1, 1997 executed by Scott &
Stringfellow, Inc. (the "Loan Agreement")
- -> Special Agreement Regarding Hypothecation of Customer's Securities dated
November 1, 1997 executed by Scott & Stringfellow, Inc.
- -> BB&T Security & Control Agreement dated November 1, 1997 executed by Scott
& Stringfellow, Inc.
All of the terms, conditions and covenants of the above described
agreements (the "Agreements") are expressly made a part of this Note by
reference in the same manner and with the same effect as if set forth herein at
length and any holder of this Note is entitled to the benefits of and remedies
provided in the Agreements and any other agreements by and between the
undersigned and the Bank.
In addition to collateral pledged pursuant to the terms of the Agreements
(if any) described above, the undersigned, as collateral security for the
indebtedness evidenced by this note, hereby grants the Bank a security interest
and lien in and to all deposit accounts, certificates of deposit, securities and
stocks now or hereafter in Bank's possession or on deposit with the Bank.
If any stock or securities are pledged to Bank herein, the security
interest includes all stock splits, reissued shares, substituted shares, and all
proceeds thereof, which the undersigned promises to deliver to Bank.
No delay or omission on the part of the holder in exercising any right
hereunder shall operate as a waiver of such right or of any other right of such
holder, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or of any other right on any future occasion. Every
one of the undersigned and every endorser or guarantor of this note regardless
of the time, order or place of signing waives presentment, demand, protest and
notices of every kind and assents to any one or more extensions or postponements
of the time of payment or any other indulgences, to any substitutions, exchanges
or releases of collateral if at any time there be available to the holder
collateral for this note, and to the additions or releases of any other parties
or persons primarily or secondarily liable.
<PAGE>
The failure to pay any part of the principal or interest when due on this
Note or to fully perform any covenant, obligation or warranty on this or on any
other liability to the Bank by any one or more of the undersigned, by any
affiliate of the undersigned (as defined in 11 USC Section (101) (2)), or by any
guarantor or surety of this Note (said affiliate, guarantor, and surety are
herein called Obligor), or if any financial statement or other representation
made to the Bank by any of the undersigned or any Obligor shall be found to be
materially incorrect or incomplete, or in the event the default pursuant to any
of the Agreements or any other obligation of any of the undersigned or any
Obligor in favor of the Bank, or in the event the Bank demands that the
undersigned secure or provide additional security for its obligations under this
Note and security deemed adequate and sufficient by the Bank is not given when
demanded, or in the event one or more of the undersigned or any Obligor shall
die, terminate its existence, allow the appointment of a receiver for any part
of its property, make an assignment for the benefit of creditors, or where a
proceeding under bankruptcy or insolvency laws is initiated by or against any of
the undersigned or any Obligor, or in the event the Bank should otherwise deem
itself, its security interest, or any collateral unsafe or insecure; or should
the Bank in good faith believe that the prospect of payment or other performance
is impaired, or if there is an attachment, execution, or other judicial seizure
of all or any portion of the Borrower's or any Obligor's assets, including an
action or proceeding to seize any funds on deposit with the Bank, and such
seizure is not discharged within 20 days, or if final judgment for the payment
of money shall be rendered against the Borrower or any Obligor which is not
covered by insurance and shall remain undischarged for a period of 30 days
unless such judgment or execution thereon is effectively stayed, or the
termination of any guaranty agreement given in connection with this Note, then
any one of the same shall be a material default hereunder and this Note and
other debts due the Bank by any one or more of undersigned shall immediately
become due and payable without notice, at the option of the Bank. From and after
any event of default hereunder, interest shall accrue on the sum of the
principal balance and accrued interest then outstanding at the variable rate
equal to the Bank's Prime Rate plus 5% per annum ("Default Rate"), provided that
such rate shall not exceed at any time the highest rate of interest permitted by
the laws of the State of North Carolina; and further provided that such rate
shall apply after judgment. In the event of any default, the then remaining
unpaid principal amount and accrued but unpaid interest then outstanding shall
bear interest at the Default Rate called for hereunder until such principal and
interest have been paid in full. In addition, upon default, the Bank may pursue
its full legal remedies at law or equity, and the balance due hereunder may be
charged against any obligation of the Bank to any party including any Obligor.
Bank shall not be obligated to accept any check, money order, or other payment
instrument marked "payment in full" on any disputed amount due hereunder, and
Bank expressly reserves the right to reject all such payment instruments.
Borrower agrees that tender of its check or other payment instrument so marked
will not satisfy or discharge its obligation under this Note, disputed or
otherwise, even if such check or payment instrument is inadvertently processed
by Bank unless in fact such payment is in fact sufficient to pay the amount due
hereunder.
The term "Prime Rate," if used herein, means the rate of interest per annum
announced by the Bank from time to time and adopted as its Prime Rate. The Prime
Rate is one of several rate indexes employed by the Bank when extending credit.
Any change in the interest rate resulting from a change in the Bank's Prime Rate
shall become effective as of the opening of business on the effective date of
the change. If this Note is placed with an attorney for collection, the
undersigned agrees to pay, in addition to principal and interest, all costs of
collection, including but not limited to reasonable attorneys' fees. All
obligations of the undersigned and of any Obligor shall bind his heirs,
executors, administrators, successors, and/or assigns. Use of the masculine
pronoun herein shall include the feminine and the neuter, and also the plural.
If more than one party shall execute this Note, the term "undersigned" as used
herein shall mean all the parties signing this Note and each of them, and all
such parties shall be jointly and severally obligated hereunder. Wherever
possible, each provision of this Note shall be interpreted in such a manner to
be effective and valid under applicable law, but if any provision of this Note
shall be prohibited by or invalid under such law, such provision shall be
ineffective but only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Note. All of the undersigned hereby waive all exemptions and homestead laws. The
proceeds of the loan evidenced by this Note may be paid to any one or more of
the undersigned. From time to time the maturity date of this Note may be
extended, or this Note may be renewed in whole or in part, or a new note of
different form any be substituted for this Note, or the rate of interest may be
modified, or changes may be made in consideration of loan extensions, and the
holder hereof, from time to time may waive or surrender, either in whole or in
part any rights, guaranties, secured interest, or liens, given for the benefit
of the holder in connection with the payment and the securing the payment of
this Note; but no such occurrence shall in any manner affect, limit, modify, or
otherwise impair any rights, guaranties or security of the holder not
specifically waived, released, or surrendered in writing, nor shall the
undersigned makers, or any guarantor, endorser, or any person who is or might be
liable hereon, either primarily or contingently, be released from such event.
The holder hereof, from time to time, shall have the unlimited right to release
any person who might be liable hereon, and such release shall not affect or
discharge the liability of any other person who is or might be liable hereon. No
waivers and modifications shall be valid unless in writing and signed by the
Bank. The Bank may, at its option, charge any fees for the modification,
renewal, extension, or amendment of any of the terms of the Note permitted by
N.C.G.S.ss.24-1 .1. In case of a conflict between the terms of this Note and the
Loan Agreement or Commitment Letter issued in connection herewith, the priority
of controlling terms shall be first this Note, then the Loan Agreement, and then
the Commitment Letter. This Note shall be governed by and construed in
accordance with the laws of North Carolina; provided however that any Mortgage
encumbering the Borrower's property in South Carolina shall be governed by and
construed in accordance with the laws of South Carolina, and the Borrower hereby
submits to the jurisdiction of South Carolina in connection with any foreclosure
or enforcement proceeding undertaken in connection with the Borrower's property
situated in South Carolina.
IN WITNESS WHEREOF, the undersigned, on the day and year first written
above, has caused this note to be executed under seal.
SCOTT & STRINGFELLOW, INC.
ATTEST: /s/ David Plageman By: /s/ Mike D. Johnston
Title: Secretary Title: Vice President and CFO
By:________________________________
[Corporate Seal] Title:_____________________________
<PAGE>
BB&T
PROMISSORY NOTE
Borrower: Scott & Stringfellow, Inc.
Account Number: 499-0008839 Note Number: 00002
Address: 909 East Main Street Date: December 1, 1997
Richmond, Virginia
THE UNDERSIGNED REPRESENTS THAT THE LOAN EVIDENCED HEREBY IS BEING OBTAINED FOR
BUSINESS/COMMERCIAL OR AGRICULTURAL PURPOSES. For value received, the
undersigned, jointly and severally, if more than one, promises to pay to BRANCH
BANKING AND TRUST COMPANY, a North Carolina banking corporation (the "Bank"), or
order, at any of Bank's offices in the above referenced city (or such other
place or places that may be hereafter designated by Bank), the sum of Three
Million Dollars and no/100th ($3,000,000.00), in immediately available coin or
currency of the United States of America.
Interest shall accrue from the date hereof on the unpaid principal balance
outstanding from time to time at the:
- -> Variable rate of the Bank's Prime Rate per annum to be adjusted daily as
the Bank's Prime Rate changes.
Principal and interest is payable as follows:
- -> Principal plus accrued interest is due in full on demand.
In addition, the undersigned promises to pay to Bank, or order, a late fee
in the amount of four percent (4%) of any installment past due for fifteen (15)
or more days. When any installment payment is past due for fifteen (15) or more
days, subsequent payments shall first be applied to the past due balance. All
interest shall be computed and charged for the actual number of days elapsed on
the basis of a year consisting of three hundred sixty (360) days. In the event
periodic accruals of interest shall exceed any periodic fixed payment amount
described above, the fixed payment amount shall be immediately increased, or
additional supplemental interest payments required on the same periodic basis as
specified above (increased fixed payments or supplemental payments to be
determined in the Bank's sole discretion), in such amounts and at such times as
shall be necessary to pay all accruals of interest for the period and all
accruals of unpaid interest from previous periods. Such adjustments to the fixed
payment amount or supplemental payments shall remain in effect for so long as
the interest accruals shall exceed the original fixed payment amount and shall
be further adjusted upward or downward to reflect changes in the variable
interest rate. In no event shall the fixed payment amount be reduced below the
original fixed payment amount specified above.
This note ("NOTE") is given by the undersigned in connection with the following
agreements (if any) between the undersigned and the Bank:
- -> Application and Agreement for Irrevocable Letter of Credit dated December
1, 1997 executed by Scott & Stringfellow, Inc.
- -> Letter Loan Agreement dated November 1, 1997 executed by Scott &
Stringfellow, Inc. (the "Loan Agreement")
- -> Special Agreement Regarding Hypothecation of Customer's Securities dated
November 1, 1997 executed by Scott & Stringfellow, Inc.
- -> BB&T Security & Control Agreement dated November 1, 1997 executed by Scott
& Stringfellow, Inc.
All of the terms, conditions and covenants of the above described
agreements (the "Agreements") are expressly made a part of this Note by
reference in the same manner and with the same effect as if set forth herein at
length and any holder of this Note is entitled to the benefits of and remedies
provided in the Agreements and any other agreements by and between the
undersigned and the Bank.
In addition to collateral pledged pursuant to the terms of the Agreements
(if any) described above, the undersigned, as collateral security for the
indebtedness evidenced by this note, hereby grants the Bank a security interest
and lien in and to all deposit accounts, certificates of deposit, securities and
stocks now or hereafter in Bank's possession or on deposit with the Bank.
If any stock or securities are pledged to Bank herein, the security
interest includes all stock splits, reissued shares, substituted shares, and all
proceeds thereof, which the undersigned promises to deliver to Bank.
No delay or omission on the part of the holder in exercising any right
hereunder shall operate as a waiver of such right or of any other right of such
holder, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or of any other right on any future occasion. Every
one of the undersigned and every endorser or guarantor of this note regardless
of the time, order or place of signing waives presentment, demand, protest and
notices of every kind and assents to any one or more extensions or postponements
of the time of payment or any other indulgences, to any substitutions, exchanges
or releases of collateral if at any time there be available to the holder
collateral for this note, and to the additions or releases of any other parties
or persons primarily or secondarily liable.
<PAGE>
The failure to pay any part of the principal or interest when due on this
Note or to fully perform any covenant, obligation or warranty on this or on any
other liability to the Bank by any one or more of the undersigned, by any
affiliate of the undersigned (as defined in 11 USC Section (101) (2)), or by any
guarantor or surety of this Note (said affiliate, guarantor, and surety are
herein called Obligor), or if any financial statement or other representation
made to the Bank by any of the undersigned or any Obligor shall be found to be
materially incorrect or incomplete, or in the event the default pursuant to any
of the Agreements or any other obligation of any of the undersigned or any
Obligor in favor of the Bank, or in the event the Bank demands that the
undersigned secure or provide additional security for its obligations under this
Note and security deemed adequate and sufficient by the Bank is not given when
demanded, or in the event one or more of the undersigned or any Obligor shall
die, terminate its existence, allow the appointment of a receiver for any part
of its property, make an assignment for the benefit of creditors, or where a
proceeding under bankruptcy or insolvency laws is initiated by or against any of
the undersigned or any Obligor, or in the event the Bank should otherwise deem
itself, its security interest, or any collateral unsafe or insecure; or should
the Bank in good faith believe that the prospect of payment or other performance
is impaired, or if there is an attachment, execution, or other judicial seizure
of all or any portion of the Borrower's or any Obligor's assets, including an
action or proceeding to seize any funds on deposit with the Bank, and such
seizure is not discharged within 20 days, or if final judgment for the payment
of money shall be rendered against the Borrower or any Obligor which is not
covered by insurance and shall remain undischarged for a period of 30 days
unless such judgment or execution thereon is effectively stayed, or the
termination of any guaranty agreement given in connection with this Note, then
any one of the same shall be a material default hereunder and this Note and
other debts due the Bank by any one or more of undersigned shall immediately
become due and payable without notice, at the option of the Bank. From and after
any event of default hereunder, interest shall accrue on the sum of the
principal balance and accrued interest then outstanding at the variable rate
equal to the Bank's Prime Rate plus 5% per annum ("Default Rate"), provided that
such rate shall not exceed at any time the highest rate of interest permitted by
the laws of the State of North Carolina; and further provided that such rate
shall apply after judgment. In the event of any default, the then remaining
unpaid principal amount and accrued but unpaid interest then outstanding shall
bear interest at the Default Rate called for hereunder until such principal and
interest have been paid in full. In addition, upon default, the Bank may pursue
its full legal remedies at law or equity, and the balance due hereunder may be
charged against any obligation of the Bank to any party including any Obligor.
Bank shall not be obligated to accept any check, money order, or other payment
instrument marked "payment in full" on any disputed amount due hereunder, and
Bank expressly reserves the right to reject all such payment instruments.
Borrower agrees that tender of its check or other payment instrument so marked
will not satisfy or discharge its obligation under this Note, disputed or
otherwise, even if such check or payment instrument is inadvertently processed
by Bank unless in fact such payment is in fact sufficient to pay the amount due
hereunder.
The term "Prime Rate," if used herein, means the rate of interest per annum
announced by the Bank from time to time and adopted as its Prime Rate. The Prime
Rate is one of several rate indexes employed by the Bank when extending credit.
Any change in the interest rate resulting from a change in the Bank's Prime Rate
shall become effective as of the opening of business on the effective date of
the change. If this Note is placed with an attorney for collection, the
undersigned agrees to pay, in addition to principal and interest, all costs of
collection, including but not limited to reasonable attorneys' fees. All
obligations of the undersigned and of any Obligor shall bind his heirs,
executors, administrators, successors, and/or assigns. Use of the masculine
pronoun herein shall include the feminine and the neuter, and also the plural.
If more than one party shall execute this Note, the term "undersigned" as used
herein shall mean all the parties signing this Note and each of them, and all
such parties shall be jointly and severally obligated hereunder. Wherever
possible, each provision of this Note shall be interpreted in such a manner to
be effective and valid under applicable law, but if any provision of this Note
shall be prohibited by or invalid under such law, such provision shall be
ineffective but only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Note. All of the undersigned hereby waive all exemptions and homestead laws. The
proceeds of the loan evidenced by this Note may be paid to any one or more of
the undersigned. From time to time the maturity date of this Note may be
extended, or this Note may be renewed in whole or in part, or a new note of
different form any be substituted for this Note, or the rate of interest may be
modified, or changes may be made in consideration of loan extensions, and the
holder hereof, from time to time may waive or surrender, either in whole or in
part any rights, guaranties, secured interest, or liens, given for the benefit
of the holder in connection with the payment and the securing the payment of
this Note; but no such occurrence shall in any manner affect, limit, modify, or
otherwise impair any rights, guaranties or security of the holder not
specifically waived, released, or surrendered in writing, nor shall the
undersigned makers, or any guarantor, endorser, or any person who is or might be
liable hereon, either primarily or contingently, be released from such event.
The holder hereof, from time to time, shall have the unlimited right to release
any person who might be liable hereon, and such release shall not affect or
discharge the liability of any other person who is or might be liable hereon. No
waivers and modifications shall be valid unless in writing and signed by the
Bank. The Bank may, at its option, charge any fees for the modification,
renewal, extension, or amendment of any of the terms of the Note permitted by
N.C.G.S.ss.24-1 .1. In case of a conflict between the terms of this Note and the
Loan Agreement or Commitment Letter issued in connection herewith, the priority
of controlling terms shall be first this Note, then the Loan Agreement, and then
the Commitment Letter. This Note shall be governed by and construed in
accordance with the laws of North Carolina; provided however that any Mortgage
encumbering the Borrower's property in South Carolina shall be governed by and
construed in accordance with the laws of South Carolina, and the Borrower hereby
submits to the jurisdiction of South Carolina in connection with any foreclosure
or enforcement proceeding undertaken in connection with the Borrower's property
situated in South Carolina.
IN WITNESS WHEREOF, the undersigned, on the day and year first written
above, has caused this note to be executed under seal.
SCOTT & STRINGFELLOW, INC.
ATTEST: /s/ David Plageman By: /s/ Mike D. Johnston
Title: Secretary Title: Vice President and CFO
By:_______________________________
[Corporate Seal]
Title:____________________________
Exhibit 13
SELECTED FINANCIAL DATA
(In thousands except per share amounts and Other Company Data)
<TABLE>
<CAPTION>
Years Ended
June 26, June 27, June 28, June 30, June 24,
1998 1997 1996 1995 1994
<S> <C>
Results of Operations
Total Revenues $ 105,364 $ 80,907 $ 73,165 $ 54,119 $ 52,108
Income before income taxes 9,120 5,453 6,568 3,288 4,665
Net income 5,782 3,458 4,176 2,101 2,958
Per Share Data
Earnings per share - basic $ 1.81 $ 1.12 $ 1.30 $ 0.67 $ 0.94
Earnings per share - diluted 1.67 1.09 1.28 0.66 0.93
Cash dividends per share 0.37 0.33 0.28 0.27 0.23
Book value per share 10.46 9.20 8.47 7.98 7.61
Average shares outstanding 3,200 3,079 3,224 3,147 3,158
Average shares and dilutive
potential shares outstanding 3,465 3,160 3,256 3,163 3,173
Financial Condition
Total assets $ 167,993 $129,854 $114,249 $ 93,266 $ 80,702
Total liabilities 133,707 100,676 88,558 68,028 56,680
Total stockholders' equity 34,286 29,178 25,690 25,238 24,022
Other Financial Data
Profit margin:
Pre-tax 8.7% 6.7% 9.0% 6.1% 9.0%
After-tax 5.5% 4.3% 5.7% 3.9% 5.7%
Return on average equity:
Pre-tax 28.6% 19.7% 24.1% 13.3% 20.2%
After-tax 18.1% 12.5% 15.3% 8.5% 12.8%
Other Company Data
Total employees 616 566 520 479 458
Investment brokers 260 237 223 214 205
Branch offices 31 29 28 26 25
</TABLE>
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 26, 1998, the Company operated 31 offices in communities
located across Virginia, North Carolina, West Virginia, and South Carolina and
had approximately 616 employees including 260 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 1998, approximately 79% of the Company's total revenues were
derived from brokerage and investment banking including 70% from retail
brokerage, 7% from institutional brokerage, and 2% from investment banking fees.
Of the Company's remaining revenues, dividends and interest income provided 9%
and investment advisory and administrative service fees and other income
provided 12%.
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. As a full
service firm, the Company's fixed cost structure is significantly higher than
many of its competitors, particularly discount and internet brokerage firms.
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, CAPITAL RESOURCES, AND MARKET RISK
The Company's primary sources of funds include its net income, 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 26, 1998, presented in the financial statements which follow, cash
provided by operations was negative $10.8 million. Although net income,
depreciation, and amortization provided $7.8 million of cash flow, the Company's
receivable from customer balances increased by $33.2 million and receivable from
other brokers, dealers, and clearing organizations increased by $6.1 million
during the year. The increase in receivable from customers was primarily due to
increase in margin loan balances used to finance purchases or carrying of
securities by clients. Investing activities used cash of $5.9 million, inlcuding
$3.0 million used for purchases of fixed asssets and $2.6 million in new loans
receivable, which principally include forgivable loans used in connection with
the recruitment of new employees. Financing activities provided cash of $13.3
million, which included an increase in borrowings under short-term bank loans of
$14.0 million.
During fiscal 1998, the Company's total assets increased by 29% to $168.0
million from $129.9 million, primarily as a result of higher customer margin
loan balances, which are classified as receivable from customers on the
Consolidated Statements of Financial Condition. Receivable from customers
increased 37% during the year and represented 74% of the Company's total assets
as of June 26, 1998. Approximately 88% 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 26, 1998, total
stockholders' equity was $34.3 million, or 20% of total assets, compared to
$29.2 million, or 22% of total assets, at June 27, 1997. The Company's largest
liability, payable to customers, amounted to $89.8 million at June 26, 1998, an
increase of 15% from June 27, 1997. 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 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 or are unsecured
The Company maintains lines of credit from commercial banks totaling $60.0
million, of which $18.9 million was outstanding as of June 26, 1998. Additional
bank credit facilities are available on a short-term basis for the purpose of
financing securities underwritings.
The Company received cash proceeds from issuance of common stock totaling
$2.6 million during the year, compared to $1.5 million in 1997 and $1.0 million
in 1996. Common stock is issued primarily to participants in the Company's
employee stock purchase plan, pursuant to exercises of stock options granted to
employees, and in connection with the Management Stock Purchase Loan Plan. The
company repurchased $2.0 million of its common stock in the open market under
its existing share repurchase program, for which authorization to repurchase
327,060 shares remained at June 26, 1998.
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 26, 1998, Scott & Stringfellow's
regulatory net capital of $15.9 million exceeded the minimum requirement by
approximately $13.3 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.
The Company is exposed to some degree of market risk, the risk of loss
arising from adverse changes in the fair value of financial instruments. Market
risk represents the potential loss the Company may incur as a result of absolute
and relative price movements in financial instruments due to changes in interest
rates, foreign exchange rates, equity prices, and other political factors.
The Company is not subject to significant direct market risk due to changes in
foreign exchange rates. However, the Company is subject to market risk as a
result of changes in interest rates and equity prices which are impacted by
global economic conditions. The principal source of this risk arises from
13.3
<PAGE>
maintaining securities inventory positions and trading and market-making in
these securities. The Company carries inventories of marketable securities
including equities and municipal, U.S. government, and corporate fixed income
securities primarily for re-sale to its retail brokerage customers. The Company
is exposed to interest rate risk on its fixed income securities due to changes
in the level of interest rates, interest rate volatility, and the shape of the
yield curve in various markets. The Company is exposed to equity price risk
due to changes in the leval and volatility of equity prices primarily in the
NASDAQ and over-the-counter markets. The Company controls its market risk
primarily through notional limits on trading inventories. In addition, the
Company attempts to control interest rate risk on its long municipal bond
and corporate bond inventories through maintaining short cash positions in U.S.
government obligations. The Company does not use index futures, options nor
derivative instruments in managing risk in its securities inventories. The
following table shows the fair market value of the Company's long, short,
and net positions, with weighted average maturities for fixed income securities,
and overall position limits as of June 26, 1998:
<TABLE>
<CAPTION>
Long Short Net Limit
<S> <C>
U.S. Government, government agency
and corporate obligations $ 1,261,697 ($2,026,240) ($764,543) Long $8,000,000
(weighted average maturities of 7.8 yrs.) Short $6,000,000
State and municipal obligations - Trading 4,267,549 0 4,267,549 Long $10,000,000 (1)
(weighted average maturities of 18.1 yrs.)
State and municipal obligations -
Underwritten 686,391 0 686,391 Long $10,000,000 (1)
(weighted average maturities of 11.1 yrs)
Corporate stocks - NASDAQ/OTC Trading 2,431,193 (524,492) 1,906,701 Long $3,000,000
Short $1,500,000
Corporate stocks - Underwritten 1,373,683 0 1,373,683 None
Other securities 898,202 (19) 898,183 None
</TABLE>
(1) State and municipal obligations for both trading and underwritten
inventories are subject to aggregate position limits of $10,000,000.
RESULTS OF OPERATIONS
The results of the Company's operations over the three year period covered
by fiscal years 1998, 1997, and 1996 reflect the growth of the Company which has
resulted in increasing levels of revenues and expenses. These periods have
generally been characterized by favorable financial market conditions and
expanding markets for the Company's services. At the same time, the financial
services industry has been and continues to be in a period of significant
competitive change. Improved technology has resulted in financial information
being more widely available to the investing public, often at a lower cost.
Thus, the role of the full service retail investment broker is undergoing a
transformation to one of providing valuable investment advice and services such
as financial planning. To remain competitive, the Company continues to make
significant financial commitments, especially in the areas of technology,
recruitment of investment brokers, and the development of a capital markets
effort based upon regional equity research capabilities. The results of
operations during the past three years, therefore, reflect the costs of these
committments.
13.4
<PAGE>
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 26, 1998, June 27, 1997, and June 28, 1996, 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 1998, 1997, and 1996, respectively. Because the
Company's fiscal periods end with the last Friday of each month, the results of
operations for each of the fiscal years presented include 52 weeks of activity.
<TABLE>
<CAPTION>
CHANGES IN RESULTS OF OPERATIONS
(In thousands) 1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
Amount Percent Amount Percent
<S> <C>
Revenues
Commissions $10,658 25% $2,763 7%
Principal transactions 1,524 11% 2,727 24%
Investment banking 5,871 70% -2,202 -21%
Interest and dividends 2,014 26% 1,236 19%
Advisory and administrative fees 3,964 52% 2,974 64%
Other 426 87% 244 99%
Total revenues 24,457 30% 7,742 11%
Expenses
Employee compensation
and benefits 15,701 31% 4,376 9%
Communications 300 8% 451 14%
Occupancy and equipment 981 22% 1,428 47%
Advertising and sales promotion 689 31% 399 22%
Postage, stationery and supplies 502 22% 158 7%
Brokerage, clearing and
exchange fees 259 16% 315 24%
Data processing 513 36% 260 22%
Interest 948 31% 733 32%
Other operating expenses 897 17% 737 16%
Total expenses 20,790 28% 8,857 13%
Income before income taxes 3,667 67% -1,115 -17%
Income taxes 1,343 67% -397 -17%
Net income $ 2,324 67% $ -718 -17%
1998 Compared With 1997
</TABLE>
As a result of strong revenue growth, net income increased by 67% from 1997
to 1998. Earnings per share of $1.67 represented a record year, as did after-tax
return on equity of 18%.
Total revenues increased by $24.5 million, or 30%, in 1998 to a record
$105.4 million. Revenues increased in every major revenue category. Strong
equity market conditions, as well as internal growth, were contributing factors.
13.5
<PAGE>
Commissions revenues increased by $10.7 million, or 25%, from the prior
year. Commissions on agency trades of exchange listed equity securities
increased significantly, as did sales of mutual funds and annuities. Retail
production grew by approximately 23%, reflecting an 8% increase in the average
number of investment brokers employed, from 230 in 1997 to 249 in 1998, as well
as higher production per broker. Meanwhile, institutional commisions increased
by 121%, reflecting a strategic emphasis in institutional equity sales which
began in 1997.
Principal transactions increased by $1.5 million, or 11%, from the previous
year. 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. Sales credits from over-the-counter equity securities increased by
$0.8 million, or 9%, while sales credits from fixed income securities were flat
with the prior year. Trading profits on equity securities increased by $0.8
million from the prior year, while trading profits on fixed income securities
declined slightly.
Investment banking revenues increased significantly from the prior year.
After managing or co-managing only 5 equity offerings in 1997, the Company was
manager or co-manager on 16 offerings during 1998. As a result, commisions on
managed underwritten stocks increased by $3.7 million and equity underwriting
management fees increased by $1.9 million. The corporate finance department also
recorded a $0.5 million increase in corporate finance fees from last year. As a
result of these efforts, overall investment banking revenues were up by $5.9
million, or 70%, from 1997.
Interest and dividend income increased by $2.0 million, or 26%, from 1997
to 1998. A 27% increase in the average balances of client margin borrowings
accounted for this increase.
Advisory and administrative fees increased by $4.0 million, or 52%, from
the prior period. Investment advisory fees from Scott & Stringfellow Capital
Management increased by $1.5 million. Assets under management at Scott &
Stringfellow Capital Management were approximately $600 million at the beginning
of the fiscal year, reached over $800 million prior to the transfer of assets to
Atlantic Capital Management, LLC ("Atlantic") at the end of Feburary 1998, and
stood at over $350 million at June 26, 1998. In February 1998, the Company
transferred certain assets and assigned certain investment advisory contracts to
Atlantic, an investment advisory firm. The Company has retained a 15% membership
interest in Atlantic. In addition, significant growth in money market
distribution, 37%, and managed accounts fee income, 110%, contributed to the
increase in advisory and administrative fees.
Total expenses increased by $20.8 million, or 28%, from the prior year.
While a significant portion of this increase was attributable to expenses which
are variable with revenue, such as investment broker compensation, certain fixed
cost expense categories also increased during the year.
Employee compensation and benefits increased by $15.7 million, or 31%, from
the previous fiscal year. Compensation categories with the largest increases
included investment broker commissions and production bonuses, professional
salaries, departmental bonuses and discretionary compensation, which includes
profit sharing contributions and management bonuses. Compensation increases were
related to higher levels of gross revenue, branch and departmental
profitability, and firm profitability. In addition, the increase in professional
salaries reflected a continued build-up of capabilities within areas such as
capital markets. Higher payroll taxes and employee benefits resulted from an
increase in employee headcount; there were 616 employees at June 26, 1998 as
compared to 566 employees at June 27, 1997. The average support-to-broker
personnel ratio was 1.37 during 1998, a slight increase from 1.36 in 1997.
Communications expense, primarily comprised of telephone and market quote
services, increased by $0.3 million, or 8%. Higher costs for data communications
lines supporting the Company's intranet increased as additional applications
were added. These costs were partially offset by a decline in charges for basic
quote services.
13.6
<PAGE>
Occupancy and equipment expense increased by $1.0 million, or 22%,
primarily as a result of higher office rent expense. Additional space was taken
under the Company's headquarter lease of the Mutual Building in Richmond. In
addition, two branch offices were added and other branch offices were expanded
and renovated during the year. Depreciation for leasehold improvements, computer
equipment, and furniture and office equipment also increased as a result of
workforce growth, fixed asset replacements associated with the Mutual Building
renovoations, normal fixed asset replacements, and a full year of software
amortization of broker workstation software which was placed in service during
1997.
Advertising and sales promotion increased by $0.7 million, or 31%, due to
higher expenses for business travel, client seminars, and community relations.
Postage, stationery and supplies increased by $0.5 million, or 22%. This
increase reflected higher costs for general postage, client statement
processing, and general office supplies.
Brokerage, clearing and exchange fees increased by $0.3 million, or 16%,
due to higher brokerage transaction volumes.
Data processing costs increased by $0.5 million, or 36%, due to higher
transaction volumes. Additional costs were incurred during the year to customize
computer programming at our transaction processing service bureau. These
enhancements included projects such as automated fee processing and the linking
of client statements to result in a single mailing per household.
Interest expense increased by $0.9 million, or 31%, reflecting higher
average interest-bearing customer credit balances. In addition, bank borrowings
to finance the Company's securities inventories and growth in margin balances
also increased.
Other operating expenses increased by $0.9 million, or 17%. Business
consulting fees, used in connection with marketing Scott & Stringfellow Capital
Management's investment advisory services, increased significantly. In addition,
the Company continues to utilize third party computer consulting personnel for
support of its expanding technology infrastructure. Stock exchange fees,
correspondent research, market research, and sales training also increased from
the previous year.
1997 Compared With 1996
Net income declined by 17% from 1996 to 1997 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 . Diluted earnings per share of $1.09 equaled the third highest
total in firm history.
Total revenues increased by $7.7 million, or 11%, in 1997 to $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.
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.
13.7
<PAGE>
Equity trading profits, aided by generally favorable market conditions,
increased by $0.7 million compared to the prior year. Municipal bond trading
profits were flat 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 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 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 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 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
13.8
<PAGE>
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 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.
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, 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
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 1998, 1997, and 1996, there would not have been a
material difference between net income and comprehensive income.
13.9
<PAGE>
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 information. This standard
is effective for years beginning after December 15, 1997. Based upon initial
research, it appears the operations of the Company do not constitute more than
one segment as defined in SFAS 131. The Company will continue to assess the
methodologies for compliance and reporting under SFAS 131.
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
Accounting for Derivative Instruments and Hedging Activities, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. The standard requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends upon its intended use. For example, gains and losses
related to certain types of hedging activities are reported outside of the
statement of earnings while gains and losses related to non-hedging activities
are included in earnings. Based upon initial research, and the fact the Company
does not currently and has no current intentions to utilize derivative
instruments in the future, it is expected SFAS 133 will have little, if any,
effect on the Company's financial position or results of operations.
YEAR 2000 COMPUTER ISSUES
When the date changes to January 1, 2000, there is general concern that
some computer systems may not correctly identify the numeral "00" as the year
2000, rather than 1900 or some other date. Such an error could seriously disrupt
information processing and impede commerce. With regard to Year 2000 computer
conversion issues, the Company is in the process of determining its exposure to
material Year 2000 issues. The Company has formed a Year 2000 Committee, which
includes members of senior management, to identify and evaluate its Year 2000
issues and take corrective action. The Company relies heavily on a third party
service bureau for processing the majority of its business transactions.
Communications from the service bureau indicate that it is aware of its Year
2000 issues, has assessed these issues, and is currently in the final stages of
renovating its computer programs to make them Year 2000 compliant. The service
bureau has participated in some industry wide testing and expects to participate
in broader industry testing in the first half of calendar year 1999. We expect
their programs will be converted in time to be properly tested prior to June 30,
1999 and implemented prior to December 31, 1999. However, any failure on the
part of the service bureau to successfully correct these problems could result
in a serious disruption to the Company's ability to record and process
transactions. Virtually all of the Company's revenues are dependent on its
ability to process securities transactions on behalf of its own and its
customers' accounts. In the event the service bureau is unable to successfully
convert its core processing programs prior to the Year 2000 event, the Company
could encounter significant operational difficulties. Although it may have
alternative courses of action available such as conversion to another service
bureau, the Company does not currently have a written contingency plan in such
an event.
The Company maintains other computer systems and relies on other third
party service bureaus for a variety of data processing tasks. Most of the
computer programs are relatively new products and are believed to be Year 2000
compliant based upon communications from vendors. In addition, the Company
relies on financial institutions and service providers such as
telecommunications companies, commercial banks, clearing and depositary
institutions, landlords, and vendors for information technology and
non-information technology services which are crucial to the continued operation
of its business. While the Company has identified the important third party
service providers and is currently in the stage of assessing their state of
readiness for the Year 2000 event, there can be no assurance that one or more of
these service providers will not experience problems which could disrupt the
Company's operations. As the activities of the Year 2000 Committee are being
carried out with existing personnel, management does not currently believe the
costs to address the Year 2000 issues will have a material effect on its
financial position or results of operations.
13.10
<PAGE>
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.
13.11
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 26, June 27,
1998 1997
<S> <C>
ASSETS
Cash and cash equivalents $ 3,218,034 $ 6,566,361
Cash segregated under Federal regulations 5,397 670,044
Receivable from brokers, dealers and
clearing organizations (note 2) 8,342,188 2,256,973
Receivable from customers (note 3) 123,667,772 90,404,457
Trading and investment securities,
at market value (note 4) 12,470,571 13,548,274
Exchange memberships, at adjusted cost
(market value $3,151,500 in 1998 and $2,761,500 in 1997) 838,100 838,100
Equipment and leasehold improvements, at
cost (less accumulated depreciation and amortization of
$6,726,774 in 1998 and $6,240,658 in 1997) 4,993,196 4,075,051
Deferred income taxes (note 7) 1,703,429 1,087,429
Other assets (note 9) 12,754,076 10,406,848
Total Assets $167,992,763 $129,853,537
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term bank loans (note 5) 18,900,000 4,950,000
Payable to brokers, dealers and
clearing organizations (note 2) 6,134,290 4,714,494
Payable to customers (note 3) 89,810,049 77,976,229
Securities sold, but not yet purchased,
at market value (note 4) 2,550,751 545,978
Accounts payable, accrued compensation
and other liabilities (note 8) 16,311,773 12,489,184
Total Liabilities 133,706,863 100,675,885
Stockholders' Equity (notes 6, 8, 10 and 11)
Common stock, $0.10 par value. Authorized
10,000,000 shares; issued and outstanding
3,277,657 in 1998 and 3,172,946 in 1997 327,767 317,295
Additional paid-in capital 15,430,595 12,540,734
Retained earnings 20,251,287 17,384,953
Subscriptions receivable -1,723,749 -1,065,330
Total Stockholders' Equity 34,285,900 29,177,652
Commitments and Contingencies (notes 12 and 13)
Total Liabilities and Stockholders' Equity $167,992,763 $129,853,537
</TABLE>
See notes to consolidated financial statements.
13.12
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
June 26, June 27, June 28,
1998 1997 1996
<S> <C>
REVENUES
Commissions $ 53,323,402 $42,665,846 $39,902,423
Principal transactions 15,410,960 13,886,838 11,159,434
Investment banking 14,228,186 8,357,622 10,559,244
Interest and dividends 9,870,634 7,856,697 6,621,355
Advisory and administrative
service fees 11,615,333 7,651,131 4,677,522
Other income 915,487 489,077 245,327
Total Revenues 105,364,002 80,907,211 73,165,305
EXPENSES
Employee compensation and
benefits (notes 8 and 11) 67,078,140 51,377,400 47,001,154
Communications 4,055,802 3,755,984 3,305,237
Occupancy and equipment 5,466,961 4,485,341 3,057,326
Advertising and sales promotion 2,929,536 2,240,461 1,841,300
Postage, stationery and supplies 2,788,841 2,287,018 2,128,837
Brokerage, clearing and
exchange fees 1,886,275 1,627,275 1,312,314
Data processing 1,953,121 1,440,231 1,180,086
Interest 3,960,308 3,012,398 2,280,110
Other operating expenses 6,125,097 5,228,124 4,491,128
Total Expenses 96,244,081 75,454,232 66,597,492
Income before income taxes 9,119,921 5,452,979 6,567,813
Income taxes (note 7) 3,338,000 1,995,400 2,392,100
Net income $ 5,781,921 $ 3,457,579 $ 4,175,713
Earnings per common share:
Basic $ 1.81 $ 1.12 $ 1.30
Diluted $ 1.67 $ 1.09 $ 1.28
</TABLE>
See notes to consolidated financial statements.
13.13
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 26, 1998, June 27, 1997, and June 28, 1996
<TABLE>
<CAPTION>
Common Stock Additional Subscrip-
Number of Paid-in Retained tions
Shares Amount Capital Earnings Receivable Total
<S> <C>
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
Issuance of common stock
(notes 8, 10 and 11) 193,436 19,344 3,207,953 - -843,245 2,384,052
Purchase and retirement of
common stock (note 10) -88,725 -8,872 -318,092 -1,721,689 - -2,048,653
Subscriptions received - - - - 184,826 184,826
Cash dividends
($0.37 per share) - - - -1,193,898 - -1,193,898
Net income - - - 5,781,921 - 5,781,921
Balance at June 26, 1998 3,277,657 $ 327,767 $ 15,430,595 $ 20,251,287 $-1,723,749 $34,285,900
</TABLE>
See notes to consolidated financial statements.
13.14
<PAGE>
SCOTT & STRINGFELLOW FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 26, June 27, June 28,
1998 1997 1996
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,781,921 $ 3,457,579 $ 4,175,713
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 2,002,298 1,767,026 920,418
Losses on disposition of fixed assets 24,045 173,326 829
Deferred income taxes -616,000 -448,000 -314,000
Allowance for doubtful accounts 68,113 -35,882 -24,497
Changes in assets and liabilities:
Cash segregated under Federal regulations 664,647 -669,417 5,176
Receivable from brokers, dealers and
clearing organizations -6,085,215 2,516,910 -2,448,268
Receivable from customers -33,243,364 -11,742,050 -13,698,032
Trading securities 1,503,768 -594,510 506,367
Other assets 61,468 761,671 -1,963,476
Payable to brokers, dealers
and clearing organizations 1,419,796 2,487,118 1,334,382
Payable to customers 11,833,820 17,398,465 9,795,185
Securities sold, but not yet purchased 2,004,773 -1,826,138 1,801,328
Accounts payable, accrued compensation
and other liabilities 3,780,442 620,173 4,100,258
Net cash provided by (used for) operating activities -10,799,488 13,866,271 4,191,383
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of not readily
marketable securities 122,931 77,658 260,077
Purchases of not readily marketable securities -548,996 -90,700 -340,899
Proceeds from disposition of fixed assets 87,823 30,623 911
Purchases of fixed assets -3,019,498 -3,060,192 -1,719,691
Repayments of loans receivable 130,753 176,165 81,018
Increase in loans receivable -2,645,356 -2,568,048 -1,405,521
Net cash used for investing activities -5,872,343 -5,434,494 -3,124,105
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in drafts payable - -4,068,235 2,642,850
Net change in short-term bank loans 13,950,000 1,350,000 -3,000,000
Cash dividends paid -1,146,720 -1,003,409 -857,641
Purchase and retirement of common stock -2,048,653 -4,296,161 -19,138
Issuance of common stock 2,568,877 1,548,070 1,009,589
Net cash provided by (used for) financing activities 13,323,504 -6,469,735 -224,340
Net increase (decrease) in cash and cash equivalents -3,348,327 1,962,042 842,938
Cash and cash equivalents at beginning of year 6,566,361 4,604,319 3,761,381
Cash and cash equivalents at end of year $ 3,218,034 $ 6,566,361 $ 4,604,319
Cash paid during the year for interest $ 3,950,703 $ 3,008,337 $ 2,297,495
Cash paid during the year for income taxes $ 4,194,725 $ 2,468,975 $ 2,570,481
</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 31 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.
The Company's fiscal years presented in this report include the years ended June
26, 1998, June 27, 1997, and June 28, 1996, and are referred to as 1998, 1997,
and 1996, respectively. Because the Company's fiscal years end with the last
Friday of each month, the results of operations, changes in shareholders'
equity, and cash flows for each of the fiscal years presented include 52 weeks
of activity.
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 carrying value of all financial
assets and liabilities on the consolidated statements of financial condition
approximates 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 26, 1998 and June 27, 1997, cash equivalents included $1,211,081 and
$778,134 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.
13.16
<PAGE>
I. EARNINGS PER COMMON SHARE. The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 128, which established 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. Under the
new standard, basic earnings per share are calculated by dividing net income by
the average common shares outstanding during the period. Diluted earnings per
share is computed using the average common shares outstanding during the period,
including the effect of potential dilutive shares. Potential dilutive shares
include unexercised stock options and are determined using the treasury stock
method.
The number of shares used in the basic and diluted earnings per share
calculations are as follows:
<TABLE>
<CAPTION>
Year Ended
June 26, June 27, June 28,
1998 1997 1996
<S> <C>
Average common shares outstanding 3,199,811 3,079,290 3,223,989
Dilutive potential shares from unexercised
stock options 265,466 80,611 32,106
Average common shares and dilutive potential
shares outstanding 3,465,277 3,159,901 3,256,095
</TABLE>
J. STOCK OPTION PLAN. 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 allows entities to continue to apply
the provisions of APB Opinion No. 25, which does not require entities to
recognize any expense as a result of stock option awards, and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants made in 1996 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:
<TABLE>
<CAPTION>
June 26, June 27,
1998 1997
<S> <C>
Receivable from brokers, dealers, and
clearing organizations:
Securities failed to deliver $ 1,186,487 $ 264,793
Deposits paid for securities borrowed 6,224,000 1,821,989
Receivable from clearing organizations 931,701 170,191
Total $ 8,342,188 $ 2,256,973
Payable to brokers, dealers, and
clearing organizations:
Securities failed to receive $ 1,033,694 $ 580,238
Deposits received for securities loaned 3,117,691 3,610,700
Payable to clearing organizations 1,982,905 523,556
Total $ 6,134,290 $ 4,714,494
</TABLE>
13.17
<PAGE>
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:
<TABLE>
<CAPTION>
June 26, June 27,
1998 1997
<S> <C>
Receivable from officers and directors $ 3,722,295 $ 2,543,815
Payable to officers and directors $ 472,600 $ 889,807
</TABLE>
NOTE 4. TRADING AND INVESTMENT SECURITIES
Trading and investment securities consist of the following:
<TABLE>
<CAPTION>
June 26, June 27,
1998 1997
<S> <C>
Owned:
Marketable securities, at market value:
U.S. government and government
agency obligations $ 514,605 $ 420,896
State and municipal obligations 4,953,940 8,694,168
Corporate bonds 747,092 806,508
Corporate stocks 3,804,876 2,248,043
Other 898,202 466,385
Sub-total 10,918,715 12,636,000
Not readily marketable securities, at
estimated fair value 1,551,856 912,274
Total $12,470,571 $13,548,274
Sold, but not yet purchased, at market value:
U. S. Government and government
agency obligations $ 2,026,240 $ 28,727
State and municipal obligations - -
Corporate stocks 524,492 479,486
Other 19 37,765
Total $ 2,550,751 $ 545,978
</TABLE>
NOTE 5. SHORT-TERM BANK LOANS
The Company maintains lines of credit from commercial banks totaling $60
million, of which $18.9 million was outstanding at June 26, 1998. Additional
bank credit facilities are available on a short-term basis for the purpose of
financing securities underwritings. Short-term bank loans are secured by
customer-owned securities purchased on margin or firm-owned securities. The
market value of firm-owned securities pledged as collateral at June 26, 1998 was
$5,840,497. The market value of customer-owned securities pledged as collateral
at June 26, 1998 was $36,006,810. Secured short-term bank loans are generally
made at interest rates not exceeding the bank's broker call rate (7.25% at June
26, 1998) and are payable on demand. The Company also borrows from banks on an
unsecured basis. Included in short-term bank loans at June 26, 1998 were
unsecured loans of $2,500,000.
13.18
<PAGE>
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 26, 1998,
Scott & Stringfellow's net capital of $15,896,542 was 12% of aggregate debit
balances and was $13,320,893 in excess of the minimum net capital required.
NOTE 7. INCOME TAXES
The provision for income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year Ended
June 26, June 27, June 28,
1998 1997 1996
<S> <C>
Current:
Federal $ 3,337,000 $ 2,080,000 $ 2,301,100
State 617,000 363,400 405,000
Total current 3,954,000 2,443,400 2,706,100
Deferred:
Federal -511,000 -374,000 -261,000
State -105,000 -74,000 -53,000
Total deferred -616,000 -448,000 -314,000
Total $ 3,338,000 $ 1,995,400 $ 2,392,100
</TABLE>
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 26, June 27, June 28,
1998 1997 1996
<S> <C>
Federal tax, computed at
statutory rate $ 3,100,773 $ 1,854,013 $ 2,233,056
State income taxes, net of
Federal tax benefit 338,301 190,321 232,643
Tax-exempt interest and dividends,
net of non-deductible carrying
charges -84,533 -37,142 -94,105
Meals and entertainment 111,645 79,155 46,488
Increase in cash surrender value of life insurance policies -162,169 -112,776 -31,145
Other, net 33,983 21,829 5,163
Income tax expense 3,338,000 $ 1,995,400 $ 2,392,100
</TABLE>
13.19
<PAGE>
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 26, June 27,
1998 1997
<S> <C>
Deferred tax assets:
Deferred compensation $ 1,469,692 $ 953,712
Accrued expenses for financial reporting purposes 277,922 284,165
Loans receivable, principally due to allowance for
doubtful accounts 35,188 1,283
Other, principally due to differences in assigned
values and tax bases of investments 62,711 -
Total gross deferred tax assets 1,845,513 1,239,160
Less: valuation allowance - -
Deferred tax assets 1,845,513 1,239,160
Deferred tax liabilities:
Exchange seats, principally due to differences in
assigned values and tax bases -142,084 -142,084
Other, principally due to differences in assigned
values and tax bases of investments - -9,647
Total gross deferred tax liabilities -142,084 -151,731
Net deferred tax asset $ 1,703,429 $ 1,087,429
</TABLE>
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 $365,018, $351,262, and $307,850 were made in
1998, 1997, and 1996, respectively. Additional contributions, determined on the
basis of calendar year profitability, totaled $1,985,036 in 1998, $1,478,754 in
1997, and $1,286,750 in 1996.
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
$1,153,676 in 1998, $807,101 in 1997, and $413,289 in 1996. At June 26, 1998 and
June 27, 1997, the Company's obligations under this plan amounted to $3,817,383
and $2,380,921, 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 1998, a total of 64,847 shares of common stock were issued to this
plan at an average price of $21.32 per share. During 1997, a total of 60,340
shares of common stock were issued to the 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. 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.
13.20
<PAGE>
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
$398,965 and $443,662 at June 26, 1998 and June 27, 1997, respectively. The
loans are included in other assets in the accompanying consolidated statements
of financial condition. In addition, promissory notes in the amount of
$1,723,749 and $1,065,330 at June 26, 1998 and June 27, 1997, 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 1998, 1997, and 1996, the Company repurchased and retired 88,725, 36,239,
and 201,392 shares, respectively, of its common stock. Of the shares
repurchased, 53,884 were repurchased from directors at a cost of $1,241,050 in
1998, 25,308 were repurchased from directors at a cost of $488,125 in 1997, and
29,758 were repurchased from directors at a cost of $565,402 in 1996.
During 1998, 1997, and 1996, the Company issued 37,000; 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
Purchase Loan Plan in exchange for promissory notes with original face amounts
totaling $809,375 in 1998, $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 5.39% to 6.23% during 1998. The notes are full 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 26, 1998. In addition, non-qualified
options were granted to a limited number of employees after the expiration of
the Plan. 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 26, 1998,
June 27, 1997, and June 28, 1996, 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 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
Granted 25,000 19.13
Canceled -24,894 9.48
Exercised -66,589 7.09
Outstanding June 26, 1998 525,708 9.93
<PAGE>
The following table summarizes information about stock options outstanding at
June 26, 1998:
<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 12,060 4.4 years $ 4.41 12,060 $ 4.41
6.00 - 9.00 223,598 7.7 7.74 138,908 7.70
9.00 - 19.13 290,050 9.3 11.84 11,430 9.42
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C>
Net Income As Reported $ 5,781,921 $ 3,457,579 $ 4,175,713
Pro Forma $ 5,488,457 3,251,445 4,158,726
Basic earnings
per share As Reported $ 1.81 $1.12 $1.30
Pro Forma 1.72 1.06 1.29
Diluted
earnings per share As Reported $ 1.67 $ 1.09 $ 1.28
Pro Forma 1.58 1.03 1.28
</TABLE>
Pro forma net income reflects only options granted in fiscal 1998, 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 July 1,
1995 is not considered.
The per share weighted-average fair value of stock options granted during fiscal
1998, 1997 and 1996 was $8.80, $5.56 and $3.80, respectively, on the date of
grant using the binomial option pricing model with the following
weighted-average assumptions: 1998 - expected dividend yield 1.88%, risk-free
interest rate of 5.35%, expected volatiliy of 32.2%, and expected life of 7.1
years; 1997 - expected dividend yield 2.72%, risk-free interest rate of 6.56%,
expected volatility of 32.2%, 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.
13.22
<PAGE>
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 26, 1998 are as
follows:
<TABLE>
<CAPTION>
Year Minimum Rental Commitments
Office Space Equipment Total
<S> <C>
1999 $ 2,915,546 $ 616,987 $ 3,532,533
2000 2,730,109 582,810 3,312,919
2001 2,724,289 349,759 3,074,048
2002 2,447,917 147,944 2,595,861
2003 1,997,222 120,132 2,117,354
Thereafter 3,862,470 35,231 3,897,701
Total $ 16,677,553 $ 1,852,863 $18,530,416
</TABLE>
Some of the Company's leases contain escalation clauses and renewal options.
Total rent expense under operating leases approximated $3,214,000 in 1998,
$2,660,000 in 1997, and $2,341,000 in 1996.
As of June 26, 1998, the Company had a $3.0 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 26,
1998 or June 27, 1997.
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>
NOTE 14. SUBSEQUENT EVENT
On August 10, 1998, the Company announced an agreement of merger with BB&T
Corporation. Under the agreement, which is subject to the approval of regulators
and the shareholders of the Company, one share of BB&T common stock will be
exchanged for each share of the Company's common stock. The transaction is
expected to be accounted for as a purchase.
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
26, 1998 and June 27, 1997, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the years ended June 26,
1998, June 27, 1997 and June 28, 1996. 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 26, 1998 and June 27,
1997, and the results of their operations and their cash flows for the years
ended June 26, 1998, June 27, 1997 and June 28, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
August 14, 1998
13.25
<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 1998 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
Senior Vice President and Chief Financial Officer
/s/ C. Lewis Loth
C. Lewis Loth
Vice President and Treasurer
13.26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
1998 June 26 March 27 December 31 September 26
<S> <C>
Revenues $ 26,414 $ 26,179 $ 27,327 $ 25,444
Expenses 24,602 24,156 24,616 22,870
Income before income taxes 1,812 2,023 2,711 2,574
Income taxes 639 755 995 949
Net income $ 1,173 $ 1,268 $ 1,716 $ 1,625
Earnings per share - diluted $0.33 $0.37 $0.50 $0.48
Quarter Ended
1997 June 27 March 27 December 31 September 27
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 share - diluted $0.33 $0.19 $0.30 $0.28
</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 26, 1998, there were
303 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 26, 1998 and June 27, 1997.
<TABLE>
<CAPTION>
Common Stock Prices (1) Dividends Per Share (1)
1998 1997 1998 1997
High Low High Low
<S> <C>
First Quarter $ 26.25 $ 17.75 $ 12.33 $ 11.33 $ .09 $ .08
Second Quarter 29.75 25.25 12.83 11.67 .09 .08
Third Quarter 26.25 20.25 17.33 12.83 .09 .08
Fourth Quarter 26.00 22.25 20.00 13.50 .10 .09
</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
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Scott & Stringfellow Financial, Inc.:
We consent to 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 14, 1998, relating to the consolidated statements of
financial condition of Scott & Stringfellow Financial, Inc. and subsidiaries as
of June 26, 1998 and June 27, 1997, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the years ended June
26, 1998, June 27, 1997 and June 28, 1996, and our report dated August 14, 1998
on the financial statement Schedule I as of June 26, 1998 and June 27, 1997 and
for the years ended June 26, 1998, June 27, 1997 and June 28, 1996, which
reports appear or are incorporated by reference in the June 26, 1998 annual
report on Form 10-K of Scott & Stringfellow Financial, Inc.
/s/KPMG Peat Marwick LLP
Richmond, Virginia
September 23, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-26-1998
<PERIOD-END> JUN-26-1998
<CASH> 3,223,431
<RECEIVABLES> 125,785,960
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 6,224,000
<INSTRUMENTS-OWNED> 12,470,571
<PP&E> 4,993,196
<TOTAL-ASSETS> 167,992,763
<SHORT-TERM> 18,900,000
<PAYABLES> 109,138,421
<REPOS-SOLD> 0
<SECURITIES-LOANED 3,117,691
<INSTRUMENTS-SOLD> 2,550,751
<LONG-TERM> 0
0
0
<COMMON> 327,767
<OTHER-SE> 33,958,133
<TOTAL-LIABILITY-AND-EQUITY> 167,992,763
<TRADING-REVENUE> 15,410,960
<INTEREST-DIVIDENDS> 9,870,634
<COMMISSIONS> 53,323,402
<INVESTMENT-BANKING-REVENUE> 14,228,186
<FEE-REVENUE> 11,615,333
<INTEREST-EXPENSE> 3,960,308
<COMPENSATION> 67,078,140
<INCOME-PRETAX> 9,119,921
<INCOME-PRE-EXTRAORDINARY> 5,781,921
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,781,921
<EPS-BASIC> 1.81
<EPS-DILUTED> 1.67
</TABLE>
