1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 33-22183
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OLDE FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Michigan 38-2722519
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
751 Griswold Street Detroit, Michigan 48226
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(Address of principal executive offices) (Zip Code)
(313) 961-6666
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, $0.10 par value 36,810,000
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Class Outstanding as of August 8, 1996
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OLDE Financial Corporation
Form 10-Q
For the Period Ended June 28, 1996
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial
Condition - June 28, 1996 (Unaudited)
and December 31, 1995 3
Consolidated Statements of Operations
Three Months and Six Months Ended
June 28, 1996 and June 30, 1995 (Unaudited) 5
Consolidated Statements of Cash Flows
Six Months Ended June 28, 1996 and
June 30, 1995 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
Forward looking statements: Some of the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other statements which are not historical facts are forward-looking statements
that involve risks and uncertainties, including but not limited to, the effect
of national and international economic and political conditions, the impact of
competitive products and services, successful introductions and acceptance of
the Company's new products and services, the effect of changes in securities
rules and regulations affecting the Company's business, the level and
volatility of interest rates, changes in customer investment product
preferences, and certain other risks.
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Part I. - Financial Information
Item 1. - Financial Statements
OLDE Financial Corporation
Consolidated Statements of Financial Condition
June 28, 1996 and December 31, 1995
June 28, December 31,
1996 1995
(Unaudited)
-------------------------------
Assets:
Cash $ 23,840,378 $ 32,545,541
Short term investments - at cost which approximates
market 21,992,542 20,388,951
U.S. Government and U.S. Government Agencies securities
purchased under agreements to resell - at resale amount 27,000,000 125,066,000
Special reserve account for benefit of customers:
U.S. Government securities purchased under
agreements to resell - at resale amount 25,242,000 10,258,000
Cash 6,073 6,808
-------------------------------
25,248,073 10,264,808
Deposits with clearing organizations:
Cash 2,009,965 1,894,061
U.S. Government and other securities - at market 3,690,126 3,827,401
-------------------------------
5,700,091 5,721,462
Receivables:
Customers 1,352,845,911 1,286,000,111
Brokers, dealers and clearing organizations 20,299,014 25,984,261
Other, including $365,831 and $513,310 from,
affiliates at June 28, 1996 and December 31, 1995,
respectively 10,992,368 9,443,661
Less reserve for doubtful accounts (1,620,097) (1,576,801)
-------------------------------
1,382,517,196 1,319,851,232
Securities owned - at market 31,043,896 45,523,348
Property and equipment - at cost less accumulated
depreciation and amortization of $26,091,348 and $21,588,842
at June 28, 1996 and December 31, 1995, respectively 57,173,589 58,764,062
Exchange memberships - at cost 814,778 814,778
Other 7,196,648 6,220,678
-------------------------------
$1,582,527,191 $1,625,160,860
===============================
See accompanying notes
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OLDE Financial Corporation
Consolidated Statements of Financial Condition
June 28, 1996 and December 31, 1995
June 28, December 31,
1996 1995
(Unaudited)
-------------------------------
Liabilities and Stockholders' Equity:
Payable to customers $ 823,447,555 $ 820,007,186
Payable to brokers and dealers 394,556,623 473,132,159
Securities sold, not yet purchased - at market 9,707,735 5,968,008
Accrued income taxes 1,967,692 3,268,127
Real estate mortgages 14,719,165 16,530,674
Capital lease obligations 5,526,346 6,483,397
Accounts payable, accrued expenses and other
including $1,249,839 and $1,000,503 to affiliates
at June 28, 1996 and December 31, 1995,
respectively 28,675,271 27,568,995
-------------------------------
1,278,600,387 1,352,958,546
Subordinated debt:
12% Senior subordinated debentures due
April, 1996 - 7,500,000
12.5% Senior subordinated debentures due
August, 1998 10,000,000 10,000,000
9.6% Senior subordinated debentures due
May, 2002 20,000,000 20,000,000
-------------------------------
30,000,000 37,500,000
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock ($0.10 par value; 40,000,000 shares
authorized; 36,810,000 and 36,745,000 shares
issued and outstanding at June 28, 1996
and December 31, 1995, respectively) 3,681,000 3,674,500
Retained earnings 270,245,804 231,027,814
-------------------------------
Total stockholders' equity 273,926,804 234,702,314
-------------------------------
$1,582,527,191 $1,625,160,860
===============================
See accompanying notes.
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OLDE Financial Corporation
Consolidated Statements of Operations
For the Three Months and Six Months Ended
June 28, 1996 and June 30, 1995
(Unaudited)
Three Months Ended Six Months Ended
June 28, June 30, June 28, June 30,
1996 1995 1996 1995
------------------------- --------------------------
Revenues:
Commissions $ 40,600,794 $31,698,449 $ 77,289,131 $ 61,193,375
Principal transactions 34,680,660 35,034,994 66,890,369 67,877,101
Interest 26,309,785 22,851,799 51,991,789 43,923,158
Other 3,898,765 2,611,730 7,163,538 5,159,076
------------------------- --------------------------
Total revenues 105,490,004 92,196,972 203,334,827 178,152,710
Expenses:
Employee compensation and benefits 35,982,301 30,165,964 67,266,313 57,135,999
Commissions, floor brokerage and fees 2,509,244 2,284,785 5,080,377 4,755,451
Communications 2,914,692 2,364,662 5,481,447 4,780,872
Advertising and promotional 4,813,305 4,585,614 8,753,148 8,844,535
General and administrative 7,775,372 5,215,312 14,307,147 9,301,770
Interest 12,068,461 9,716,641 23,797,220 18,677,066
Occupancy 5,653,958 4,649,592 11,724,443 9,279,590
Data processing and supplies 2,436,757 2,042,387 4,949,590 3,993,831
------------------------- --------------------------
Total expenses 74,154,090 61,024,957 141,359,685 116,769,114
------------------------- --------------------------
Income before income taxes 31,335,914 31,172,015 61,975,142 61,383,596
Income tax provision 11,610,000 11,924,000 23,166,000 23,357,000
------------------------- --------------------------
Net income $ 19,725,914 $19,248,015 $ 38,809,142 $ 38,026,596
========================= ==========================
Net income per common share $ 0.53 $ 0.52 $ 1.05 $ 1.02
========================= ==========================
Weighted average shares
outstanding 36,810,000 37,195,000 36,781,167 37,198,315
========================= ==========================
See accompanying notes
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OLDE Financial Corporation
Consolidated Statements of Cash Flows
For the Six Months Ended
June 28, 1996 and June 30, 1995
(Unaudited)
Six Months Ended
June 28, June 30,
1996 1995
---------------------------
Cash flows from operating activities:
Net income $ 38,809,142 $ 38,026,596
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,501,239 3,816,212
(Increase) decrease in:
Special reserve account for benefit of customers (14,983,265) (138,303,535)
Deposits with clearing organizations 21,371 758,508
Receivables from customer (66,845,800) 18,532,777
Receivables from brokers, dealers, and clearing organizations 5,685,247 (8,206,289)
Receivables from others (1,505,411) 53,831
Securities purchased under agreements to resell 98,066,000 (7,012,000)
Securities owned 14,479,452 (6,963,601)
Other assets, net (975,970) 1,319,269
Increase (decrease) in:
Payables to customers 3,440,369 109,886,862
Payables to brokers and dealers (78,575,536) (8,239,872)
Securities sold, not yet purchased 3,739,727 1,125,646
Accrued income taxes (1,300,435) (369,771)
Accounts payable, accrued expenses and other liabilities 1,106,274 3,828,189
---------------------------
Net cash provided by (used in) operating activities (5,662,404) 8,252,822
Cash flows used in investing activities:
Capital expenditures (2,910,766) (6,521,802)
Cash flows provided by (used in) financing activities:
Issuance of common stock 415,350 -
Redemption of common stock - (853,917)
Payment of Senior Subordinated Debt (7,500,000) -
Principal payments on real estate mortgages (1,811,509) (1,170,470)
Real estate mortgages obtained - 6,927,500
Principal payments on capital lease obligations (957,051) (1,877,094)
---------------------------
Net cash used in financing activities (9,853,210) 3,026,019
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Net increase (decrease) in cash (7,101,572) 4,757,039
Cash and cash equivalents at the beginning of period 52,934,492 49,078,410
---------------------------
Cash and cash equivalents at end of period $ 45,832,920 $ 53,835,449
===========================
See accompanying notes
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OLDE Financial Corporation
Notes to Consolidated Financial Statements
June 28,1996
(Unaudited)
1. Business
The accompanying financial statements present the consolidated financial
statements of the Company and its subsidiaries, OLDE Discount Corporation
("OLDE Discount"), American Brokerage Services, Inc. ("ABS"), OLDE Asset
Management , Inc. ("OAM"), OLDE Realty Corporation ("ORC"), OLDE Property
Corporation ("OPC"), OLDE Equipment Corporation ("OEC"), Realty Acquisitions,
Inc. ("RAI"), and Smart Travel, Inc. ("STI"). Material intercompany balances
have been eliminated for all periods presented.
The Company is a financial services company. OLDE Discount engages in a
discount securities brokerage business primarily for retail customers
throughout the United States. OLDE Discount also engages in market making and
specialist activities in common stocks and is a dealer in corporate and
municipal bonds and U. S. Government securities.
Other products and services provided to customers include: stock research and
recommendations; money market funds with sweep provisions for settlement of
customer transactions; fixed-income products; mutual funds; margin accounts;
accounts offering checking privileges; option accounts; and individual
retirement accounts with no annual fee.
OAM provides portfolio management and administrative services to the OLDE
Custodian Fund, a mutual fund sponsor. ORC, OPC, and RAI are engaged in the
acquisition, ownership and operation of commercial real estate, leased
primarily to OLDE Discount. OEC leases computer hardware and software to OLDE
Discount. STI provides travel management and purchasing services primarily to
OLDE Discount. ABS is currently inactive.
2. Significant accounting policies
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, which consist only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
at June 28, 1996 and December 31, 1995, and the results of its operations and
its cash flows for the periods ended June 28, 1996 and June 30, 1995. The
Company's accounting policies have been consistently followed. These unaudited
consolidated financial statements should be read in conjunction with the
Company's annual report on Form 10-K, and periodic reports on other Forms 10-Q.
Results for interim periods may not be indicative of results for the entire
year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
OLDE Discount is a registered securities broker-dealer and accounts for
securities transactions (and related commission revenue and expense) on the
trade date basis. The risk of loss on transactions as of trade date is
equivalent to the risk of loss on settlement date and relates to customers' or
other brokers' inability to meet the terms of contracts. Credit risk is
reduced by obtaining and maintaining adequate collateral until the contract is
settled.
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OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
2. Significant accounting policies (continued)
The Company is a party to financial instruments with off balance sheet risk in
its normal course of business. The Company is required, in the event of the
non-delivery of customers' securities owed the Company by other broker-dealers,
or by its customers, to purchase identical securities in the open market. Such
purchases could result in losses not reflected in the accompanying financial
statements.
Securities owned and securities sold, not yet purchased, are carried at market
value. Unrealized gains and losses are reflected in operations. Sales of
securities not yet purchased represent an obligation of the Company to deliver
specified securities at a predetermined date and price. The Company will be
obligated to acquire the required securities at prevailing market prices in the
future to satisfy this obligation.
Securities purchased under agreements to resell are treated as financing
transactions and are carried at the amounts at which the securities will be
subsequently resold as specified in the respective agreements. Collateral
relating to investments in repurchase agreements is held by independent
custodian banks. The securities are valued daily and collateral added whenever
necessary to bring the market value of the underlying collateral equal to or
greater than the repurchase price specified in the contracts.
Depreciation and amortization are provided using both straight-line and
accelerated methods over estimated useful lives of three to thirty nine years.
Leasehold improvements are amortized using both straight-line and accelerated
methods.
The Company considers all non-segregated highly liquid investments (short-term
investments) with a maturity of three months or less when purchased to be cash
equivalents.
The Company does not provide post-employment retirement benefits for any of its
officers, directors or employees.
3. Special reserve account for benefit of customers
U.S. Government securities purchased under agreements to resell and cash have
been segregated in a special reserve account for the exclusive benefit of
customers pursuant to federal regulations under Rule 15c3-3 of the Securities
Exchange Act of 1934.
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OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4. Receivables
Receivables from customers include amounts due on margin and cash transactions.
The receivables are collateralized by customers' securities held, which are
not reflected in the financial statements.
Receivables from brokers generally are collected within thirty days and are
collateralized by securities in physical possession, on deposit, or receivable
from customers or other brokers. The Company does business with brokers that
for the most part are members of the major securities exchanges.
The Company monitors the credit standing of broker-dealers and customers with
whom it conducts business. In addition, the Company monitors the market value
of collateral held and the market value of securities receivable from others.
The Company obtains additional collateral if insufficient protection against
loss exists.
5. Securities lending
At June 28, 1996, funds obtained under securities lending agreements amounted
to $393.8 million. Securities loaned are securities held by customers on
margin. When loaning securities OLDE Discount receives cash collateral
approximately equal to the value of the securities loaned. The amount of cash
collateral is adjusted daily for market fluctuations in the value of the
securities loaned. Interest rates paid on the cash collateral fluctuate with
short-term interest rates.
6. Bank lines of credit, debt, commitments and contingencies
At June 28, 1996, bank lines of credit available to OLDE Discount amounted to
$180 million. A line of credit in the amount of $80 million may be withdrawn
at the discretion of the bank. A $100 million committed line of credit expires
on August 28, 1996 and, subject to the terms of the agreement, may be extended
for one year at the bank's discretion. Separate commitments for letters of
credit in the amount of $45 million were also available. Short-term bank loans
outstanding under the lines of credit are payable either on demand or upon
expiration of the line of credit and are collateralized by marketable
securities carried for the accounts of margin customers. Loans outstanding
bear interest at broker loan rates.
There were no borrowings under these lines of credit at June 28, 1996 or
December 31, 1995. During 1995 and 1996, there were no compensating balance
requirements related to these lines of credit.
As of June 28, 1996, OLDE Discount had provided a clearing corporation with
letters of credit totaling $30 million which satisfied margin deposit
requirements of $23.5 million. These letters of credit are secured by
customers' margin securities.
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OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
6. Bank lines of credit, debt, commitments and contingencies (continued)
OLDE Discount leases office facilities over varying periods extending to 2005.
The Company's approximate minimum annual rental commitments under
noncancellable operating leases are as follows:
1996 $ 2,534,000
1997 4,010,000
1998 2,751,000
1999 2,034,000
2000 1,135,000
Thereafter 944,000
-----------
$13,408,000
===========
Certain of the office leases contain renewal options ranging from one to five
years. The office leases generally provide for rent escalation resulting from
increased real estate assessments for real estate taxes and other charges.
Rental expense for office facilities under noncancellable operating leases was
$3,797,100 and $3,002,400, respectively for the six month periods ended June
28, 1996 and June 30, 1995.
OLDE Discount is a defendant in a number of civil actions arising out of its
business as a broker-dealer, including a consolidated class action in Federal
court which alleges that 33 securities dealers conspired to fix and maintain
artificial bid-ask spreads on certain securities traded in the National
Association of Securities Dealers Automated Quotation System ("Nasdaq")
over-the-counter market, and other purported class actions. The Company
believes it has meritorious defenses against these claims and intends to assert
them vigorously. It is management's opinion that the disposition of these
claims will not have a material adverse effect on the financial condition of
the Company.
OLDE Discount is the subject of an investigation by the Securities and Exchange
Commission ("SEC"). The investigation has focused on certain sales practices
of the broker-dealer. OLDE Discount has cooperated fully with the SEC and does
not believe that the broker-dealer has engaged in improper activity. However,
at this time this investigation has not been concluded. The SEC may seek to
impose a fine and/or other remedial sanctions on OLDE Discount and/or its
employees.
The Company, its principal shareholder, OLDE Discount and certain affiliates
("the OLDE Parties") and others, have been named as defendants in a civil
action filed on March 17, 1992 by a former executive of the firm. The complaint
alleges various tort, contractual, and statutory claims relative to OLDE
Discount's termination of the former executive's employment, for cause, and
seeks damages of over $20 million together with costs, interest and attorney's
fees. The court issued an order compelling the former executive to arbitrate
substantially all of his claims against the OLDE parties. The Court of Appeals
has compelled arbitration of the remainder of the claims. The Company intends
to vigorously defend all claims that have been made against it in this matter,
and believes that there are substantial meritorious defenses to the causes of
action that have been alleged.
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OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
7. Net capital requirements
OLDE Discount is required to maintain minimum net capital as defined under Rule
15c3-1 of the Securities Exchange Act of 1934 and has elected to comply with
the alternative net capital requirement, which requires a broker-dealer to
maintain minimum net capital equal to the greater of $250,000 or 2% of the
combined aggregate debit balances arising from customer transactions, as
defined. The net capital rule also provides that equity capital may not be
withdrawn or cash dividends paid if resulting net capital would be less than
the greater of 5% of combined aggregate debit items or $250,000. At June 28,
1996, OLDE Discount's net capital of $244.1 million, which was 18% of aggregate
debit items, exceeded by $216.3 million its minimum required net capital of
$27.8 million.
8. Income taxes
The difference between the Company's effective tax rate and the statutory tax
rate is attributable primarily to the effect of state and local taxes.
The Company paid approximately $25.9 million and $22.9 million in income taxes
for the six month periods ending June 28, 1996 and June 30, 1995, respectively.
9. Related party transactions
Directors and officers of the Company and their associates maintain cash and
margin accounts with OLDE Discount and execute securities transactions through
OLDE Discount in the ordinary course of business.
OLDE Discount purchases significant advertising and promotional material from
Financial Marketing Services, Inc. ("FMS"), a Michigan corporation wholly-owned
by the majority shareholder of the Company, and North American Printing Company
("North American") formerly Sumner Press, Ltd., a Canadian company controlled
by FMS. North American supplies FMS with substantially all of OLDE Discount's
printed advertising materials. OLDE Discount has agreed to purchase
substantially all of its printed materials from FMS. Minimum annual
advertising purchases under this agreement will be $2.4 million through 1997.
In total, the Company's advertising purchases from FMS amounted to
approximately $5.5 million and $6.3 million for the six months ending June 28,
1996 and June 30, 1995, respectively. Other subsidiaries of FMS charged the
Company approximately $451,000 and $441,000 primarily for mailing and general
services for the same periods, respectively.
Cash disbursements (including deposits made for future deliveries) for office
furnishings, office renovation, remodeling materials and other supplies from
Canadian Consumer League, Inc., a company owned by the Company's majority
shareholder, amounted to approximately $685,000 and $1.9 million, respectively
for the six month periods ended June 28, 1996 and June 30, 1995.
Future rental commitments (see Note 6) include amounts payable to the Company's
majority stockholder under various operating leases covering the Company's and
OLDE Discount's corporate headquarters and other facilities. The leases expire
in 2000, and provide for monthly rental payments of $39,659, $13,148 and
$14,500. OLDE Discount pays utilities, real estate taxes and other occupancy
expenses under these leases.
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OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
9. Related party transactions (continued)
At June 28, 1996 and December 31, 1995, the Company held investments of $22
million and $20.4 million, respectively, in shares of money market mutual funds
sponsored and managed by subsidiaries of the Company.
10. Estimated fair values of financial instruments
Generally accepted accounting principles currently require disclosure of
estimated fair values of financial instruments. The Company uses present value
techniques to determine the estimated values of its financial instruments where
quoted market values are not available. These techniques require judgment, and
the estimates may be significantly affected by the assumptions made. A portion
of the Company's financial instruments are securities, traded in nationally
recognized financial markets. These instruments are carried in the Company's
financial statements at quoted market value or the market value for comparable
securities which represents estimated fair value. Changes in market values of
these instruments are reflected in current operating results.
A substantial portion of the Company's other financial instruments, consisting
primarily of customer margin loans and customer credit balances, earn or pay
rates of interest that change in accordance with general changes in short-term
interest rates. Such instruments are carried in the financial statements at
the amount receivable or payable on demand, which is considered to be the
estimated fair value. Outstanding subordinated debentures of the Company pay
rates of interest fixed at the time of their issuance. The estimated value of
these debentures fluctuates inversely to changes in interest rates. The excess
of estimated market value of the debentures compared to their recorded cost
based on interest rates in effect at June 28, 1996 and December 31, 1995, is
not considered material.
The above disclosures do not extend to estimated fair value amounts for items
not defined as financial instruments by FASB No. 107 "Disclosures About Fair
Value of Financial Instruments", for example customer relationships, which
possess significant value.
11. Non cash financing activities
The Company incurred liabilities for capital lease obligations in the amount of
approximately $1.6 million for the six month period ending June 30, 1995.
Capital lease obligations in the amount of $858,000 were incurred for the six
month period ending June 28, 1996. These transactions affected the Company's
recognized liabilities but were not characterized by the receipt or payment of
cash.
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Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
OLDE Financial Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The following discussion of the Company's financial condition and results of
operations for the periods indicated, should be read in conjunction with the
Financial Statements and related notes thereto. Unless otherwise indicated,
all references to the term "Company" refers to OLDE Financial Corporation and
its consolidated subsidiaries.
The business of the Company, like that of other firms in the securities
business, is directly affected by general fluctuations in transaction volumes
and price levels in U.S. securities markets. These are affected by a multitude
of national and international economic and political factors and changing
legislation and regulations, that are unpredictable. Accordingly, results for
any interim period may not necessarily be indicative of results for an entire
fiscal year.
The securities industry is governed by extensive regulation under both Federal
and state laws, including regulation delegated to self-regulatory
organizations. The primary stated purpose of the regulations is the protection
of investors and the securities markets. New legislation, changes in rules by
the SEC and self-regulatory organizations or changes in the interpretation or
enforcement of current regulations may directly affect the methods of operation
and profitability of securities broker-dealers.
As a result of recent regulatory and legislative proposals, the manner in which
the securities brokerage firms conduct business may change. Current practices
may change in response to new rules, advances in technology or increased
disclosure requirements. If implemented, new or modified market systems would
have significant impact on the manner in which all brokerage firms, including
OLDE Discount, conduct business and could have a corresponding negative impact
on revenues. The Company anticipates that it will adapt the conduct of its
business to any new market environment and continue to promote brokerage
services providing benefit and value to its customers.
In July 1996, OLDE Discount and 23 other Nasdaq market-makers settled a
two-year Department of Justice investigation regarding allegations of
anti-competitive pricing behavior in the Nasdaq market. The industry-wide
settlement resolved all aspects of the investigation without admission or
finding of liability. The settlement is consistent with the Company's
commitment to advancing the best interests of its customers. The settlement
contains no monetary fine, and the settling market-makers have undertaken to
comply with specified trading practices and procedures.
Financial Condition
From December 31, 1995, total assets of the Company decreased by $42.6 million
to $1.6 billion at June 28, 1996. Cash decreased by $7.1 million and firm
investments in repurchase agreements decreased by $98.1 million. Net
receivables, consisting primarily of secured margin loans, increased $62.7
million as the Company's customers margin loan balances increased.
Total liabilities decreased by $81.9 million from December 31, 1995 to $1.3
billion at June 28, 1996. There was a $3.4 million increase in payables to
customers as customer credit balances increased. There was a $78.6 million
decrease in payables to broker-dealers and clearing organizations, primarily a
result of decreased securities lending balances. Accrued income taxes
decreased $1.3 million.
Shareholder's equity increased by $39.2 million during the six month period to
$273.9 million as a result of earnings.
13
14
OLDE Financial Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Results of Operations for the Three Months Ended June 28, 1996
Compared to the Three Months Ended June 30, 1995
Total revenues for the three months ended June 28, 1996 increased by $13.3
million or 14.4% compared to the three months ended June 30, 1995. There were
increases in revenue from commissions and interest.
Total expenses increased by $13.1 million or 21.5%, primarily due to increases
in employee compensation expense, general and administrative expenses, and
interest expense.
Pretax income increased by $164,000 or .5% to $31.3 million. Net income
increased by $478,000 or 2.5% to $19.7 million.
Commission revenue increased by $8.9 million, or 28%, primarily due to an
increase in retail customer trading activity.
Interest revenue increased by $3.5 million, or 15.1%, primarily due to higher
average balances of customer margin loans outstanding. The determinants of the
Company's interest revenue are the average balances of invested assets and the
rates of interest earned. Interest rates on all of these assets fluctuate with
market conditions. The primary components of interest revenue are identified
in Table I.
Table I - Interest Revenue
(Dollars in thousands)
Three Months Ended Six Months Ended
June 28, June 30, June 28, June 30,
1996 1995 1996 1995
------------------ -----------------
Customer margin balances $24,518 $19,410 $47,895 $38,520
Repurchase agreements 1,348 2,528 2,711 3,905
U.S. Government securities 30 87 87 112
Securities borrowed 193 397 404 736
Other 221 430 895 650
------------------ -----------------
Total $26,310 $22,852 $51,992 $43,923
================== =================
Revenue from principal transactions decreased $354,000 or 1%, as OLDE Discount
experienced a moderate decline in revenue from its firm trading activities.
Revenues derived from making markets in equity securities were $26.9 million
and $27.7 million for the three month periods ending June 28, 1996 and June 30,
1995, respectively. This represents a decrease of $800,000 or 2.8%. Revenues
from dealer activity in fixed income securities were $7.8 million and $7.3
million for the same period, respectively. This represents an increase of
$500,000 or 6.2%. Trading revenues are affected by a variety of factors which
cannot be predicted including, but not limited to, market liquidity,
volatility, trader skill, national and international economic conditions, and
legislation and regulation affecting the U.S. and international business and
financial communities. Changes in any of these factors may affect revenue
derived from these activities.
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15
OLDE Financial Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Compensation expense increased $5.8 million or 19.3% primarily due to increases
in salary and commission expense for salespersons and salaries and bonus
provision for other staff. The increase in commissions reflects the increase
in revenues. Staffing levels were also increased from the year earlier period.
Interest expense increased $2.4 million or 24.2% primarily due to increases in
average customer credit balances. In addition, average securities lending
balances were greater than in the year earlier period. The components of
interest expense are identified in Table II.
Table II - Interest Expense
(Dollars in thousands)
Three Months Ended Six Months Ended
June 28, June 30, June 28, June 30,
1996 1995 1996 1995
------------------ -----------------
Customers credit balances $ 7,409 $6,291 $14,676 $12,174
Subordinated loans 792 1,017 1,810 2,035
Securities lending 3,457 1,934 6,475 3,626
Other 410 475 836 842
------------------ -----------------
Total $12,068 $9,717 $23,797 $18,677
================== =================
Advertising and promotion expense increased $228,000 or 5%.
General and administrative expenses increased $2.6 million or 49.1% due to
general increases in expenses occurring as a result of an increased volume of
business. Expenses related to legal matters generally described in Note 6 to
the consolidated financial statements also increased.
Provisions for federal, state and local income taxes decreased by $314,000 or
2.6% due to lower effective tax rates. The difference between the statutory
income tax rate and the Company's effective tax rate is primarily due to
provisions for state and local income taxes.
15
16
Results of Operations for the Six Months Ended June 28, 1996
Compared to the Six Months Ended June 30, 1995
Total revenues for the six months ended June 28, 1996 increased by $25.2
million or 14.1% compared to the six months ended June 30, 1995.
Total expenses increased by $24.6 million or 21.1% primarily due to employee
compensation expense, general and administrative expenses, and interest
expense.
Pretax income increased by $592,000 or 1% to just under $62 million. Net
income increased by $783,000 or 2.1% to $38.8 million.
Commission revenue increased by $16.1 million or 26.3% primarily due to
increased retail trading volume.
Interest revenue increased by $8.1 million or 18.4%, primarily due to increased
customer margin loans outstanding. The determinants of the Company's interest
revenue are the average balances of invested assets and the rates of interest
earned. Interest rates on all of these assets fluctuate with market
conditions. The primary components of interest revenue are identified in Table
I.
Revenue from principal transactions decreased by $1 million or 1.5%, primarily
due to market fluctuations. Revenues derived from making markets in equity
securities were $52.5 million and $55.2 million for the six month periods
ending June 28, 1996 and June 30, 1995 respectively. This represents a
decrease of $2.7 million or 5%. Revenues from dealer activity in fixed income
securities were $14.4 million and $12.7 million for the respective periods.
This represents an increase of $1.7 million or 13.7%. The Company has sought
to increase its dealer business in fixed income securities, including high
quality preferred stocks, municipal and corporate bonds.
Trading revenues are subject to a variety of factors including, but not limited
to, market liquidity, volatility, trader skill and economic conditions.
Changes in any of these factors may affect revenue derived from these
activities.
Compensation expense increased $10.1 million or 17.7% primarily due to
increases in salary and commission expense for salespersons and salaries and
bonus provision for other staff.
Interest expense increased $5.1 million or 27.4%, due to increases in average
customer credit balances and securities lending balances. The components of
interest expense are identified in Table II.
Advertising and promotion expense decreased $91,000 or 1%. Occupancy expense
increased $2.4 million or 26.4%. The Company continued to refurbish offices
and purchase or lease larger branch office locations.
General and administrative expenses increased $5 million or 53.8%. The
increase resulted from both an increased volume of business and expenses
related to legal matters generally described in Note 6 to the consolidated
financial statements.
Communication expense increased $701,000 or 14.7%, mostly as a result of adding
telephone lines to service higher staffing levels.
Provisions for federal, state, and local income taxes decreased by $191,000 or
.8% due to lower effective tax rates. The difference between the statutory
income tax rate and the Company's effective tax rate is due primarily to
provisions for state and local income taxes.
16
17
OLDE Financial Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Liquidity and Capital Resources
Most of the Company's assets are highly liquid, consisting primarily of cash,
U.S. Government and U.S. Government agencies securities purchased under
agreements to resell (which may be segregated for the exclusive benefit of
customers pursuant to regulatory requirements), marketable securities and
receivables from customers and other broker-dealers. As of June 28, 1996,
approximately $25.2 million of U.S. Government securities purchased under
agreements to resell and cash were segregated in special reserve accounts of
OLDE Discount for the exclusive benefit of customers. Assets in special
reserve accounts are not available to meet obligations of OLDE Discount except
to customers. Receivables from customers are collateralized by readily
marketable securities in accordance with margin regulations. Receivables from
other broker-dealers represent amounts due upon the Company's delivery of
securities, either to settle a sell transaction or close a stock borrowed
position.
The Company does not regularly hold for its own account or actively engage in
the trading of either fixed income securities rated below investment grade
("junk bonds"), derivative securities ("derivatives"), or "penny stocks". As
an accommodation to customers, the Company may occasionally hold immaterial
positions of such items on a temporary basis.
With the exception of subordinated indebtedness, substantially all of OLDE
Discount's liabilities are due on demand of customers or within 30 days. OLDE
Discount has historically maintained investment durations of less than 30 days
through investment in repurchase agreements.
Customer credit balances have provided the Company's principal subsidiary, OLDE
Discount, with the primary source of funds for financing customer margin loans.
OLDE Discount has obtained funds from securities lending activities, cash
subordinations, and retained earnings as well. Management believes that such
sources of funds will continue to provide financing for OLDE Discount in the
future.
OLDE Discount has arranged $180 million in secured lines of credit and letters
of credit from two banks and it has periodically drawn on these lines of
credit. Average daily borrowings, under the Company's current bank
arrangements, were less than $324,000 and there were no amounts outstanding at
any month end date under the lines of credit during the six months ending June
28, 1996. Other sources of financing for OLDE Discount's operations have been
subordinated borrowings and cash generated by operations.
On April 1, 1996, the Company redeemed its $7.5 million of 12% senior
subordinated debentures.
OLDE Property Corporation, the primary real estate subsidiary of the Company,
acquired funds through the Company's subordinated debt offering in 1992 and has
subsequently arranged mortgage financing for additional real estate
acquisitions. To the extent that the Company continues to increase its real
property interests, an increased percentage of the Company's consolidated
assets will not be liquid.
As a broker-dealer registered with the Securities and Exchange Commission, OLDE
Discount is subject to regulatory net capital requirements designed to ensure
the financial integrity and liquidity of broker-dealers. As of June 28, 1996,
OLDE Discount had net capital for regulatory purposes of $244.1 million which
exceeded its minimum net capital requirement by $216.3 million. See also, Note
7 to Consolidated Financial Statements.
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18
Part II. - Other Information
Item 6. Exhibits and Reports on Form 8-K
(b) There were no reports filed on Form 8-K during
the quarterly period ended June 28, 1996.
18
19
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 9, 1996 OLDE Financial Corporation
-----------------------------
(Registrant)
By:/s/ Randal J. Mudge
-----------------------------
Randal J. Mudge
President and Director
By:/s/ Mack H. Sutton
-----------------------------
Mack H. Sutton
Chief Financial Officer
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20
Exhibit Index
Exhibit
No. Description
- ------- -----------
27 Broker-Dealers and Broker Dealer Holding Companies
Financial Data Schedule BD, which is submitted electronically
to the Securities and Exchange Commission for information only
and not filed.
20