<PAGE> 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 SEPTEMBER 30,
1998 OR
- ------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________
TO _________________
Commission File Number 1-13993
-------
FREEDOM SECURITIES CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-4019175
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Beacon Street
Boston, Massachusetts 02108
--------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617)725-2000
Indicate by checkmark 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 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
--- ---
As of November 12, 1998, the Company has 20,101,369 shares of common
stock outstanding.
<PAGE> 2
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income - Three and nine
months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
2
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,844 $ 12,936
Receivables from brokers, dealers and others 109,976 74,314
Securities purchased under agreements to resell 94,600 113,335
Securities owned, at market 221,380 423,522
Fixed assets, net of accumulated depreciation
and amortization 19,140 20,464
Goodwill, net of accumulated amortization 35,614 24,861
Exchange memberships, owned at cost 5,939 5,939
Deferred taxes 9,616 9,263
Prepaid expenses 3,222 2,641
Other assets 54,552 40,312
------- -------
Total assets $ 565,883 $ 727,587
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payables to brokers, dealers and others $ 79,797 $ 59,062
Securities sold under agreements to repurchase 28,029 -
Securities sold, not yet purchased, at market 116,416 354,565
Accrued compensation and benefits 62,648 65,653
Accounts payable and accrued expenses 42,860 44,535
Notes payable to banks 17,929 101,446
------- -------
Total liabilities 347,679 625,261
------- -------
Stockholders' equity:
Common stock (60,000,000 shares authorized,
20,107,960 and 14,840,627 shares issued in
1998 and 1997, respectively, $.01 par value) 201 147
Additional paid-in-capital 181,307 83,654
Retained earnings 36,696 19,438
Subscribed stock (136,532 shares in 1997) - (913)
------- -------
Total stockholders' equity 218,204 102,326
------- -------
Total liabilities and stockholders' equity $ 565,883 $ 727,587
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Commissions $ 48,665 $ 45,948 $143,147 $123,638
Principal transactions 18,087 28,553 69,030 73,123
Investment banking 15,473 15,018 61,232 37,003
Asset management 6,857 5,115 18,748 14,655
Other 4,358 2,952 11,261 9,397
------- ------- ------- -------
Total operating revenues 93,440 97,586 303,418 257,816
Interest income 12,825 10,989 38,695 32,125
------- ------- ------- -------
Total revenues 106,265 108,575 342,113 289,941
Interest expense 6,420 4,996 20,466 16,785
------- ------- ------- -------
Net revenues 99,845 103,579 321,647 273,156
Non-interest expenses
Compensation and benefits 62,991 68,196 209,328 177,933
Occupancy and equipment 7,159 6,378 20,288 19,218
Communications 4,925 4,385 13,968 12,936
Brokerage and clearance 3,193 2,872 9,369 8,490
Promotional 3,386 2,783 9,870 7,255
Other 7,546 6,956 24,865 21,199
------- ------- ------- -------
Total non-interest expenses 89,200 91,570 287,688 247,031
Operating pre-tax income 10,645 12,009 33,959 26,125
Acquisition interest expense 23 1,545 1,503 4,578
------- ------- ------- -------
Income before income taxes 10,622 10,464 32,456 21,547
Income taxes 3,952 4,497 13,122 9,169
------- ------- ------- -------
Net income before extraordinary item 6,670 5,967 19,334 12,378
Extraordinary item (net of
applicable taxes of $922) - - 1,276 -
------- ------- ------- -------
Net income after extraordinary item $ 6,670 $ 5,967 $ 18,058 $ 12,378
======= ======= ======= =======
Net income per share:
Basic before extraordinary item $ 0.33 $ 0.42 $ 1.06 $ 0.87
Basic after extraordinary item $ 0.33 $ 0.42 $ 0.99 $ 0.87
Diluted before extraordinary item $ 0.32 $ 0.41 $ 1.00 $ 0.85
Diluted after extraordinary item $ 0.32 $ 0.41 $ 0.94 $ 0.85
Cash dividends declared per share $ 0.04 $ - $ 0.08 $ -
Weighted average common shares
outstanding:
Basic 20,029 14,217 18,228 14,255
Diluted 20,978 14,652 19,268 14,514
</TABLE>
See accompanying notes.
4
<PAGE> 5
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 18,058 $ 12,378
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation 3,754 3,726
Amortization 3,632 3,547
Non-cash compensation 590 266
Extraordinary item; write-off of capitalized debt costs 2,198 -
Changes in assets and liabilities, net of purchase for
Cleary Gull
(Increase) decrease in operating assets:
Receivables from brokers, dealers and others (29,425) 20,551
Securities purchased under agreements to resell 20,239 (32,243)
Securities owned, at market 206,212 (141,880)
Deferred taxes (353) (831)
Prepaid expenses (581) 213
Other assets (11,192) (1,246)
Increase (decrease) in operating liabilities:
Payables to brokers, dealers and others 20,735 (15,945)
Securities sold under agreements to repurchase 28,029 (31,572)
Securities sold, not yet purchased, at market (241,171) 189,995
Accrued compensation and benefits (5,667) 2,534
Accounts payable and accrued expenses (3,569) 1,069
------- -------
Net cash from operating activities 11,489 10,562
Cash flows from investing activities
Purchases of ixed assets (3,058) (1,394)
Proceeds from sale of fixed assets - 711
Payment for Cleary Gull, net of cash acquired (2,910) -
------- -------
Net cash used in investing activities (5,968) (683)
Cash flows from financing activities
Proceeds from sale of common stock, net 1,963 -
Proceeds from initial public offering, net 75,741 -
Purchases of treasury stock - (511)
Payment of dividends (800) -
Repayment of notes payables to banks (83,517) (5,747)
------- -------
Net cash used in financing activities (6,613) (6,258)
Increase (decrease) in cash and cash equivalents (1,092) 3,621
Cash and cash equivalents, beginning of period 12,936 7,248
------- -------
Cash and cash equivalents, end of period $ 11,844 $ 10,869
======= =======
Supplemental disclosure of cash flow information
Cash paid for:
Income taxes $ 9,163 $ 8,358
Interest $ 21,495 $ 21,341
</TABLE>
See accompanying notes.
5
<PAGE> 6
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(UNAUDITED)
1. Basis of Presentation
Freedom Securities Corporation is a holding company which together with its
wholly owned subsidiaries (collectively, the "Company") is a full-service,
regionally focused retail brokerage and investment banking firm. The Company is
engaged primarily in the retail and institutional brokerage business including
corporate finance and underwriting services. The consolidated financial
statements include the accounts of the Company and its primary operating
subsidiaries Tucker Anthony Incorporated ("Tucker Anthony"), Sutro & Co.
Incorporated ("Sutro"), Cleary Gull Reiland & McDevitt Inc. ("Cleary Gull") and
Freedom Capital Management Corporation ("Freedom Capital").
The Company was formed in November 1996 to effect the acquisition (the
"Acquisition") of Freedom Securities Holding Corporation and its subsidiaries
from John Hancock Mutual Life Insurance Company ("Hancock"). The consideration
paid to Hancock was financed with equity contributions from two private investor
groups and certain employee investors, bank financing and excess cash of the
Company.
The Acquisition was accounted for as a purchase and, accordingly, the purchase
price was allocated to the assets and liabilities acquired based upon their
fair values at the date of the Acquisition. The purchase price, including
acquisition costs, exceeded the fair value of net assets acquired and the excess
was recorded as goodwill.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for audited
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the three and nine month months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. The information included in this Form 10-Q should be read in
conjunction with the Risk Factors and Management's Discussion and Analysis of
Financial Condition and Results of Operations sections and the 1997 financial
statements and notes thereto included in the Company's Registration Statement on
Form S-1, File #333-62857, and the Company's Quarterly Reports on Forms 10-Q
for the periods ended March 31, 1998 and June 30, 1998.
2. Initial Public Offering
On April 2, 1998, the Company completed its intial public offering of 7.4
million shares plus an over-allotment of 1.1 million shares (the "Offering"),
including 4.2 million shares of $.01 par value common stock ("Common Stock")
sold by the Company. The Offering raised approximately $75.7 million for the
Company after deducting underwriting discounts, commissions and expenses. The
Company used the proceeds and available cash to repay existing debt (see Note
4).
6
<PAGE> 7
3. Acquisition of Cleary Gull Reiland & McDevitt Inc.
On April 16, 1998, the Company closed into escrow and funded its acquisition of
Cleary Gull, a privately-held investment banking, institutional brokerage and
investment advisory firm headquartered in Milwaukee, Wisconsin. The
acquisition was completed on May 1, 1998 after appropriate notification was made
to the New York Stock Exchange and was accounted for under the purchase method
of accounting. The consolidated financial statements include the results of
Cleary Gull's operations from the date of acquisition. The purchase price was
$24.9 million which included 889,878 shares of the Company's Common Stock
valued at $17.8 million (valued at a price equal to the initial public
offering price) and $4.4 million in cash. In addition, stock options to
purchase shares of Cleary Gull capital stock with a value of $2.7 million were
converted into options to purchase the Company's Common Stock. The excess of
the purchase price over the estimated fair value of net assets acquired was
$12.5 million and is being amortized over 15 years using the straight-line
method of amortization.
4. Notes Payable to Banks
In 1996, the Company entered into a revolving credit agreement (the "Credit
Agreement") with certain participating banks and borrowed $85 million. The
balance outstanding under the Credit Agreement of $77.5 million was repaid in
full on April 7, 1998 with the Company's net proceeds from the Offering and
available cash. The consolidated statement of income for the nine months ended
September 30, 1998 includes an extraordinary item of $1.2 million resulting
from the write-off of capitalized debt costs related to the Credit Agreement.
In August 1998, the Company entered into a new revolving credit agreement
whereby participating banks have made commitments totaling $50 million. Under
the new credit agreement, the Company has the option to borrow at the federal
funds rate or the eurodollar rate (each plus applicable margin as defined,
ranging from 0.50% to 0.75% based on a calculated leverage ratio) or the
agent's base rate. Borrowings under the new credit agreement may be prepaid
without penalty and the agreement matures on August 21, 2001. Additionally, the
Company must pay a quarterly commitment fee for the new credit facility
calculated at 0.15% per year on the unused facility. The Company did not have
any borrowings under the new credit agreement at September 30, 1998.
The Company also maintains through two of its subsidiaries, a fixed asset credit
facility with an outstanding balance of $17.9 million at September 30, 1998.
5. Net Capital Requirements
Certain subsidiaries of the Company are subject to the net capital requirements
of the New York Stock Exchange ("Exchange") and the Uniform Net Capital
requirements of the Securities and Exchange Commission ("Commission") under
Rule 15c3-1. The Exchange and the Commission rules also provide that equity
capital may not be withdrawn or cash dividends paid if certain minimum net
capital requirements are not met. The Company's principal regulated
subsidiaries are discussed below.
Under a clearing arrangement with Wexford Clearing Services Corporation
("Wexford"), Tucker Anthony, Sutro and Cleary Gull are required to maintain
certain minimum levels of net capital and comply with other financial ratio
requirements. At September 30, 1998, Tucker Anthony, Sutro and Cleary Gull were
in compliance with all such requirements.
Tucker Anthony is a registered broker and dealer. At September 30, 1998, Tucker
Anthony had net capital of approximately $51.8 million which was $50.8 million
in excess of the $1.0 million amount required to be maintained at that date.
Sutro is a registered broker and dealer. At September 30, 1998, Sutro had net
capital of approximately $15.7 million which was $14.7 million in excess of the
$1.0 million amount required to be maintained at that date.
Cleary Gull is a registered broker and dealer. At September 30, 1998, Cleary
Gull had net capital of approximately $4.9 million which was $4.3 million in
excess of the $0.6 million amount required to be maintained at that date.
Freedom Trust Company ("FTC") is a subsidiary of Freedom Capital and is a
limited purpose trust company. Pursuant to state regulations, FTC is required
to meet and maintain certain capital minimums and ratios.
7
<PAGE> 8
At September 30, 1998, FTC's regulatory capital, as defined, was $1.3 million
and FTC was in compliance with all such requirements.
6. Commitments and Contingencies
The Company leases office space and various types of equipment under
noncancelable leases generally varying from one to ten years, with certain
renewal options for like terms.
The Company has been named as defendant in a number of civil actions and
arbitrations primarily relating to its broker-dealer activities. The Company
is also involved, from time to time, in proceedings with, and investigations
by, governmental agencies and self regulatory organizations. While the ultimate
outcome of litigation involving the Company cannot be predicted with certainty,
management believes it has meritorious defenses to all such actions and intends
to defend each of these vigorously.
While there can be no assurance that such actions, proceedings, investigations
and litigation will not have a material adverse effect on the financial results
of operations of the Company in any future period, it is the opinion of
management that the resolution of any such actions, proceedings, investigations
and litigation will not have a material adverse effect on the consolidated
financial position and results of operations of the Company.
The Company has outstanding underwriting agreements and when-issued contracts
which commit it to purchase securities at specified future dates and prices.
The Company presells such issues to manage risk exposure related to these
off-balance sheet commitments. Subsequent to September 30, 1998, such
transactions settled at no loss.
7. Earnings Per Share
The Company computes its earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") 128 "Earnings Per Share." The
following table sets forth the computation for basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator
- ---------
Net income before extraordinary item $ 6,670 $ 5,967 $19,334 $12,378
Extraordinary item - - 1,276 -
----- ----- ------ ------
Net income after extraordinary item $ 6,670 $ 5,967 $18,058 $12,378
Denominator
- -----------
Weighted average shares oustanding 20,029 14,217 18,228 14,255
Dilutive effect of:
Stock options and other exercisable shares 949 435 1,040 259
------ ------ ------ ------
Adjusted weighted average shares outstanding 20,978 14,652 19,268 14,514
Basic earnings per share before extraordinary item $ 0.33 $ 0.42 $ 1.06 $ 0.87
Less: Extraordinary item - - 0.07 -
------ ------ ------ ------
Basic earnings per share after extraordinary item $ 0.33 $ 0.42 $ 0.99 $ 0.87
Diluted earnings per share before extraordinary item $ 0.32 $ 0.41 $ 1.00 $ 0.85
Less: Extraordinary item - - 0.06 -
------ ------ ------ ------
Diluted earnings per share after extraordinary item $ 0.32 $ 0.41 $ 0.94 $ 0.85
</TABLE>
8
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing in Item 1 of this
report. This Form 10-Q may contain or incorporate by reference statements
which may constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Prospective investors are
cautioned that any such forward-looking statements are not guarantees for future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Business Environment
The Company's retail securities brokerage activities, as well as its investment
banking, investment advisory, institutional sales and trading and equity
research services, are highly competitive and subject to various risks
including volatile trading markets and fluctuations in the volume of market
activity. These markets are affected by general economic and market conditions,
including fluctuations in interest rates, volume and price levels of securities
and flows of investor funds into and out of mutual funds and pension plans and
by factors that apply to particular industries such as technological advances
and changes in the regulatory environment. Until August 1998, a favorable
economic environment contributed to a significant increase in activity in the
equity markets in the United States. In August and September 1998, conditions
in the financial markets were extremely turbulent resulting in a difficult
operating environment for the third quarter, particularly in trading and
investment banking activities. The Company's financial results have been and
may continue to be subject to fluctuations due to these and other factors.
Consequently, the results of operations for a particular period may not be
indicative of results to be expected for other periods.
Equity Participation of Employees
In connection with the April Offering, employees sold no shares of the Company's
common stock and purchased their entire allocation of 335,000 shares. As of
September 30, 1998, the Company's employees, including senior management and
investment executives, owned approximately 32% of the Company's outstanding
Common Stock, excluding shares purchased in the open market. Management
believes that significant employee ownership has resulted in progressively
higher levels of employee motivation, confidence and commitment.
Incentive equity programs have been established pursuant to which employees have
acquired or may acquire additional equity of the Company, which when added to
shares previously owned would result in employees owning approximately 45% of
the shares of Common Stock outstanding.
Components of Revenues and Expenses
Revenues. Commission revenues include retail and institutional commissions
received by the Company as an agent in securities transactions, including all
exchange listed, over-the-counter agency, mutual fund, insurance and annuity
transactions. Principal transactions revenues include principal sales credits
and dividends as well as gains and losses from the trading of securities by the
Company as principal. Investment banking revenues include selling
concessions, underwriting fees and management fees received from the
underwriting of corporate or municipal securities as well as fees earned from
providing merger and acquisition and other financial advisory services. Asset
management revenues include fees generated from providing investment advisory
and portfolio management services to institutional and high net worth
investors. Other revenues primarily consist of transaction fees, retirement
plan revenue and third party correspondent clearing fees. Interest income
primarily consists of interest earned on margin loans made to customers,
securities purchased under agreements to resell and fixed income securities held
in the Company's trading accounts. Net revenues equal total revenues less
interest expense. Interest expense includes interest paid under its Wexford
financing arrangement and on bank borrowings, securities sold under agreements
to repurchase, fixed asset financing and cash balances in customer accounts.
Expenses. Compensation and benefits expense includes sales, trading and
incentive compensation, which are primarily variable based on revenue
production and/or business unit profit contribution, and salaries, payroll
taxes
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<PAGE> 10
and employee benefits which are relatively fixed in nature. Incentive
compensation, including bonuses for eligible employees, is accrued proratably
throughout the year based on actual or estimated annual amounts. Brokerage and
clearance expense includes the cost of securities clearance, floor brokerage and
exchange fees. Communications expense includes service charges for
telecommunications, news and market data services. Occupancy and equipment
expense includes rent and operating expenses for facilities, expenditures for
repairs and maintenance, and depreciation and amortization of furniture,
fixtures, business equipment, computer equipment and leasehold improvements.
Promotional expense includes travel, entertainment and advertising. Other
expenses include general and administrative expenses, including professional
services, litigation expenses, goodwill amortization, data processing and other
miscellaneous expenses. Acquisition interest expense represents the interest
expense incurred under the previous Credit Agreement, the balance of which was
repaid with proceeds from the Company's initial public offering.
Results of Operations
The following table compares third quarter results (dollars in millions)
between 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Period to Period Percentage of
September 30, Increase/(Decrease) Net Revenues
1998 1997 Amount Percent 3Q98 3Q97
---- ---- ------ ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions $48.7 $45.9 $ 2.8 6 49 44
Principal transactions 18.1 28.6 (10.5) (37) 18 28
Investment banking 15.4 15.0 0.4 3 15 14
Asset Management 6.9 5.1 1.8 34 7 5
Other 4.3 3.0 1.3 48 4 3
----- ---- ---- --- ---
Total operating revenues 93.4 97.6 (4.2) (4) 93 94
Interest Income 12.8 11.0 1.8 17 13 11
----- ---- ---- --- ---
Total revenues 106.2 108.6 (2.4) (2) 106 105
Interest expense 6.4 5.0 1.4 29 6 5
----- ----- ---- --- ---
Net revenues 99.8 103.6 (3.8) (4) 100 100
Non-interest expenses:
Compensation and benefits 63.0 68.2 (5.2) (8) 63 66
Occupancy and equipment 7.2 6.4 0.8 12 7 6
Communications 4.9 4.4 0.5 12 5 4
Brokerage and clearance 3.2 2.9 0.3 11 3 3
Promotional 3.4 2.8 0.6 22 3 2
Other 7.5 6.9 0.6 8 8 7
----- ----- ---- --- ---
Total non-interest expenses 89.2 91.6 (2.4) (3) 89 88
Operating pre-tax income 10.6 12.0 (1.4) (11) 11 12
Acquisition interest expense 0.0 1.5 (1.5) (99) 0 2
----- ----- ---- --- ---
Income before income taxes 10.6 10.5 0.1 2 11 10
Income taxes 3.9 4.5 (0.6) (12) 4 4
----- ----- ---- --- ---
Net Income $ 6.7 $ 6.0 $ 0.7 12 7 6
===== ===== ==== === ===
</TABLE>
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Despite a difficult operating environment in the 1998 third quarter, net income
rose 12% to $6.7 million compared with $6.0 million in the prior year's
quarter. The overall improvement in third quarter financial results was
attributable to several factors. First, the Company's cost structure enabled
management to control expenses, particularly compensation and benefits.
Additionally, the early retirement of debt in April 1998 resulted in a decline
in acquisition interest expense of $1.5 million in the 1998 third quarter
compared to prior year's quarter. Lastly, the Company continued to benefit in
the third quarter of 1998 compared to the same period last year due to the
inclusion of Cleary Gull's financial results.
Earnings per common share (diluted) were $0.32 for the 1998 third quarter
compared to $0.41 for the 1997 third quarter in spite of a 12% increase in net
income. Earnings per common share in 1998 were significantly impacted by the
increase in the number of shares outstanding following the Company's initial
public offering and acquisition of Cleary Gull in 1998. Earnings per share
(diluted) on a pro forma basis, adjusted to reflect the public
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<PAGE> 11
offering, repayment of debt and the Cleary Gull acquisition as if they had
occurred at the beginning of 1997, would result in essentially no change in
earnings per share quarter versus quarter.
Total operating revenues decreased $4.2 million or 4% to $93.4 million for the
three months ended September 30, 1998 from $97.6 million for the quarter ended
September 30, 1997. Net revenues, including the effect of interest income and
interest expense, other than acquisition interest expense, decreased $3.8
million or 4% to $99.8 million for the three months ended September 30, 1998
versus $103.6 million in the comparable period in 1997.
Commission revenues grew 6 % in the quarter ended September 30, 1998 to $48.7
million from the comparable period of 1997 mainly due to strong institutional
sales and penetration into new markets, particularly in the Midwest.
Principal transactions revenues were $18.1 million, down 37% from $28.6 million
in the 1997 third quarter. The Company's arbitrage trading activities,
consisting of merger and acquisition and convertible arbitrage, generated net
losses of approximately $2.5 million during the quarter due to unusually
volatile financial markets in August and September. Additionally, while fixed
income and over-the-counter trading activities were profitable during the
quarter, revenues from these activities were lower than last year and
contributed to the overall decline in principal transactions revenues.
Investment banking revenues increased 3% to $15.4 million for the three months
ended September 30, 1998 compared to $15.0 million in the 1997 third quarter
primarily due to higher advisory fees. These revenue increases were partially
offset by declines in public offering fees due to an industry wide slowdown in
public offerings during the third quarter.
Asset management revenues reached a record $6.9 million, up 34% for the three
months ended September 30, 1998 from $5.1 million for the three months ended
September 30, 1997 reflecting overall growth in assets under management which
reached more than $6.8 billion by the end of the 1998 third quarter.
Other income increased $1.3 million or 48% to $4.3 million compared to $3.0
million in the 1997 third quarter in part due to higher transfer agent fees in
1998.
Interest income increased $1.8 million or 17% to $12.8 million for the three
months ended September 30, 1998 from $11.0 million for the three months ended
September 30, 1997, due primarily to the combination of higher interest income
on customer margin balances and greater stock borrow activity. Interest
expense, excluding those expenses associated with financing the Acquisition,
increased $1.4 million or 29% to $6.4 million for the three months ended
September 30, 1998 from $5.0 million for the three months ended September 30,
1997, primarily reflecting the cost of financing increased customer margin
balances.
Compensation and benefits expense decreased $5.2 million or 8% to $63.0 million
for the three months ended September 30, 1998 from $68.2 million for the three
months ended September 30, 1997, primarily due to decreased incentive
compensation accruals resulting in part from lower year-to-date trading results,
and modifications to existing employee compensation programs as a result of the
Company's change from private to public ownership.
All other operating expenses increased an aggregate of $2.8 million or 12% to
$26.2 million for the three months ended September 30, 1998 of which
approximately $1.9 million reflects the inclusion of operating expenses for
Cleary Gull not included in 1997.
The Company's income tax provision was $3.9 million for the third quarter of
1998 compared to $4.5 million for the third quarter of 1997. The effective tax
rate was 37% for the third quarter of 1998 down from 43% for the third quarter
of 1997 reflecting an increase in book income not subject to tax.
11
<PAGE> 12
The following table compares the first nine months results (dollars in millions)
between 1998 and 1997:
<TABLE>
<CAPTION>
Nine Months Ended Period to Period Percentage of
September 30, Increase/(Decrease) Net Revenues
1998 1997 Amount Percent 1998 1997
---- ---- ------ ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions $143.1 $123.6 $ 19.5 16 44 45
Principal transactions 69.0 73.1 (4.1) (6) 21 27
Investment banking 61.2 37.0 24.2 65 19 14
Asset Management 18.8 14.7 4.1 28 6 5
Other 11.3 9.4 1.9 20 4 3
----- ---- ---- --- ---
Total operating revenues 303.4 257.8 45.6 18 94 94
Interest Income 38.7 32.1 6.6 20 12 12
----- ---- ---- --- ---
Total revenues 342.1 289.9 52.2 18 106 106
Interest expense 20.5 16.8 3.7 22 6 6
----- ----- ---- --- ---
Net revenues 321.6 273.1 48.5 18 100 100
Non-interest expenses:
Compensation and benefits 209.3 177.9 31.4 18 65 65
Occupancy and equipment 20.3 19.2 1.1 6 6 7
Communications 14.0 12.9 1.1 8 4 5
Brokerage and clearance 9.4 8.5 0.9 10 3 3
Promotional 9.9 7.3 2.6 36 3 2
Other 24.8 21.2 3.6 17 8 8
----- ----- ---- --- ---
Total non-interest expenses 287.7 247.0 40.7 16 89 90
Operating pre-tax income 33.9 26.1 7.8 30 11 10
Acquisition interest expense 1.5 4.6 (3.1) (67) 1 2
----- ----- ---- --- ---
Income before income taxes 32.4 21.5 10.9 51 10 8
Income taxes 13.1 9.1 4.0 43 4 3
----- ----- ---- --- ---
Net Income before extraordinary
item 19.3 12.4 6.9 56 6 5
Extraordinary item 1.2 0.0 1.2 100 0 0
----- ----- ---- --- ---
Net income after extraordinary
item $ 18.1 $ 12.4 $ 5.7 46 6 5
===== ===== ==== === ===
</TABLE>
Nine months ended September 30, 1998 compared to nine months ended September
30, 1997.
The Company achieved record operating results for the first nine months of 1998
compared to the first nine months of 1997. Net income was $18.1 million, up
$5.7 million or 46% for the first nine months of 1998 versus net income of
$12.4 million in the comparable 1997 period, even after deducting the after-tax
extraordinary item of $1.2 million in the 1998 period.
Earnings per common share (diluted) before extraordinary item were $1.00 for the
nine months ended September 30, 1998 compared to $0.85 for the same 1997
period. Earnings per common share in 1998 were significantly impacted by the
increase in the number of shares outstanding following the Company's initial
public offering and acquisition of Cleary Gull in 1998. Earnings per share
(diluted) on a pro forma basis, adjusted to reflect the public offering,
repayment of debt and the Cleary Gull acquisition as if they had occurred at
the beginning of 1997, would result in a year over year improvement in
earnings per share of $0.24 versus the $0.15 improvement actually reported.
Total operating revenues increased $45.6 million or 18% to $303.4 million in the
nine months ended September 30, 1998 from $257.8 million in the same period in
1997. Net revenues increased $48.5 million or 18% in the 1998 period compared
with 1997.
Commission revenues increased $19.5 million or 16% to $143.1 million in the
first nine months of 1998 from $123.6 million for the first nine months of
1997, due to higher institutional sales as well as increased volume in the
Company's retail businesses, resulting from a greater number of investment
executives and higher average production per retail investment executive.
Principal transactions revenues declined $4.1 million or 6% to $69.0 million in
the first nine months of 1998 from $73.1 million in the comparable 1997
period. The decrease in revenues is primarily due to lower over-the-
12
<PAGE> 13
counter and arbitrage trading revenues which were adversely impacted by
turbulent financial market conditions in the 1998 third quarter.
Investment banking revenues increased $24.2 million or 65% to $61.2 million in
the first nine months of 1998 from $37.0 million for the first nine months of
1997. The improvement in investment banking revenues resulted from higher
public offering revenues during the first six months of the year and increased
fees from advisory and merger and acquisition activities during 1998.
Asset management revenues grew $4.1 million or 28% to $18.8 million in the first
nine months of 1998 from $14.7 million in the first nine months of 1997. This
revenue increase reflected the overall growth in assets under management, which
resulted from both new money added to the funds as well as asset appreciation
arising from equity market performance.
Interest income increased $6.6 million or 20% to $38.7 million in the first nine
months of 1998 from $32.1 million in the first nine months of 1997, due
primarily to the combination of higher interest income on customer margin
balances and greater stock borrow activity. Interest expense, excluding those
expenses associated with financing the Acquisition, increased $3.7 million or
22% to $20.5 million for the first nine months of 1998 from $16.8 million in
the comparable 1997 period mainly reflecting the financing of higher average
inventory balances.
Compensation and benefits expense increased $31.4 million or 18% to $209.3
million for the nine months ended September 30, 1998 from $177.9 million in the
same period in 1997, primarily due to increased incentive and
production-related compensation attributable to higher revenues. Compensation
and benefits as a percentage of net revenues were 65% for the first nine months
of both 1998 and 1997.
All other operating expenses increased an aggregate of $9.3 million or 13% to
$78.4 million for the first nine months of 1998 from $69.1 million for the
first nine months of 1997. In addition, all other operating expenses as a
percentage of net revenues declined to 24% in 1998 from 25% in 1997.
Promotional expenses increased $2.6 million or 36% to $9.9 million for the
first nine months of 1998 from $7.3 million in the comparable 1997 period due
to increased spending on research conferences, advertising, business development
and travel in 1998. Other expenses increased $3.6 million or 17% to $24.8
million for the nine months ended September 30, 1998 from $21.2 million in the
comparable 1997 period.
The Company's income tax provisions for the nine months ended September 30, 1998
and 1997 were $13.1 million and $9.1 million, respectively. The effective tax
rate was 40% for the nine months of 1998 were down from 42% for the nine months
of 1997 reflecting an increase in book income not subject to tax.
Liquidity and Capital Resources
The Company receives dividends, interest on loans and other payments from its
subsidiaries which are the Company's primary source of funds to pay expenses,
service debt and pay dividends. Distributions and interest payments to the
Company from its registered broker-dealer subsidiaries, which are expected to be
the Company's primary sources of liquidity, are restricted as to amounts which
may be paid by applicable law and regulations. The Net Capital Rules are the
primary regulatory restrictions regarding capital resources (See Note 5 of the
financial statements). The Company's rights to participate in the assets of any
subsidiary are also subject to prior claims of the subsidiary's creditors,
including customers of the broker-dealer subsidiaries.
On April 2, 1998, the Company completed the offering of its Common Stock of
7,400,000 shares plus an over allotment of 1,110,000 shares, including
4,200,000 shares sold by the Company.
Borrowings under the Credit Agreement were repaid in full with the net proceeds
of the Offering to the Company, leaving the Company with $17.9 million of
indebtedness under a fixed asset credit facility secured by the Company's fixed
assets. In August 1998, the Company entered into a new revolving credit
agreement whereby participating banks have made commitments totaling $50
million. Under the new credit agreement, the Company has the option to borrow
at the federal funds rate or the eurodollar rate (each plus applicable margin
as defined, ranging from 0.50% to 0.75% based on a calculated leverage ratio)
or the agent's base rate. Borrowings under the new credit agreement may be
prepaid without penalty and the agreement matures on August 21, 2001.
Additionally, the Company must pay a quarterly commitment fee for the new
credit facility calculated at 0.15% per
13
<PAGE> 14
year on the unused facility. The Company did not have any borrowings under the
new agreement at September 30, 1998.
The assets of the Company's primary operating subsidiaries are highly liquid
with the majority of such assets consisting of securities inventories and
collateralized receivables, both of which fluctuate depending on the levels of
customer business. Collateralized receivables consist mainly of securities
purchased under agreements to resell which are secured by U.S. government and
agency securities. A relatively small percentage of total assets is fixed or
held for a period of longer than one year.
The majority of the subsidiaries' assets are financed through Wexford, by
securities sold under repurchase agreements and by securities sold, not yet
purchased. The Company's principal source of short-term financing is based on
its clearing arrangement with Wexford under which the Company can borrow on an
uncommitted collateralized basis against its proprietary inventory positions.
This financing generally is obtained from Wexford at rates based upon
prevailing market conditions. The Company monitors overall liquidity by tracking
the extent to which unencumbered marketable assets exceed short-term unsecured
borrowings.
Repurchase agreements are used primarily for customer accommodation purposes and
to finance the Company's inventory positions in U.S. government and agency
securities. These positions provide products and liquidity for customers and
are not maintained for the Company's investment or market speculation. The level
of activity fluctuates depending on customer needs; however, these fluctuations
have not materially affected liquidity or capital resources. The Company
monitors the collateral position and counterparty risk on these transactions
daily.
The subsidiaries' total assets and short-term liabilities and the individual
components thereof may vary significantly from period to period because of
changes relating to customer needs and economic and market conditions.
The Company's operating activities generate cash resulting from net income
earned during the period and fluctuations in the Company's current assets and
liabilities. The most significant fluctuations have resulted from changes in
the level of customer activity and changes in proprietary arbitrage trading
strategies dictated by prevailing market conditions.
In addition to normal operating requirements, capital is required to satisfy
financing and regulatory requirements on securities inventories and investment
banking commitments. The Company's overall capital needs are continually
reviewed to ensure that its capital base can appropriately support the
anticipated capital needs of the subsidiaries. Management believes that
existing capital funds provided from operations, the current credit
arrangements with Wexford and the unutilized credit facility from participating
banks will be sufficient to finance the operating subsidiaries' ongoing
businesses.
In September 1998, the Board of Directors approved a stock repurchase program
that permits the Company to purchase at its discretion up to five percent of
its common stock outstanding or approximately one million shares. The Company
will fund the buyback from internal sources or its existing borrowing facility
and will use the shares for issuance of stock under employee stock option plans
or retain the shares as treasury shares. As of September 30, 1998, the Company
had not repurchased any shares.
Cash Flows
Cash and cash equivalents at September 30, 1998 and 1997 totaled $11.8 million
and $10.9 million, respectively. For the nine months ended September 30, 1998,
funds generated from operating activities of $11.5 million, including net
income of $18.1 million, along with available cash were used primarily for
purchases of fixed assets, repayment of debt and the Cleary Gull acquisition.
Net proceeds of approximately $75.7 million from the sale of 4,200,000 shares of
Common Stock in the Offering on April 2, 1998 and available cash were used to
repay the full amount of existing bank debt under the Credit Agreement.
14
<PAGE> 15
Year 2000 Compliance
The securities industry is, to a significant extent, technologically driven and
dependent. In addition to internally utilized technological applications, the
Company's businesses are materially dependent upon the performance of
exchanges, market centers, counterparties, customers and vendors (collectively
"the Company's material third parties") who, in turn, may be heavily reliant on
technological applications. In sum, the securities industry is pervasively
interdependent with each "link of the chain" strengthened or weakened by the
quality and performance of its attendant information and embedded technology.
The Company is aware that the Year 2000 provides potential problems with the
programming code in existing computer systems. The "Year 2000 problem" is
extensive and complex as virtually every computer operation will be affected to
some degree by the change of the two digit year value to 00. The issue is
whether computer systems will properly recognize date-sensitive information
when the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or fail.
The failure or faulty performance of computer systems could potentially have a
far ranging impact on the Company's businesses such as a diminution in its
ability to (a) ascertain information vital to strategic decision making by both
the Company and its customers; (b) perform interest rate and pricing
calculations; (c) execute and settle proprietary and customer transactions; (d)
undertake regulatory surveillance and risk management; (e) maintain accurate
books and records and provide timely reports; (f) maintain appropriate internal
financial operations and accounting; and (g) access credit facilities for both
the Company and its customers. Accordingly it is necessary for the Company, to
the extent reasonably practicable, to identify the internal computer systems
and software which are likely to have a critical impact on its operations,
make an assessment of its Year 2000 readiness and modify or replace information
and embedded technology as needed. In addition, the Company must make a Year
2000 readiness assessment for the Company's material third parties.
In the fourth quarter of 1995, the Company began to strategically assess the
need for renovation, replacement or retirement of all business applications.
This assessment was coincident with the conversion of the Company's principal
broker-dealer subsidiaries to clear securities transactions through Wexford
Clearing Services Corporation ("Wexford"), an unaffiliated broker-dealer.
During the first half of 1996, in connection with the conversion to Wexford, a
substantial portion of all application and vendor code were modified to be Year
2000 compliant and these changes were tested and verified in 1998 to be
materially effective. The Company continues to test the remainder of
application and vendor code in order to ensure that it is Year 2000 compliant.
Although Wexford is the contracting party for the provision of clearing
services, it in fact delivers those services through the operations of its
guaranteeing parent company, Prudential Securities Incorporated ("Prudential"),
a leading registered broker and dealer. Consequently, it is the readiness of
Prudential that is critical when assessing the Year 2000 compliance of the
clearing and operations capacity of the Company's active broker-dealer
subsidiaries. Prudential has been assessed, by internal industry standards
established by the Securities Industry Association, to be within the top tier
of Year 2000 readiness. In recent industry-wide testing conducted by the
Securities Industry Association, in which Prudential took part, Prudential and
other participants were able to input transactions and send them to the
appropriate markets for execution, confirmation and clearance under simulated
Year 2000 conditions.
Additionally, the Company has assessed the state of readiness of all known
technologically oriented service vendors and believes, based on letters of
certification, that the vast majority of these vendors are Year 2000 compliant
with the remainder expected to be compliant by December 1998. This
determination does not mean that the vast majority of the Company's material
third parties pose no Year 2000 risk to the Company. First, the Company is
relying in large measure on these parties' assessments of their readiness.
Second, there are several vendors, which account for a substantial portion of
the Company's mission critical operations, which may be partially or largely,
but not fully, Year 2000 compliant. Finally, certain critical third parties,
such as exchanges, clearing houses, depositories and other service vendors have
no direct functional contact with the Company (as they operate directly with
Wexford) but may impact the Company's operations.
At this juncture the Company is in the process of establishing a strategic plan
for the remainder of its Year 2000 remediation efforts which would include (1)
identification, modification and testing of any remaining non-
15
<PAGE> 16
compliant Year 2000 code; (2) identification, inventory, assessment and, if
necessary, modification of internal ad hoc systems or applications that may be
material to the Company's operations; (3) with the exception of counterparties
and customers, documentation of the assessment of the readiness of the Company's
material third parties; and (4) a timetable for completion of the plan. The
Company intends to complete its written plan by December 1998 while
concomitantly proceeding to assess, and taking measures to enhance, Year 2000
readiness. Specifically, the Company intends to test the Year 2000 readiness
of its major vendor for market data and undertake certain disaster recovery
simulations of its systems before the end of 1998. To date, the Company's Year
2000 costs have been minimal. The Company believes that, going forward, it
will incur Year 2000 costs of approximately $500,000 which will be funded out
of its working capital. Provided there is an absence of unanticipated critical
events, the Company does not expect Year 2000 costs to have a material effect on
its operating results, financial condition or cash flows.
At this stage the Company has not developed any Year 2000 contingency plans
because of the following reasons: (1) the Company has substantially modified,
to the extent it can ascertain the problem, most mission critical code and
embedded technology; (2) the Company's vendors have represented that they are
either currently Year 2000 compliant or will become so by the second quarter of
1999; (3) there are no alternatives in the event the exchanges or other market
centers fail to perform; and (4) the Company believes it is highly likely that
the factors which may prevent a particular clearing firm from performing would
similarly affect all other clearing firms which would either preclude the
availability of alternative clearing service providers or overwhelm the
resources of surviving alternative clearing services providers. In other
words, the Year 2000 presents a problem which is not likely to be susceptible
to remediation at a future date if it is not fixed in advance. The Company
will, however, continue to consider the viability of a contingency plan.
The Company is cautiously optimistic about its current state of readiness and
its ability to make any further necessary modifications to internal systems in
time for the Year 2000. The Company also believes that its major third party
service provider, Prudential, has undertaken a systematic approach to the Year
2000 problem and will complete its plan which is designed to achieve a state of
readiness. However, there are factors outside the control of the Company which
make certainty impossible such as: (1) the inability to assess the readiness of
market counterparties and customers; (2) the inability to achieve assurance as
to any material third parties' representations of readiness; (3) the global
exposure of material third parties to Year 2000 problems outside the United
States which have a "knock-on" effect within the domestic securities markets
and operations; and (4) the limitations in anticipating all aspects of a
problem with which there is no prior historical experience . The presence of
any or all of these and other factors may well have a material adverse effect
on the Company's businesses, operating results, financial condition and cash
flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Yet Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business, the Company and its' subsidiaries are named as
defendants in various legal proceedings and litigation primarily relating to
its broker-dealer activities. The Company believes that it has adequately
reserved for such legal proceedings and litigation matters and that they will
not have a material adverse effect on the Company's financial condition or
results of operations.
Item 2. Changes in Securities and Use of Proceeds
(c) Unregistered Securities:
During the 1998 third quarter, the Company issued 114,646 shares upon exercise
of employee stock options in transactions, which were exempt as private
placements under section 4(2) of the Securities Act. The Company received
$614,311 as proceeds from the exercise of the employee stock options.
16
<PAGE> 17
Additionally, the Company issued 5,731 shares of Common Stock during the 1998
third quarter in a private placement transaction exempt under section 4(2) of
the Securities Act to John Hancock Subsidiaries, Inc. pursuant to the
Additional Share Agreement entered into in connection with the Acquisition.
(d) Initial Public Offering:
The effective date of the Form S-1, SEC File No. 333-44931, Registration
Statement, registering 7,400,000 shares (4,200,000 primary shares) of Common
Stock of the Company, plus an over-allotment of 1,110,000 shares, was
April 1, 1998. The date of commencement of the offering of such registered
shares was April 2, 1998. The Company received the proceeds from the sale of
primary shares. The managing underwriters in the offering were Donaldson,
Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston, Sutro and
Tucker Anthony.
The updated information concerning the registered shares as of the date of this
report is set forth below:
Title of Security: Common Stock
Amount Registered: 8,510,000
Aggregate Price of the
Offering Amount Registered: $170,200,000
Amount Sold by the Company: 4,200,000
Aggregate Offering Price of
Amount Sold by the Company: $84,000,000
The expenses incurred by the Company in connection with the issuance and
distribution of the registered shares were as follows:
Underwriting Discounts and Commissions: $5,670,000
Other Expenses: 2,589,000
---------
Total $8,259,000
All of the expenses listed above were direct or indirect payments to others and
not payments to directors, officers, affiliates (except in the case of Tucker
Anthony and Sutro) or 10% stockholders (or their associates) of the Company.
The amount of net offering proceeds to the Company after the total expenses
listed above was approximately $75,741,000. The Company used the proceeds and
available cash to repay $77,500,000 million of existing debt on April 7, 1998
and none of such payments were made to directors, officers, affiliates or 10%
stockholders (or their associates) of the Company.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are included herein or are
incorporated by reference.
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K - The company filed no reports on Form 8-K during
the quarter ended September 30, 1998.
17
<PAGE> 18
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.
FREEDOM SECURITIES CORPORATION
(REGISTRANT)
DATE: NOVEMBER 16, 1998 BY: /s/JOHN H. GOLDSMITH
---------------------------------------
JOHN H. GOLDSMITH
CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
DATE: NOVEMBER 16, 1998 BY: /s/WILLIAM C. DENNIS, JR.
--------------------------------------
WILLIAM C. DENNIS, JR.
CHIEF FINANCIAL OFFICER
18
<PAGE> 19
EXHIBIT INDEX
-------------
ITEM NO. DESCRIPTION SEQUENTIAL PAGE NO.
-------- ----------- -------------------
11 Computation of Earnings per Share 20
27 Financial Data Schedule 21
19
<PAGE> 1
EXHIBIT 11
The Company computes its earnings per share in accordance with SFAS 128
"Earnings Per Share." The following table sets forth the computation for basic
and diluted earnings per share (in thousands except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NUMERATOR
- ---------
Net income before extraordinary item $ 6,670 $ 5,967 $ 19,334 $ 12,378
Extraordinary item - - 1,276 -
-------------------- ---------------------
Net income after extraordinary item $ 6,670 $ 5,967 $ 18,058 $ 12,378
DENOMINATOR
- -----------
Weighted average shares outstanding 20,029 14,217 18,228 14,255
Dilutive effect of:
Stock options and other exercisable shares 949 435 1,040 259
-------------------- ---------------------
Adjusted weighted average shares outstanding 20,978 14,652 19,268 14,514
Basic earnings per share before
extraordinary item $ 0.33 $ 0.42 $ 1.06 $ 0.87
Less: Extraordinary item - - 0.07 -
-------------------- ---------------------
Basic earnings per share after
extraordinary item $ 0.33 $ 0.42 $ 0.99 $ 0.87
Diluted earnings per share before
extraordinary item $ 0.32 $ 0.41 $ 1.00 $ 0.85
Less: Extraordinary item - - 0.06 -
-------------------- ---------------------
Diluted earnigs per share after
extraordinary item $ 0.32 $ 0.41 $ 0.94 $ 0.85
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,844
<RECEIVABLES> 109,976
<SECURITIES-RESALE> 94,600
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 221,380
<PP&E> 19,140
<TOTAL-ASSETS> 565,883
<SHORT-TERM> 0
<PAYABLES> 185,305
<REPOS-SOLD> 28,029
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 116,416
<LONG-TERM> 17,929
0
0
<COMMON> 201
<OTHER-SE> 218,003
<TOTAL-LIABILITY-AND-EQUITY> 565,883
<TRADING-REVENUE> 69,030
<INTEREST-DIVIDENDS> 38,695
<COMMISSIONS> 143,147
<INVESTMENT-BANKING-REVENUES> 61,232
<FEE-REVENUE> 18,748
<INTEREST-EXPENSE> 21,969
<COMPENSATION> 209,328
<INCOME-PRETAX> 32,456
<INCOME-PRE-EXTRAORDINARY> 19,334
<EXTRAORDINARY> 1,276
<CHANGES> 0
<NET-INCOME> 18,058
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.94
</TABLE>
