<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 1998
REGISTRATION NO. 333-44931
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FREEDOM SECURITIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 6211 04-3335712
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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ONE BEACON STREET
BOSTON, MA 02108
(617) 725-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN H. GOLDSMITH
CHIEF EXECUTIVE OFFICER
ONE BEACON STREET
BOSTON, MA 02108
(617) 725-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies to:
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JAMES WESTRA, ESQUIRE RICHARD D. TRUESDELL, JR., ESQUIRE
HUTCHINS, WHEELER & DITTMAR DAVIS POLK & WARDWELL
A PROFESSIONAL CORPORATION 450 LEXINGTON AVENUE
101 FEDERAL STREET NEW YORK, NY 10017
BOSTON, MASSACHUSETTS 02110 (212) 450-4000
(617) 951-6600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the earlier
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 1, 1998
PROSPECTUS
, 1998
6,700,000 SHARES
[FREEDOM SECURITIES CORPORATION LOGO]
COMMON STOCK
Of the 6,700,000 shares of Common Stock of Freedom Securities Corporation
("Freedom" or the "Company") offered hereby (the "Offering"), 4,200,000 shares
are being sold by the Company and 2,500,000 shares are being sold by the Selling
Stockholders (as defined herein). The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders.
Prior to the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price of the
Common Stock will be between $17.00 and $19.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
offering price.
The Common Stock has been approved for listing on The New York Stock
Exchange ("NYSE") under the symbol "FSI", subject to official notice of
issuance.
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF RISK FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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- ----------------------------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE SELLING
PUBLIC(1) COMMISSIONS(2) COMPANY(3) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
Total(4)........................ $ $ $ $
- ----------------------------------------------------------------------------------------------------------------------------
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(1) In connection with the Offering, the Underwriters have reserved for sale
approximately 335,000 shares of Common Stock for directors and current
employees of the Company who have an interest in purchasing such shares of
Common Stock in the Offering. The Underwriters have advised the Company that
the price per share for such shares will be the Price to the Public less
Underwriting Discounts and Commissions, or per share.
(2) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(3) Before deducting expenses estimated at $1,000,000, including $5,000 payable
to Donaldson, Lufkin & Jenrette Securities Corporation for services as a
qualified independent underwriter, all of which are payable by the Company.
(4) The Selling Stockholders have granted to the Underwriters a 30-day option to
purchase up to 1,005,000 additional shares at the Price to the Public less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company, and Proceeds to
Selling Stockholders will be $ , $ , $ and
$ , respectively. See "Underwriting."
The shares are being offered by the several Underwriters (including Sutro &
Co. Incorporated and Tucker Anthony Incorporated, which are indirect, wholly
owned subsidiaries of the Company), subject to prior sale, when, as and if
delivered to and accepted by them and subject to various prior conditions,
including their right to reject orders in whole or in part. It is expected that
delivery of the shares will be made against payment in New York, New York on or
about , 1998.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CREDIT SUISSE FIRST BOSTON
SUTRO & CO. INCORPORATED
TUCKER ANTHONY
INCORPORATED
<PAGE> 3
[Map of United States which indicates locations of branch offices of the
Company.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in the Prospectus. Unless the context otherwise requires, the terms "Freedom"
and "the Company" mean Freedom Securities Corporation and its consolidated
subsidiaries during the periods following the Acquisition described below and
its predecessor (the "Predecessor Company") during periods prior to the
Acquisition. Certain market information contained herein is based on securities
industry publications. Unless otherwise indicated, information in the Prospectus
assumes no exercise of the Underwriters' option to purchase up to 1,005,000
additional shares from the Selling Stockholders to cover over-allotments, if
any, and that employees of the Company purchase 335,000 shares reserved for sale
to them in the Offering. Share information contained in this Prospectus gives
effect to a 1.818 for 1 split of the Company's Common Stock to be effected prior
to consummation of the Offering.
THE COMPANY
Freedom, through its two brokerage subsidiaries, Tucker Anthony
Incorporated ("Tucker Anthony") and Sutro & Co. Incorporated ("Sutro"), and its
asset management subsidiary, Freedom Capital Management Corporation ("Freedom
Capital"), is a full-service, regionally focused retail brokerage and investment
banking firm. The Company was formed in November 1996 to effect the acquisition
(the "Acquisition") of Freedom Securities Holding Corporation (the "Predecessor
Company") and its subsidiaries, including Tucker Anthony, Sutro and Freedom
Capital, from John Hancock Mutual Life Insurance Company ("Hancock"). Tucker
Anthony, headquartered in Boston and focused primarily on the northeastern
United States, and Sutro, headquartered in San Francisco and focused primarily
on the western United States, are both over 100 years old and have well
established reputations in their respective regions. Management believes that it
can best serve the needs of these distinct regions through separate, locally
managed organizations, while avoiding cost duplication through the use of shared
clearing and support services. This approach enables the Company to capitalize
on each organization's name recognition, historical areas of expertise and close
community ties while lessening the Company's reliance on a single region's
economy.
The Company's three primary areas of focus, described below, are (i) its
full-service retail brokerage operations; (ii) its equity capital markets
activities; and (iii) its asset management operations.
Retail Operations. The retail operations of Tucker Anthony and Sutro,
conducted in 13 states and the District of Columbia, have together generated
between 56% and 62% of the Company's operating revenues in each of the last
three years and have historically represented the Company's core business. In
its retail operations, the Company focuses on maintaining and developing strong
client relationships through a dedicated community focus while providing the
breadth and quality of services and products offered by national brokerage
firms. As of December 31, 1997, customers had over $28 billion of assets in over
200,000 Tucker Anthony and Sutro brokerage accounts. Management believes that
the experience of its 677 investment executives and their strong ties to their
communities help differentiate the Company from its competitors and enable the
Company to more effectively access and serve its clients. Management also
believes that its strategy of providing its investment executives with a high
level of support and the flexibility to operate in an entrepreneurial manner has
allowed the Company to recruit and retain highly effective, motivated investment
executives, many of whom have significant tenure at their local branch offices.
Equity Capital Markets. Each of Tucker Anthony and Sutro has historically
demonstrated strengths in offering various investment banking services, such as
merger and acquisition services, to clients within its respective region. The
Company's strategy is to develop equally strong research-driven equity capital
markets groups including equity research, investment banking, institutional
sales, trading and syndication services. Tucker Anthony's and Sutro's research
and investment banking departments target emerging and middle-market companies
within their respective regions and within the industries in which they
specialize. Equity capital markets activities have generated 16% to 17% of the
Company's operating revenues in each of the past three years.
3
<PAGE> 5
Asset Management. Freedom Capital, headquartered in Boston, was formed in
1930 and as of December 31, 1997 managed approximately $5.6 billion of assets,
including approximately $3.0 billion of investments by public sector entities,
high net worth individuals and others, with the remainder comprised of money
market funds for the benefit of Tucker Anthony and Sutro clients. Freedom
Capital has developed a leading position in the management of public funds for
local Massachusetts municipalities and agencies, has also developed an important
presence in certain sectors of the union pension fund market and is growing its
corporate funds management business. Asset management revenues have represented
approximately 5% to 6% of the Company's operating revenues in each of the past
three years.
The Company's subsidiaries also engage in a number of other activities,
including trading fixed income securities, underwriting municipal securities,
and purchasing and selling securities in arbitrage transactions. Additionally,
the Company, through a subsidiary, has a 25% interest in the profits and losses
of a joint specialist account in which it participates with two other NYSE
specialist firms. See "Business" for a more complete description of the
Company's activities.
The following chart depicts in simplified form the Company's corporate
structure, including its primary subsidiaries:
----------------------------------------
FREEDOM SECURITIES
CORPORATION
----------------------------------------
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- ------------------------------ ------------------------------ ------------------------------
TUCKER ANTHONY SUTRO & CO. FREEDOM CAPITAL
INCORPORATED INCORPORATED MANAGEMENT CORPORATION
- ------------------------------ ------------------------------ ------------------------------
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BUSINESS STRATEGY
Since the Acquisition, management formulated and is implementing a strategy
to (i) enhance the services the Company offers its customers; (ii) improve the
profitability of Tucker Anthony's and Sutro's retail operations; (iii) expand
each firm's equity capital markets activities; and (iv) increase Freedom
Capital's money management business. Management also plans to supplement the
Company's internal growth with strategic acquisitions. See "Business -- Business
Strategy." The principal elements of the Company's strategy are set forth below:
Enhance Personalized, High-End Service. Tucker Anthony and Sutro have
traditionally sought to attract and retain brokerage clients by offering a high
level of personal service responsive to customer needs. The Company intends to
increase its commitment to service by providing its investment executives with
advanced account information systems and flexibility in determining appropriate
fee schedules for certain services based upon the level of customer needs, and
by providing an array of one-stop investment and financial planning services.
Improve Profitability of Retail Brokerage Operations. The Company intends
to continue to improve the profitability of its retail operations by hiring
additional experienced and highly productive investment executives and by
providing Tucker Anthony's and Sutro's investment executives with enhanced
training, product offerings, information systems and support.
Expand Regional and Speciality Equity Capital Markets Activities. The
Company intends to continue to increase Tucker Anthony's and Sutro's investment
banking business by committing greater resources to, and by carefully focusing
their research and investment banking coverage on, companies in geographic
regions and industries which management believes offer the greatest
opportunities.
4
<PAGE> 6
Increase Asset Management Business. Management intends to grow Freedom
Capital's business by extending its public funds business from Massachusetts to
other states, by improving coordination with the Tucker Anthony and Sutro
brokerage networks and by increasing the assets under its management and the
number of its portfolio managers through acquisitions or recruiting.
Supplement Growth With Strategic Acquisitions. Management plans to
actively pursue opportunities to acquire other firms with complementary
businesses which would strengthen or expand the Company's geographic or product
offering base. Management believes that acquisitions may also allow the Company
to realize cost benefits by leveraging its infrastructure. Consistent with this
strategy, on March 10, 1998, the Company announced that it had agreed to acquire
Cleary Gull Reiland & McDevitt Inc., a Milwaukee-based regional brokerage firm.
See "Recent Developments."
THE ACQUISITION
To finance the Acquisition of Freedom from Hancock in November 1996,
approximately 350 employees of the Company, including senior management and
investment executives, purchased an aggregate of approximately 31% of the
Company's equity (28% after giving effect to the Offering), with additional
equity financing provided by affiliates of Thomas H. Lee Company ("THL") and SCP
Private Equity Partners, L.P. ("SCP"). 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 purchased, would
result in employees owning up to approximately 43% of the shares of Common Stock
outstanding after giving effect to the Offering. See "Certain Relationships and
Related Transactions -- The Acquisition" for a more complete description of the
Acquisition and "Management" for a description of the Company's incentive equity
programs.
Management believes that the Company's independence and employee ownership
have resulted in progressively higher levels of employee motivation, confidence
and commitment during 1997, as compared to 1996 when the Predecessor Company was
for sale and it was uncertain whether the Acquisition would be consummated or
whether the Predecessor Company would be sold to another organization.
Management believes that uncertainty surrounding the future of the Company
adversely affected the Company's performance in 1996 and, to a lesser extent, in
early 1997 by weakening employee motivation and the Company's ability to recruit
personnel, creating uncertainty among customers and prospective customers,
consuming management's time and inhibiting the Company's ability to pursue new
initiatives. The Company believes that the Acquisition and the strategies
instituted in connection therewith have been successful. For example, Tucker
Anthony and Sutro managed or co-managed 34 equity offerings in 1997 compared to
16 in 1996 and 9 in 1995. In 1997, the Company reported net income of $18.7
million, a 52% increase over net income of $12.3 million in 1996 and 43%
increase over net income of $13.1 million in 1995. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RISK FACTORS
No assurances can be given that the Company's objectives or strategies will
be achieved. Prospective investors should consider carefully the factors
discussed in detail elsewhere in this Prospectus under the caption "Risk
Factors."
5
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THE OFFERING
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Common Stock offered by the Company.................... 4,200,000 shares
Common Stock offered by the Selling Stockholders....... 2,500,000 shares
Common Stock to be outstanding after the Offering...... 19,097,403 shares(1)
Dividend policy........................................ The Company intends to pay quarterly
dividends of $0.04 per share on the
outstanding shares of Common Stock beginning
with the dividend payable in the third
quarter of 1998 with respect to the second
quarter of 1998. See "Dividend Policy."
Use of proceeds........................................ To repay existing credit facility.
See "Use of Proceeds."
NYSE symbol............................................ "FSI"
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(1) Excludes 2,133,888 shares of Common Stock issuable upon exercise of
outstanding stock options under the Company's stock option plans at December
31, 1997, with a weighted average exercise price of $5.50, of which 276,247
shares were exercisable as of such date at a weighted average exercise price
of $5.50, and up to 88,609 shares issuable to Hancock for no additional
consideration upon such exercise. See "Management -- Stock Option and Stock
Purchase Plans" and "Certain Relationships and Related
Transactions -- Additional Shares Agreement."
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6
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The information set forth below should be read in conjunction with
"Selected Historical Consolidated Financial and Other Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's and Predecessor Company's Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
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PREDECESSOR COMPANY COMBINED(1)
---------------------------------------- ------------
YEARS ENDED ELEVEN MONTHS ONE MONTH
DECEMBER 31, ENDED ENDED YEAR ENDED YEAR ENDED
------------------------ NOVEMBER 29, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1996 1996 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
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STATEMENT OF INCOME DATA:
Total revenues............. $385.6 $327.1 $368.5 $347.5 $30.6 $378.1 $398.2
Net revenues(2)............ 364.5 296.9 332.5 321.0 28.8 349.8 375.8
Total non-interest
expenses................ 335.8 286.0 310.2 300.6 26.8 327.4 337.3(3)
Acquisition interest
expense................. -- -- -- -- 0.6 0.6 6.1
Income before income
taxes................... 28.7 10.9 22.3 20.4 1.4 21.8 32.4
Net income................. 16.7 6.4 13.1 11.6 0.7 12.3 18.7
Basic earnings per
share(4)................ -- -- -- -- $0.05 -- $ 1.31
Diluted earnings per
share(4)................ -- -- -- -- 0.05 -- 1.27
Pro forma basic earnings
per share(5)............ -- -- -- -- -- -- $ 1.18
Pro forma diluted earnings
per share(5)............ -- -- -- -- -- -- 1.16
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AS OF
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED(6)
(IN MILLIONS, EXCEPT
PER SHARE DATA)
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STATEMENT OF FINANCIAL CONDITION DATA:
Total assets.............................................. $727.6 $714.5
Long-term debt............................................ 101.4 21.4
Stockholders' equity...................................... 102.3 170.2
Book value per common share outstanding................... $ 6.96 $ 9.01
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PREDECESSOR COMPANY COMBINED(1)
----------------------- -----------
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996 1997
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OTHER FINANCIAL DATA:
After-tax return on average equity(7).............. 12.6% 4.5% 8.8% 10.6% 20.6%
Compensation and benefits expense as a percentage
of net revenues.................................. 64.9 66.8 65.4 65.2 65.5
Non-compensation and benefits operating expense as
a percentage of net revenues..................... 27.3 29.5 27.8 28.4 24.3
Amortization of Acquisition intangibles (in
millions)........................................ -- -- -- $ 0.2 $ 2.5
Assets in retail brokerage accounts (at end of
period) (in billions)............................ $15.0 $17.0 $20.0 $23.0 $28.0
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(1) Year ended December 31, 1996 combined financial data refer to the
consolidated results of the Predecessor Company for the eleven months ended
November 29, 1996 combined with the consolidated results of the Company for
the one month ended December 31, 1996. These periods are not directly
comparable due to the effects of the Acquisition, including related purchase
accounting adjustments and the Acquisition financing.
(2) Net revenues equals total revenues less interest expense other than the
Acquisition interest expense.
(3) Includes the effect of $1.4 million of non-cash compensation expense
resulting from issuance of Common Stock and stock options to employees.
(4) Basic earnings per share ("Basic EPS") is calculated by dividing net income
by the weighted average number of outstanding shares. Diluted earnings per
share ("Diluted EPS") also includes the effects of the issuance of stock
options and other exercisable shares.
(5) Pro forma earnings per share ("Pro forma EPS") for the year ended December
31, 1997 is calculated in the same manner as in (4) above with the following
adjustments: (i) net income is adjusted to eliminate the after-tax effect of
interest expense on the Acquisition indebtedness to be repaid with the net
Offering proceeds and available cash, and a decrease in interest income due
to the use of available cash, as if the repayment occurred at the beginning
of the year; and (ii) the number of outstanding shares used for basic and
diluted EPS gives effect to the issuance of 4.2 million shares by the
Company in the Offering at the mid-point of the range set forth on the cover
page of this Prospectus. These adjustments result in Pro forma net income,
excluding extraordinary item (the write-off of capitalized debt issuance
costs related to the Acquisition), of $21.9 million.
(6) Adjusted to reflect the issuance of 4.2 million shares by the Company in the
Offering at the mid-point of the range on the cover page of this Prospectus
and the use of the proceeds thereof as well as available cash to pay off the
Credit Facility.
(7) After-tax return on average equity is calculated by dividing net income by
average stockholders' equity for the year.
7
<PAGE> 9
RECENT DEVELOPMENTS
As part of its strategy of acquiring other firms with complementary
businesses to strengthen or expand the Company's geographic or product offering
base, the Company has agreed to acquire, through a merger with a wholly owned
subsidiary of the Company, the regional investment banking firm of Cleary Gull
Reiland & McDevitt Inc. ("Cleary Gull"), headquartered in Milwaukee, Wisconsin,
pursuant to an Agreement and Plan of Merger dated March 9, 1998 (the "Merger").
The consideration to be paid in the Merger will be a combination of shares of
the Company's Common Stock with a value (valued at a price equal to the initial
offering price of the shares to the public) of $17.6 million and $4.4 million in
cash, subject to adjustment. In addition, stock options to purchase shares of
Cleary Gull capital stock with a value of approximately $3.5 million will be
converted into options of the Company so that, after consummation of the Cleary
Gull transaction, Cleary Gull employees will have Freedom options to purchase an
aggregate of approximately $3.5 million worth of the Company's Common Stock
(valued at a price equal to the initial offering price of the shares to the
public) for an aggregate exercise price equal to approximately $1.0 million, and
the Company has agreed to grant new options to Cleary Gull employees to purchase
up to an additional 272,700 shares of the Company's Common Stock with an
exercise price equal to the initial public offering price. Of the shares
issuable in connection with the Merger, shares with a value equal to $4.0
million will be placed in escrow and, subject to forfeiture in certain
circumstances, will be released in equal amounts annually over four years. The
Company has committed to register the sale of the Company's shares issued in
connection with the Merger pursuant to a shelf registration statement which will
become effective on or about 180 days following the consummation of the
Offering. Following the Merger, David P. Prokupek, the Chief Executive Officer
of Cleary Gull, will be appointed to the Company's Board of Directors. The
Company has entered into employment agreements with Cleary Gull's senior
management that will become effective upon consummation of the Merger.
Cleary Gull was established in 1987 in Milwaukee, Wisconsin as a private
investment bank focusing on the equity capital markets through institutional
research, sales and trading, and investment banking services. Cleary Gull's
twelve research analysts cover such areas as distribution and logistics,
business services, applied technology (including diagnostics, dental and
filtration/separation) and growth companies in the upper Midwest. Cleary Gull's
equity capital markets practice includes a national institutional sales force
and over-the-counter and listed trading services. Cleary Gull's investment
banking practice is focused primarily on merger and acquisition advisory
services and financing assignments in both public and private equity and debt
markets. The firm opened its offices in Chicago in 1997 and in Denver in 1998.
Cleary Gull had net income of $1.3 million on total revenues of $26.4 million in
1997.
Management believes that the Company will benefit from Cleary Gull's strong
presence in the midwestern United States, that Cleary Gull's equity research and
institutional trading groups will complement those of Tucker Anthony and Sutro
and that the potential exists to enhance the growth of Cleary Gull's retail
brokerage business. In addition, management believes that the Company can
improve profitability after the Merger by eliminating certain duplicative costs
and by incorporating Cleary Gull into its clearing arrangement with Wexford
Clearing Services Corporation ("Wexford"), a wholly owned subsidiary of
Prudential Securities, Inc. ("PSI") whose obligations to the Company are
guaranteed by PSI.
Consummation of the Merger is subject to standard closing conditions,
including receipt of Hart-Scott-Rodino clearance, other regulatory approvals and
the completion of the Offering. There can be no assurance that the Merger will
be consummated or that the Merger will result in strategic or financial benefits
to the Company.
The Company is not currently in negotiations with any other party
concerning an acquisition by the Company.
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby.
ADVERSE CONSEQUENCES OF THE VOLATILE NATURE OF THE SECURITIES BROKERAGE BUSINESS
The stock market has recently experienced significant volatility, including
some of the largest single day point declines in history. After the stock market
declines in October 1987 and October 1989, many firms in the industry suffered
financial losses and the level of individual investor trading activity
decreased. Reduced trading volume and lower prices generally result in reduced
transaction revenues. A severe market fluctuation in the future could have a
material adverse effect on the Company's business, financial condition and
operating results. Lower price levels of securities may result in (i) reduced
volumes of securities transactions, with a consequent reduction in commission
revenues, and (ii) reduced management fees calculated as a percentage of assets
managed. Sudden sharp declines in market values of securities and the failure of
issuers and counterparties to perform their obligations can result in illiquid
markets which, in turn, may result in the Company having difficulty selling
securities, hedging its securities positions and investing funds under its
management.
The securities brokerage business is, by its nature, subject to significant
risks, particularly in volatile or illiquid markets. Risks inherent in the
securities brokerage business discussed elsewhere herein, such as the risk of
trading losses, losses resulting from the ownership or underwriting of
securities, risks associated with principal activities, the failure of
counterparties to meet commitments, customer fraud, employee fraud, issuer
fraud, litigation and errors, misconduct and failures in connection with the
processing of securities transactions, are enhanced in periods of volatility and
illiquidity. The Company's principal business activity, its retail broker-dealer
operations, as well as its investment banking, institutional sales, proprietary
trading, investment advisory and other services, are subject to these enhanced
risks present during volatile trading markets and fluctuations in the volume of
market activity.
In addition, to the extent the Company, through Wexford, permits customers
to purchase securities on margin, the Company is subject to risks inherent in
extending credit, especially during periods of rapidly declining markets in
which collateral value could fall below the amount of a customer's indebtedness.
Any resulting losses could have a material adverse effect on the Company's
business, financial condition and operating results.
BUSINESS SUBJECT TO GENERAL ECONOMIC AND POLITICAL CONDITIONS
The securities business is directly affected by many factors, including
economic and political conditions, broad trends in business and finance,
legislation and regulation affecting the national and international business and
financial communities, currency values, inflation, market conditions, the
availability and cost of short-term or long-term funding and capital, the credit
capacity or perceived creditworthiness of the securities industry in the
marketplace and the level and volatility of interest rates. Any one or more of
these factors may contribute to reduced levels of trading activity, securities
offerings and merger and acquisition activities, which would result in lower
revenues from the Company's brokerage, trading, institutional sales and
investment banking activities. In addition, these and other factors can
contribute to lower price levels for securities and illiquid markets.
SIGNIFICANT COMPETITION
All aspects of the Company's business and of the securities business in
general are highly competitive. The principal competitive factors influencing
the Company's business are its professional staff, its reputation in the
marketplace, its existing client relationships, its ability to commit capital to
client transactions and its mix of market capabilities. The Company's ability to
compete effectively in its securities brokerage and investment banking
activities will also be influenced by the adequacy of its capital levels and by
its ability to raise additional capital.
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The Company competes directly with national and regional full service
broker-dealers and, to a lesser extent, with discount brokers, dealers,
investment banking firms, investment advisors and certain commercial banks. In
addition, the Company competes indirectly for investment assets with insurance
companies and others. In addition to competition from firms currently in the
securities business, domestic commercial banks and investment banking boutiques
have recently entered the business. In recent years, large international banks
have entered the markets served by United States investment banks, including the
markets in which the Company competes. The Company expects competition from
domestic and international banks to increase as a result of recent and
anticipated legislative and regulatory initiatives in the United States to
remove or relieve certain restrictions on commercial banks relating to the sale
of securities. The financial services industry has become considerably more
concentrated as numerous securities firms have either ceased operations or have
been acquired by or merged into other firms. Such mergers and acquisitions have
increased competition from these firms, many of which have significantly greater
equity capital and financial and other resources than the Company. Many of these
firms, because of their significantly greater financial capital and scope of
operations, are able to offer their customers more product offerings, broader
research capabilities, access to international markets and other products and
services not offered by the Company, which may provide such firms with
competitive advantages over the Company.
The Company also faces competition from a rapidly developing industry
comprised of companies offering discount and/or electronic brokerage services.
These competitors may have lower costs and may offer their customers more
attractive pricing or other terms than those offered by the Company. The Company
also anticipates competition from underwriters who attempt to effect public
offerings for emerging and middle-market companies through new means of
distribution, including transactions effected using electronic media such as the
Internet. In addition, issuers may attempt to sell their securities directly to
purchasers, including through sales using electronic media such as the Internet.
To the extent that issuers and purchasers of securities are able to transact
business without the assistance of financial intermediaries such as the Company,
the Company's operating results could be adversely affected.
DEPENDENCE ON PERSONNEL
The Company's business is dependent on the highly skilled and often highly
specialized individuals it employs. Retention of senior management and retail
investment executives, research, investment banking, public finance,
institutional sales and trading, money management and administrative
professionals is particularly important to the Company's prospects. The Company
generally does not have written employment agreements with its investment
professionals.
The departure of an investment executive typically results in such
executive taking his or her clients with him or her. The departure of investment
executives could adversely impact the Company's operating results.
The Company's strategy with respect to investment banking is to establish
relationships with the Company's prospective corporate clients in advance of any
transaction and to maintain such relationships over the long term by providing
advisory services to corporate clients in public or private offerings of equity
or debt securities and merger and acquisition transactions. Similarly, the
Company's strategy with respect to state and local government clients is to
establish long-term relationships by providing advisory services to governmental
entities as well as underwriting services. Research professionals contribute
significantly to the Company's ability to secure a role in managing public
offerings and in providing other investment banking services. From time to time,
the Company has experienced losses of equity research, investment banking,
public finance, and institutional sales and trading professionals. The loss of a
significant number of such professionals could materially adversely affect the
Company's operating results.
The intense competition for skilled professionals has led to escalating
compensation packages in the industry for such individuals. Upfront payments,
increased payouts and guaranteed contracts make hiring of employees more
difficult and can be a major factor in an employee leaving the Company. There
can be no assurance that losses of key personnel due to such competition or
otherwise will not occur in the future.
The Company's business, financial condition and operating results depend,
to a significant extent, on the ability of the management of the Company and its
subsidiaries to implement the Company's strategy outlined
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in this Prospectus. See "Business -- Business Strategy." There is no guarantee,
however, that management will be able to successfully implement such strategy or
that such strategy will be effective, and the inability of management to succeed
in its efforts may have an adverse effect on the Company's business, financial
condition and operating results.
GEOGRAPHIC CONCENTRATION OF THE COMPANY'S BUSINESS
Because of the Company's focus on investors and equity capital market
clients based in the northeastern and western United States, a significant
economic downturn in either of those regions could adversely affect the
Company's revenues. Approximately 59% of the Company's 1997 operating revenue
(and a significantly greater percentage of the Company's operating income) was
generated by Tucker Anthony whose clients are primarily located in the
northeastern United States and approximately 35% was generated by Sutro whose
clients are primarily located in the western United States. As a result, an
economic downturn in one of these regions could adversely affect the companies
in these regions, which in turn could reduce the Company's underwriting and
brokerage business relating to those companies. In addition, a regional economic
downturn in one of these regions could have an adverse effect on the Company's
retail clients in that region or emerging and middle-market companies in that
region. Any adverse effect on emerging and middle-market companies or growth
industries concentrated in the northeastern or western United States or, to a
lesser extent, in other regions in which emerging or middle-market technology,
healthcare, financial service or consumer product companies are also
concentrated could also reduce the Company's business relating to those
companies.
DEPENDENCE ON CERTAIN RELATIONSHIPS
The Company has entered into an arrangement with Wexford pursuant to which
Wexford acts as the Company's clearing broker. The Company's communications and
information systems are coordinated with the clearing information systems of
Wexford. Additionally, Wexford furnishes the Company with information necessary
to run the Company's business, including commission runs, transaction summaries,
data feeds for various reports including compliance and risk management,
execution reports, trade confirmations, monthly account statements, cashiering
functions and the handling of margin accounts. Accordingly, the Company is
currently dependent upon Wexford's clearing capabilities and systems. The
Company and Wexford are parties to an agreement setting forth the terms and
conditions of their relationship. The initial term of the Agreement expires
April 3, 2001 and renews annually thereafter (unless either party gives notice
of its intent not to renew), subject to earlier termination by Wexford in the
event the Company fails to meet certain financial tests. The per trade charge
under the Wexford Agreement is subject to adjustment based on a consumer price
index commencing in April 1999. The Agreement provides that either Wexford or
the Company have the right to renegotiate the financial terms and services of
the contract to apply after the end of the initial term. Any interruption of
service by or at Wexford, or the inability of the Company to extend the Wexford
arrangement on acceptable terms or find an acceptable alternative for the
Company's financing or clearing arrangements could have a material adverse
effect on the Company's business, financial condition and operating results. For
1997 the Company paid clearing and financing fees to Wexford totaling
approximately $20 million, which represented approximately 5% of net revenues.
Assuming similar trading volumes in 1998, the Company expects that these charges
will continue at a similar amount in 1998.
DEPENDENCE ON OUTSIDE SOURCES OF FINANCING
The principal sources of the Company's cash and liquidity are financing
activities, commissions, collateralized repurchase agreements and collateralized
loans. The Company currently has an uncommitted financing arrangement with
Wexford through which the Company finances its customer accounts and firm
trading positions. Such financing of customer accounts is not reflected in the
Company's Statements of Financial Condition. The Company retains risk with
respect thereto, however, because the Company has agreed to indemnify Wexford
for losses it may sustain in connection with the accounts of the Company's
customers. The availability of financing to the Company may vary depending on
market conditions, the volume of certain trading activities, credit ratings,
credit capacity and the overall availability of credit to the financial services
industry. There can be no assurance that the Company will be able to access the
necessary lines of credit or that financing adequate to support the Company's
business will be available in the future.
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CONSTRAINTS IMPOSED BY BANK DEBT
The Company currently maintains a senior reducing revolving credit facility
with BankBoston, N.A. as agent for several lenders (the "Credit Facility"), with
a current fully drawn outstanding balance of $77.5 million. The Company also
maintains through two of its subsidiaries, a fixed asset leasing arrangement
with BancBoston Leasing Inc. (the "Fixed Asset Facility") with an outstanding
balance at December 31, 1997 of approximately $21.4 million. In connection with
the Offering, the Company will prepay the existing indebtedness under the Credit
Facility.
The terms and conditions of the Credit Facility impose limitations that
affect, among other things, the ability of the Company to incur debt, make
acquisitions, sell assets or merge, grant or incur liens, make investments or
loans, make capital expenditures, engage in transactions with affiliates and
change its lines of business. In addition, the terms of the Credit Facility
limit the Company's ability to redeem or otherwise repurchase shares of its
capital stock and limit the Company and its subsidiaries from paying cash
dividends on its capital stock. The terms of the Credit Facility also require
the Company and certain of its subsidiaries to maintain specified financial
ratios and satisfy certain tests, including, among others, a minimum interest
coverage ratio, a minimum debt service coverage ratio and a maximum leverage
ratio. The ability of the Company to comply with the foregoing financial ratios
and tests may be affected by events beyond the control of the Company, and there
can be no assurance that the Company will achieve operating results that comply
with such provisions. A breach of any of the foregoing covenants would result in
a default under the Credit Facility. In the event of any such default, the
lenders could elect to declare all amounts borrowed under the Credit Facility,
together with accrued interest thereon, to be immediately due and payable and
pursuant to a cross-default provision in the Fixed Asset Facility, BancBoston
Leasing, Inc. may accelerate the amounts due under the Fixed Asset Facility. If
the Company were unable to repay such amounts, the lenders could proceed against
the collateral granted to them to repay the indebtedness and other obligations
due and payable under the Credit Facility. If the Credit Facility were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full such indebtedness and the other indebtedness of the
Company. The stock of the Company's subsidiaries currently is pledged as
security under the terms of the Credit Facility. If the Company were to default
under the Credit Facility and the lenders thereunder were to foreclose on such
subsidiary stock, such subsidiary stock could be sold to a third party, which
would adversely affect the Company. Following consummation of the Offering, the
Company expects to amend or replace the Credit Facility. Any such amendment or
replacement will likely contain restrictive provisions similar to those
described above, except that the Company would be permitted to make the
dividends contemplated by this Prospectus so long as no other defaults under
such financing facility existed.
DEPENDENCE ON TECHNOLOGY
The Company's business is highly dependent on communications and
information systems. Any failure or interruption of the Company's or its
subsidiaries' systems, or of the systems of Wexford, could cause delays in the
Company's securities trading activities which could have a material adverse
effect on the Company's operating results. Such failures and interruptions may
result from the inability of certain computing systems (including those of the
Company, Wexford and other third party vendors) to recognize the year 2000. In
addition, the Company may incur costs in addressing the year 2000 issue, which
costs the Company estimates to be less than $500,000. There can be no assurance,
however, that these year 2000 issues can be adequately addressed by the Company,
that the costs incurred in connection therewith will not exceed such amount or
that any such additional payments would not have a material adverse effect on
the results of operations or financial condition of the Company. In addition,
there can be no assurance that the Company, its subsidiaries or Wexford will not
suffer any systems failure or interruption, whether caused by earthquake, fire,
other natural disaster, power or telecommunications failure, act of God, act of
war or otherwise, or that the Company's or its subsidiaries' or Wexford's
back-up procedures and capabilities in the event of any such failure or
interruption will be adequate. Furthermore, any deterioration in Wexford's or
its parent's financial condition could materially adversely affect the Company.
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LITIGATION IN THE COMPANY'S SECURITIES BROKERAGE BUSINESS
Many aspects of the Company's securities brokerage business involve
substantial risks of liability. From time to time the Company or its
subsidiaries may be named as defendants in civil litigation arising from their
business activities as retail broker-dealers. The plaintiffs in such litigation
may allege misconduct on the part of the Company's investment executives,
claiming, for example, that investments sold to such plaintiffs by the Company's
investment executives were unsuitable for their portfolios, or that such
investment executives engaged in excessive trading with respect to such
plaintiffs' accounts. Factors affecting the likelihood of such litigation
include the conduct of individual investment executives and the performance of
the investment vehicles sold by the Company's investment executives. Such
factors have resulted in the Company making payments to plaintiffs in the past,
and there can be no assurance that substantial payments in connection with the
resolution of such litigation will not occur in the future.
In recent years, there has been a substantial amount of litigation
involving the securities brokerage industry, including class action lawsuits
that generally seek substantial damages and other suits seeking punitive
damages. Companies engaged in the underwriting of securities, including Tucker
Anthony and Sutro, are subject to substantial potential liability, including for
material misstatements or omissions in prospectuses and other communications
with respect to underwritten offerings of securities or statements made by
securities analysts, under federal laws such as Rule 10b-5 promulgated under the
Securities and Exchange Act of 1934 and Section 11 of the Securities Act and
similar state statutes and common law doctrines. See "-- Business Subject to
Significant Regulation." Like other securities brokerage firms, the Company and
its subsidiaries have been named as defendants in class action and other
lawsuits and have in the past been subject to substantial settlements and
judgments. The risk of liability may be higher for an underwriter which, like
the Company, is active in the underwriting of securities offerings for emerging
and middle-market companies due to the higher degree of risk and volatility
associated with the securities of such companies. The defense of these or any
other lawsuits or arbitrations may divert the efforts and attention of the
Company's management and staff, and the Company may incur significant legal
expense in defending such litigation or arbitration. This may be the case even
with respect to frivolous claims or litigation. The amount of time that
management and other employees may be required to devote in connection with the
defense of litigation could be substantial and might divert their attention from
other responsibilities within the Company.
In the normal course of business, the Company and its subsidiaries are also
defendants in various civil actions and arbitrations arising out of their
activities as employers and as a result of other business activities. The
Company and its subsidiaries have in the past made substantial payments in
connection with the resolution of disputed claims, and there can be no assurance
that substantial payments in connection with the resolution of disputed claims
will not occur in the future.
As of December 31, 1997, there were approximately 46 lawsuits and
arbitrations pending against the Company and its subsidiaries. The Company does
not believe that these lawsuits and arbitrations, in the aggregate, will have a
material adverse effect on the Company's results of operations or financial
condition.
As is common in the securities industry, the Company does not carry
insurance that would cover payments made in connection with certain types of
lawsuits. In addition, the Company's and its subsidiaries' charter documents
require indemnification of the Company's and such subsidiaries' officers,
directors and agents to the maximum extent permitted by law.
POTENTIAL LOSSES DUE TO FRAUD OR MISTAKES OF CUSTOMERS OR EMPLOYEES
The Company is exposed to the risk of significant losses as a result of
customer fraud, employee errors, misconduct and fraud (including unauthorized
transactions by traders) and failures in connection with the processing of
securities transactions. There can be no assurance that the Company's risk
management procedures and internal controls will prevent such losses from
occurring.
The Company has determined that a former employee improperly valued
securities positions of the Company over the first eleven months of 1997 in
order to conceal trading losses for which such former employee was responsible.
The Company determined in the fourth quarter of 1997 that approximately $2.6
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million of trading losses arose from the actions of the former employee. The
loss has been included in the Company's financial results as follows: $228,000
in the first quarter, $1,071,000 in the second quarter, $431,000 in the third
quarter and $901,000 in the fourth quarter. The Company has notified the
Securities and Exchange Commission (the "Commission") and the NYSE of this
situation and is conducting an internal review of the specific trading loss and
the Company's reports and procedures relating thereto. The Commission and the
NYSE are currently investigating this situation. The Company does not expect
that the results of these investigations will have a material adverse effect on
the Company's business, financial condition or operating results.
MARKET, CREDIT AND LIQUIDITY RISKS ASSOCIATED WITH MARKET MAKING, PRINCIPAL
TRADING, ARBITRAGE AND UNDERWRITING ACTIVITIES
The Company's market making, principal trading, arbitrage and underwriting
activities often involve the purchase, sale or short sale of securities as
principal. Such activities subject the Company's capital to significant risks
from markets that may be characterized by relative illiquidity or that may be
particularly susceptible to rapid fluctuations in liquidity. Such market
conditions could limit the Company's ability to resell securities purchased or
to repurchase securities sold short. Such activities subject the Company's
capital to significant risks, including market, credit, counterparty and
liquidity risks. Market risk relates to the risk of fluctuating values based on
market prices without any action on the part of the Company. Credit risk relates
generally to the ability of third parties to whom the Company has extended
credit to repay amounts owed to the Company. Counterparty risk relates to
whether a counterparty on a derivative or other transaction will fulfill its
contractual obligations, which may include delivery of securities or payment of
funds. Liquidity risk relates to the Company's inability to liquidate assets or
redirect the deployment of assets contained in illiquid investments.
As a result of its underwriting and arbitrage activities, from time to time
the Company has large position concentrations in securities of, or commitments
to, a single issuer or issuers engaged in a specific industry. In addition, the
trend in all major capital markets, for competitive and other reasons, toward
larger commitments on the part of lead underwriters means that, from time to
time, an underwriter (including a co-manager) may retain significant position
concentrations in individual securities. Such concentrations increase the
Company's exposure to specific credit and market risks.
CONSTRAINTS IMPOSED BY NET CAPITAL REQUIREMENTS
The Commission, the NYSE, and various other securities exchanges and other
regulatory bodies in the United States have rules with respect to net capital
requirements which affect each broker-dealer subsidiary of the Company. These
rules are designed to ensure that broker-dealers maintain adequate regulatory
capital in relation to their liabilities and the size of their customer
business. These rules (the "Net Capital Rules") have the effect of requiring
that a substantial portion of a broker-dealer's assets be kept in cash or highly
liquid investments. Failure to maintain the required net capital may subject a
firm to suspension or revocation of its registration by the Commission and
suspension or expulsion by the National Association of Securities Dealers (the
"NASD") and other regulatory bodies, and ultimately may require its liquidation.
Compliance by the Company's broker-dealer subsidiaries with such Net Capital
Rules could limit certain operations that require intensive use of capital, such
as underwriting or trading activities. These rules could also restrict the
ability of the Company to withdraw capital, even in circumstances where the
Company's broker-dealer subsidiaries have more than the minimum amount of
required capital, which, in turn, could limit the ability of the Company to pay
dividends, implement its strategies, pay interest on and repay the principal of
its debt and redeem or repurchase shares of outstanding capital stock. In
addition, a change in such Net Capital Rules or the imposition of new rules
affecting the scope, coverage, calculation or amount of such net capital
requirements, or a significant operating loss or any large charge against net
capital, could have similar adverse effects.
CONCENTRATED CONTROL OF THE COMPANY
Upon the completion of this Offering, THL is expected to own approximately
29%, SCP is expected to own approximately 7%, the current employees of the
Company and its subsidiaries are expected to own
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approximately 28% and Hancock will own approximately 3% of the outstanding
Common Stock of the Company. This concentration of ownership and voting power
may have the effect of accelerating, delaying or preventing a change in control
of the Company or otherwise affect the ability of any stockholder to influence
the policies of the Company. See "Certain Relationships and Related
Transactions -- Stockholders Agreement."
BUSINESS SUBJECT TO EXTENSIVE REGULATION
Each subsidiary of the Company which is registered as a broker-dealer
and/or investment advisor is, and the securities industry in general is, subject
to extensive regulation in the United States at both the federal and state
level. Broker-dealers are subject to regulations covering all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure, record keeping and the conduct of directors, officers and employees.
As registered investment advisors under the Investment Advisors Act of 1940
(the "Advisors Act"), Tucker Anthony, Sutro and Freedom Capital are subject to
regulations which cover various aspects of the Company's business, including
compensation arrangements. Under the Advisors Act, every investment advisory
agreement with the Company's clients must expressly provide that such contract
may not be assigned by the investment advisor without the consent of the client.
Under the Investment Company Act of 1940 (the "Investment Company Act"), every
investment advisor's agreement with a registered investment company must provide
for the agreement's automatic termination in the event it is assigned. Under
both the Advisors Act and the Investment Company Act, an investment advisory
agreement is deemed to have been assigned when there is a direct or indirect
transfer of the Agreement, including a direct assignment or a transfer of a
"controlling block" of the advisor's voting securities or, under certain
circumstances, upon the transfer of a "controlling block" of the voting
securities of its parent corporation. A transaction is not, however, an
assignment under the Advisors Act or the Investment Company Act if it does not
result in a change of actual control or management of the investment advisor.
Any assignment of the Company's investment advisory agreements would require, as
to any registered investment company client, the approval of a majority of its
shareholders, and as to the Company's other clients, the consent of such clients
to such assignments. Following completion of the Offering, sales by THL or
issuances of Common Stock by the Company, among other things, could result in a
deemed assignment of the Company's investment advisory agreements under such
statutes. Shortly after the Offering, the Company intends to seek approval of
the shareholders of its registered investment clients and of its other clients
for any such future deemed assignment. The Company expects to incur
approximately $300,000 in costs in connection with seeking such approval. There
can be no assurance that the Company will be successful in obtaining the
necessary approvals. If any such deemed assignment were to occur, the failure to
obtain such approvals for a significant number of clients could have a material
adverse effect on the Company.
As a matter of public policy, regulatory bodies are charged with
safeguarding the integrity of the securities and other financial markets and
with protecting the interests of customers participating in those markets, not
with protecting the interests of the Company's stockholders. In addition,
self-regulatory organizations ("SROs") and other regulatory bodies in the United
States, such as the Commission, the NYSE, the NASD, the Commodities Futures
Trading Commission (the "CFTC"), the National Futures Association (the "NFA")
and the Municipal Securities Rulemaking Board (the "MSRB"), require strict
compliance with their rules and regulations. Failure to comply with any of these
laws, rules or regulations, the application of which under certain circumstances
may be unclear, could result in a variety of adverse consequences including
censure, civil penalties (including treble damages in the case of insider
trading violations), fines, the issuance of cease-and-desist orders, the
deregistration or suspension of a broker-dealer, investment adviser or futures
commission merchant, the statutory disqualification of officers or employees or
other adverse consequences which could have a material adverse effect on the
Company. Even if none of such actions is taken, such administrative or judicial
proceedings or arbitrations could have a material adverse effect on the
Company's perceived creditworthiness, reputation and competitiveness. Customers
of the Company's subsidiaries or others who allege that they have been damaged
by a violation of applicable regulations also may seek to obtain compensation
from such subsidiary, including the unwinding of any transactions with such
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subsidiary. Additional legislation or regulations, or changes in the methods or
enforcement of existing regulations by governmental entities or SROs may
materially and adversely affect the Company's business, financial condition or
operating results.
The Company's businesses may be materially affected not only by regulations
applicable to its subsidiaries as financial market intermediaries, but also by
regulations of general application. For example, the volume of the Company's
underwriting, merger and acquisition and principal investment business in a
given time period could be affected by, among other things, existing and
proposed tax legislation, antitrust policy and other governmental regulations
and policies (including the interest rate policies of the Federal Reserve Board)
and changes in interpretation or enforcement of existing laws and rules that
affect the business and financial communities. From time to time, various forms
of antitakeover legislation and legislation that could affect the benefits
associated with financing leveraged transactions with high-yield securities have
been proposed that, if enacted, could adversely affect the volume of merger and
acquisition business, which in turn could adversely affect the Company's
underwriting, advisory and trading revenues related thereto. The level of
business and financing activity in each of the industries on which the Company
and its subsidiaries focus can be affected not only by such legislation or
regulations of general applicability, but also by industry-specific legislation
or regulations.
The Company's subsidiaries' ability to comply with applicable laws and
rules is dependent in large part upon the establishment and maintenance of a
compliance system designed to monitor compliance with such laws and rules, as
well as the Company's ability to attract and retain qualified compliance
personnel. The Company and its subsidiaries could in the future be subject to
disciplinary or other actions due to claimed noncompliance which could have a
material adverse effect on the Company's business, financial condition and
operating results.
LIMITED OPERATING HISTORY AS STAND-ALONE COMPANY
The Company is a holding company formed in November 1996 to effect the
Acquisition. It conducts its business solely through its subsidiaries. Prior to
the Acquisition, Tucker Anthony, Sutro and the Company's other subsidiaries were
indirect wholly owned subsidiaries of Hancock. Consequently, the Company has a
limited history as a stand-alone operating company. In the past, Hancock or its
affiliates provided certain services to the Company, particularly short term
financing and various employee benefit and insurance services, and also limited
legal and other support services. The Company and its subsidiaries no longer
obtain such services from Hancock or its affiliates. See "Certain Relationships
and Related Transactions -- Relationship Between the Company and Hancock."
ABSENCE OF PRIOR MARKET FOR COMMON STOCK
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock has been determined
through negotiations among the Company and the Underwriters and may not be
indicative of the market price for the Common Stock after the Offering. The
Company believes that certain factors, such as sales of Common Stock into the
market by THL, Hancock, SCP or Company employees, fluctuations in operating
results of the Company or its competitors and market conditions generally for
similar stocks, could cause the market price of the Common Stock to fluctuate
substantially. Such market volatility may adversely affect the market price of
the Common Stock. Although the Common Stock has been approved for listing on the
NYSE subject to official notice of issuance, there can be no assurance that an
active public market will develop or, if developed, will be sustained following
the Offering. See "Underwriting."
POTENTIAL ADVERSE MARKET EFFECT OF FUTURE SALES OF COMMON STOCK
Sales of a substantial number of shares of Common Stock in the public
market, whether by purchasers in the Offering or by THL, Hancock, SCP or
employees of the Company, could adversely affect the prevailing market price of
the Common Stock and could impair the Company's future ability to raise capital
through an offering of its equity securities. There will be 19,097,403 shares of
Common Stock outstanding immediately
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after completion of the Offering, of which the 6,700,000 shares offered hereby
will be freely tradeable. All other shares will be owned by THL, Hancock, SCP or
current or former Company employees and will be "restricted securities" for
purposes of the Securities Act of 1933, as amended (the "Securities Act"), and,
subject to the volume and other limitations set forth in Rule 144 promulgated
under the Securities Act, will be eligible for sale upon expiration of 180 day
lock-up agreements with the Underwriters, unless released earlier by Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"). The Company, THL, Hancock, SCP
and certain employees of the Company are parties to an agreement which provides
THL, Hancock, SCP and such employees with certain registration rights. In
addition, if the Cleary Gull acquisition is consummated, the Company has
committed to register an aggregate of up to 977,778 shares of Common Stock
issued in connection with its acquisition of Cleary Gull (assuming a price at
the mid-point of the range on the front cover of this Prospectus) commencing 180
days after consummation of the Offering. See "Recent Developments," "Certain
Relationships and Related Transactions," "Shares Eligible for Future Sale" and
"Underwriting."
IMMEDIATE DILUTION TO PURCHASERS IN THE OFFERING
Purchasers of Common Stock in the Offering will experience immediate
dilution in the net tangible book value of $10.36 per share based on an assumed
initial public offering price of $18.00 per share (the mid-point of the range on
the cover page of this Prospectus). See "Dilution."
HOLDING COMPANY STRUCTURE
Substantially all of the revenues of the Company are generated by Tucker
Anthony, Sutro and Freedom Capital, and their subsidiaries. Freedom Securities
Corporation, the issuer of the shares offered hereby, relies exclusively on
financing activities and distributions from its subsidiaries for funds required
to pay dividends, implement its strategies and redeem or repurchase shares of
outstanding capital stock. The Company's ability to receive distributions from
its subsidiaries may be limited by the Net Capital Rules, restrictions which may
be imposed by the Credit Facility or successor borrowing arrangements of the
Company's subsidiaries, or by the earnings, financial condition and cash
requirements of the Company's subsidiaries. Additionally, there can be no
assurance that the Company will be able to obtain funds through financing
activities. These factors may impose limitations on or prevent the Company from
paying dividends, implementing its strategies or repurchasing shares of its
capital stock.
INTEGRATION AND OTHER RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company expects to continue a strategy of identifying and acquiring
companies with complementary businesses which would strengthen or expand the
firm's geographical or product offering base. There can be no assurance that the
Company will be able to identify appropriate acquisition candidates, negotiate
appropriate acquisition terms, obtain financing which may be needed to effect
such acquisitions or integrate acquisitions successfully into the Company's
operations. Additionally, there can be no assurance that any such acquisitions
will contribute to the profitability of the Company.
BOARD OF DIRECTORS' ABILITY TO DESIGNATE TERMS AND AUTHORIZE ISSUANCE OF BLANK
CHECK PREFERRED STOCK
The Company is authorized to issue "blank check" preferred stock
("Preferred Stock"), which may be issued from time to time in one or more series
upon authorization by the Company's Board of Directors. The Board of Directors,
without further approval of the stockholders, is authorized to fix the dividend
rights, conversion rights, voting rights, redemption rights, liquidation
preferences, and any other rights, preferences, privileges and restrictions
applicable to each series of the Preferred Stock. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes could, among other things, adversely affect the voting
power and dividend rights of the holders of Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of the
Company, discourage bids for the Company's Common Stock at a premium or
otherwise adversely affect the market price of the Common Stock. See
"Description of Capital Stock -- Certain Certificate of Incorporation, Bylaw and
Statutory Anti-Takeover Provisions Affecting Stockholders."
17
<PAGE> 19
USE OF DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into derivatives transactions as part of its principal
trading activities, primarily to manage its own interest rate and price risks,
and also as an alternative to investment in the cash markets. While the use of
derivatives may allow the Company to better manage certain risks, derivatives
also have risks that are similar in type to the risks of the cash market
instruments to which their values are linked. For example, in times of market
stress, sharp price movements or reductions in liquidity in the cash markets may
be related to comparable or even greater price movements and reductions in
liquidity in the derivatives markets. Further, the risks associated with
derivatives are potentially greater than those associated with the related cash
market instruments because of the additional complexity and potential for
leverage. In addition, derivatives may create credit risk (the risk that a
counterparty on a derivative transaction will not fulfill its contractual
obligations), as well as legal, operational, reputational and other risks beyond
those associated with the underlying cash market instruments to which their
values are linked. The Company manages the risks associated with its derivative
financial instruments as part of its overall risk management policies and
procedures. There can be no assurance, however, that the Company's use of
derivatives may not have a material adverse effect on its results of operations
or financial condition in any period.
CONFLICTS OF INTEREST
Tucker Anthony and Sutro, each of which is one of the representatives of
the Underwriters, are subsidiaries of the Company. Accordingly, underwriting
discounts and commissions received by Tucker Anthony and Sutro will benefit the
Company. Conflicts of interest may result from Tucker Antony and Sutro acting as
Underwriters in the Offering, such as conflicts that may arise from pricing
discussions between the Company and the Underwriters. Pursuant to Rule 2720 of
the Conduct of Rules of the NASD, the initial public offering price can be no
higher than that recommended by a "Qualified Independent Underwriter" meeting
certain standards. In accordance with this requirement, DLJ has assumed the
responsibility of acting as Qualified Independent Underwriter and will recommend
a price in compliance with the requirements of Rule 2720.
Also, certain key employees of the Company, including the executive
officers of the Company, make investments in, or make investments together with,
certain of the Company's equity capital markets clients through various
investment vehicles. See "Certain Relationships and Related
Transactions -- Other Transactions with Management -- Investment Partnerships."
Conflicts of interest could exist in situations where the investment objectives
of such employees are not aligned with those of such clients. The Company does
not believe that any such conflict of interest will have any adverse effect on
the Company's operations or financial condition. The Company believes that no
material conflicts of interest exist between the Company or its employees, on
the one hand, and investors in the Offering, on the other.
RESTRICTION ON PAYMENT OF DIVIDENDS
The Predecessor Company paid dividends on its Common Stock each year from
1991 to 1995. No dividends were paid by the Company in 1996 or 1997. Following
consummation of the Offering, the Company's Board of Directors intends to pay a
quarterly dividend of $0.04 per share on the outstanding shares of Common Stock
beginning with the dividend payable in the third quarter of 1998 with respect to
the second quarter of 1998. The timing and amount of future dividends will be
determined by the Board and will depend, among other factors, upon the Company's
earnings, financial condition and cash requirements at the time such payment is
considered as well as restrictions which may be imposed on the Company's
subsidiaries' ability to fund dividends by the Credit Facility or successor
borrowing arrangements. Furthermore, the net capital rules of the various
regulatory bodies and covenants in instruments governing outstanding
indebtedness of the Company impose limitations on the payment of dividends by
the Company. The Credit Facility currently prohibits the Company from paying
dividends. The Company intends to amend, replace or terminate the Credit
Facility after completion of the Offering so as to allow the Company to pay
dividends as contemplated hereby, so long as the Company is not in default
thereunder. See "Dividend Policy".
18
<PAGE> 20
CERTAIN CERTIFICATE OF INCORPORATION, BYLAW AND STATUTORY ANTI-TAKEOVER
PROVISIONS AFFECTING STOCKHOLDERS
The Company's Certificate of Incorporation and Bylaws and certain statutes
affecting the Company contain provisions that might diminish the likelihood that
a potential acquiror would make an offer for the Common Stock, or impede a
transaction favorable to the interests of the stockholders, or increase the
difficulty of removing the incumbent Board of Directors and management. These
provisions with respect to the Company's Certificate of Incorporation and Bylaws
include (i) the authority of the Board of Directors to issue a series of
preferred stock with such voting rights and other powers as the Board of
Directors may determine; (ii) the inability of stockholders to take any action
without a meeting or to call a special meeting of stockholders; and (iii)
certain advance notice procedures for nominating candidates for election as
directors and for submitting proposals for consideration at stockholders'
meetings. See "Description of Capital Stock -- Certain Certificate of
Incorporation, Bylaw and Statutory Anti-Takeover Provisions Affecting
Stockholders."
19
<PAGE> 21
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,200,000 shares of
Common Stock offered by the Company hereby are estimated to be $69,300,000,
assuming an initial public offering price of $18.00 per share (the mid-point of
the range on the cover page of this Prospectus) and after deducting underwriting
discount and commissions and estimated offering expenses. The Company intends to
use all of the Offering proceeds to repay existing indebtedness under the Credit
Facility, which was incurred in connection with the Acquisition. Such
indebtedness accrues interest at variable rates (which averaged 7.1% per annum
during 1997) and matures on December 31, 2001. The Company will not receive any
proceeds from the sale of shares of Common Stock by the Selling Stockholders.
See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Predecessor Company paid dividends on its Common Stock each year from
1991 to 1995. No dividends were paid by the Company in 1996 or 1997. Following
consummation of the Offering, the Company's Board of Directors intends to pay a
quarterly dividend of $0.04 per share on the outstanding shares of Common Stock
beginning in the third quarter of 1998 with respect to the second quarter of
1998. The timing and amount of future dividends will be determined by the Board
and will depend, among other factors, upon the Company's earnings, financial
condition and cash requirements at the time such payment is considered.
Furthermore, the net capital rules of the various regulatory bodies and
covenants in instruments governing outstanding indebtedness of the Company
impose limitations on the payment of dividends by the Company. The Credit
Facility currently prohibits the Company from paying dividends. The Company
intends to amend or replace the Credit Facility after completion of the Offering
so as to allow the Company to pay dividends as contemplated hereby so long as
the Company is not in default thereunder. Under the most restrictive of such
covenants and limitations, the Company has substantial excess capacity to make
anticipated dividend payments and expects to have excess capacity for the
foreseeable future (although the existence of excess capacity pursuant to
regulatory and contractual limitation does not necessarily mean that the Company
will have sufficient cash to fund such dividends). See "Risk
Factors -- Restriction on Payment of Dividends" and Note 10 to the Company's
Consolidated Financial Statements included elsewhere in this Prospectus.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth the long-term debt and total capitalization
of the Company as of December 31, 1997 on an actual basis and as adjusted to
give effect to the sale of the 4,200,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $18.00 per share
(the mid-point of the range on the cover page of this Prospectus), after
deducting the underwriting discount and commissions and estimated offering
expenses and the application of the estimated net proceeds therefrom as
described in "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
<S> <C> <C>
Long-term debt:
Credit Facility (1)....................................... $ 80,000 $ --
Fixed asset financing..................................... 21,446 21,446
-------- -------
Total long-term borrowings........................ 101,446 21,446
Stockholders' equity:
Common Stock, $.01 par value; 21,816,000 shares
authorized, 14,840,627 actual shares issued; 60,000,000
shares authorized, as adjusted; 19,040,627 shares
issued, as adjusted.................................... 147 189
Additional paid-in capital................................ 83,654 152,912
Retained earnings......................................... 19,438 18,046
Subscribed stock (136,532 shares)......................... (913) (913)
-------- -------
Total stockholders' equity........................ 102,326 170,234
-------- -------
Total capitalization.................. $203,772 191,680
======== =======
</TABLE>
- ------------------------------
(1) The Company expects that, upon consummation of the Offering, $77.5 million
will be outstanding under the Credit Facility, all of which is expected to
be repaid in full with the Company's net proceeds from the Offering and
available cash. See "Use of Proceeds."
21
<PAGE> 23
DILUTION
The net tangible book value of the Common Stock of the Company at December
31, 1997 was $75.1 million or $5.11 per share. After giving effect to the sale
of the shares of Common Stock by the Company pursuant to the Offering at an
assumed initial public offering price of $18.00 per share (after deducting
underwriting discounts and commissions and estimated expenses of the Offering),
the Company's adjusted pro forma net tangible book value at December 31, 1997,
would have been $144.4 million or $7.64 per share.
Net tangible book value per share before the Offering has been determined
by dividing the net tangible book value of the Company (total tangible assets
less total liabilities) by the number of shares of Common Stock outstanding at
December 31, 1997. The Offering will result in an increase in net tangible book
value per share of $2.53 to existing stockholders and a dilution of $10.36 per
share to new investors who purchase shares of Common Stock in the Offering.
Dilution is determined by subtracting pro forma net tangible book value per
share of Common Stock from the assumed initial public offering price of $18.00
per share. The following table illustrates this dilution per share of Common
Stock.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $18.00
------
Net tangible book value per share at December 31, 1997...... $5.11
Increase attributable to sale of shares of Common Stock in
the Offering.............................................. 2.53
-----
Pro forma net tangible book value per share of Common Stock
after the Offering........................................ 7.64
------
Dilution to persons who purchase shares of Common Stock in
the Offering.............................................. $10.36
======
</TABLE>
The following table summarizes (i) the number of shares of Common Stock to
be purchased from the Company pursuant to the Offering; (ii) the number of
shares of Common Stock held by existing stockholders after the Offering; and
(iii) the cash consideration paid therefor:
<TABLE>
<CAPTION>
TOTAL CASH CONSIDERATION
------------------------------------
SHARES AVERAGE
--------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Common Stock purchased in the
Offering............................ 4,200,000 22.2% $ 75,600,000 49.4% $18.00
Common Stock owned by existing
stockholders(1)..................... 14,704,095(2) 77.8 77,509,264(2) 50.6 5.27(2)
---------- ----- ------------ -----
Total................................. 18,904,095 100.0% $153,109,264 100.0% 8.10
========== ===== ============ =====
</TABLE>
- ---------------
(1) Does not reflect purchase of up to 335,000 shares by employees pursuant to
the Offering.
(2) Includes 717,481 shares issued to Hancock in connection with the Acquisition
for which no cash consideration was paid.
The foregoing tables assume no exercise of the Underwriters' over-allotment
option or stock options outstanding at December 31, 1997 and does not give
effect to any issuances of stock, other than in connection with the Offering,
after December 31, 1997. At December 31, 1997, there were 2,133,888 shares of
Common Stock issuable upon exercise of outstanding stock options at a weighted
average exercise price of $5.50 per share and up to 88,609 shares issuable to
Hancock for no additional consideration upon such exercise. To the extent that
outstanding options are exercised in the future, there will be further dilution
to new investors. See "Management -- Stock Option and Stock Purchase Plans,"
"Certain Relationships and Related Transactions -- Additional Share Agreement"
and Note 15 of the Notes to Consolidated Financial Statements for the year ended
December 31, 1997.
22
<PAGE> 24
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial data set forth below as of December 31,
1996 and 1997 and for the one month period ended December 31, 1996 and year
ended December 31, 1997 are derived from the consolidated financial statements
of the Company included elsewhere in the Prospectus which have been audited by
Ernst & Young LLP, independent accountants. The selected consolidated financial
data set forth below for the year ended December 31, 1995 and for the eleven
months ended November 29, 1996 are derived from the consolidated financial
statements of the Predecessor Company included elsewhere in this Prospectus
which have been audited by Ernst & Young LLP, independent accountants. The
selected consolidated financial data as of December 31, 1993, 1994 and 1995 and
for the years ended December 31, 1993 and 1994 are derived from financial
statements of the Predecessor Company, also audited by Ernst & Young LLP, not
included in this Prospectus. The historical results are not necessarily
indicative of the results of operations to be expected in the future. The
following financial data are qualified in their entirety by, and should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMBINED(1)
---------------------------------------- ------------
ELEVEN ONE MONTH
YEARS ENDED DECEMBER 31, MONTHS ENDED ENDED YEAR ENDED YEAR ENDED
------------------------ NOVEMBER 29, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1996 1996 1997
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Commissions......................... $131.1 $122.9 $140.2 $139.0 $12.5 $151.5 $167.2
Principal transactions.............. 125.3 85.3 105.8 95.5 8.4 103.9 99.3
Investment banking.................. 63.0 40.1 34.8 34.0 4.1 38.1 55.2
Asset management.................... 12.6 13.0 14.9 17.3 1.7 19.0 19.9
Other............................... 12.9 13.7 12.7 15.2 0.6 15.8 12.5
------ ------ ------ ------ ----- ------ ------
Total operating revenues....... 344.9 275.0 308.4 301.0 27.3 328.3 354.1
Interest income..................... 40.7 52.1 60.1 46.5 3.3 49.8 44.1
------ ------ ------ ------ ----- ------ ------
Total revenues................. 385.6 327.1 368.5 347.5 30.6 378.1 398.2
Interest expense.................... 21.1 30.2 36.0 26.5 1.8 28.3 22.4
------ ------ ------ ------ ----- ------ ------
Net revenues(2)................ 364.5 296.9 332.5 321.0 28.8 349.8 375.8
Non-interest expenses:
Compensation and benefits........... 236.4 198.3 217.6 209.2 18.9 228.1 245.9(3)
Occupancy and equipment............. 26.0 25.8 26.1 31.0 2.2 33.2 24.3
Communications...................... 15.8 16.4 18.1 16.6 1.3 17.9 17.0
Brokerage and clearance............. 7.9 7.5 7.3 10.5 1.0 11.5 11.3
Promotional......................... 9.2 7.9 9.5 9.1 0.8 9.9 10.3
Other............................... 40.5 30.1 31.6 24.2 2.6 26.8 28.5
------ ------ ------ ------ ----- ------ ------
Total non-interest expenses.... 335.8 286.0 310.2 300.6 26.8 327.4 337.3
------ ------ ------ ------ ----- ------ ------
Acquisition interest expense.......... -- -- -- -- 0.6 0.6 6.1
------ ------ ------ ------ ----- ------ ------
Income before income taxes............ 28.7 10.9 22.3 20.4 1.4 21.8 32.4
Income taxes.......................... 12.0 4.5 9.2 8.8 0.7 9.5 13.7
------ ------ ------ ------ ----- ------ ------
Net income............................ $ 16.7 $ 6.4 $ 13.1 $ 11.6 $ 0.7 $ 12.3 $ 18.7
====== ====== ====== ====== ===== ====== ======
Basic earnings per share(4)........... -- -- -- -- $0.05 -- $ 1.31
===== ======
Diluted earnings per share(4)......... 0.05 1.27
===== ======
Pro forma basic earnings per
share(5)............................ -- -- -- -- -- -- $ 1.18
======
Pro forma diluted earnings per
share(5)............................ -- -- -- -- -- -- 1.16
======
STATEMENT OF FINANCIAL CONDITION DATA
(AT END OF PERIOD):
Total assets.......................... $1,159.8 $1,037.9 $1,214.0 $517.0(6) $727.6
Long-term debt........................ -- -- -- 110.8(7) 101.4
Stockholders' equity.................. 140.0 145.4 152.7 79.5(7) 102.3
Book value per share of Common Stock
outstanding......................... -- -- -- $ 5.55 $ 6.96
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMBINED(1)
---------------------------------------- ------------
ELEVEN ONE MONTH
YEARS ENDED DECEMBER 31, MONTHS ENDED ENDED YEAR ENDED YEAR ENDED
------------------------ NOVEMBER 29, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
After-tax return on average
equity(8)........................... 12.6% 4.5% 8.8% 10.6% 20.6%
Compensation and benefits expense as a
percentage of net revenues.......... 64.9 66.8 65.4 65.2 65.5(3)
Non-compensation and benefits
operating expense as a percentage of
net revenues........................ 27.3 29.5 27.8 28.4 24.3
Amortization of Acquisition
intangibles (in millions)........... -- -- -- -- $ 0.2 $ 0.2 $ 2.5
Assets in retail brokerage accounts
(at end of period) (in billions).... $15.0 $17.0 $20.0 $23.0 $28.0
</TABLE>
- ------------------------------
(1) Year ended December 31, 1996 combined financial data refer to the
consolidated results of the Predecessor Company for the eleven months ended
November 29, 1996 combined with the consolidated results of the Company for
the one month ended December 31, 1996. These periods are not directly
comparable due to the effects of the Acquisition, including related purchase
accounting adjustments and the Acquisition financing.
(2) Net revenues equals total revenues less interest expense other than the
Acquisition interest expense.
(3) Includes the effect of $1.4 million of non-cash compensation expense
resulting from issuance of Common Stock and stock options to employees.
(4) Basic earnings per share ("Basic EPS") is calculated by dividing net income
by the weighted average number of outstanding shares. Diluted earnings per
share ("Diluted EPS") also includes the effects of the issuance of stock
options and other exercisable shares.
(5) Pro forma earnings per share ("Pro forma EPS") for the year ended December
31, 1997 is calculated in the same manner as in (4) above with the following
adjustments: (i) net income is adjusted to eliminate the after-tax effect of
interest expense on the Acquisition indebtedness to be repaid with the net
offering proceeds and available cash, and a decrease in interest income due
to the use of available cash, as if the repayment occurred at the beginning
of the year; and (ii) the number of outstanding shares used for basic and
diluted EPS gives effect to the issuance of 4.2 million shares by the
Company in the Offering at the mid-point of the range on the cover page of
this Prospectus. These adjustments result in Pro forma net income, excluding
extraordinary item (the write-off of capitalized debt issuance costs related
to the Acquisition costs), of $21.9 million.
(6) The decline in total assets from December 31, 1995 to December 31, 1996 is
primarily attributable to the initiation of the Wexford clearing arrangement
pursuant to which certain customer and broker-dealer balances are no longer
included on the Company's Statement of Financial Condition.
(7) The decrease in stockholders' equity and increase in long-term debt from
December 31, 1995 to December 31, 1996 was primarily a result of the
Acquisition.
(8) After-tax return on average equity is calculated by dividing net income by
average stockholders' equity for the year.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Historical Consolidated Financial and Other Data" and the Company's Consolidated
Financial Statements and Notes thereto, each appearing elsewhere in this
Prospectus. In addition to historical information, the following Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ significantly from those anticipated in
these forward-looking statements as a result of certain factors, including those
discussed in "Risk Factors" contained elsewhere in this Prospectus.
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. Declining interest rates and an
improving economic environment contributed to a significant increase in activity
in the equity markets in the United States during the latter part of 1995, which
continued throughout 1996 and 1997. 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.
THE ACQUISITION
The Acquisition of the Company occurred in November 1996. Discussions
herein with respect to 1996 refer to the consolidated results of the Predecessor
Company for the eleven months ended November 29, 1996 combined with the
consolidated results of the Company for the one month period ended December 31,
1996. As a result of purchase accounting in connection with the Acquisition, the
Company's goodwill, which is amortized over a period of 15 years, increased by
$14.7 million dollars in 1996. As part of the Acquisition, the Company increased
its level of long-term indebtedness and experienced an attendant increase in
annual interest expense. The net proceeds of the Offering to the Company,
together with available cash, will be used to repay this indebtedness and, as a
result, the Company will record an extraordinary item of $2.4 million ($1.4
million on an after-tax basis) for the write-off of capitalized debt issuance
costs during the period in which the Offering is consummated. The effects of the
Acquisition impact the comparability of the Company's financial results with
those of the Predecessor Company.
The Company believes that, especially during the months prior to the
Acquisition and to some extent immediately thereafter, uncertainty regarding a
change in ownership of the Company and the subsequent transition adversely
affected the business of the Company. In management's opinion, employee
purchases of equity of the Company in conjunction with the Acquisition and the
consummation of the Acquisition have significantly enhanced employee motivation
and the Company's ability to retain existing employees and improved its ability
to recruit additional investment professionals. During 1998, the Company has
sold approximately 42,723 shares of Common Stock to employees at an average
purchase price of $6.95 per share. The Company will recognize non-cash
compensation expense equal to the difference between the fair market value of
such shares and the purchase price therefor.
CONTRIBUTION OF PRINCIPAL SUBSIDIARIES
During 1996 and 1997, Tucker Anthony contributed 62% and 59%, respectively,
of the Company's total operating revenues while Sutro contributed 32% and 35%,
respectively, of total operating revenues and Freedom Capital contributed 6% of
total operating revenues in each of 1996 and 1997. During these periods,
25
<PAGE> 27
Tucker Anthony and Freedom Capital contributed a significantly greater
percentage of the Company's net operating income than their respective
contributions to total operating revenues. As a result of initiatives to improve
the productivity of Sutro, its profit margins have been improving since 1995.
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 ("OTC") agency, mutual fund, insurance, and
annuity transactions. Principal transactions revenues include gains and losses
from the trading of securities by the Company as principal including principal
sales credits and dividends. 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, 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 of furniture, fixtures, leasehold improvements, business equipment
and computer equipment. 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 Credit Facility.
26
<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
net revenues:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995(1) 1996(2) 1997
<S> <C> <C> <C>
Revenues:
Commissions............................................. 42.1% 43.3% 44.5%
Principal transactions.................................. 31.8 29.7 26.4
Investment banking...................................... 10.5 10.9 14.7
Asset management........................................ 4.5 5.4 5.3
Other................................................... 3.8 4.5 3.3
----- ----- -----
Total operating revenues............................. 92.7 93.8 94.2
Interest income......................................... 18.1 14.2 11.7
----- ----- -----
Total revenues....................................... 110.8 108.0 105.9
Interest expense........................................ 10.8 8.0 5.9
----- ----- -----
Net revenues......................................... 100.0 100.0 100.0
Non-interest expenses:
Compensation and benefits............................... 65.4 65.2 65.5(3)
Occupancy and equipment................................. 7.9 9.5 6.5
Communications.......................................... 5.4 5.1 4.5
Brokerage and clearance................................. 2.2 3.3 3.0
Promotional............................................. 2.9 2.8 2.7
Other................................................... 9.5 7.7 7.6
----- ----- -----
Total non-interest expenses.......................... 93.3 93.6 89.8
----- ----- -----
Acquisition interest expense.............................. -- 0.2 1.6
----- ----- -----
Income before income taxes................................ 6.7 6.2 8.6
Income taxes.............................................. 2.8 2.7 3.6
----- ----- -----
Net income................................................ 3.9% 3.5% 5.0%
===== ===== =====
</TABLE>
- ------------------------------
(1) Predecessor Company.
(2) Based on the consolidated results of the Predecessor Company for the eleven
months ended November 29, 1996 combined with the consolidated results of the
Company for the one month ended December 31, 1996.
(3) Includes the effect of $1.4 million of non-cash compensation expense
resulting from issuance of Common Stock and stock options to employees.
1997 COMPARED TO 1996
The Company experienced strong operating results in 1997 compared to 1996.
Revenues increased in all of the Company's core businesses, with the exception
of principal transaction revenues, and expenses declined as a percentage of net
revenues. Net income increased $6.4 million or 52% to $18.7 million in 1997 from
net income of $12.3 million in 1996, even after deducting after-tax expenses of
$5.9 million in 1997 related to the Acquisition (primarily amortization of
goodwill and interest and other expenses related to the Credit Facility).
Total operating revenues increased $25.8 million or 8% to $354.1 million in
1997 from $328.3 million in 1996. During 1996 and 1997, Tucker Anthony
contributed 62% and 59%, respectively, of the Company's total operating revenues
while Sutro contributed 32% and 35%, respectively, and Freedom Capital
contributed 6% in each year. Net revenues, including the effect of interest
income and interest expense, other than the Acquisition interest expense,
increased $26.0 million or 7% to $375.8 million in 1997 versus $349.8 million in
1996.
27
<PAGE> 29
Commission revenues increased $15.7 million or 10% to $167.2 million in
1997 from $151.5 million in 1996, due to increased business in the Company's
retail systems, reflecting the growth in listed share volume on all the major
equity exchanges and higher mutual fund commission revenue. During 1997, Tucker
Anthony and Sutro increased average production per retail investment executive
by 15% and 13%, respectively, over the prior year.
Principal transaction revenues declined $4.6 million or 4% to $99.3 million
in 1997 from $103.9 million in 1996, mainly due to the combined result of
management's decision to discontinue certain institutional fixed income business
resulting in a decline of $1.5 million, the $1.3 million net effect of a
decrease in convertible arbitrage trading profits as interest rates declined
during the period partially offset by improvement in risk arbitrage trading, a
$0.8 million improvement in the trading of equities and a mortgage-backed
securities trading loss of $2.6 million caused by a former employee.
Investment banking revenues increased $17.1 million or 45% to $55.2 million
in 1997 from $38.1 million in the prior year. The higher investment banking
revenues resulted from increased underwriting activity, similar to that
experienced in the securities industry generally, and due to the Company's
refocused and increased emphasis on the public offering business at Tucker
Anthony and Sutro. Tucker Anthony or Sutro collectively managed or co-managed 34
public equity offerings during 1997 compared to 16 during 1996 and generated an
increase in private placement, advisory and merger and acquisition fees of 17%
over 1996.
Asset management revenues increased $0.9 million or 5% to $19.9 million in
1997 from $19.0 million in 1996. This revenue increase arose primarily in the
institutional area where assets grew 14% to $1.7 billion and related revenues
increased 21% or $1.0 million in 1997, reflecting the full year effect of new
accounts at year-end 1996 and asset appreciation arising from equity market
performance which produced higher fee income. Revenues from other areas of the
asset management business were essentially unchanged from 1996 as higher money
market fee income in 1997 was largely offset by lower revenues in the taxable
advisory business which discontinued its tax preparation services at year-end
1996. Total assets under management grew to $5.6 billion at year end 1997 from
$5.1 billion at year end 1996.
Other income decreased $3.3 million or 21% to $12.5 million in 1997 from
$15.8 million in 1996. This decrease resulted primarily from the mid-1997
expiration of a five year contract with John Hancock Broker Distribution
Services under which the Company recovered mutual fund sales charges.
Interest income decreased a net of $5.7 million or 11% to $44.1 million in
1997 from $49.8 million in 1996, due primarily to the combination of $4.4
million of higher interest income on customer balances more than offset by a
$10.1 million decline in interest income mainly on lower average government bond
inventories. Interest expense, excluding those expenses associated with
financing the Acquisition, decreased $5.9 million or 21% to $22.4 million in
1997 from $28.3 million in 1996, reflecting lower average inventory balances.
Total non-interest expenses increased $9.9 million or 3% to $337.3 million
in 1997 from $327.4 million in 1996. This increase was the result of higher
production-related compensation principally attributable to higher revenues
partially offset by reduced operating expenses mainly resulting from the
Company's outsourcing of its clearing function to Wexford and other cost
efficiencies. Although the Company's income statement refers to brokerage and
clearance as a specific category of expense, the compensation, occupancy and
other expense categories also included costs associated with the Company's
clearing activity, both while self clearing and after its conversion to Wexford.
The Company achieved substantial savings in these expense categories as a result
of the Wexford clearing arrangement, even after the incurrence of $4.5 million
of one-time occupancy expense in conjunction with entering into the Wexford
clearing arrangement. The Company began to clear through Wexford in April 1996;
consequently, comparisons between 1996 and 1997 do not reflect the full cost
savings experienced as a result of the new clearing arrangement.
Compensation and benefits expense increased $17.8 million or 8% to $245.9
million in 1997 from $228.1 million in 1996, primarily due to increased
incentive and production-related compensation, offset by lower fixed expenses
resulting from back office support personnel reductions associated with the
outsourcing of the Company's clearing function in 1996 and substantial
organizational changes in the fixed income area. Compensation and benefits as a
percentage of net revenues remained virtually unchanged at 65% in 1997 as
28
<PAGE> 30
compared to 1996. During 1997, the Company incurred $1.4 million of non-cash
compensation expense resulting from issuance of Common Stock and stock options
to its employees.
Despite substantially increased clearing activity, brokerage and clearance
expenses declined slightly to $11.3 million in 1997 compared to $11.5 million in
1996, primarily as a result of the cost effective Wexford clearing arrangement.
All other operating expenses decreased an aggregate of $7.7 million or 9%
to $80.1 million for 1997 from $87.8 million in 1996, primarily due to the
realization of benefits from outsourcing and other cost efficiencies initiated
by management. All other expenses as a percentage of net revenues declined to
21% in 1997 from 25% in 1996. Specifically, communications expense decreased
$0.9 million, or 5%, and occupancy and equipment expense decreased $8.9 million,
or 27% (including a one-time charge of $4.5 million in 1996 related to entering
into the Wexford clearing arrangement). These decreases were partially offset by
an increase in promotional expense of $0.4 million or 4% and an increase in
other expenses which totaled $28.5 million in 1997 (including $1.9 million in
goodwill amortization relating to the Acquisition), as compared to 1996 when
other expenses totaled $26.8 million (including a one-time credit of $6.3
million due to an insurance recovery associated with litigation expenses
incurred during a prior period). Without giving effect to such amortization
expense and insurance recovery, other expenses decreased $6.5 million or 20%
compared to 1996, primarily as a result of the Wexford clearing arrangement.
The Company's income tax provisions in 1997 and 1996 were $13.7 million and
$9.5 million, respectively, which represented a 42% effective tax rate in 1997
and a 44% effective tax rate in 1996. The lower effective tax rate in 1997 was
due mainly to an increase in non-taxable dividend income.
1996 COMPARED TO 1995
Total operating revenues increased $19.9 million or 6% to $328.3 million in
1996 from $308.4 million in 1995. The Company, along with the rest of the
securities industry, benefited during 1996 from continued strength in the equity
markets and resultant higher trading volumes. In particular, agency commission
income, OTC principal sales credits and asset management fee income increased
substantially over the prior year. Revenues from fixed income trading and
institutional sales declined, partially offsetting these gains. Net income
decreased $0.8 million or 6% to $12.3 million in 1996 from $13.1 million in
1995.
Commission revenues increased $11.3 million or 8% to $151.5 million in 1996
from $140.2 million in 1995 reflecting higher sales of both listed and OTC
securities and increased mutual fund business.
Principal transaction revenues decreased $1.9 million or 2% to $103.9
million in 1996 from $105.8 million in 1995, primarily as a result of a $0.6
million decline in certain institutional fixed income business and a $1.4
million decline in over the counter trading activity, particularly in the
municipal bond business of Tucker Anthony. Accordingly, management took steps in
1996 to curtail further such losses by downsizing the fixed income group and
redirecting the municipal bond trading business away from institutional sales
and trading towards support of retail operations.
Investment banking revenues increased $3.3 million or 9% to $38.1 million
in 1996 from $34.8 million in 1995, primarily due to an increase in underwriting
and management fees of $4.3 million partially offset by lower public finance
fees which decreased $0.9 million.
Asset management revenues increased $4.1 million or 28% to $19.0 million in
1996 from $14.9 million in 1995, due to growth in fees from the Company's asset
management subsidiary, Freedom Capital. Assets under management grew from $4.6
billion at the end of 1995 to $5.1 billion at the end of 1996, reflecting
increases of approximately $300 million in money market funds and $200 million
in institutional funds.
Other income increased $3.1 million or 24% to $15.8 million in 1996 from
$12.7 million in 1995, primarily reflecting an increase of $1.0 million in
Hancock mutual fund distribution fees and $1.5 million from the sale of
securities obtained from litigation settlements.
Interest income decreased $10.3 million or 17% to $49.8 million in 1996
from $60.1 million in 1995 reflecting the combined effects of a reduced level of
bond inventories ($5.3 million lower interest income), and
29
<PAGE> 31
decreased stock borrowing activity ($5.0 million). Interest expense, excluding
those expenses associated with financing the Acquisition in 1996, decreased $7.7
million or 21% to $28.3 million in 1996 from $36.0 million in 1995 due in part
to reduced stock loan activity.
Total non-interest expenses increased $17.2 million or 6% to $327.4 million
in 1996 from $310.2 million in 1995, largely as a result of increased
production-based compensation. During 1996, the Company incurred a one-time
charge of $4.5 million, included in occupancy and equipment expense, in
conjunction with entering into its Wexford clearing arrangement and the related
abandonment of certain properties previously leased for the Company's clearing
operations.
Compensation and benefits expenses increased $10.5 million or 5% to $228.1
million in 1996 from $217.6 million in 1995, primarily due to payment of higher
commissions, resulting from higher retail revenues, and increased
production-based compensation.
Brokerage and clearance expenses increased $4.2 million or 58% to $11.5
million in 1996 from $7.3 million in 1995. This increase is primarily
attributable to the costs associated with clearing through Wexford. Clearing
expenses in 1995, while the Predecessor Company was self-clearing, were also
reported in compensation, occupancy and other expense categories of the income
statement.
Occupancy and equipment expense increased $7.1 million or 27% to $33.2
million in 1996 from $26.1 million in 1995 primarily due to a $4.5 million
provision for future lease obligations pertaining to New York office space which
was previously occupied by the Company's clearing and cash management
operations, which operations are now performed by Wexford effective April 1,
1996.
All other expenses declined $4.6 million or 8% to $54.6 million in 1996
from $59.2 million in 1995. Specifically, communications expense decreased $0.2
million or 1%, promotional expense increased $0.4 million or 4%, and other
expenses decreased $4.8 million or 15%, attributable in large part to a $6.3
million insurance recovery related to litigation during a prior period.
The Company's income tax provision for 1996 and 1995 was $9.5 million and
$9.2 million, respectively, which represented a 44% effective tax rate in 1996
and a 41% effective tax rate in 1995. The higher effective tax rate for 1996 was
due primarily to decreases in tax-exempt interest income and non-taxable
dividend income.
LIQUIDITY AND CAPITAL RESOURCES
The Company is the parent of Freedom Securities Holding Corporation, which
is in turn the holding company for the Company's operating subsidiaries. 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. 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.
Borrowings under the Credit Facility, maturing in December 2001, will be
repaid in full with 100% of the net proceeds of the Offering to the Company,
together with cash on hand, leaving the Company with $21.4 million of
indebtedness under the Fixed Asset Facility secured by the Company's fixed
assets. See "Use of Proceeds." Other than under the Company's Fixed Asset
Facility, after payment of the Credit Facility, the Company will not have any
outstanding long-term debt obligations.
The assets of Tucker Anthony, Sutro and Freedom Capital, the Company's
primary operating subsidiaries, are highly liquid with the majority consisting
of securities inventories and collateralized receivables, both of which
fluctuate depending on the levels of customer business. Collateralized
receivables consist primarily 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.
30
<PAGE> 32
The majority of the subsidiaries' assets are financed through Wexford, by
securities sold under repurchase agreements and through 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 is generally 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 significantly depending on customer needs; however,
these fluctuations have no material effect on liquidity or capital resources.
The Company monitors the collateral position and counterparty risk on these
transactions daily. See "-- Risk Management."
The subsidiaries' total assets and short-term liabilities and the
individual components thereof vary significantly from period to period because
of changes relating to customer needs and economic and market conditions. The
Company's total assets at December 31, 1994, December 31, 1995, December 31,
1996 and December 31, 1997 were $1,037.9 million, $1,214.0 million, $517.0
million and $727.6 million, respectively. The decline in total assets from
December 31, 1995 to December 31, 1996 is primarily attributable to the
initiation of the Wexford clearing arrangement pursuant to which certain
customer and broker-dealer balances are no longer included in the Company's
Statements of Financial Condition.
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.
The Acquisition was funded through proceeds from the sale of Common Stock
and borrowings under the Credit Facility.
The Company has historically financed capital expenditures through internal
cash generation and through the Fixed Asset Facility, established in 1996, which
matures in 2001. During 1997, the Company had capital expenditures of $2 million
which were funded from operations. The Company currently does not intend to
incur material capital expenditures in the near term.
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 and current credit arrangements
with Wexford will be sufficient to finance the operating subsidiaries' ongoing
businesses.
31
<PAGE> 33
QUARTERLY RESULTS
The information set forth below is derived from unaudited quarterly results
of operations of the Company for each quarter of 1996 and 1997. The data have
been prepared by the Company on a basis consistent with the Consolidated
Financial Statements included elsewhere in this Prospectus and includes all
adjustments, consisting principally of normal recurring accruals, that the
Company considers necessary for a fair presentation thereof. These operating
results are not necessarily indicative of the Company's future performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1996(1) 1997 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions.......... $41,313 $38,621 $32,823 $38,783 $40,098 $37,592
Principal
transactions....... 26,224 27,062 24,614 25,931 22,009 22,561
Investment banking... 7,266 9,567 10,107 11,161 9,569 12,416
Asset management..... 4,473 4,640 4,819 5,066 4,880 4,660
Other................ 3,868 3,676 3,349 4,898 3,387 3,058
------- ------- ------- ------- ------- -------
Total operating
revenues......... 83,144 83,566 75,712 85,839 79,943 80,287
Interest income...... 14,911 12,490 11,358 11,088 10,411 10,725
------- ------- ------- ------- ------- -------
Total revenues..... 98,055 96,056 87,070 96,927 90,354 91,012
Interest expense..... 8,774 7,888 6,036 5,585 5,906 5,883
------- ------- ------- ------- ------- -------
Net revenues....... 89,281 88,168 81,034 91,342 84,448 85,129
Non-interest
expenses:
Compensation and
benefits........... 58,363 56,566 52,358 60,759 54,476 55,261
Occupancy and
equipment.......... 6,826 7,235 7,303 11,860(3) 6,519 6,321
Communications....... 4,539 4,976 4,341 4,057 4,189 4,362
Brokerage and
clearance.......... 2,024 3,308 3,084 3,064 2,704 2,914
Promotional.......... 2,378 2,509 2,562 2,525 2,094 2,378
Other................ 8,711 8,213 6,906 2,984(4) 6,929 7,314
------- ------- ------- ------- ------- -------
Total non-interest
expenses......... 82,841 82,807 76,554 85,249 76,911 78,550
Acquisition interest
expense............ -- -- -- 567 1,494 1,539
------- ------- ------- ------- ------- -------
Income before income
taxes.............. 6,440 5,361 4,480 5,526 6,043 5,040
Income taxes......... 2,763 2,332 1,963 2,466 2,550 2,122
------- ------- ------- ------- ------- -------
Net income........... $ 3,677 $ 3,029 $ 2,517 $ 3,060 $ 3,493 $ 2,918
======= ======= ======= ======= ======= =======
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1997
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Commissions.......... $45,948 $43,546
Principal
transactions....... 28,553 26,146
Investment banking... 15,018 18,256
Asset management..... 5,115 5,295
Other................ 2,952 3,068
------- -------
Total operating
revenues......... 97,586 96,311
Interest income...... 10,989 11,931
------- -------
Total revenues..... 108,575 108,242
Interest expense..... 4,996 5,643
------- -------
Net revenues....... 103,579 102,599
Non-interest
expenses:
Compensation and
benefits........... 68,196 68,006(2)
Occupancy and
equipment.......... 6,378 5,113
Communications....... 4,385 4,012
Brokerage and
clearance.......... 2,872 2,772
Promotional.......... 2,783 3,053
Other................ 6,956 7,281
------- -------
Total non-interest
expenses......... 91,570 90,237
Acquisition interest
expense............ 1,545 1,474
------- -------
Income before income
taxes.............. 10,464 10,888
Income taxes......... 4,497 4,568
------- -------
Net income........... $ 5,967 $ 6,320
======= =======
</TABLE>
- ------------------------------
(1) Represents the consolidated results of the Predecessor Company for the two
months ended November 29, 1996 combined with the consolidated results of the
Company for the one month ended December 31, 1996.
(2) Includes $1.2 million of the $1.4 million non-cash compensation expense
resulting from issuance of Common Stock and stock options to employees
during 1997.
(3) Includes $4.5 million in provisions for lease obligations pertaining to
abandoned New York office space.
(4) Includes an insurance recovery in the amount of $6.3 million relating to
litigation expenses incurred during prior periods.
32
<PAGE> 34
The following table sets forth certain financial data as a percentage of
net revenues for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1996(1) 1997 1997
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions................ 46.3% 43.8% 40.5% 42.5% 47.5% 44.2%
Principal transactions..... 29.4 30.7 30.4 28.4 26.1 26.5
Investment banking......... 8.1 10.9 12.5 12.2 11.3 14.6
Asset management........... 5.0 5.3 5.9 5.5 5.8 5.5
Other...................... 4.3 4.2 4.1 5.4 4.0 3.5
----- ----- ----- ----- ----- -----
Total operating
revenues............... 93.1 94.9 93.4 94.0 94.7 94.3
Interest income............ 16.7 14.2 14.0 12.1 12.3 12.6
----- ----- ----- ----- ----- -----
Total revenues........... 109.8 109.1 107.4 106.1 107.0 106.9
Interest expense........... 9.8 9.1 7.4 6.1 7.0 6.9
----- ----- ----- ----- ----- -----
Net revenues............. 100.0 100.0 100.0 100.0 100.0 100.0
Non-interest expenses:
Compensation and
benefits................. 65.4 64.2 64.6 66.5 64.5 64.9
Occupancy and equipment.... 7.6 8.2 9.0 13.0(3) 7.7 7.4
Communications............. 5.1 5.6 5.4 4.4 5.0 5.1
Brokerage and clearance.... 2.3 3.8 3.8 3.4 3.2 3.4
Promotional................ 2.7 2.8 3.2 2.8 2.5 2.8
Other...................... 9.8 9.3 8.5 3.3(4) 8.2 8.6
----- ----- ----- ----- ----- -----
Total non-interest
expenses............... 92.9 93.9 94.5 93.4 91.1 92.2
Acquisition interest
expense.................. -- -- -- 0.6 1.8 1.8
Income before income
taxes.................... 7.2 6.1 5.5 6.0 7.1 6.0
Income taxes............... 3.1 2.6 2.4 2.7 3.0 2.5
----- ----- ----- ----- ----- -----
Net income................. 4.1% 3.5% 3.1% 3.3% 4.1% 3.5%
===== ===== ===== ===== ===== =====
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1997
<S> <C> <C>
Revenues:
Commissions................ 44.4% 42.4%
Principal transactions..... 27.6 25.5
Investment banking......... 14.5 17.8
Asset management........... 4.9 5.2
Other...................... 2.9 3.0
----- -----
Total operating
revenues............... 94.3 93.9
Interest income............ 10.6 11.6
----- -----
Total revenues........... 104.9 105.5
Interest expense........... 4.9 5.5
----- -----
Net revenues............. 100.0 100.0
Non-interest expenses:
Compensation and
benefits................. 65.8 66.3(2)
Occupancy and equipment.... 6.2 5.0
Communications............. 4.2 3.9
Brokerage and clearance.... 2.8 2.7
Promotional................ 2.7 3.0
Other...................... 6.7 7.1
----- -----
Total non-interest
expenses............... 88.4 88.0
Acquisition interest
expense.................. 1.5 1.4
Income before income
taxes.................... 10.1 10.6
Income taxes............... 4.3 4.5
----- -----
Net income................. 5.8% 6.1%
===== =====
</TABLE>
- ---------------
(1) Based on the consolidated results of the Predecessor Company for the two
months ended November 29, 1996 combined with the consolidated results of the
Company for the one month ended December 31, 1996.
(2) Includes 1.2% of non-cash compensation expense resulting from issuance of
Common Stock and stock options to employees during the fourth quarter of
1997.
(3) Includes 4.9% in provisions for lease obligations pertaining to abandoned
New York office space.
(4) Includes an insurance recovery of 6.9% relating to litigation expenses
incurred during prior periods.
33
<PAGE> 35
RISK MANAGEMENT
Tucker Anthony's and Sutro's exposure to risk includes items that are
fundamental to the securities industry, such as trading of securities, extension
of credit to counterparties and investment banking activities, as well as other
risks, such as extension of credit to retail and institutional customers. Tucker
Anthony and Sutro monitor their market and credit risk daily through a number of
control procedures designed to identify and evaluate the various risks to which
Tucker Anthony and Sutro are exposed.
Tucker Anthony and Sutro may act as a principal to facilitate
customer-related transactions in financial instruments which expose the firm to
market risks. Tucker Anthony and Sutro make markets for dealers in certain
equity and debt securities and Tucker Anthony trades for its own account in
arbitrage trading activities. Whether acting as principal to facilitate customer
transactions or trading for their own account, Tucker Anthony and Sutro
undertake a variety of measures to manage against losses which may be incurred
through market risk.
Methods of managing exposure to market risk include: limiting firm
commitments by position levels both long and short for every product that is
traded; limiting the type of trade that can occur in each inventory account;
limiting the number of days inventory is held; using third party security
pricing services to enhance market price testing and variance analysis; and
tactically employing certain hedging techniques that reduce the amount of risk
taken by Tucker Anthony and Sutro. Management believes that the subsidiaries'
risk management and hedging practices aid in managing their market exposure and
reducing volatility of the Company's earnings.
At December 31, 1996 and December 31, 1997, the Company's securities owned
and securities sold, not yet purchased consisted of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OWNED:
Obligations of the U.S. government or its agencies..... $ 23,650 $ 27,396
State and municipal obligations........................ 56,057 38,222
Arbitrage securities................................... 84,967 291,023
Other corporate obligations............................ 73,127 51,709
Other corporate stocks and warrants.................... 15,305 15,172
-------- --------
$253,106 $423,522
======== ========
SOLD, NOT YET PURCHASED:
Obligations of the U.S. government or its agencies..... $ 37,663 $ 22,890
State and municipal obligations........................ 1,476 1,519
Arbitrage securities................................... 51,671 322,316
Other corporate obligations............................ 6,055 1,356
Other corporate stocks and warrants.................... 4,275 6,484
-------- --------
$101,140 $354,565
======== ========
</TABLE>
Tucker Anthony and Sutro manage their daily risk exposure in their firm
inventory accounts by requiring various levels of management to participate in
review of these accounts. The primary purpose of the risk management function is
to participate in the establishment of position limits and to monitor both the
buy and sell activity in the firm's trading accounts relative to the established
position limits. Tucker Anthony's and Sutro's trading activities result in the
creation of inventory positions. Position and exposure reports indicating both
long and short exposure are prepared, distributed and reviewed each day by
Tucker Anthony's and Sutro's risk management personnel as well as by certain
members of senior management. These reports enable Tucker Anthony and Sutro to
control their inventory levels, monitor trading results on a product-by-product
basis and review inventory aging, pricing and concentration.
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<PAGE> 36
In addition to position and exposure reporting, Tucker Anthony and Sutro
each produce a daily revenue report which summarizes trading, interest and
commission revenue items for each product area. Daily revenues are reviewed
independently for various risk factors that could adversely affect certain
trading decisions. The daily revenue reports are produced by their accounting
departments and distributed to various levels of management together with the
position and exposure reports. The combined use of these reports enables senior
management to monitor and control firm trading activity on a product-by-product
basis.
Tucker Anthony and Sutro deal with counterparties or other broker-dealers
in conducting business for their clients or for their own account. Credit and
trading limits extended to counterparties are controlled and managed by Tucker
Anthony's and Sutro's credit and risk management functions. Financing extended
to counterparties is provided against collateral. Tucker Anthony and Sutro
monitor their exposure to counterparty risk on a daily basis through the use of
internally generated credit exposure information and the monitoring of
collateral values. The risk management function participates in the review of
counterparties to establish appropriate exposure limits on a product-by-product
basis. Tucker Anthony and Sutro manage their daily credit exposure by monitoring
on an ongoing basis the creditworthiness of counterparties and their related
trading limits, requesting additional collateral when deemed necessary and
limiting the amount and duration of counterparty exposure.
Tucker Anthony and Sutro, through Wexford, also extend credit to their
retail customers. Amounts loaned are limited by margin regulations of the Board
of Governors of the Federal Reserve System and other regulatory authorities and
are subject to Wexford's, Tucker Anthony's and Sutro's credit review and daily
monitoring procedures.
Risks associated with investment banking activities are controlled through
committees within Tucker Anthony and Sutro. Their respective commitment
committees review every significant proposed investment banking transaction
prior to its acceptance by Tucker Anthony and Sutro. Their respective capital
committees review major proposed transactions in order to determine the effect
of such transactions on regulatory capital prior to their acceptance. Only after
acceptance by both committees within a firm will that firm's commitment to
underwrite a specific security be extended to the investment banking client.
Tucker Anthony's and Sutro's compliance department professionals monitor
customer and employee transactions, conduct periodic and other examinations and
communicate with the various regulatory agencies that have jurisdiction over
Tucker Anthony and Sutro and their businesses.
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<PAGE> 37
BUSINESS
INDUSTRY BACKGROUND
In recent years, the financial markets have grown in size and complexity,
characterized by a proliferation of investment products and services, frequent
innovations, increased globalization, strong capital flows and heavy trading
volume. These trends have increased the number and variety of choices available
to investors and the range of financing alternatives available to businesses and
other issuers of securities. Management believes these trends will continue in
the future and consequently believes that the needs of both investors and
issuers for high quality professional financial advice and services, such as
those offered by the Company, will continue to increase.
Demand for investment products has increased significantly as large numbers
of "baby boomers" have begun to invest for their children's education and for
their own retirement. In 1996, the first 3.4 million baby boomers turned 50; the
impact of this generation on the capital markets is expected to continue to
build through the year 2010, when 57 million people will be in what has
historically been their prime investing years (ages 50 through 65).
Additionally, it is estimated that these individuals will inherit over $10
trillion (adjusted for inflation) from the previous generation between 1990 and
2040, representing the largest absolute transference of wealth in history.
Changes in household investing patterns have also contributed to the
increase in demand for investment products. In 1980, households owned $1.3
trillion of marketable securities, representing 48% of their liquid financial
assets. By September 30, 1997, the household sector's ownership of marketable
securities had risen by more than 660% to $9.9 trillion, or 76% of household
liquid financial assets. Over the same period, bank deposits decreased from 52%
to 24% of household liquid financial assets.
The volume of equity securities offered to the public illustrates the
growth in supply of investment products. Initial public offerings ("IPOs")
underwritten and total common equity issued in the United States public market
grew from $1.4 billion and $12.8 billion, respectively, in 1980, to $10.2
billion and $19.2 billion, respectively, in 1990, to $43.9 billion and $118.4
billion, respectively, in 1997. California and Massachusetts (the headquarters
states of Sutro and Tucker Anthony, respectively) ranked first and eighth,
respectively, among the 50 states in dollar volume of IPOs for locally
headquartered companies in 1997 and first and seventh, respectively, in dollar
volume of public offerings of common stock. Management believes that a
significant portion of the growth in equity offerings has come from emerging and
middle-market companies and that the increase in emerging and middle-market
issuers has been facilitated by large increases in the flow of cash into equity
mutual funds and other managed funds as a result of these changes in household
investing patterns.
The combination of increasing flows of funds into the equity markets and
new issuance activity has contributed to significantly higher trading volumes.
From 1980 to 1997, average daily trading volume grew at a compound annual rate
of 15.6% on the NYSE and 20.7% on the Automated Quotation System of the NASD
(the "Nasdaq"). More recently, the combined NYSE and Nasdaq average daily
trading volumes grew at a compound annual rate of 22.2% for the five years ended
1997 and increased 22.9% in 1997 over 1996.
COMPANY OVERVIEW
Freedom, through its two brokerage subsidiaries, Tucker Anthony and Sutro,
and its asset management subsidiary, Freedom Capital, is a full-service,
regionally focused retail brokerage and investment banking firm. Tucker Anthony,
headquartered in Boston and focused primarily on the northeastern United States,
and Sutro, headquartered in San Francisco and focused primarily on the western
United States, are both over 100 years old and have well established reputations
in their respective regions. Management believes that it can best serve the
needs of these distinct regions through separate, locally managed organizations,
while avoiding cost duplication through the use of shared clearing and support
services. This approach enables the Company to capitalize on each organization's
name recognition, historical areas of expertise and close community ties while
lessening the Company's reliance on a single region's economy.
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<PAGE> 38
The Company believes that its primary strengths are (i) the experience and
tenure of its investment executives, which have often led to long-term
relationships with clients in their respective communities; (ii) its high level
of employee commitment, evidenced by significant employee ownership in the
Company; (iii) its personalized, service-oriented culture emphasizing
responsiveness to client and regional market demands; (iv) its focus on emerging
and middle-market companies in targeted industries in which the Company has
specialized expertise or regional presence; and (v) its ability to manage and
control operating costs through centralization of certain services and other
cost effective solutions, including its clearing and processing arrangements
with Wexford.
The Company's three primary areas of focus, described below, are (i) its
full-service retail brokerage operations; (ii) its equity capital markets
activities; and (iii) its asset management operations.
Retail Operations. The retail operations of Tucker Anthony and Sutro,
conducted in 13 states and the District of Columbia, have together generated
between 56% and 62% of the Company's operating revenues in each of the last
three years and have historically represented the Company's core business. In
its retail operations, the Company focuses on maintaining and developing strong
client relationships through a dedicated community focus while providing the
breadth and quality of services and products offered by national brokerage
firms. As of December 31, 1997, customers had over $28 billion of assets in over
200,000 Tucker Anthony and Sutro brokerage accounts. Management believes that
the experience of its 677 investment executives and their strong ties to their
communities help differentiate the Company from its competitors and enable the
Company to more effectively access and serve its clients. Management also
believes that its strategy of providing its investment executives with a high
level of support and the flexibility to operate in an entrepreneurial manner has
allowed the Company to recruit and retain highly effective, motivated investment
executives, many of whom have significant tenure at their local branch offices.
Equity Capital Markets. Each of Tucker Anthony and Sutro has historically
demonstrated strengths in offering various investment banking services, such as
mergers and acquisition services, to clients within its respective region. The
Company's strategy is to develop equally strong research-driven equity capital
markets groups including equity research, investment banking, institutional
sales, trading and syndication services. Tucker Anthony's and Sutro's respective
research and investment banking departments target emerging and middle-market
companies within their respective regions and within the industries in which
they specialize, such as consumer products, healthcare, financial services and
technology industries. Equity capital markets activities have represented 16% to
17% of the Company's operating revenues in each of the past three years.
Asset Management. Freedom Capital, headquartered in Boston, was formed in
1930 and as of December 31, 1997 managed approximately $5.6 billion of assets,
including approximately $3.0 billion of investments by public sector entities,
high net worth individuals and others, with the remainder comprised of money
market funds for the benefit of Tucker Anthony and Sutro clients. Freedom
Capital has developed a leading position in the management of public funds for
local Massachusetts municipalities and agencies, has also developed an important
presence in certain sectors of the union pension fund market and is growing its
corporate funds management business. Asset management revenues have represented
approximately 5% to 6% of the Company's total operating revenues in each of the
past three years.
The Company's subsidiaries also engage in a number of other activities,
including trading fixed income securities, underwriting municipal securities,
and purchasing and selling securities in arbitrage transactions. Additionally,
the Company, through a subsidiary, has a 25% interest in the profits and losses
of a joint specialist account in which it participates with two other NYSE
specialist firms.
BUSINESS STRATEGY
Since the Acquisition, management formulated and is implementing a strategy
to (i) enhance the services the Company offers its customers; (ii) improve the
profitability of Tucker Anthony's and Sutro's retail operations; (iii) expand
each firm's equity capital markets activities; and (iv) increase Freedom
Capital's money management business. Management also plans to supplement the
Company's internal growth
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<PAGE> 39
with strategic acquisitions. See "Recent Developments." The principal elements
of the Company's strategy are set forth below.
Enhance Personalized, High-End Service. Tucker Anthony and Sutro have
traditionally sought to attract and retain brokerage clients by offering a high
level of personal service responsive to customer needs. The Company intends to
increase its commitment to service by providing its investment executives with
advanced account information systems and flexibility in determining appropriate
fee schedules for certain services based upon the level of customer needs, and
by providing an array of one-stop investment and financial planning services.
Improve Profitability of Retail Brokerage Operations. The Company intends
to continue to improve the profitability of its retail operations primarily by
hiring additional experienced and highly productive investment executives and by
providing Tucker Anthony's and Sutro's investment executives with enhanced
training, product offerings, information systems and support. Average production
per retail investment executive increased 15% in 1997 compared to 1996 and 18%
in 1996 compared to 1995 at Tucker Anthony, while average production per retail
investment executive increased 13% in 1997 compared to 1996 and 8% in 1996
compared to 1995 at Sutro. Management believes that the implementation of this
strategy will be aided by the Company's entrepreneurial culture and strategy of
providing a high level of support for its investment executives.
Expand Regional and Specialty Equity Capital Markets Activities. Tucker
Anthony and Sutro maintain separate and independent investment banking groups.
Each investment banking group is supported by its own regionally and industry
focused research department, institutional sales group and equity trading. The
Company intends to continue to increase Tucker Anthony's and Sutro's investment
banking business by committing greater resources to, and by carefully focusing
their research and investment banking coverage on, geographic regions and
industries which management believes offer the greatest opportunities.
Management believes that this independent and regional focus is particularly
well suited to the northeastern and western regions currently served by Tucker
Anthony and Sutro, respectively. In 1997, for example, Massachusetts and
California ranked seventh and first, respectively, in dollar volume of public
offerings of common stock of locally headquartered companies. Management also
believes that consolidations within the investment banking industry, as a whole,
will offer enhanced opportunities for those firms which maintain their local and
industry specific focus.
Increase Asset Management Business. Management intends to grow Freedom
Capital's business by extending its public funds business from Massachusetts to
other states, by improving coordination with the Tucker Anthony and Sutro
brokerage networks, and by increasing the assets under its management and the
number of its portfolio managers through acquisitions or recruiting.
Supplement Growth with Strategic Acquisitions. Management plans to
actively pursue opportunities to acquire other firms with complementary business
which would strengthen or expand the firm's geographic or product offering base.
Management believes that attractive acquisition opportunities exist particularly
among smaller regional firms that want to affiliate with a larger firm while
still retaining their regional identity and focus and entrepreneurial culture,
as Tucker Anthony and Sutro have been able to do. In addition, the Company
believes that the consolidation trends in the brokerage and asset management
businesses will allow it to hire proven investment professionals who prefer the
culture and opportunities inherent in a smaller, entrepreneurial and independent
firm. Management believes that acquisitions may also allow the Company to
realize cost benefits by leveraging its infrastructure. Consistent with this
strategy, on March 10, 1998, the Company announced that it had agreed to acquire
Cleary Gull. See "Recent Developments."
THE ACQUISITION
To finance the Acquisition of Freedom from Hancock in November 1996,
approximately 350 employees of the Company, including senior management and
investment executives, purchased an aggregate of approximately 31% of the
Company's equity (28% after giving effect to the Offering), with additional
equity financing provided by THL and SCP. 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
38
<PAGE> 40
previously purchased, would result in employees owning up to approximately 43%
of the shares of Common Stock outstanding after giving effect to the Offering.
See "Certain Relationships and Related Transactions -- The Acquisition" for a
more complete description of the Acquisition and "Management" for a description
of the Company's incentive equity programs.
Management believes that the Company's independence and employee ownership
have resulted in progressively higher levels of employee motivation, confidence
and commitment during 1997, as compared to 1996 when the Predecessor Company was
for sale and it was uncertain whether the Acquisition would be consummated or
whether the Predecessor Company would be sold to another organization.
Management believes that uncertainty surrounding the future of the Company
adversely affected the Company's performance in 1996 and, to a lesser extent, in
early 1997 by weakening employee motivation and the Company's ability to recruit
personnel, creating uncertainty among customers and prospective customers,
consuming management's time and inhibiting the Company's ability to pursue new
initiatives. The Company believes that the Acquisition and the strategies
instituted in connection therewith have been successful. For example, Tucker
Anthony and Sutro managed, or co-managed 34 equity offerings in 1997 compared to
16 in 1996 and 9 in 1995. In 1997, the Company reported net income of $18.7
million, a 52% increase over net income of $12.3 million in 1996 and 43%
increase over net income of $13.1 million in 1995. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
GENERAL
A chart depicting in simplified form the corporate structure of the Company
and its primary subsidiaries is set forth below, together with a brief
description of the business undertaken by each of the entities shown:
----------------------------------------
FREEDOM SECURITIES
CORPORATION
----------------------------------------
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
- ------------------------------ ------------------------------ ------------------------------
TUCKER ANTHONY SUTRO & CO. FREEDOM CAPITAL
INCORPORATED INCORPORATED MANAGEMENT CORPORATION
- ------------------------------ ------------------------------ ------------------------------
</TABLE>
Freedom Securities Corporation: Issuer of the shares offered hereby,
Freedom Securities Corporation is a holding company formed in 1996 to acquire
Freedom Securities Holding Corporation from Hancock.
Tucker Anthony Incorporated: One of the Company's primary operating
subsidiaries, Tucker Anthony engages in the securities brokerage and investment
banking businesses and transacts business primarily in the northeastern United
States.
Sutro & Co. Incorporated: One of the Company's primary operating
subsidiaries, Sutro engages in the securities brokerage and investment banking
businesses and transacts business primarily in the western United States.
Freedom Capital Management Corporation: One of the Company's primary
operating subsidiaries, Freedom Capital engages in the investment advisory and
asset management businesses.
The Company's business is described in more detail below.
39
<PAGE> 41
TUCKER ANTHONY AND SUTRO
Most of the Company's business activities are conducted through Tucker
Anthony and Sutro, and its asset management business is conducted through
Freedom Capital. Tucker Anthony's and Sutro's principal business activities are
summarized below.
Retail Brokerage
A large portion of the Company's revenues are generated from commissions or
fees earned as a broker for individual clients in the purchase and/or sale of
equity securities, fixed income securities, mutual funds, insurance products,
options and U.S. government and municipal securities. The Company also earns
commissions or fees for services provided in the areas of managed accounts and
personal trusts. As of December 31, 1997, Tucker Anthony had 448 investment
executives located in 10 states and the District of Columbia, and Sutro had 229
investment executives located in 3 states. For the fiscal years ended December
31, 1995, 1996 and 1997, commissions and sales credits from individual investors
constituted approximately 77%, 82% and 84%, respectively, of total commissions
and sales credits and 46%, 52% and 54%, respectively, of the Company's total
revenues. Management believes that such retail services will continue to be the
Company's primary source of revenue for the foreseeable future. Tucker Anthony
and Sutro charge retail commissions on both exchange and OTC transactions in
accordance with commission rate tables which they have formulated. Discounts
from the commission rate tables are granted in certain cases and the commission
rate tables may change from time to time. Each firm also offers certain account
arrangements under which a single fee is charged based on a percentage of the
assets held in a customer's account and no commissions are charged on a
transaction by transaction basis. Tucker Anthony and Sutro have also adopted the
"Beacon Account" and "Sutro Asset Value Account" programs, respectively, through
which clients may be charged negotiated fees based upon the level of services
provided.
Tucker Anthony and Sutro provide their retail clients with a broad range of
services delivered in a personalized, service oriented manner. In addition to
recommending and effecting transactions in securities, the Company makes
available equity research reports prepared by Tucker Anthony, Sutro and other
research analysts and offers services such as financial planning and tax, trust
and estate advice to its retail clients. The Company believes that the
personalized nature and range of services it provides to its retail clients is a
key factor in the success of its retail brokerage units.
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<PAGE> 42
The following table sets forth the locations and number of investment
executives in the Company's retail offices as of December 31, 1997:
TUCKER ANTHONY
<TABLE>
<S> <C>
MASSACHUSETTS
Andover................ 3
Boston................. 72
Burlington............. 7
Franklin............... 6
New Bedford............ 5
Springfield............ 12
Worcester.............. 5
------
Total................ 110
CONNECTICUT
Hartford............... 27
New Haven.............. 13
Stamford............... 12
------
Total................ 52
MAINE
Bangor................. 7
Portland............... 15
------
Total................ 22
RHODE ISLAND
Providence............. 20
NEW HAMPSHIRE
Concord................ 1
Nashua................. 4
Peterborough........... 3
Portsmouth............. 2
------
Total................ 10
NEW YORK
Garden City............ 4
New York City
Fifth Avenue......... 32
World Financial
Center............ 61
Rochester.............. 8
Rome................... 8
Schenectady............ 6
Southampton............ 7
Syracuse............... 9
Watertown.............. 5
------
Total................ 140
NEW JERSEY
Fairhaven.............. 16
Morristown............. 15
Princeton.............. 16
------
Total................ 47
PENNSYLVANIA
Philadelphia........... 19
ILLINOIS
Chicago................ 18
DISTRICT OF COLUMBIA
Washington............. 7
DELAWARE
Wilmington............. 3
TOTAL TUCKER ANTHONY... 448
------
SUTRO
CALIFORNIA
Beverly Hills.......... 27
Big Bear............... 2
Fresno................. 8
Hollywood.............. 1
La Jolla............... 9
Los Angeles............ 18
Newport Beach.......... 19
Oakland................ 18
Sacramento............. 12
San Francisco.......... 34
San Jose............... 13
San Luis Obispo........ 4
Santa Maria............ 5
Santa Rosa............. 12
West Los Angeles....... 2
Woodland Hills......... 13
------
Total................ 197
ARIZONA
Scottsdale............. 14
Tucson................. 8
------
Total................ 22
NEVADA
Las Vegas.............. 10
TOTAL SUTRO............ 229
------
TOTAL COMPANY.......... 677
======
</TABLE>
The Tucker Anthony and Sutro retail sales forces are comprised of an
experienced and productive group of investment executives. Management believes
that its strategy of providing its investment executives with a high level of
support and the flexibility to operate in an entrepreneurial manner has allowed
the Company to recruit and retain highly productive and experienced investment
executives. Tucker Anthony's and Sutro's investment executives average more than
10 and 6 1/2 years, respectively, of tenure with the Company and 19 and 17 1/2
years, respectively, of experience in the securities brokerage industry.
Management believes that Tucker Anthony and Sutro have been able to successfully
recruit and retain investment executives for a number of reasons including a
corporate culture which supports and encourages performance, employee ownership,
advanced technology, competitive payouts, no discount sharing and a
service-driven rather than a products-driven environment.
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<PAGE> 43
The following table illustrates the improved production of the Company's
retail investment executives.
AVERAGE PRODUCTION PER RETAIL INVESTMENT EXECUTIVE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TUCKER ANTHONY SUTRO
- ----------------------------------------------- ---------------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL ANNUAL ANNUAL
YEAR PRODUCTION(1) INCREASE YEAR PRODUCTION(1) INCREASE
<S> <C> <C> <C> <C> <C>
1994................. $208 1994............... $271
1995................. 242 16.3% 1995............... 289 6.6%
1996................. 285 17.8 1996............... 312 8.0
1997................. 327 14.7 1997............... 352 12.8
</TABLE>
- ---------------
(1) Calculated by dividing total retail commissions and managed account fees by
the average of the number of investment executives at the beginning and end
of each period (excluding non-producing managers and trainees).
Tucker Anthony and Sutro together have over 200,000 accounts representing
approximately $28 billion in client assets as of December 31, 1997. The Company
maintains insurance provided by the Securities Investors Protection Corporation
(the "SIPC") for up to $500,000 (coverage of cash is limited to $100,000) per
customer account, as well as excess SIPC coverage for an additional $9.5 million
per client account. Clients who have established a Freedom Asset Account are
provided protection up to a maximum of $60 million, which is included in the
Freedom Asset Account annual fee. The excess SIPC coverage of $9.5 million and
$59.5 million is provided under an insurance policy arranged through Wexford.
Institutional Equity Sales and Research
Tucker Anthony and Sutro execute securities transactions for institutional
investors such as banks, mutual funds, insurance companies and pension and
profit-sharing plans. These investors normally purchase and sell securities in
large quantities, which transactions require specialized marketing and trading
expertise. In order to service these institutional accounts, the Company has
established a network of institutional offices located in New York, Boston, San
Francisco, Los Angeles, Washington, D.C. and Paris, France.
Institutional transactions are executed by the Company acting as broker or
principal. The Company permits discounts from its commission schedule to its
institutional customers. The size of such discounts varies with the size of
particular transactions and other factors. For the fiscal years ended December
31, 1995, 1996 and 1997, commissions and sales credits from institutional
investors constituted approximately 11%, 10% and 10%, respectively, of total
commissions and sales credits and 6% of the Company's total revenues in each
year. The Company believes that it receives a significant portion of its
institutional brokerage commissions as a consequence of its research advice and
services regarding specific corporations and industries, its principal
transactions business and its investment banking activity.
Historically, Tucker Anthony and Sutro combined their institutional equity
sales and research forces under a joint venture, which was intended to create
efficiencies in institutional account coverage and research development costs.
In order to better coordinate the respective institutional sales, investment
banking, equity research and trading departments of Tucker Anthony and Sutro,
the research joint venture was disbanded following the Acquisition, and each of
Tucker Anthony and Sutro have established their own targeted regional and
industry equity research and institutional equity sales programs.
Tucker Anthony and Sutro have each focused their equity research on
selected sectors of the consumer products, healthcare, financial services and
technology industries primarily concentrated in their respective regions. Within
each of these industries, Tucker Anthony and Sutro have focused on various
industry niches which each believes offers it the greatest opportunities. Each
firm focuses its equity capital markets group on integrating its research,
institutional sales, corporate finance, trading and syndication functions.
Management believes that its research will be a key factor in growing its equity
capital markets activities.
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<PAGE> 44
Principal Transactions and Trading
The Company conducts its principal transactions and trading business
through Tucker Anthony and Sutro, with each firm's business focused on the
activities summarized below, except for arbitrage activities which are engaged
in primarily by Tucker Anthony.
Tucker Anthony and Sutro make markets, buying and selling as principal, in
common stocks, convertible preferred stocks, warrants and other securities
traded on Nasdaq or in other OTC markets. As of December 31, 1997, the Company
made markets in equity securities of over 400 issuers. Such securities are
principally those in which there is substantial continuing client interest and
include securities which the Company has underwritten or on which it provides
research opinions. The Company also effects transactions in blocks of
securities, usually with institutional investors and generally involving 10,000
or more shares of listed stocks. Such transactions are handled on an agency
basis to the extent possible, but the Company may take a long or short position
as principal to the extent that no buyer or seller is immediately available. By
engaging in block positioning, the Company places a portion of its capital at
risk to facilitate transactions for clients.
The Company provides clients access to a range of fixed income products
including municipal securities, U.S. government and agency securities, mortgage
related securities including those issued through Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corp. ("FHLMC"), and corporate investment-grade and
high-yield bonds. The Company takes positions on a principal basis in municipal,
U.S. government, agency and corporate securities to facilitate transactions for
its clients. Profits or losses are recognized from fluctuations in the value of
securities in which it maintains positions. The Company's capital can be at risk
to the extent significant adverse price fluctuations occur. Additionally,
trading activities include the purchase of securities under agreements to resell
at future dates (resale agreements) and the sale of the same or similar
securities under agreements to repurchase at future dates (repurchase
agreements). Profits and losses on the repurchase transactions result from the
interest rate differentials. The Company actively participates on a principal
basis in the mortgage-backed securities markets through the purchase or sale of
GNMA, FNMA, FHLMC, mortgage pass-through securities, collateralized mortgage
obligations and other mortgage related securities, in order to meet client
needs. The Company finances its trading positions as part of its Wexford
clearing arrangement, by overnight borrowing and by repurchase agreements. See
"Risk Factors -- Market, Credit and Liquidity Risks Associated with Principal
Trading Arbitrage and Underwriting Activities."
Tucker Anthony and Sutro are each municipal securities dealers in both the
primary and secondary markets, buying and selling securities for their own
account and for clients. Revenues derived from these activities include
underwriting and management fees, selling concessions and trading profits.
Tucker Anthony engages in the purchase and sale of convertible and equity
securities to take advantage of price differences prevailing in separate
markets. These arbitrage activities include both convertible and risk arbitrage.
To the extent that purchase and sale transactions are not simultaneous, or the
closing of a position is subject to a subsequent event such as the successful
consummation of a corporate merger, Tucker Anthony places a portion of its
capital at risk. Sutro does not engage in significant arbitrage activities.
Underwriting Activities and Investment Banking
The Company's investment banking and underwriting activities are performed
by Tucker Anthony's and Sutro's corporate finance, public finance and syndicate
departments. The corporate finance groups manage and underwrite public offerings
of equity and, to a significantly lesser extent, debt securities, arrange
private placements of equity and debt securities and provide financial advice in
connection with mergers and acquisitions, divestitures and other corporate
reorganizations and restructurings. Tucker Anthony's and Sutro's managed public
equity offerings and merger and acquisition transactions are typically
undertaken for emerging or middle-market companies in the consumer products,
healthcare, financial services and technology sectors or companies located in
each firm's respective geographic region.
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<PAGE> 45
Historically, the Company's merger and acquisition advisory business has
been responsible for a majority of the Company's investment banking revenues.
The Company believes that it has a well established merger and acquisition
advisory business and plans to capitalize on this strength in further building
upon Tucker Anthony's and Sutro's equity capital markets groups.
Through the Company's renewed focus on its equity capital markets groups,
Tucker Anthony's and Sutro's corporate finance and syndicate departments
coordinate closely with their respective research and institutional sales
departments in order to enhance marketing and provide integrated services to
emerging and middle-market companies and institutional clients. As the following
chart indicates, the Company has been successful in increasing the underwriting
activities of Tucker Anthony and Sutro.
PUBLIC EQUITY OFFERINGS LED OR CO-MANAGED(1)
<TABLE>
<CAPTION>
1995 1996 1997
--------------- --------------- ---------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
(DOLLARS IN MILLIONS)(2)
<S> <C> <C> <C> <C> <C> <C>
Issues managed by Tucker Anthony............... 5 $171 10 $229 10 $ 419
Issues managed by Sutro........................ 3 118 5 251 20 1,124
Issues managed by Tucker Anthony and Sutro
jointly...................................... 1 24 1 50 4 200
-- ---- -- ---- -- ------
Total.......................................... 9 $313 16 $530 34 $1,743
</TABLE>
- ------------------------------
(1) Including public common or preferred stock issues and rights offerings;
excluding closed-end funds.
(2) Shares offered by entire syndicate (excluding over-allotment shares)
multiplied by offering price.
The public finance departments of Tucker Anthony and Sutro provide
financial consulting, advisory and underwriting services to cities and public
service districts. The Company's subsidiaries manage and underwrite offerings of
municipal securities to finance the construction and maintenance of a broad
range of public-related facilities, including healthcare, housing, education,
public power, water and sewer, airports, highways and other infrastructure
needs. Over the last several years, the public finance sector has generally
experienced diminishing spreads and a lower level of publicly financed projects.
Nevertheless, both firms have experienced increasing profitability in this
sector in 1997 by concentrating on smaller local community projects.
The syndicate departments coordinate the distribution of managed and
co-managed corporate securities offerings and accept invitations to participate
in underwritings managed by other investment banking firms.
The Company, through certain subsidiaries, has from time to time in the
past and may from time to time in the future participate as an equity investor
in connection with specific transactions.
Other Activities
Tucker Anthony and Sutro hold memberships in major securities exchanges in
the United States (including the NYSE) in order to provide services to their
brokerage clients in the purchase and sale of listed securities.
Additionally, the Company's wholly owned subsidiary, Freedom Specialist
Inc. ("FSI"), has a 25% interest in the profits and losses of a joint specialist
account in which it participates with two other NYSE specialist firms, RPM
Specialist Corp. and R. Adrian & Co. Specialists are responsible for executing
transactions and maintaining a fair and orderly market in securities under NYSE
rules and regulations. In this function, the specialist firm acts as an agent in
executing orders entrusted to it and/or acts as a dealer on the opposite side of
public orders in the security executed on the floor of the NYSE. As of December
31, 1997, the specialist firm acted as a specialist in 39 equity issues. FSI's
specialist stock settlement and clearing activities are provided by RPM Clearing
Corporation.
Retail client securities transactions are executed on either a cash or
margin basis. Under the current clearing arrangement with Wexford, in a retail
margin transaction, credit is extended to a client through Wexford for the
purchase of securities, using the securities purchased and/or other securities
in the client's account as collateral for amounts loaned. The Company receives
income from interest charged on such
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<PAGE> 46
extensions of credit. The financing of margin purchases can be an important
source of revenue to the Company, since the interest rate paid by the client on
funds loaned through Wexford exceeds the Company's interest costs for net
customer debit balances paid to Wexford. The amount of the Company's gross
interest revenues is affected not only by prevailing interest rates, but also by
the volume of business conducted on a margin basis. By permitting a client to
purchase on margin, the Company takes the risk that market declines could reduce
the value of the collateral below the principal amount loaned, plus accrued
interest, before the collateral can be sold. Amounts loaned are limited by
margin regulations of the Board of Governors of the Federal Reserve System and
other regulatory authorities and are subject to Wexford's, Tucker Anthony's and
Sutro's credit review and daily monitoring procedures.
FREEDOM CAPITAL
The Company's asset management activities are conducted principally by
Freedom Capital. Freedom Capital is a Massachusetts corporation, formerly named
Tucker Anthony Management Corp. organized in 1930. As of December 31, 1997,
Freedom Capital had 50 employees located in Massachusetts and New York. Freedom
Capital provides investment advisory and portfolio management services to
individuals, corporations, public funds, professional firms, endowments and
pension funds, and money market funds. As of December 31, 1997, total assets
under management were approximately $5.6 billion, comprised of approximately
$3.0 billion of investments by public sector entities, high net worth
individuals and others, with the remainder in money market funds for the benefit
of Tucker Anthony and Sutro clients.
The Company intends to enhance the profitability of Freedom Capital by
acquiring other money management businesses to increase both assets under
management and the number of investment professionals providing services and by
creating products to be marketed by Freedom Capital. Freedom Capital had offered
proprietary mutual funds to its clients until 1992, when the Company assigned
its investment advisory contracts to Hancock. The Company also intends to
increase the productivity and profitability of Freedom Capital through improved
coordination with the Tucker Anthony and Sutro brokerage networks and other
initiatives intended to allow Freedom Capital to manage a larger percentage of
funds held by Tucker Anthony and Sutro clients.
As with other aspects of the Company's business, Freedom Capital is focused
on service and client communication. To foster active and attentive management,
Freedom Capital limits the number of client relationships of each portfolio
manager. This policy is intended to provide each portfolio manager with the time
necessary to foster ongoing client relationships and the opportunity to discuss
portfolio strategies with the client. Freedom Capital offers comprehensive
client statements which include portfolio appraisals, performance analyses and
statements of transactions. In addition, Freedom Capital provides its clients
with economic commentary and investment letters on a regular basis. Freedom
Capital believes that its many strong, long-term client relationships attest to
its attention to service and client communication.
Freedom Trust Company, a New Hampshire chartered trust company and a
subsidiary of Freedom Capital, commenced operations in early 1996 to provide
clients the opportunity to place their assets in trust so that the Company may
continue to provide asset management services to such trusts after the client's
death. Freedom Trust Company had assets under custody of $642 million, of which
$20 million was under management, as of December 31, 1997.
RELATIONSHIP WITH WEXFORD
The Company clears all transactions, and carries accounts for customers and
proprietary accounts, with Wexford. Wexford furnishes the Company with
information necessary to run the Company's business, including commission runs,
transaction summaries, data feeds for various reports including compliance and
risk management, execution reports, trade confirmations, monthly account
statements, cashiering functions and the handling of margin accounts. As a
result of its arrangement with Wexford, the Company has achieved substantial
savings in its clearing and related operations. Under the Wexford arrangement,
management believes that the Company's cost of clearing its transactions is very
competitive with the industry's costs. The Company is entitled to pay a set fee
per trade, subject to an aggregate annual minimum payment for clearing
45
<PAGE> 47
trades through Wexford. The Company's current trading volume allows the Company
to realize substantially all of the benefit of the per trade price, although the
Company believes that the Wexford arrangement provides substantial cost
advantages to the Company even during periods with reduced trading volumes.
Consistent with its strategy of providing its investment executives with a
high level of support, following the April 1996 conversion to the Wexford
clearing arrangement, the Company retained approximately 50 of its clearing
operation employees to serve as an interface between Wexford and the Company's
investment executives. The Company's retention of these employees allows its
investment executives to deal exclusively with Company employees in connection
with any client inquiries or problems. In addition to providing the Company and
its investment executives with access to advanced technology without substantial
capital investment by the Company, the Company's relationship with Wexford will
allow the Company to provide its clients with benefits resulting from this
technology. The Company allows clients, for a fee, to access information
concerning their accounts and other market information from their own personal
computers and has acquired technology that will enable its investment executives
to communicate with its customers through electronic mail, subject to rules and
procedures in compliance with Commission and SRO guidelines. The agreement
between the Company and Wexford has a fixed term of five years, with provisions
for negotiated extensions. See "Risk Factors -- Dependence on Certain
Relationships" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company currently has an uncommitted financing arrangement with Wexford
pursuant to which the Company finances its customer accounts, certain
broker-dealer balances and firm trading positions through Wexford. Although the
customer accounts and such broker-dealer balances are not reflected on the
Company's Statements of Financial Condition for financial accounting reporting
purposes, the Company has agreed to indemnify Wexford for losses it may sustain
in connection with accounts of the Company's customers and therefore retains
risk with respect thereto. The Company seeks to control the risks associated
with these activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines. The Company and
Wexford monitor required margin levels daily and, pursuant to such guidelines,
request customers to deposit additional collateral or reduce securities
positions when necessary.
See "Risk Factors -- Dependence on Certain Relationships and Technology"
for a discussion of certain risks associated with the Company's Wexford
relationship.
PROPERTIES
The principal executive offices of the Company are located at One Beacon
Street, Boston, Massachusetts under a lease expiring December 31, 2005. The
Company is currently leasing approximately 88,000 square feet at that location,
and has agreed to lease an additional 15,000 feet there commencing in July 1998.
The Company also leases approximately 88,000 square feet (of which 20,000 square
feet has been sublet) at One World Financial Center, 200 Liberty Street, New
York, New York, under a lease expiring in January 2005; 64,000 square feet (of
which 9,000 square feet has been sublet) at 201 California Street, San
Francisco, California under a lease expiring on July 31, 2003; and 25,000 square
feet at 555 South Flower Street, Los Angeles, California under a lease expiring
July 31, 2002. For the year ended December 31, 1997, the Company's total
expenses for operating leases were $15.9 million. The Company believes that its
existing facilities will be adequate for the foreseeable future.
EMPLOYEES
As of December 31, 1997, the Company had a total of 1,812 employees, of
whom 1,156 were engaged in retail brokerage, 68 in institutional sales, 46 in
research, 116 in trading, 94 in investment banking, 15 in asset management and
317 in accounting, administration and operations. Of these employees, 1,170 were
classified as professionals and 642 were classified in support positions. None
of the Company's employees are subject to a collective bargaining agreement. The
Company believes that its relations with its employees generally are good. See
"Risk Factors -- Dependence on Personnel."
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<PAGE> 48
EFFECTS OF INTEREST RATES
The Company's business is affected by general economic conditions,
including movements of interest rates. The Company's inventory of fixed income
securities may fluctuate as interest rates change, and the Company's interest
income and interest expense may likewise change as interest rates change.
However, interest rates have indirect effects on other aspects of the Company's
business as well.
As interest rates increase, the prices of equity securities may decline,
partially reflecting the increased competition posed by more attractive rates on
fixed income securities and partially reflecting the fact that interest rate
increases may tend to dampen economic activity by increasing the cost of capital
for investment and expansion, thereby reducing corporate profits and the value
of equity securities. As interest rates decline, equity securities may tend to
rise in value. The impact of these changes may affect the Company's inventory of
equity securities, which may change in value, and may also affect the
profitability of the Company's investment banking activities. Retail commission
revenue may also be affected by changes in interest rates and any resulting
indirect impact on the value of equity securities.
The Company's asset management revenues are derived from fees which are
generally based on the market value of assets under management. Consequently,
significant fluctuations in the values of securities, which can occur as a
result of changes in interest rates or changes in other economic factors, may
materially affect the amount of assets under management and thus the Company's
revenues and profitability.
COMPETITION
All aspects of the Company's business and of the securities business in
general are highly competitive. The principal competitive factors influencing
the Company's business are its professional staff, its reputation in the
marketplace, its existing client relationships, the ability to commit capital to
client transactions and its mix of market capabilities. The Company's ability to
compete effectively in securities brokerage and investment banking activities
will also be influenced by the adequacy of its capital levels and by its ability
to raise additional capital. See "Risk Factors -- Significant Competition."
REGULATION
The securities and commodities industry is one of the nation's most
extensively regulated industries. The Commission is responsible for carrying out
the federal securities laws and serves as a supervisory body over all national
securities exchanges and associations. The regulation of broker-dealers has to a
large extent been delegated by the federal securities laws to SROs. These SROs
include all the national securities and commodities exchanges, the NASD and the
MSRB. Subject to approval by the Commission and the CFTC, these SROs adopt rules
that govern the industry and conduct periodic examinations of the operations of
certain subsidiaries of the Company. The NYSE has been designated as the primary
regulator of certain of the Company's subsidiaries including Tucker Anthony and
Sutro. In addition, these subsidiaries are subject to regulation under the laws
of the 50 states, the District of Columbia, Puerto Rico and certain foreign
countries in which they are registered to conduct securities, investment
banking, insurance or commodities business. Broker-dealers are subject to
regulations which cover all aspects of the securities business, including sales
methods, trade practices among broker-dealers, use and safekeeping of customers'
funds and securities, capital structure of securities firms, record-keeping and
the conduct of directors, officers and employees. Violation of applicable
regulations can result in the revocation of broker-dealer licenses, the
imposition of censures or fines and the suspension or expulsion of a firm, its
officers or employees.
As registered broker-dealers and member firms of the NYSE, Tucker Anthony,
Sutro and FSI are subject to certain net capital requirements set forth in Rule
15c3-1 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and NYSE Rule 325. Freedom Distributors Corporation, a subsidiary of
Freedom Capital, is also subject to Rule 15c3-1. The Net Capital Rules, which
specifies minimum net capital requirements for registered broker-dealers, is
designed to measure the financial
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<PAGE> 49
soundness and liquidity of broker-dealers. The Net Capital Rules also (i)
require that broker-dealers notify the Commission, in writing, two business days
prior to making withdrawals or other distributions of equity capital or lending
money to certain related persons if those withdrawals would exceed, in any
30-day period, 30% of the broker-dealer's excess net capital, and that they
provide such notice within two business days after any such withdrawal or loan
that would exceed, an any 30-day period, 20% of the broker-dealer's excess net
capital; (ii) prohibit a broker-dealer from withdrawing or otherwise
distributing equity capital or making related party loans if after such
distribution or loan, the broker-dealer has net capital of less than $300,000 or
if the aggregate indebtedness of the broker-dealer's consolidated entities would
exceed 1,000% of the broker-dealer's net capital and in certain other
circumstances; and (iii) provide that the SEC may, by order, prohibit
withdrawals from capital from a broker-dealer for a period of up to 20 business
days, if the withdrawals would exceed, in any 30-day period, 30% of the
broker-dealer's excess net capital and if the SEC believes such withdrawals
would be detrimental to the financial integrity of the firm or would unduly
jeopardize the broker-dealer's ability to pay its customer claims or other
liabilities. Under NYSE Rule 326, a broker-dealer that is an NYSE member is
required to reduce its business if its net capital (after giving effect to
scheduled maturities of subordinated indebtedness or other planned withdrawals
of regulatory capital during the following six months) is less than $312,500 or
4% of aggregate debit items (or 6% of the funds required to be segregated
pursuant to the Commodity Exchange Act) for fifteen consecutive days. NYSE Rule
326 also prohibits the expansion of a member's business if its net capital
(after giving effect to scheduled maturities of subordinated indebtedness or
other planned withdrawals of regulatory capital during the following six months)
is less than $375,000 or 5% of aggregate debit items (or 7% of the funds
required to be segregated pursuant to the Commodity Exchange Act) for fifteen
consecutive days.
The Company also is subject to "Risk Assessment Rules" imposed by the
Commission which require, among other things, that certain broker-dealers
maintain and preserve certain information, describe risk management policies and
procedures and report on the financial condition of certain affiliates whose
financial and securities activities are reasonably likely to have material
impact on the financial and operational condition of the broker-dealers. Certain
"Material Associated Persons" (as defined in the Risk Assessment Rules) of the
broker-dealers and the activities conducted by such Material Associated Persons
may also be subject to regulation by the Commission. In addition, the
possibility exists that, on the basis of the information it obtains under the
Risk Assessment Rules, the Commission could seek authority over the Company's
unregulated subsidiaries either directly or through its existing authority over
the Company's regulated subsidiaries.
Tucker Anthony, Sutro, Freedom Capital and other subsidiaries are
registered with the Commission as investment advisors under the Investment
Advisors Act of 1940 (the "Advisors Act") and are subject to the requirements of
regulation pursuant to both the Advisors Act and certain state securities laws
and regulations. Such requirements relate to, among other things, limitations on
the ability of investment advisors to charge performance-based or non-refundable
fees to clients, record-keeping and reporting requirements, disclosure
requirements, limitations on principal transactions between an advisor or its
affiliates and advisory clients, as well as general anti-fraud prohibitions. The
state securities law requirements applicable to registered investment advisors
are in certain cases more comprehensive than those imposed under federal
securities laws.
As registered investment advisors under the Advisors Act, Tucker Anthony,
Sutro, Freedom Capital and certain other subsidiaries of the Company are subject
to regulations which cover various aspects of the Company's business, including
compensation arrangements. Under the Advisors Act, every investment advisory
agreement with the Company's clients must expressly provide that such contract
may not be assigned by the investment advisor without the consent of the client.
Under the Investment Company Act of 1940 (the "Investment Company Act"), every
investment advisor's agreement with a registered investment company must provide
for the agreement's automatic termination in the event it is assigned. Under
both the Advisors Act and the Investment Company Act, an investment advisory
agreement is deemed to have been assigned when there is a direct or indirect
transfer of the Agreement, including a direct assignment or a transfer of a
"controlling block" of the firm's voting securities or, under certain
circumstances, upon the transfer of a "controlling block" of the voting
securities of its parent corporation. A transaction is not, however, an
assignment under the Advisors Act or the Investment Company Act if it does not
result in a change of actual
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<PAGE> 50
control or management of the investment advisor. Any assignment of the Company's
investment advisory agreements would require, as to any registered investment
company client, the prior approval of a majority of its shareholders, and as to
the Company's other clients, the prior consent of such clients to such
assignments. See "Risk Factors -- Business Subject to Extensive Regulation;
Constraints Imposed by Net Capital Requirements."
In October 1996, during an annual review of the Company's former clearing
subsidiary by the NYSE, it was discovered that for the period of April 4, 1996
through July 1, 1996, such subsidiary had a net capital deficiency on certain
days in violation of the net capital requirements of the Commission and the
NYSE. These net capital deficiencies resulted from a misclassification on the
books of such subsidiary related to the continuation by such subsidiary of a
lending arrangement for overnight and short-term loans on an unsecured basis
with a lending institution during the winding down of its clearing operation
following the commencement of the Company's financing arrangement with Wexford.
While no net capital deficiencies have occurred between July 1, 1996 and the
Company's voluntary withdrawal of such subsidiary's broker-dealer license in
March 1997, the Company has reached a tentative settlement with the NYSE in
which the Company will be censured and charged a fine of $60,000.
LITIGATION
The Company and its subsidiaries are parties to various legal proceedings
which are of an ordinary or routine nature incidental to the operations of the
Company and its subsidiaries. As of December 31, 1997, there were approximately
46 lawsuits and arbitrations pending against the Company and its subsidiaries.
The defense of such lawsuits or arbitrations may divert the efforts and
attention of the Company's management and staff, and the Company may incur
significant legal expense in defending such litigation or arbitration. This may
be the case even with respect to frivolous claims or litigation. The amount of
time that management and other employees may be required to devote in connection
with the defense of litigation could be substantial and might divert their
attention from other responsibilities within the Company. The Company believes
that it has adequately reserved for such litigation matters and that they will
not have a material adverse effect on the Company's financial condition or
results of operations.
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<PAGE> 51
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors and executive officers of the Company and their respective
ages and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
John H. Goldsmith......... 56 Chairman, Director and Chief Executive Officer as well as
Chief Executive Officer of Tucker Anthony and Chairman of
Sutro
Robert H. Yevich.......... 48 Director and President of Tucker Anthony
John F. Luikart........... 48 Director and President and Chief Executive Officer of Sutro
Henry Greenleaf........... 55 President and Chief Executive Officer of Freedom Capital
William C. Dennis, Jr..... 54 Executive Vice President and Chief Financial Officer
Kevin J. McKay............ 49 General Counsel and Secretary
Gregory N. Thomas......... 51 Director and Executive Vice President
David V. Harkins.......... 56 Director
C. Hunter Boll............ 42 Director
Thomas M. Hagerty......... 35 Director
Seth W. Lawry............. 33 Director
Winston J. Churchill...... 57 Director
David P. Prokupek......... 36 Director
</TABLE>
John H. Goldsmith. Mr. Goldsmith joined the Predecessor Company in 1988
and has served as Chairman, Director and Chief Executive Officer of the
Predecessor Company, Chief Executive Officer of Tucker Anthony and Chairman of
Sutro since that time. Mr. Goldsmith has served as Chairman, Director and Chief
Executive Officer of the Company since the Acquisition in 1996. Prior to joining
the Predecessor Company, Mr. Goldsmith served in various capacities at Prescott,
Ball & Turben in Cleveland, Ohio, including as managing partner and Chief
Executive Officer from 1978 to 1982 and as President and Chief Executive Officer
from 1982 to 1988. Mr. Goldsmith worked in the institutional sales department of
L.F. Rothschild from 1963 to 1971.
Robert H. Yevich. Mr. Yevich joined Tucker Anthony in 1985 and served as
National Sales Manager until being elected to the Board of Directors of the
Predecessor Company and promoted to President of Tucker Anthony in 1995. Mr.
Yevich has served as Director of the Company since the Acquisition in 1996. Mr.
Yevich has 24 years of varied experience in the retail brokerage business as a
stockbroker, branch manager and research associate. Prior to joining Tucker
Anthony, Mr. Yevich served as branch manager with Paine Webber.
John F. Luikart. Mr. Luikart joined Sutro in 1988 as President and was
responsible for directing all of the firm's capital markets activities. Mr.
Luikart was subsequently elected to the Board of Directors of the Predecessor
Company and appointed Chief Executive Officer of Sutro in October 1995. Mr.
Luikart has served as Director of the Company since the Acquisition in 1996.
Prior to joining Sutro, Mr. Luikart served as General Partner and Executive Vice
President at Prescott, Ball & Turben in Cleveland, Ohio. Mr. Luikart is a former
Chairman of the NASD District Business Conduct Committee and is a member of the
NYSE Regional Firm Advisory Committee.
Henry Greenleaf. Mr. Greenleaf is the President and Chief Executive
Officer of Freedom Capital Management. Prior to joining Freedom in 1997, he was
Vice President and Senior Portfolio Manager with The Glenmede Trust Company.
From 1995 to 1997, he was a Principal and Chief Investment Officer with the
investment counseling firm of Resources Management Corporation/Asset Management
Partners of Farmington, Connecticut. Earlier, he was President and Chief
Investment Officer of HT Investors, Inc. and Senior Vice President of Rhode
Island Hospital Trust National Bank. Mr. Greenleaf also served as portfolio
manager for the Phoenix Mutual Life Insurance Company and The Aetna Life and
Casualty Company. Mr. Greenleaf is a member of the Board of Directors of Cambric
Graphics.
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William C. Dennis, Jr. Mr. Dennis was elected Executive Vice President and
Chief Financial Officer of the Company in May, 1997. Prior to joining the
Company, he was a Director and Chief Financial Officer of Rodman & Renshaw
Capital Group, Inc., a financial services firm, from 1996 to 1997. Previously,
Mr. Dennis was a managing director of MIS, Inc., a database management company,
and prior to joining MIS, Inc. he was Chief Financial Officer of the Capital
Markets Sector of Merrill Lynch & Co., Inc. Earlier in his career, Mr. Dennis
was a senior financial executive of Exxon Corporation.
Kevin J. McKay. Mr. McKay joined the Predecessor Company in 1994 and has
served as General Counsel and Secretary of the Predecessor Company since that
time. Mr. McKay has served as General Counsel and Secretary of the Company since
the Acquisition in 1996. Prior to joining the Predecessor Company, Mr. McKay was
General Counsel of Prudential Securities, Inc. from 1990 to 1994. Mr. McKay has
over 19 years of experience in the legal and compliance field of the securities
industry. Mr. McKay is a past President of the Compliance & Legal Division of
the Securities Industry Association.
Gregory N. Thomas. Mr. Thomas joined the Company as Executive Vice
President in December 1997 and was elected to the Board of Directors in January
1998. Prior to joining the Company, Mr. Thomas served as President of ShadowWood
Corporation, a private real estate investment company. In 1997, Mr. Thomas also
served as an Adjunct Professor in the School of Business and Economics at the
College of Charleston. Previously, Mr. Thomas was a general partner of William
Blair & Company. Mr. Thomas is currently a director of Obermeyer Asset
Management Company.
David V. Harkins. Mr. Harkins was elected to the Board of Directors of the
Company in 1996. He has been affiliated with THL since its founding in 1974 and
joined THL as a full time employee in 1986. Mr. Harkins is Chairman of the Board
of National Dentex Corporation and is a director of First Alert, Inc., First
Security Services, Inc., Fisher Scientific International, Inc., Stanley
Furniture Company, Inc. and Syratech Corp. Mr. Harkins also serves as Senior
Vice President and Trustee of Thomas H. Lee Advisors I, and T.H. Lee Mezzanine
II, affiliates of ML-Lee Acquisition Fund, L.P., and the ML-Lee Acquisition Fund
II, L.P., respectively.
C. Hunter Boll. Mr. Boll was elected to the Board of Directors of the
Company in 1996. He joined THL in 1986. From 1984 through 1986, Mr. Boll was
with The Boston Consulting Group. From 1977 through 1982, he served as an
Assistant Vice President, Energy and Minerals Division of Chemical Bank. Mr.
Boll is a Director of Big V Supermarkets, Inc., New York Restaurant Group,
Select Beverages, Inc., Stanley Furniture Company, Inc. and TransWestern
Publishing, L.P. Mr. Boll is also a Vice President of Thomas H. Lee Advisors I,
T.H. Lee Mezzanine II, and the Administrative General Partner of Thomas H. Lee
Advisors II, L.P., which is also affiliated with the ML-Lee Acquisition Fund II,
L.P.
Thomas M. Hagerty. Mr. Hagerty was elected to the Board of Directors of
the Company in 1996. He joined THL in 1988. Prior to joining THL, Mr. Hagerty
was in the Mergers and Acquisitions Department of Morgan Stanley & Co.
Incorporated. Mr. Hagerty is a director of Select Beverages, Inc., and Syratech
Corp. Mr. Hagerty is also a Vice President of Thomas H. Lee Advisors I, T.H. Lee
Mezzanine II, and the Administrative General Partner of Thomas H. Lee Advisors
II, L.P., which is also affiliated with the ML-Lee Acquisition Fund II, L.P.
Seth W. Lawry. Mr. Lawry was elected to the Board of Directors of the
Company in 1996. He worked at THL from 1989 to 1990 and rejoined in 1994. From
1987 to 1989 and 1992 to 1994, Mr. Lawry worked at Morgan Stanley & Co.
Incorporated in the Mergers and Acquisitions, Corporate Finance and Equity
Capital Markets Departments. Mr. Lawry is a director of Safelite Glass Corp. and
Syratech Corp.
Winston J. Churchill. Mr. Churchill was elected to the Board of Directors
in 1996. Mr. Churchill joined SCP at its founding in 1996 as a Managing General
Partner. Prior to joining SCP, Mr. Churchill formed CIP Capital, Inc., in 1990
and Churchill Investment Partners, Inc., in 1989. Mr. Churchill serves as
Chairman of the Board of Central Sprinkler Corporation, and as a director of
Geotek Communications, Inc., IBAH Inc., Millenium Multimedia, Tescorp, Inc.,
Cinema Star Luxury Theatres, Inc., and Griffin Land and Nurseries, Inc. Mr.
Churchill also serves as a director of Fordham University, Georgetown
University, and several other institutions.
David P. Prokupek. Mr. Prokupek will be elected to the Board of Directors
following the acquisition of Cleary Gull. He joined Cleary Gull as Managing
Director of the Investment Banking Department in 1992,
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<PAGE> 53
was elected a director in 1994, and was named Chief Executive Officer in 1996.
Prior to joining Cleary Gull, Mr. Prokupek was a Managing Director of American
Asset Management, a New York-based investment counselor and merchant bank, and
from 1987 to 1989, he was a member of Bankers Trust Company's Merchant Banking
Group.
The Company intends to elect one additional director who is currently
unaffiliated with the Company within 90 days of the completion of the Offering
and the Company intends to elect a second additional unaffiliated director
within one year of the completion of the Offering.
BOARD COMMITTEES
The Compensation Committee of the Board of Directors of the Company is
comprised of John H. Goldsmith, David V. Harkins, Thomas M. Hagerty and Winston
J. Churchill. The Audit Committee of the Board of Directors of the Company is
comprised of C. Hunter Boll, Seth W. Lawry, and Winston J. Churchill. Following
the Offering, the Company intends to elect to the committees, directors of the
Company who are not otherwise affiliated with the Company.
ELECTION AND COMPENSATION OF DIRECTORS
Each director of the Company holds office until his successor has been duly
elected and qualified. Directors of the Company are elected annually by the
stockholders of the Company. Officers of the Company are elected by the Board of
Directors of the Company at each annual meeting of the Board of Directors and
serve at its discretion. The current directors of the Company receive no
compensation for serving as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Harkins, Boll, Hagerty and Lawry are employed by THL, Mr. Churchill
is employed by SCP and the other directors of the Company are employed by the
Company. THL, SCP and those directors who are employed by the Company have each
been involved in transactions with the Company. See "Certain Relationships and
Related Transactions."
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and each of the Company's four other most highly
compensated executive officers (collectively, the "Named Executive Officers")
during the year ended December 31, 1997:
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM ALL OTHER
1997 COMPENSATION COMPEN-
ANNUAL COMPENSATION AWARDS SATION
--------------------------- ------------ ---------
OTHER
ANNUAL SECURITIES
COMPEN- UNDERLYING
SALARY BONUS SATION OPTIONS
NAME AND PRINCIPAL POSITION ($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C>
John H. Goldsmith.............................. 400,000 850,000 (2) 54,540 41,595(3)
Chairman, Director and Chief Executive Officer
William C. Dennis, Jr. (4)..................... 350,000 400,000 -- 36,360 --
Chief Financial Officer
Kevin J. McKay................................. 300,000 400,000 (2) 29,088 3,200(3)
General Counsel and Secretary
Robert H. Yevich............................... 300,000 700,000 (2) 44,541 3,200(3)
Director and President of Tucker Anthony
John F. Luikart................................ 250,000 800,000 (2) 44,541 3,000(3)
Director and Chief Executive Officer of Sutro
</TABLE>
- ------------------------------
(1) Amounts shown reflect compensation earned in the period presented, although
payments earned in prior periods may have been paid in the period presented
and compensation earned in the period presented may have been paid in a
subsequent period.
(2) Amount does not exceed lesser of $50,000 or 10% of compensation.
52
<PAGE> 54
(3) Represents contribution to 401(k) plan and, in the case of Mr. Goldsmith,
$38,395 of insurance premiums.
(4) The amount presented in the table above includes a $250,000 forgivable loan.
Mr. Dennis' employment began May 12, 1997 and his effective annual base
salary rate is $400,000.
The following table sets forth certain information regarding the option
grants made during Fiscal 1997 to each of the Company's named executive officers
in the Summary Compensation Table above. The Company issued no stock
appreciation rights in 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------------------- VALUE
PERCENT OF AT ASSUMED ANNUAL
TOTAL RATES
OPTIONS OF STOCK PRICE
NUMBER OF GRANTED TO MARKET APPRECIATION FOR
SECURITIES EMPLOYEES VALUE ON OPTION
UNDERLYING IN EXERCISE OR DATE OF TERM(1)(2)
OPTIONS FISCAL YEAR BASE PRICE GRANT EXPIRATION --------------------
NAME GRANTED (#) (%) ($/SHARE) ($/SHARE) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C> <C>
John H. Goldsmith.... 17,998 5.50 5.50 01/31/07 62,261 157,781
36,542 5.50 5.50 05/31/06 116,014 288,746
------
54,540 2.56
------
William C. Dennis,
Jr................. 11,999 5.50 6.31 05/01/07 41,507 105,186
24,361 5.50 6.31 05/31/06 74,744 184,598
------
36,360 1.70
------
Kevin J. McKay....... 9,599 5.50 5.50 01/31/07 33,206 84,150
19,489 5.50 5.50 05/31/06 61,874 153,998
------
29,088 1.36
------
Robert H. Yevich..... 14,699 5.50 5.50 01/31/07 50,846 128,854
29,842 5.50 5.50 05/31/06 94,745 235,809
------
44,541 2.09
------
John F. Luikart...... 14,699 5.50 5.50 01/31/07 50,846 128,854
29,842 5.50 5.50 05/31/06 94,745 235,809
------
44,541 2.09
------
</TABLE>
- ------------------------------
(1) In accordance with the rules of the Commission, shown are the gains or
"option spreads" that would exist for the respective options granted. These
gains are based on the assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the option was granted over the
full option term. These assumed annual compound rates of stock price
appreciation are mandated by the rules of the Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
(2) Options issued to Mr. Dennis were issued below fair market value on the
dates of grant resulting in gains or "option spreads" of $9,719 and $19,732.
These gains are based on the assumed rate of annual compound stock price
appreciation of 0% from the dates options were granted over the full option
term.
53
<PAGE> 55
Year End Option Table. The following table sets forth information
regarding exercise of options and the number and value of options held at
December 31, 1997, by each of the Company's named executive officers in the
Summary Compensation Table above:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS AT MONEY OPTIONS AT
ACQUIRED FISCAL YEAR END FISCAL YEAR-END(1)
ON VALUE ---------------------------- -------------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
John H. Goldsmith........ -- -- 10,908 43,632 136,350 545,400
William C. Dennis, Jr.... -- -- 7,272 29,088 90,900 363,600
Kevin J. McKay........... -- -- 5,818 23,270 72,725 290,875
Robert H. Yevich......... -- -- 8,908 35,633 111,350 445,413
John F. Luikart.......... -- -- 8,908 35,633 111,350 445,413
</TABLE>
- ------------------------------
(1) Value is based on the difference between the option exercise price and the
initial public offering price of the Common Stock at the mid-point of the
range of the cover page of this Prospectus multiplied by the number of
shares of Common Stock underlying the option. No market existed for the
Common Stock prior to this Offering.
STOCK OPTION AND STOCK PURCHASE PLANS
1996 Stock Option Plan. The 1996 Stock Option Plan (the "1996 Plan")
provides for the granting of incentive stock options and non-qualified options
as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), to employees of the Company. The 1996 Plan is administered by either
the Company's Board of Directors ("the Board") or a committee (the "Committee")
comprised of members of the Board to which the Board may delegate its
administrative duties and authority. The Committee (i) interprets and applies
the 1996 Plan; (ii) determines the eligibility of an individual to participate
in the 1996 Plan; (iii) approves the assignment of options immediately prior to
the registration of the Company's stock pursuant to the 1934 Act if such
assignment would increase the number of Common Stock holders; and (iv)
determines and allocates the cancellation or exchange of outstanding options in
the case of a recapitalization, acquisition, merger or Change in Control. No
director or officer of the Company is eligible for such options unless such
director or officer is also an employee. No options may be granted to an
employee that, at the time of the grant, owns more than 10% of the voting power
or greater than 10% of each class of the Company's outstanding stock, unless the
purchase price for the purchase of the stock is not less than 110% of the
stock's fair market value on the date of the grant and the option, by its terms,
shall not be exercisable more than five years from the date it is granted.
The Company has authorized the issuance of options for up to 2,181,600
shares of the Company's Common Stock under the 1996 Plan. Matured options may be
exercised in full at one time or in part from time to time and the payment of
the exercise price may be made by delivery of (i) cash or a check payable to the
order of the Company in an amount equal to the exercise price of such options;
(ii) shares of Common Stock of the Company owned by the optionee having a fair
market value equal in amount to the exercise price of the options being
exercised; (iii) the cancellation of shares covered by this Option which are
then vested and exercisable having a fair market value equal in amount to the
purchase price of the shares being purchased; (iv) at the sole discretion of the
Committee, a promissory note; or (v) any combination of (i), (ii), (iii) and
(iv); provided, however, that payment of the exercise price by delivery of
shares of Common Stock of the Company owned by such optionee or cancellation of
shares covered by the option may be made only with the consent of the Committee
if such payment results in a charge to earnings for financial accounting
purposes as determined by the Committee. The Company may delay the issuance of
shares covered by the exercise of an option until (a) the shares for which such
option has been exercised have been registered or qualified under the applicable
federal or state securities laws or (b) counsel for the Company has opined that
such shares are exempt from the registration requirements of such federal or
state securities laws.
54
<PAGE> 56
The term of any option granted under the 1996 Plan shall be limited to ten
years. Upon the termination of an optionholder's employment with the Company,
such options shall terminate between 30 and 180 days after that optionholder
leaves the employ of the Company. All options under the 1996 Plan may only be
assigned to the spouse and children of the optionholder or by will or law of
descent.
As of December 31, 1997, options to purchase 2,133,888 shares were granted
under the 1996 Plan of which options to purchase 455,840 shares vest based on
time at the rate of 20% per year for five years following the date of grant and
options to purchase 1,678,048 shares vest on the sixth anniversary of the date
of grant, of which options to purchase 925,396 shares are subject to accelerated
vesting, based on certain performance thresholds tied to the Company's
operations and options to purchase 752,652 shares are subject to accelerated
vesting based on individual performance (none of which have been granted to the
Company's executive officers). All of the outstanding options have an exercise
price of $5.50 per share. The following options under the 1996 Plan have been
granted to the executive officers of the Company:
<TABLE>
<CAPTION>
TIME-VESTED COMPANY PERFORMANCE
OPTIONS OPTIONS
<S> <C> <C>
John H. Goldsmith............................... 17,998 36,542
William C. Dennis, Jr. ......................... 11,999 24,361
Kevin J. McKay.................................. 9,599 19,489
Robert H. Yevich................................ 14,699 29,842
John F. Luikart................................. 14,699 29,842
Henry Greenleaf................................. 4,500 9,135
</TABLE>
1998 Long-Term Incentive Plan. The Company's 1998 Long-Term Incentive Plan
(the "1998 Plan") provides for the granting of stock options, SARs, restricted
stock and long-term performance awards, in each case on such terms and to such
officers and other key employees as the administrators of the 1998 Plan may
select. The 1998 Plan shall be administered by a committee (the "Committee") of
the Board of Directors comprised of directors who qualify as "non-employee
directors" within the meaning of Rule 16(b)
promulgated under Section 16 of the Exchange Act and as "outside directors"
within the meaning of Code Section 162(m) and the regulations promulgated
thereunder. The failure of a Committee member to qualify under these
requirements shall not invalidate any award otherwise made under the Bonus Plan.
A total of 2,291,688 shares of the Common Stock have been reserved for issuance
under the 1998 Plan.
The maximum number of stock options, SARs or shares of restricted stock
that can be granted at any time shall equal 2,291,688 shares reduced by the sum
(without duplication) of: the number of shares of Common Stock subject to
outstanding awards under the 1998 Plan, the number of shares of Common Stock in
respect of which awards have been exercised, and the number of shares of Common
Stock issued without forfeiture or similar restrictions or issued with
forfeiture or similar restrictions which have lapsed, and increased by the
number of shares of stock delivered or withheld in payment of the exercise
price, purchase price or tax withholding requirements of an award granted under
the 1998 Plan. Unless specifically consented to by the administrators of the
1998 Plan, shares may not be delivered or withheld in payment of the exercise
price, purchase price or tax withholding requirements of an award granted under
the 1998 Plan if such payment would result in a charge to earnings for financial
accounting purposes. The maximum number of stock options, SARs or shares of
restricted stock that can be granted to any one participant in any one plan year
is 250,000. Stock options awarded under the 1998 Plan may either be "incentive
stock options" as defined in Section 422A of the Internal Revenue Code of 1986,
as amended (the "Code") or non-qualified stock options. The term of each stock
option shall be fixed by the administrators of the 1998 Plan, but no incentive
stock option shall be exercisable for a period of more than ten years from the
date the option is granted and any option granted to any optionee who, at the
time the option is granted, owns more than 10% of the voting power of all
classes of capital stock of the Company or of a subsidiary may not have a term
of more than five years from the date of grant. Upon receipt of written notice
to exercise a stock option, the Company may, in the administrators' sole
discretion, elect to cash out all or part of the option to be exercised by
paying the optionee an amount, in cash or Common Stock, equal to the excess of
the fair market value of the Common Stock over the option price on the effective
date of such cashout. Restricted stock under the 1998 Plan shall be awarded for
nominal or no consideration on behalf of the recipient.
55
<PAGE> 57
The 1998 Plan contains provisions intended to comply with Section 162(m) of
the Code. During such time Section 162(m) of the Code or any successor provision
is in effect, the maximum value any participant subject to the provisions of
Section 162(m) may receive in any calendar year under the 1998 Plan will be $2
million multiplied by the number of years in the relevant measuring period, but
in no event more than $5 million, and the maximum annual amount that may be paid
to a participant under the 1998 Plan for (i) the year in which the 1998 Plan is
implemented shall equal no more than $2 million, and (ii) each subsequent year
shall equal 110% of such maximum amount for the preceding year; provided that
the maximum annual amount determined under this provision shall be determined
without regard to the value of any stock options granted to a participant under
the 1998 Plan.
The 1998 Plan provides that in the event of a Change in Control of the
Company (i) SARs and stock options awarded under the 1998 Plan not previously
exercisable and vested which have been held for at least six months from the
date of grant shall become fully vested and exercisable; (ii) the restrictions
applicable to any restricted stock awards under the 1998 Plan shall lapse and
such shares and awards shall be deemed fully vested and (iii) any outstanding
long-term performance awards shall be vested and paid out based on the pro rated
target results for the performance period relating to such awards, unless the
administrators of the 1998 Plan provide at or after grant and prior to the
Change in Control for a different payment. The value of outstanding stock
options, SARs and restricted stock awards shall, unless otherwise determined by
the administrator of the 1998 Plan at or after grant, be cashed out on the basis
of the Change in Control Price. "Change in Control" is defined as the happening
of any of the following: (i) when any "person" as such term is used in Sections
13(d) and 14(d) of the Exchange Act (other than the Company or a subsidiary or
employee benefit plan of the Company) who is not the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting power
of the Company's outstanding securities on the effective date of the 1998 Plan
is or becomes the beneficial owner, directly or indirectly, of securities of the
Company representing 20% or more of the combined voting power of the Company's
outstanding securities without the consent of the Board of Directors of the
Company; (ii) the occurrence of any transaction or event relating to the Company
required to be described pursuant to the requirements of item 6(e) of Schedule
14A of the Exchange Act; (iii) when, during any period of two consecutive years
during the existence of the 1998 Plan, the individuals who, at the beginning of
such period, constitute the Board of Directors of the Company cease for any
reason other than death to constitute a majority thereof, provided, however,
that a director who is not a director at the beginning of such period shall be
deemed to have satisfied the two-year requirement if such director was elected
by, or on the recommendation of, at least a majority of the directors who were
directors at the beginning of such period (either actually or by prior operation
of this clause (iii)); or (iv) the occurrence of a transaction requiring
stockholder approval for the acquisition of the Company by an entity other than
the Company through purchase of assets, or by merger or otherwise. The "Change
in Control Price" is defined as the highest sales price per share of Common
Stock paid or offered in any bona fide transaction relating to a Change in
Control of the Company, as determined by the administrators of the 1998 Plan.
The 1998 Plan provides that no payment shall be made in connection with a Change
in Control which, when aggregated with other payments made to the employee
would, as determined by such persons as the administrators of the 1998 Plan
shall irrevocably designate at or prior to a Change in Control, result in an
"excess parachute payment" for which the Company would not receive a federal
income tax deduction by reason of Section 280G of the Code.
The administrators of the 1998 Plan may amend, alter or discontinue the
1998 Plan at any time and from time to time, but no alteration or
discontinuation shall be made which would impair the rights of an optionee or
participant with respect to an award which has been granted under the 1998 Plan
without the optionee's or participant's consent. In addition, without the
approval of the Company's stockholders, the administrators of the 1998 Plan may
not make any such amendment which would, except in connection with stock splits,
dividends or similar recapitalizations of the Company, increase the total number
of shares reserved for purposes of the 1998 Plan, change the employees or class
of employees eligible to participate in the 1998 Plan or extend the maximum
option period applicable to incentive stock options granted under the 1998 Plan.
The other terms and conditions of awards under the 1998 Plan, including
vesting provisions, term and exercisability of the awards, shall be as
determined by the administrators of the 1998 Plan. Upon closing of the
56
<PAGE> 58
Offering, options to purchase an aggregate of 545,400 shares with an exercise
price equal to the initial public offering price will be granted under the 1998
Plan to employees of the Company. Such options will vest in three equal annual
installments commencing on the third anniversary of the grant date.
1998 STOCK PURCHASE PLAN
The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
authorizes the issuance of a maximum of 500,000 shares of Common Stock pursuant
to the exercise of nontransferable options granted to participating employees.
The 1998 Purchase Plan is administered by the Compensation Committee. All
employees of the Company whose customary employment is 20 hours or more per week
and five months or more per year and have been employed by the Company for at
least six months are eligible to participate in the 1998 Purchase Plan.
Employees who own 5% or more of the Company's stock, directors who are not
employees of the Company and persons subject to the reporting requirements of
Section 16(a) of the Securities Exchange Act of 1934 may not participate in the
1998 Purchase Plan. To participate in the 1998 Purchase Plan an employee must
authorize the Company in writing to deduct an amount (not less than 1% nor more
than 10% of a participant's base compensation and not more than $25,000 in any
year) from his or her pay commencing on January 1 and July 1, of each year (each
a "Purchase Period"), commencing July 1, 1998. On the first day of each Purchase
Period, the Company grants to each participating employee an option to purchase
up to that number of shares of Common Stock they are entitled to purchase under
the 1998 Purchase Plan. The exercise price for the option for each Purchase
Period is 85% of the fair market value of the Common Stock on the first or last
business day of the Purchase Period, whichever is lower. During such time as the
Common Stock is listed on the NYSE, the fair market value will be the closing
selling price of the Common Stock on the NYSE. If an employee is not a
participant on the last day of the Purchase Period, such employee is not
entitled to exercise his or her option, and the amount of his or her accumulated
payroll deduction will be refunded to the employee. An employee's rights under
the 1998 Purchase Plan terminate upon his or her voluntary withdrawal from the
Plan at any time or upon termination of employment.
Common Stock for the 1998 Purchase Plan will be made available either from
authorized but unissued shares of Common Stock or from shares of Common Stock
reacquired by the Company, including shares repurchased in the open market.
1998 EXECUTIVE PERFORMANCE BONUS PLAN
Certain of the Company's executive officers and other key employees are
entitled to participate in the Company's 1998 Executive Performance Bonus Plan
(the "Bonus Plan"). The Bonus Plan shall be administered by a committee (the
"Committee") of the Board of Directors comprised of directors who qualify as
"non-employee directors" within the meaning of Rule 16(b) promulgated under
Section 16 of the Exchange Act and as "outside directors" within the meaning of
Code Section 162(m) and the regulations promulgated thereunder. The failure of a
Committee member to qualify under these requirements shall not invalidate any
award otherwise made under the Bonus Plan. Amounts paid pursuant to the Bonus
Plan are intended to qualify as performance-based compensation within the
meaning of Section 162(m) of the Code. The Bonus Plan provides that the
Committee will establish an award pool from which awards may be paid to eligible
employees in accordance with the Bonus Plan. The amount included in the award
pool for any particular performance period shall be equal to a percentage of
pre-tax operating income of the Company (as defined) for the performance period
before provision for incentive compensation and extraordinary items, which
percentage shall be determined by the Committee and shall not exceed 15%. Within
ninety days following the commencement of each performance period, the Committee
shall allocate in writing, on behalf of each participant, a portion of the award
pool, if any, to be paid for such performance period; provided in no event shall
the percentage portion of the award pool allocated to any participant exceed 50%
of the award pool. The Committee may establish other criteria which it deems
appropriate for awards under the Bonus Plan, which may or may not be tied to
pre-tax operating income of the Company, so long as the amounts of the awards
fall within the maximum amounts described above. The Committee is authorized at
any time during or after a performance period, in its sole discretion, to reduce
or eliminate (but not increase) the award
57
<PAGE> 59
pool or a portion of the award pool allocated to any participant for any reason,
including changes in the position or duties of any participant with the Company
during the performance period, whether due to termination of employment or
otherwise. Participants are entitled to receive payment under the Bonus Plan in
cash as soon as practicable after the total amount of the award pool and the
awards payable to each participant are determined. In the discretion of the
Committee, partial payments may be made to participants during the course of a
performance period; provided that the aggregate of such partial payments may not
exceed the amount of the award that a participant would otherwise receive
pursuant to the Bonus Plan. The Board of Directors of the Company may at any
time terminate, suspend or modify the Bonus Plan and the terms and conditions of
any award thereunder that has not been paid. No award may be granted under the
Bonus Plan during any period of suspension or after its termination. Amendments
of the Bonus Plan are subject to the approval of the stockholders of the Company
only if such approval is necessary to maintain the Bonus Plan in compliance with
the requirements of Section 162(m) of the Code, or any other applicable law or
regulation. No awards have yet been made under the Bonus Plan.
LIMITATION OF LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, the Company has
included in its Charter a provision to eliminate the personal liability of its
directors for monetary damages for breach or alleged breach of their fiduciary
duties as directors, subject to certain exceptions. In addition, the Bylaws of
the Company provide that the Company is required to indemnify its officers and
directors under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and the Company is required to
advance expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. The Company has also
agreed to indemnify its directors and certain officers to the maximum extent
permitted by Delaware law pursuant to agreements with such directors and
officers. At present, the Company is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of the
Company in which indemnification would be required or permitted. The Company
believes that its charter provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
58
<PAGE> 60
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock as of December 31, 1997, and as adjusted
to reflect the sale of the Common Stock offered hereby by: (i) each person who
is known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock; (ii) each of the Company's directors; (iii) each of the
Selling Stockholders; (iv) each named executive officer, and (v) all directors
and executive officers as a group. Except as otherwise specified below, the
persons named in the table below have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL OWNERSHIP
OWNERSHIP PRIOR AFTER
TO THE OFFERING(1) THE OFFERING(1)
-------------------- NUMBER OF --------------------
NUMBER OF SHARES BEING NUMBER OF
NAME OF BENEFICIAL OWNER(1) SHARES PERCENT OFFERED SHARES PERCENT
<S> <C> <C> <C> <C> <C>
Thomas H. Lee Equity Fund III,
L.P.(2)............................. 6,228,064 42.2% 1,585,007 4,643,057 24.5%
Thomas H. Lee Foreign Fund III,
L.P.(2)............................. 385,374 2.6 98,076 287,298 1.5
THL-CCI, L.P. ........................ 646,054 4.4 164,417 481,637 2.5
SCP Private Equity L.P. .............. 1,814,873 12.3 462,500 1,352,373 7.1
John Hancock Subsidiaries, Inc.(3) ... 717,481 4.9 190,000 527,481 2.8
John H. Goldsmith(4).................. 119,988 * -- 119,988 *
William C. Dennis, Jr.(5) ............ 98,172 * -- 98,172 *
Kevin J. McKay(6)..................... 78,538 * -- 78,538 *
Robert H. Yevich(7)................... 99,808 * -- 99,808 *
John F. Luikart(8).................... 99,808 * -- 99,808 *
Gregory N. Thomas..................... 90,900 * -- 90,900 *
David V. Harkins(9)................... 7,259,492 49.2 1,847,500 5,411,992 28.5
C. Hunter Boll(10).................... 7,259,492 49.2 1,847,500 5,411,992 28.5
Thomas M. Hagerty(11)................. 7,259,492 49.2 1,847,500 5,411,992 28.5
Seth W. Lawry(12)..................... 7,259,492 49.2 1,847,500 5,411,992 28.5
Winston J. Churchill(13).............. 1,814,873 12.3 462,500 1,352,373 7.2
All Directors and Executive Officers
as a Group (12 persons, including
the above).......................... 9,682,486 65.6% 2,310,000 7,372,486 38.9%
</TABLE>
- ------------------------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with rules of the
Commission and includes general voting power or investment power with
respect to securities. Shares of Common Stock subject to options and
warrants currently exercisable or exercisable within sixty (60) days of
December 31, 1997 are deemed outstanding for computing the percentage of
the person holding such options, but are not deemed outstanding for
computing the percentage of any other person. Unless otherwise indicated,
the address of each of the beneficial owners identified is One Beacon
Street, Boston, MA 02108.
(2) Each of THL Equity Advisors III, L.P. ("Advisors III"), the general partner
of Thomas H. Lee Equity Fund III, L.P. and Thomas H. Lee Foreign Fund III,
L.P., and THL Equity Trust III, the general partner of Advisors III, also
may be deemed to be beneficial owners of the 6,228,064 shares of Common
Stock held by Thomas H. Lee Equity Fund III, L.P. and the 385,374 shares of
Common Stock held by Thomas H. Lee Foreign Fund III, L.P. Each of Advisors
III and THL Equity Trust III disclaim beneficial ownership of such shares.
Each of Advisors III and THL Equity Trust III maintains a principal
business address c/o Thomas H. Lee Company, 75 State Street, Boston, MA
02109.
(3) Excludes 31,099 shares Hancock has acquired pursuant to a preemptive right.
Excludes shares issuable under the Additional Share Agreement. See "Certain
Relationships and Related Transactions -- The Acquisition -- Additional
Share Agreement." Hancock maintains a principal business address at 200
Clarendon Street, Boston, MA 02116.
(4) Includes 10,908 shares of Common Stock which Mr. Goldsmith has the right to
acquire pursuant to the 1996 Stock Option Plan.
(5) Includes 7,272 shares of Common Stock which Mr. Dennis has the right to
acquire pursuant to the 1996 Stock Option Plan.
(6) Includes 5,818 shares of Common Stock which Mr. McKay has the right to
acquire pursuant to the 1996 Stock Option Plan.
(7) Includes 8,908 shares of Common Stock which Mr. Yevich has the right to
acquire pursuant to the 1996 Stock Option Plan.
(8) Includes 8,908 shares of Common Stock which Mr. Luikart has the right to
acquire pursuant to the 1996 Stock Option Plan.
59
<PAGE> 61
(9) Includes the shares of Common Stock held by Thomas H. Lee Equity Fund III,
L.P., Thomas H. Lee Foreign Fund III, L.P. and THL-CCI, L.P. ("THL-CCI"),
which Mr. Harkins may be deemed to beneficially own by virtue of his
position as a Trustee of THL Equity Trust III and officer of THL Investment
Management Corp., the general partner of THL-CCI. Mr. Harkins disclaims
beneficial ownership of such additional shares. Mr. Harkins maintains his
principal business address c/o Thomas H. Lee Company, 75 State Street,
Boston, MA, 02109.
(10) Includes the shares of Common Stock held by Thomas H. Lee Equity Fund III,
Thomas H. Lee Foreign Fund III, L.P. and THL-CCI, which Mr. Boll may be
deemed to beneficially own by virtue of his position as officer of each of
THL Equity Trust III and THL Investment Management Corp. Mr. Boll disclaims
beneficial ownership of such additional shares. Mr. Boll maintains his
principal business address c/o Thomas H. Lee Company, 75 State Street,
Boston, MA 02109.
(11) Includes the shares of Common Stock held by Thomas H. Lee Equity Fund III,
L.P., Thomas H. Lee Foreign Fund III, L.P. and THL-CCI, which Mr. Hagerty
may be deemed to beneficially own by virtue of his position as officer of
each of THL Equity Trust III and THL Investment Management Corp. Mr.
Hagerty disclaims beneficial ownership of such additional shares. Mr.
Hagerty maintains his principal business address c/o Thomas H. Lee Company,
75 State Street, Boston, MA, 02109.
(12) Includes the shares of Common Stock held by Thomas H. Lee Equity Fund III,
L.P., Thomas H. Lee Foreign Fund III, L.P. and THL-CCI, which Mr. Lawry may
be deemed to beneficially own by virtue of his position as officer of each
of THL Equity Trust III and THL Investment Management Corp. Mr. Lawry
disclaims beneficial ownership of such additional shares. Mr. Lawry
maintains his principal business address c/o Thomas H. Lee Company, 75
State Street, Boston, MA, 02109.
(13) Mr. Churchill also may be deemed to be the beneficial owner the shares of
Common Stock held by SCP Private Equity L.P. by virtue of his position as
officer of the general partner of SCP Private Equity, L.P. Mr. Churchill
disclaims beneficial ownership of such additional shares. Mr. Churchill
maintains his principal business address c/o SCP Private Equity, L.P., 800
The Safeguard Building, 435 Devon Park Drive, Wayne, PA, 19087.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE ACQUISITION
On November 29, 1996, the Acquisition was completed pursuant to the terms
of the Contribution Agreement, dated October 4, 1996 (the "Contribution
Agreement").
Under the terms of the Contribution Agreement, THL, SCP and approximately
350 employee investors (the "Employee Investors") contributed to the Company an
aggregate of $75,000,000 in exchange for shares representing approximately 95%
of the then outstanding shares of the Company. THL contributed $39,931,200 in
exchange for approximately 51%. SCP contributed $9,982,800 in exchange for
approximately 13%, and the Employee Investors contributed an aggregate of
$25,086,000 in exchange for approximately 31%. Hancock contributed 100% of the
outstanding capital stock of the Predecessor Company to the Company in exchange
for $180,000,000 in cash and 4.999% of the Company's outstanding capital stock.
The consideration paid to Hancock was financed with the $75,000,000 equity
contribution of THL, SCP and the Employee Investors, $85,000,000 of bank
financing under the Credit Facility and $20,000,000 of excess cash of the
Company. In connection with the Acquisition, the Company also repaid its
existing debt to Hancock totaling approximately $32,500,000. Approximately
$25,800,000 of the debt was paid with bank financing and approximately
$6,700,000 was paid from excess cash of the Company.
Under the terms of the Contribution Agreement and a Tax Matters Agreement
(the "Tax Matters Agreement") entered into at the closing of the Acquisition,
each of the Company and Hancock agreed to indemnify the other party for breaches
of representations, warranties and covenants contained in the Contribution
Agreement, and Hancock has agreed to indemnify the Company for certain specified
matters. Each party's right to indemnification for breaches of any
representations and warranties contained in the Contribution Agreement survives
the closing until April 1, 1998, with the exception of certain representations
and warranties relating to authorization, validity and title to shares which
continue beyond such date. In addition, indemnification for breaches of certain
covenants contained in the Contribution Agreement, such as confidentiality and
non-competition, survive beyond April, 1998. With respect to most other claims,
if any, based on breaches of representations or warranties, a party providing
indemnification is liable for all of the other party's losses in excess of $1.75
million. Hancock's liability for all indemnification obligations under the
Contribution Agreement is limited to $30 million, except with respect to
representations regarding capitalization and share ownership and certain
covenants. In addition, the Chief Executive Officer of the Company agreed in a
separate agreement to contribute towards Hancock's indemnification obligations
for breaches of certain representations one-third of any amounts paid by Hancock
up to a maximum of $250,000.
The Contribution Agreement provides that following the closing of the
Acquisition, the Company and its affiliates have the exclusive right to use all
names incorporating "Freedom", "Tucker Anthony" or "Sutro" or to use the
Freedom, Tucker Anthony or Sutro logos. Hancock agreed to cause the mutual funds
managed by its affiliates to change their names to exclude the words "Freedom,"
"Tucker Anthony" or "Sutro" from their names and to no longer use any such names
or confusingly similar names, subject to the continuation of the use of the
"Freedom" name by Hancock for a period ending April 30, 1998 for certain
purposes relating to mutual funds advised by its affiliates. In addition, the
Company agreed that after the closing date of the Acquisition the Company and
its affiliates would not have any right to use names incorporating "John
Hancock" or use any John Hancock logo, and the Company agreed to discontinue the
use of any such names and logos, provided that the Company has no liability to
Hancock for any incidental or accidental use of such names for a twelve month
period following the closing date if it is attempting in good faith to
discontinue such use and does so when it becomes aware of such use.
In connection with the Acquisition, the Company and certain of its
stockholders entered into certain agreements described below affecting the
rights and obligations of the Company and its affiliates.
Tax Matters Agreement. Pursuant to the Tax Matters Agreement, the Company
assumed responsibility for all federal, state and local taxes of the Company
beginning in 1996, exclusive of (i) 50% of any sales or transfer taxes triggered
by the Acquisition and (ii) certain taxes for which Hancock has agreed to
indemnify the Company. Amounts paid by the Company in respect of its obligations
under the Tax Matters Agreement
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were treated by Hancock and the Company as an adjustment to the amount received
by Hancock pursuant to the Contribution Agreement.
Transition Services Agreement. At the closing of the Acquisition, the
Company and Hancock entered into a Transition Services Agreement (the
"Transition Services Agreement") pursuant to which, among other things, the
parties have provided for the continuation for specified periods of time of
certain services historically provided by Hancock to the Company and its
subsidiaries at market rates. These services included certain employee benefits
and insurance coverage, which are no longer provided, and access to telephone
service rates which is expected to continue until August 2000. The Company paid
Hancock $6.1 million under the Transition Services Agreement during 1997.
Additional Share Agreement. Upon consummation of the Acquisition, the
Company entered into an Additional Share Agreement (the "Additional Share
Agreement") with Hancock pursuant to which Hancock is entitled to receive, for
no additional consideration, five percent of the number of shares issued
pursuant to any incentive stock plan adopted by the Company prior to November
29, 1998, up to a maximum of 88,609 shares of Common Stock.
STOCKHOLDERS AGREEMENT
The Stockholders Agreement among certain of the existing stockholders of
the Company (the "Stockholders Agreement") provides that THL may require the
Company to effect the registration of shares of Common Stock held by THL for
sale to the public on two occasions, subject to certain limitations. The
Stockholders Agreement further provides that, at any time following the first
offering of the Common Stock of the Company to the public, SCP may require the
Company to effect the registration of shares of Common Stock held by SCP for
sale to the public and after the second offering, the employees party to such
agreements may require the Company to effect two such registrations. In
addition, under the terms of the Stockholders Agreement, if the Company proposes
to register any of its shares under the Securities Act, whether for its own
account or otherwise, any holders of the Company's registrable shares party to
the Stockholders Agreement are entitled to notice of such registration and are
entitled to include their shares therein, subject to certain conditions and
limitations. All fees, costs, and expenses (other than underwriting discounts
and commissions transfer taxes and attorneys' fees) of any registration effected
pursuant to the Stockholders Agreement, including this Offering, will be paid by
the Company. The Stockholders Agreement also grants certain "tag-along" rights
to the parties in the event THL enters into a single transaction to sell more
than 50% of the stock acquired by it in the Acquisition. In addition, the
Stockholders Agreement provides that all of the existing stockholders of the
Company prior to the Offering will vote their shares so as to elect to the Board
of Directors of the Company four designees of THL, one designee of SCP and three
members of senior management of the Company. This voting agreement expires on
the forty-fifth day following the consummation of the Offering.
MANAGEMENT AGREEMENTS
In accordance with a management agreement entered into by the Company and
THL (the "Management Agreement"), the Company will pay THL an annual management
fee of $250,000 and reimburse any reasonable expenses incurred by THL in
performing such management services. The THL Management Agreement continues
until terminated by the mutual consent of the parties and terminates
automatically upon consummation of the Offering. In accordance with a Management
Agreement entered into by the Company and SCP (the "SCP Management Agreement"),
the Company will pay SCP an annual management fee of $62,500 and reimburse any
reasonable expenses incurred by SCP in performing such management services. The
SCP Management Agreement continues until terminated by the mutual consent of the
parties and terminates automatically upon consummation of the Offering.
EMPLOYMENT AGREEMENTS
Mr. Goldsmith is employed pursuant to a three year employment agreement
expiring on December 31, 1999 renewable annually thereafter. Mr. Goldsmith is
entitled to receive such annual base salary and bonus compensation as is agreed
to by Mr. Goldsmith and the Company from time to time, provided that he is
entitled to receive minimum cash compensation in any calendar year of at least
$750,000. Mr. Goldsmith is
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also entitled to participate in the employee benefit and incentive compensation
plans that the Company makes available to its key executives. If Mr. Goldsmith's
employment is terminated by the Company without cause or if he resigns for
certain enumerated reasons, such as a reduction in executive duties, a decrease
in compensation or benefits or default by the Company ("Good Reason"), Mr.
Goldsmith is entitled to receive cash compensation at his then current rate of
pay and benefits through the end of the twenty-fourth month following such date
of termination. Such amount shall be payable in a lump sum amount equal to
$500,000 at the time of termination with the remaining amounts paid in equal
monthly installments, plus interest. In addition, in the event of any such
termination, any unvested stock options granted to Mr. Goldsmith shall become
fully vested. If Mr. Goldsmith's employment is terminated for cause or if he
resigns other than for Good Reason, he shall be entitled to receive only that
compensation accrued through the date of termination. Mr. Goldsmith's employment
agreement contains a covenant not to solicit any of the Company's clients,
officers, senior managers or senior investment executives for a period of two
years following termination by the Company without cause or by Mr. Goldsmith for
Good Reason, or for a period of six months following termination by Mr.
Goldsmith for any other reason.
Mr. Thomas is employed pursuant to a two year employment agreement expiring
on December 3, 1999. Mr. Thomas is entitled to receive such annual base salary
and bonus compensation as is agreed to by Mr. Thomas and the Company from time
to time, provided that he is entitled to receive minimum cash compensation in
any calendar year of at least $700,000. Mr. Thomas is also entitled to
participate in the employee benefit and incentive compensation plans that the
Company makes available to its key executives. If Mr. Thomas' employment is
terminated by the Company without cause or if he resigns for Good Reason, Mr.
Thomas is entitled to receive cash compensation at his then current rate of pay
and benefits through the end of the twenty-fourth month following such date of
termination. Such amount shall be payable in a lump sum amount equal to $500,000
at the time of termination with the remaining amounts paid in equal monthly
installments, plus interest. In addition, in the event of any such termination,
any unvested stock options granted to Mr. Thomas shall become fully vested and
immediately exercisable. If Mr. Thomas' employment is terminated for cause or if
he resigns other than for Good Reason, he shall be entitled to receive only that
compensation accrued through the date of termination. Mr. Thomas' employment
agreement contains a covenant not to solicit any of the Company's clients,
officers, senior managers or senior investment executives for a period of two
years following termination by the Company without cause or by Mr. Thomas for
Good Reason, or for a period of six months following termination by Mr. Thomas
for any other reason.
Mr. Dennis is employed pursuant to a two year employment agreement with the
Company which expires May 11, 1999. Mr. Dennis is entitled to base salary of
$150,000 during the first year of employment and $400,000 during the second year
of employment. In addition, the Company loaned Mr. Dennis $250,000 upon
commencement of his employment which shall be forgiven on May 12, 1998 if he
remains employed by the Company on such date or is terminated without cause or
resigns for Good Reason prior thereto. He is entitled to minimum annualized
bonuses of $200,000 for 1997 and 1998, plus an additional $400,000 in the
aggregate if the Company attains certain performance targets in each of the
first two twelve month periods of his employment with the Company. Mr. Dennis is
eligible to receive additional merit bonuses as determined by the Board of
Directors of the Company. If, prior to May 12, 2001, Mr. Dennis' employment is
terminated by the Company without cause or if he resigns for Good Reason, he
shall be entitled to receive the greater of his salary and bonus compensation
through the end of his initial two year term of employment, if any, or $600,000.
If he is terminated for cause or resigns other than for Good Reason, Mr. Dennis
shall only be entitled to receive the compensation accrued up to the date of
termination or resignation. Mr. Dennis is also entitled to participate in the
Company's benefit and incentive plans to the same extent as any senior
management executive of the Company.
OTHER TRANSACTIONS WITH MANAGEMENT
Compensation and Benefits. The executive officers of the Company receive
compensation, bonuses and other benefits under various employee benefit plan
arrangements maintained by the Company and its subsidiaries. The executive
officers participated in such benefit plans under the same terms generally made
available to other similarly situated employees of the Company or its
subsidiaries with similar responsibilities and levels of compensation.
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Outstanding Indebtedness. Certain executive officers and directors borrow
from time to time under margin accounts maintained at the Company's
subsidiaries. All such borrowings on margin are made in the ordinary course of
business, are made on substantially the same terms, including interest rates and
collateral, as those prevailing for margin transactions with other persons at
the time made and do not involve more than the normal risk of collectibility or
other unfavorable features.
Investment Partnerships. Certain executive officers of the Company are the
limited partners of certain investment vehicles organized to allow these
employees to invest in funds and other investment vehicles sponsored by certain
of the Company's clients and on a co-investment basis in transactions in which
the Company's clients also invest (collectively, the "Employee Investment
Partnerships"). In certain instances, the Company lends to the limited partners
the amounts used by them to invest in the Employee Investment Partnerships.
Limited partnership interests owned by employees are subject to redemption by
the applicable Employee Investment Partnership if the employee terminates
employment with the Company for any reason during a three or, in certain
instances, four year period following his initial investment in the Employee
Investment Partnership at the lesser of (i) his paid-in capital contribution,
less distributions paid prior to such redemption, or (ii) the value of the
limited partnership interest. Such redemptions are made at the option of the
applicable Employee Investment Partnership. Any outstanding loans are also
callable by the Company at the time the limited partner ceases to be an employee
of the Company. Through December 31, 1997, the Employee Investment Partnerships
have invested $27.2 million in 44 investments and $22.9 million has been
contributed to date by the limited partners. The limited partners have received
distributions totaling $55.2 million through December 31, 1997, including $7.1
million, $23.1 million and $4.8 million during 1995, 1996 and 1997,
respectively. Amounts contributed to the Employee Investment Partnerships by
each of the Company's executive officers and distributions made during 1995,
1996 and 1997 and the outstanding balances of related loans made to them by the
Company as of December 31, 1997 are set forth below:
<TABLE>
<CAPTION>
AMOUNT DISTRIBUTIONS LOAN
NAME CONTRIBUTED MADE BALANCE
<S> <C> <C> <C>
John H. Goldsmith.................................. $139,466 $333,333 $ 26,667
Gregory N. Thomas.................................. -- -- --
William C. Dennis, Jr. ............................ -- -- --
Kevin J. McKay..................................... 140,416 51,393 86,861
Robert H. Yevich................................... 113,065 238,239 26,667
John F. Luikart.................................... 75,194 13,944 40,678
Henry Greenleaf.................................... -- -- --
</TABLE>
TRANSACTIONS WITH HANCOCK PRIOR TO THE ACQUISITION
Prior to the Acquisition the Predecessor Company, Hancock and their
respective affiliates engaged in a variety of transactions in the ordinary
course of business. As a general rule, the Predecessor Company did not retain
independent third parties to evaluate transactions with Hancock and there was no
independent committee of the Board of Directors of the Predecessor Company to
evaluate such transactions. Notwithstanding this fact, the Company believes that
each of the arrangements described below was made on an arms-length basis. All
of the transactions or relationships described below were completed or
terminated at or prior to the time of the Acquisition. The Company anticipates
that future transactions with Hancock, if any, will be made on an arms-length
basis.
Loans, Advances and Dividends. The aggregate outstanding amount of
payables, primarily inter-company tax allocations and working capital financing,
between the Predecessor Company and Hancock and its affiliates was $233.7
million as of December 31, 1995 and $32.5 million as of November 29, 1996, which
was repaid in full in connection with the Acquisition. In addition, the
Predecessor Company paid dividends to Hancock in the amount of $5.8 million and
none, respectively, during 1995 and 1996.
Other Transactions with Hancock. As a wholly-owned subsidiary of Hancock,
the Predecessor Company participated in group insurance arrangements arranged
through Hancock. In addition, the Predecessor Company participated in certain
shared services provided by Hancock to certain of its affiliates, including
limited legal and other support functions. The Predecessor Company paid Hancock
its allocable share of the cost of such insurance and other items, which
amounted to $11.6 million and $11.1 million during 1995 and 1996, respectively.
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DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering, the authorized capital stock of the
Company will consist of 60,000,000 shares of Common Stock, $.01 par value per
share, of which 19,097,403 shares will be outstanding, and 1,000,000 shares of
Preferred Stock, $.01 par value per share, none of which will be outstanding.
The following description of the capital stock of the Company and certain
provisions of the Company's Restated Certificate of incorporation (the
"Certificate of Incorporation") and Bylaws is a summary and is qualified in its
entirety by the provisions of the Certificate of Incorporation and Bylaws,
copies of which have been filed as exhibits to the Company's Registration
Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of the stockholders, including the election of
directors. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. The Certificate of Incorporation
does not provide for cumulative voting for the election of directors. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, and shall be entitled to receive, pro rata, all assets of
the Company available for distribution to such holders upon liquidation. Holders
of Common Stock have no preemptive, subscription or redemption rights.
PREFERRED STOCK
The Company is authorized to issue "blank check" preferred stock
("Preferred Stock"), which may be issued from time to time in one or more series
upon authorization by the Company's Board of Directors. The Board of Directors,
without further approval of the stockholders, is authorized to fix the dividend
rights and terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, and any other rights, preferences, privileges and
restrictions applicable to each series of the Preferred Stock. The issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of the
Company, discourage bids for the Company's Common Stock at a premium or
otherwise adversely affect the market price of the Common Stock. The Company
currently has no plans to issue any Preferred Stock.
CERTAIN CERTIFICATE OF INCORPORATION, BYLAW AND STATUTORY ANTI-TAKEOVER
PROVISIONS AFFECTING STOCKHOLDERS
Section 203 of Delaware Law. The Company is subject to the "business
combination" statute of the Delaware General Corporation Law. In general, such
statute prohibits a publicly held Delaware corporation from engaging in various
"business combination" transactions with any "interested shareholder" for a
period of three years after the date of the transaction in which the person
became an "interested shareholder," unless (i) the transaction is approved by
the Board of Directors prior to the date the interested shareholder obtained
such status, (ii) upon consummation of the transaction which resulted in the
shareholder becoming an "interested shareholder," the "interested shareholder"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by (a) persons who are directors and
also officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or subsequent
to such date the "business combination" is approved by the Board of Directors
and authorized at an annual or special meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the "interested shareholder." A "business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
a shareholder. An "interested shareholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
a corporation's voting stock. By virtue of the Company's decision not to elect
out of the statute's provisions, the statute applies to the Company. No current
stockholders of the Company are "interested stockholders" because their
acquisition of shares was approved by the Board of Directors of the Company. The
statute could
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prohibit or delay the accomplishment of mergers or other takeover or change in
control attempts with respect to the Company and, accordingly, may discourage
attempts to acquire the Company.
Directors Liability. The Certificate of Incorporation provides that no
director shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director notwithstanding any
provision of law imposing such liability, provided that, to the extent provided
by applicable law, the Certificate of Incorporation shall not eliminate the
liability of a director for (i) any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) acts
or omissions in respect of certain unlawful dividend payments or stock
redemptions or repurchases; or (iv) any transaction from which such director
derives improper personal benefit. The effect of this provision is to eliminate
the rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the situations
described in clauses (i) through (iv) above. The limitations summarized above,
however, do not affect the ability of the Company or its stockholders to seek
non-monetary based remedies, such as an injunction or rescission, against a
director for breach of his fiduciary duty nor would such limitations limit
liability under the Federal securities laws. The Company's Bylaws provide that
the Company shall, to the extent permitted by Delaware Law, as amended from time
to time, indemnify and advance expenses to the currently acting and former
directors, officers, employees and agents of the Company or of another
corporation, partnership, joint venture, trust or other enterprise if serving at
the request of the Company arising in connection with their acting in such
capacities.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Under the terms of the Stockholders' Agreement, if the Company proposes to
register any of its securities under the Securities Act following this Offering,
whether for its own account or otherwise, holders of approximately 12,397,403
shares (the "Registrable Shares") of Common Stock are entitled to notice of such
registration and are entitled to include their shares therein, subject to
certain conditions and limitations. The holders of Registrable Shares also may
require the Company to effect the registration of their Registrable Shares for
sale to the public, subject to certain conditions and limitations. In addition,
the Company has committed to register the shares of Common Stock issued in
connection with the acquisition of Cleary Gull commencing 180 days after
consummation of the Offering. See "Recent Developments." See "Certain
Relationships and Related Transactions -- Stockholders Agreement".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, of New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
19,097,403 shares of Common Stock, assuming no exercise of options after
December 31, 1997. Of these shares, the 6,700,000 shares offered hereby
(7,705,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act, unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 described below. The remaining 12,397,403 shares of
Common Stock outstanding upon closing of the Offering are "restricted
securities" as that term is defined in Rule 144. All of such remaining shares
are subject to lock-up agreements (described below).
Beginning 90 days after commencement of the Offering, approximately
11,703,414 shares will become eligible for sale pursuant to Rule 144 or Rule 701
under the Securities Act ("Rule 701"). Upon expiration of the lock-up
agreements, an aggregate of 12,397,403 shares will become immediately eligible
for sale subject to the timing, volume, and manner of sale restrictions of Rule
144. Commencing December 1998, all outstanding shares not owned by affiliates of
the Company (currently 4,897,516 shares) will be eligible for sale pursuant to
Rule 144(k). In addition, 276,247 additional shares of Common Stock subject to
outstanding vested stock options could also be sold, subject in some cases to
compliance with certain volume limitations as described below.
In general, under Rule 144, as amended, a person (or persons whose shares
are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner except an affiliate from whom
such shares were purchased) is entitled to sell in "brokers' transactions" or to
market makers, within any three-month period commencing 90 days after the date
of this Prospectus, a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding
(approximately 190,974 shares immediately after the completion of the Offering)
or (ii) generally, the average weekly trading volume in the Common Stock during
the four calendar weeks preceding the required filing of a Form 144 with respect
to such sale. Sales under Rule 144 are generally subject to the availability of
current public information about the Company. Under Rule 144(k), a person who is
not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner
other than an affiliate from whom such shares were purchased), is entitled to
sell such shares without having to comply with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Under Rule 701,
persons who purchase shares upon exercise of options granted prior to the
effective date of the Offering are entitled to sell such shares 90 days after
the effective date of the Offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.
Pursuant to the lock-up agreements, all of the Company's officers and
directors and certain stockholders, including the Selling Stockholders, owning
upon completion of the Offering, in the aggregate, approximately 947,178 shares
of Common Stock, have executed agreements pursuant to which each has agreed that
they will not, (subject to certain exceptions), for a period of 180 days
subsequent to the date of this Prospectus, directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into, or exercisable or exchangeable for any shares of
Common Stock, enter into any swap or other arrangement that transfers all or a
portion of the economic consequences associated with the ownership of any Common
Stock without the prior written consent of DLJ. Further, holders of outstanding
vested stock options for, in the aggregate, an additional 77,443 shares of
Common Stock are subject to 180-day lock-up agreements with DLJ. In addition,
all of the holders of Common Stock prior to the Offering have agreed with the
Company in the Company's stockholders' agreement that they will not, subject to
limited exceptions, sell, transfer, or pledge their shares of Common Stock
without DLJ's consent for 180 days subsequent to the date of this Prospectus.
The Company has agreed that it will not, for a period of 180 days from the date
of this Prospectus, directly or indirectly, offer, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of any shares of Common Stock or any securities convertible into, or
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exercisable or exchangeable for, any shares of Common Stock, or enter into any
swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any Common Stock without the prior
written consent of DLJ, except that such agreement does not prevent the Company
from granting additional options under the Company's existing stock option plans
or from issuing shares pursuant to its stock option and purchase plans. DLJ may
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
The holders of an aggregate of 12,397,403 shares of Common Stock or their
transferees are entitled to certain rights with respect to the registration of
such shares under the Securities Act. In addition, the Company has committed to
register the shares of Common Stock issued in connection with the acquisition of
Cleary Gull commencing 180 days after the consummation of the Offering. See
"Description of Capital Stock-Registration Rights of Certain Holders" and
"Certain Relationships and Related Transactions -- Stockholders Agreement."
Prior to the Offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.
68
<PAGE> 70
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1998 (the "Underwriting Agreement"), the Underwriters named
below, who are represented by Donaldson, Lufkin & Jenrette Securities
Corporation, Credit Suisse First Boston Corporation, Sutro & Co. Incorporated
and Tucker Anthony Incorporated (the "Representatives"), have severally agreed
to purchase from the Company and the Selling Stockholders the respective number
of shares of Common Stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Credit Suisse First Boston Corporation......................
Sutro & Co. Incorporated....................................
Tucker Anthony Incorporated.................................
--------
Total.............................................
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives at any time without notice.
The Underwriters will not confirm sales to any accounts over which they exercise
discretionary authority without prior approval of such transactions by the
customer.
The Selling Stockholders have granted to the Underwriters an option,
exercisable within 30 days after the date of this Prospectus, to purchase, from
time to time, in whole or in part, up to an aggregate of 1,005,000 additional
shares of Common Stock at the initial public offering price less underwriting
discounts and commissions. The Underwriters may exercise such option solely to
cover overallotments, if any, made in connection with the Offering. To the
extent that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
stockholders of the Company (including the Selling Stockholders) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise) for a period of 180 days after the date of this Prospectus
without the prior written consent of DLJ.
69
<PAGE> 71
In addition, during such period, the Company has also agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and certain stockholders of the Company (including the Selling
Stockholders) has agreed not to make any demand for, or exercise any right with
respect to, the registration of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock without DLJ's
prior written consent.
Prior to the Offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiation among the Company and the
Representatives. The factors to be considered in determining the initial public
offering price include the history of and the prospects for the industry in
which the Company competes, the past and present operations of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the recent market prices of securities of generally
comparable companies and the general condition of the securities markets at the
time of the Offering.
The Common Stock has been approved for listing on the NYSE subject to
official Letter of Issuance. In order to meet the requirements for listing the
Common Stock on the NYSE, the Underwriters have undertaken to sell lots of 100
or more shares to a minimum of 2,000 beneficial owners. In addition, NYSE Rule
312(g) prohibits a member corporation, after the distribution of securities of
its parent to the public, from effecting any transactions (except on an
unsolicited basis) for the account of any customer in, or making any
recommendation with respect to the purchase or sale of, any such security. Thus,
following the Offering, Tucker Anthony, Sutro and FSI will not be permitted to
make a market in or to make recommendations regarding the purchase or sale of
the Common Stock.
Other than in the United States, no action has been taken by the Company,
the Selling Stockholders or the Underwriters that would permit a public offering
of the shares of Common Stock offered hereby in any jurisdiction where action
for that purpose is required. The shares of Common Stock offered hereby may not
be offered or sold, directly or indirectly, nor may this Prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of Common Stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
Prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the Offering of the Common Stock and the distribution
of this Prospectus. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares of Common Stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilizing transactions or otherwise. These activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
Tucker Anthony and Sutro are indirect wholly owned subsidiaries of the
Company. Tucker Anthony and Sutro have committed to purchase from the Company an
aggregate of % of the shares of Common Stock being underwritten by the
Underwriters in the Offering on the same basis as the other Underwriters.
Although the amount of proceeds derived from the Offering by the Company will
not be affected by Tucker Anthony's and Sutro's participation as Underwriters,
to the extent that part or all of the shares of Common Stock underwritten by
Tucker Anthony and Sutro are not resold; the consolidated equity of the Company
will be reduced. Until resold, any such shares will be eliminated in
consolidation as if they were not outstanding for purposes of any future
computation of earnings per common share and book value per common share. Tucker
Anthony and Sutro intend to resell any shares which they are unable to resell in
the Offering from time to time, at prevailing market prices.
70
<PAGE> 72
Under Rule 2720 of the Conduct Rules of the NASD ("Rule 2720"), the Company
is considered an affiliate of Tucker Anthony and Sutro. This Offering is being
conducted in accordance with Rule 2720, which provides that, among other things,
when an NASD member participates in the underwriting of its parent's equity
securities, the initial public offering price can be no higher than that
recommended by a "qualified independent underwriter" meeting certain standards
("QIU"). In accordance with this requirement, DLJ has assumed the
responsibilities of acting as QIU and will recommend a price in compliance with
the requirements of Rule 2720. In connection with the Offering, DLJ is
performing due diligence investigations and reviewing and participating in the
preparation of this Prospectus and the Registration Statement of which this
Prospectus forms a part. As compensation for the services of DLJ as QIU, the
Company has agreed to pay DLJ $5,000.
The Underwriters have reserved for sale approximately 335,000 shares of
Common Stock for directors and current employees of the Company who have an
interest in purchasing such shares of Common Stock in the Offering. The price
per share for such shares will be the initial public offering price less
underwriting discounts and commissions or $ per share. The number of
shares available for sale to the general public in the Offering will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same basis as the other shares offered hereby. Any such directors and
current employees of the Company who purchase any of the shares offered in the
Offerings will be prohibited from selling, pledging, assigning, hypothecating or
transferring such shares for a period of five months following the effective
date of the Offering.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
The material federal income tax consequences to Non-U.S. Holders expected
to result from the purchase, ownership and sale or other taxable disposition of
the Common Stock, under currently applicable law, are summarized below. A
"Non-U.S. Holder" is a person or entity purchasing Common Stock in the Offering
that, for U.S. federal income tax purposes, is a non-resident alien individual,
a foreign corporation, a foreign estate or trust or a foreign partnership as
such terms are defined in the Internal Revenue Code of 1986, as amended (the
"Code").
This summary is based upon the current provisions of the Code, applicable
Treasury Regulations and judicial and administrative decisions and rulings.
There can be no assurance that the Internal Revenue Service (the "IRS") will not
take a contrary view, and no ruling from the IRS has been or will be sought.
Future legislative, judicial or administrative changes or interpretations could
alter or modify the statements set forth herein, and any such changes or
interpretations could be retroactive and could affect the tax consequences to
Non-U.S. Holders of Common Stock.
The following summary is for general information only and does not purport
to deal with all aspects of federal income taxation that may affect particular
Non-U.S. Holders in light of their individual circumstances and is not intended
for (a) stockholders other than Non-U.S. Holders, (b) Non-U.S. Holders who would
not hold the Common Stock as capital assets or (c) Non-U.S. Holders who are
otherwise subject to special treatment under the Code (including insurance
companies, tax-exempt entities, financial institutions, broker-dealers and
persons who would hold the Common Stock as part of a straddle, hedge or
conversion transaction). In addition, the summary does not consider the effect
of any applicable state, local or foreign tax laws on Non-U.S. Holders. EACH
PROSPECTIVE NON-U.S. HOLDER OF COMMON STOCK SHOULD CONSULT HIS OWN TAX ADVISOR
WITH RESPECT TO THE TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL AND FOREIGN TAX LAWS, AND OF CHANGES IN APPLICABLE TAX LAWS.
71
<PAGE> 73
DIVIDENDS ON COMMON STOCK
Dividends paid to a Non-U.S. Holder of Common Stock that are not
effectively connected with the conduct by the Non-U.S. Holder of a trade or
business within the United States will generally be subject to withholding of
United States federal income tax at the rate of 30% of the gross amount of the
dividends unless the rate is reduced by an applicable income tax treaty. Except
to the extent that an applicable tax treaty otherwise provides, a Non-U.S.
Holder will be taxed in the same manner as United States citizens, resident
aliens and domestic corporations on dividends paid (or deemed paid) that are
effectively connected with the conduct of a trade or business in the United
States by the Non U.S. Holder. If such Non-U.S. Holder is a foreign corporation,
it may also be subject to a United States branch profits tax on such effectively
connected income at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. However, a Non-U.S. Holder may claim exemption
from withholding under the effectively connected income exception by filing Form
4224 (Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of Business in the United States) or a successor form with the Company
or its paying agent.
Under the currently applicable Treasury regulations, dividends paid to an
address in a country other than the United States are presumed to be paid to a
resident of such country for purposes of the withholding discussed above (unless
the payor has knowledge to the contrary) and, under the current interpretation
of Treasury regulations, for purposes of determining the applicability of a
reduced rate of withholding under an income tax treaty. However, under certain
recently finalized Treasury Regulations (the "New Withholding Regulations") a
Non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable
treaty rate would be required to satisfy certain certification and other
requirements. In addition, under the New Withholding Regulations, in the case of
Common Stock held by a foreign partnership, the certification requirement would
generally be applied to the partners of the partnership and the partnership may
be required to provide certain information, including a United States taxpayer
identification number. The New Withholding Regulations also provide look-through
rules for tiered partnerships. The New Withholding Regulations are generally
effective for payments made after December 31, 1998, subject to certain
transition rules. Non-U.S. Holders are encouraged to consult with their own tax
advisors with respect to the application of the New Withholding Regulations.
Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient and the amount, if any, of the tax
withheld. A similar report is sent to the holder. Pursuant to income tax
treaties or certain other agreements, the IRS may make its reports available to
tax authorities in the recipient's country of residence.
If paid to an address outside the United States, dividends on Common Stock
held by a Non-U.S. Holder will generally not be subject to backup withholding,
provided that the payor does not have actual knowledge that the holder is a
United States person. However, under the New Withholding Regulations (which are
effective for dividends paid after December 31, 1998), dividend payments may be
subject to backup withholding imposed at a rate of 31% unless applicable
certification requirements are satisfied. See the discussion above with respect
to rules applicable to foreign partnerships under the New Withholding
Regulations.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax or withholding on gain recognized upon the sale or other disposition
of Common Stock unless (i) the gain is effectively connected with the conduct of
a trade or business within the United States by the Non-U.S. Holder, or (ii) in
the case of a Non-U.S. Holder who is a non-resident alien individual and holds
the Common Stock as a capital asset, such holder is present in the United States
for 183 or more days in the taxable year and certain other conditions are met,
or (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of
United States federal income tax law applicable to certain United States
expatriates. If a Non-U.S. Holder falls under clause (i) above, the holder will
be taxed on the net gain derived from the sale at regular graduated United
States federal income tax rates (the branch profits tax also may apply if the
Non-U.S. Holders is a corporation). If an individual Non-U.S. Holder falls under
clause (ii) above, the holder generally will be
72
<PAGE> 74
subject to a 30% tax on the gain derived from the sale, which gain may be offset
by U.S. capital losses recognized within the same taxable year of such sale. The
foregoing discussion in this paragraph is based on the Company's conclusion that
it is not presently, and has not been for the past five years, a United States
real property holding corporation ("USRPHC") subject to the Foreign Investment
on Real Property Tax Act of 1980 ("FIRPTA"). Different consequences would apply
to certain Non-U.S. Holders if the Company were to become a USRPHC subject to
FIRPTA.
FEDERAL ESTATE TAXES
An individual Non-U.S. Holder who owns, or is treated as owning, Common
Stock at the time of his or her death or has made certain lifetime transfers of
an interest in Common Stock will be required to include the value of such Common
Stock in his gross estate for United States federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of Common Stock effected
outside the United States by a foreign office of a "broker" (as defined in
applicable Treasury Regulations), unless such broker is (i) a United States
person, (ii) a foreign person that derives 50% or more of its gross foreign
income for certain periods from activities that are effectively connected with
the conduct of a trade or business in the United States, (iii) a controlled
foreign corporation for United States federal income tax purposes or (iv)
effective December 31, 1998, certain brokers that are foreign partnerships with
partners who are U.S. persons or that are engaged in a United States trade or
business. Payment of the proceeds of any such sale effected outside the United
States by a foreign office of any broker that is described in (i), (ii), (iii)
or (iv) of the preceding sentence will not be subject to backup withholding tax
but will be subject to information reporting requirements unless such broker has
documentary evidence in its records that the beneficial owner is a Non-U.S.
Holder and certain other conditions are met, or the beneficial owner otherwise
establishes an exemption. Payment of the proceeds of any such sale to or through
the United States office of a broker is subject to information reporting and
backup withholding requirements, unless the beneficial owner of the Common Stock
either (a) provides a Form W-8 (or a suitable substitute form) signed under
penalties of perjury that includes its name and address and certifies as to its
Non-U.S. Holder status in compliance with applicable law and regulations, or (b)
otherwise establishes an exemption. Effective for payments after December 31,
1998 (and subject to certain transition rules), the New Withholding Regulations
unify certain certification procedures and forms and the reliance standards
relating to information reporting and backup withholding.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH PROSPECTIVE
NON-U.S. HOLDER OF COMMON STOCK SHOULD CONSULT HIS OWN TAX ADVISOR WITH RESPECT
TO THE TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF COMMON
STOCK.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Hutchins, Wheeler &
Dittmar, A Professional Corporation, Boston, Massachusetts. Certain stockholders
of Hutchins, Wheeler & Dittmar are limited partners in THL-CCI, L.P. and, as a
result, may be deemed to have a beneficial interest in 6,363 shares of Common
Stock. Certain legal matters in connection with the Offering will be passed upon
for the Underwriters by Davis Polk & Wardwell, New York, New York.
73
<PAGE> 75
EXPERTS
The consolidated statements of financial condition of the Company as of
December 31, 1996 and 1997 and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the one month period ended
December 31, 1996 and the year ended December 31, 1997 and the consolidated
statements of income, changes in stockholders' equity and cash flows of the
Predecessor Company for the period from January 1, 1996 to November 29, 1996 and
for the year ended December 31, 1995, included in this Prospectus, have been
included herein in reliance on the report of Ernst & Young LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is
hereby made to such Registration Statement and to the exhibits and schedules
filed therewith. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete, and
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
certain fees prescribed by the Commission. The Commission maintains a World Wide
Website that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the website is http://www.sec.gov.
Upon completion of the Offering, the Company will be subject to the
information reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and, in accordance therewith, will file reports,
proxy statements and other information with the Commission.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by the Company's independent public
accountants and quarterly reports for the first three fiscal quarters of each
fiscal year containing unaudited interim financial information.
74
<PAGE> 76
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors........................................................ F-2
Consolidated Statements of Financial Condition -- December 31, 1996 and 1997.......... F-3
Consolidated Statements of Income -- For the year ended December 31, 1995, eleven
months ended November 29, 1996, one month ended December 31, 1996 and year ended
December 31, 1997................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity -- For the year ended
December 31, 1995, eleven months ended November 29, 1996, one month ended December
31, 1996 and year ended December 31, 1997........................................... F-5
Consolidated Statements of Cash Flows -- For the year ended December 31, 1995, eleven
months ended November 29, 1996, one month ended December 31, 1996 and year ended
December 31, 1997................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 77
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Freedom Securities Corporation
We have audited the accompanying consolidated statements of financial
condition of Freedom Securities Corporation ("Company") as of December 31, 1996
and 1997 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the one month period ended December 31,
1996 and the year ended December 31, 1997, and the accompanying consolidated
statements of income, changes in stockholders' equity and cash flows of Freedom
Securities Holding Corporation ("Predecessor Company") for the year ended
December 31, 1995 and for the period January 1, 1996 to November 29, 1996. These
financial statements are the responsibility of the management of the Company and
the Predecessor Company. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly
in all material respects, the consolidated financial position of Freedom
Securities Corporation at December 31, 1996 and 1997 and the consolidated
results of its operations and its cash flows for the one month period ended
December 31, 1996 and for the year ended December 31, 1997, and the consolidated
results of operations and cash flows of the Predecessor Company for the year
ended December 31, 1995 and for the period January 1, 1996 to November 29, 1996
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG, LLP
New York, New York
March 10, 1998
F-2
<PAGE> 78
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 7,248 $ 12,936
Receivables from brokers, dealers and others................ 65,404 74,314
Securities purchased under agreements to resell............. 84,211 113,335
Securities owned, at market................................. 253,106 423,522
Fixed assets, net of accumulated depreciation and
amortization.............................................. 25,929 20,464
Goodwill, net of accumulated amortization................... 28,075 24,861
Other assets................................................ 52,979 58,155
-------- --------
Total assets................................................ $516,952 $727,587
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payables to brokers, dealers and others................... $ 74,131 $ 59,062
Securities sold under agreements to repurchase............ 44,976 --
Securities sold, not yet purchased, at market............. 101,140 354,565
Accrued compensation and benefits......................... 55,503 65,653
Accounts payable and accrued expenses..................... 50,915 44,535
Notes payable to banks.................................... 110,819 101,446
-------- --------
Total liabilities................................. 437,484 625,261
-------- --------
Stockholders' equity:
Common stock (21,816,000 shares authorized, 14,352,479 and
14,840,627 shares issued in 1996 and 1997,
respectively, $.01 par value).......................... 143 147
Additional paid-in capital................................ 78,804 83,654
Retained earnings......................................... 740 19,438
Subscribed stock (136,532 shares in 1997)................. -- (913)
Treasury stock (39,723 shares in 1996, at cost)........... (219) --
-------- --------
Total stockholders' equity............................. 79,468 102,326
-------- --------
Total liabilities and stockholders' equity........ $516,952 $727,587
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 79
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
----------------------------------
YEAR ENDED ELEVEN MONTHS ENDED ONE MONTH ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 29, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Revenues
Commissions........................ $140,180 $139,018 $12,522 $167,184
Principal transactions............. 105,789 95,481 8,350 99,269
Investment banking................. 34,773 33,964 4,137 55,259
Asset management................... 14,901 17,316 1,682 19,950
Other.............................. 12,766 15,218 573 12,465
-------- -------- ------- --------
Total operating revenues... 308,409 300,997 27,264 354,127
Interest income.................... 60,116 46,486 3,361 44,056
-------- -------- ------- --------
Total revenues............. 368,525 347,483 30,625 398,183
Interest expense................... 36,000 26,454 1,829 22,428
-------- -------- ------- --------
Net revenues............... 332,525 321,029 28,796 375,755
-------- -------- ------- --------
Non-interest expenses
Compensation and benefits.......... 217,589 209,187 18,859 245,939
Occupancy and equipment............ 26,050 30,993 2,231 24,331
Communications..................... 18,129 16,596 1,317 16,948
Brokerage and clearance............ 7,322 10,473 1,007 11,262
Promotional........................ 9,455 9,156 818 10,308
Other.............................. 31,696 24,237 2,577 28,480
-------- -------- ------- --------
Total non-interest
expenses................. 310,241 300,642 26,809 337,268
Acquisition interest expense......... -- -- 567 6,052
-------- -------- ------- --------
Income before income taxes........... 22,284 20,387 1,420 32,435
Income taxes......................... 9,220 8,844 680 13,737
-------- -------- ------- --------
Net income........................... $ 13,064 $ 11,543 $ 740 $ 18,698
======== ======== ======= ========
Basic earnings per share............. -- -- $ 0.05 $ 1.31
======= ========
Diluted earnings per share........... -- -- $ 0.05 $ 1.27
======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 80
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL RETAINED SUBSCRIBED TREASURY
SHARES PAR VALUE PAID-IN-CAPITAL EARNINGS STOCK STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balance at December 31,
1994..................... 1 $ 1 $109,748 $35,719 $ -- $ -- $145,468
Net income................. 13,064 13,064
Non-cash dividend to
Hancock.................. (5,751) (5,751)
------ ---- -------- ------- ----- ----- --------
Balance at December 31,
1995..................... 1 1 109,748 43,032 -- -- 152,781
------ ---- -------- ------- ----- ----- --------
Net income................. 11,543 11,543
------ ---- -------- ------- ----- ----- --------
Balance at November 29,
1996..................... 1 $ 1 $109,748 $54,575 $ -- $ -- $164,324
====== ==== ======== ======= ===== ===== ========
FREEDOM SECURITIES
CORPORATION(a):
Sale of Common Stock at
November 29, 1996
(including $3,947 of non-
cash capital contributed
by Hancock).............. 14,313 $143 $ 78,804 $ -- $ -- $(219) $ 78,728
Net income................. 740 740
------ ---- -------- ------- ----- ----- --------
Balance at December 31,
1996..................... 14,313 143 78,804 740 -- (219) 79,468
------ ---- -------- ------- ----- ----- --------
Sale of Common Stock....... 488 4 4,693 4,697
Net income................. 18,698 18,698
Acquisition of treasury
stock.................... (97) (537) (537)
Reissuance of treasury
stock.................... -- 157 (913) 756 --
------ ---- -------- ------- ----- ----- --------
Balance at December 31,
1997..................... 14,704 $147 $ 83,654 $19,438 $(913) $ -- $102,326
====== ==== ======== ======= ===== ===== ========
</TABLE>
- ---------------
(a) Reflects effect of 1.818 for 1 stock split. See Note 17.
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 81
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------
YEAR ENDED ELEVEN MONTHS ENDED ONE MONTH ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 29, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $ 13,064 $ 11,543 $ 740 $ 18,698
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation............................ 4,274 4,632 304 5,128
Amortization............................ 6,403 7,807 685 5,714
Non-cash compensation................... -- -- -- 1,432
Changes in assets and liabilities
(Increase) decrease in operating assets:
Receivables from brokers, dealers and
others.............................. (28,855) 105,303 19,304 (8,910)
Receivables from customers............ (24,408) 333,252 -- --
Securities purchased under agreements
to resell........................... (26,490) 92,052 31,212 (29,124)
Securities owned, at market........... (73,825) 57,720 37,698 (170,416)
Other assets.......................... (11,163) (7,628) 3,876 (6,056)
Increase (decrease) in operating
liabilities:
Short-term loans from a Hancock
affiliate........................... 10,000 (200,000) -- --
Short-term loans...................... 61,535 (107,745) -- --
Payables to brokers, dealers and
others.............................. 19,443 (39,937) (33,027) (15,069)
Payables to customers................. 23,125 (186,206) -- --
Securities sold under agreements to
repurchase.......................... 28,710 (91,795) (5,061) (44,976)
Securities sold, not yet purchased, at
market.............................. 4,523 7,517 (47,088) 253,425
Accrued compensation and benefits..... 13,066 364 2,230 10,150
Accounts payable and accrued
expenses............................ 4,663 11,060 (7,930) (6,380)
-------- --------- --------- ---------
Net cash from operating activities........ 24,065 (2,061) 2,943 13,616
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets................. (10,883) (8,417) (112) (1,994)
Proceeds from sale of fixed assets........ -- -- -- 711
Purchase of Predecessor Company........... -- -- (180,000) --
Acquisition related expenditures.......... -- -- (5,740) --
-------- --------- --------- ---------
Net cash used in investing activities..... (10,883) (8,417) (185,852) (1,283)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock, net... -- -- 74,781 2,728
Proceeds from notes payable to banks...... -- 25,819 110,819 --
Repayment of notes payable to banks....... -- -- -- (9,373)
Proceeds from notes payable to a Hancock
affiliate............................... 6,105 -- -- --
Repayment of notes payable to a Hancock
affiliate............................... (2,400) (33,736) -- --
-------- --------- --------- ---------
Net cash from financing activities........ 3,705 (7,917) 185,600 (6,645)
Increase (decrease) in cash and cash
equivalents............................. 16,887 (18,395) 2,691 5,688
Cash and cash equivalents, beginning of
period.................................. 6,065 22,952 4,557 7,248
-------- --------- --------- ---------
Cash and cash equivalents, end of
period.................................. $ 22,952 $ 4,557 $ 7,248 $ 12,936
======== ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Income taxes............................ $ 9,086 $ 10,453 $ 1,421 $ 14,859
Interest................................ $ 33,432 $ 22,912 $ 1,246 $ 28,338
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 82
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Freedom Securities Corporation (formerly JHFSC Acquisition Corp.) 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 including its primary operating subsidiaries Tucker Anthony Incorporated
("Tucker Anthony"), Sutro & Co. Incorporated ("Sutro") and Freedom Capital
Management Corporation ("Freedom Capital").
Tucker Anthony, headquartered in Boston and focused on the northeastern
United States, and Sutro, headquartered in San Francisco and focused on the
western United States, are full service regionally focused retail brokerage and
investment banking firms. Freedom Capital is the Company's investment advisory
and asset management subsidiary which is focused on public sector entities and
high net worth individuals.
Principles of Consolidation
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. Certain prior year amounts have been reclassified to conform with the
current period's financial statement presentation.
The Acquisition
The Company was established to facilitate a buyout of Freedom Securities
Holding Corporation (the "Predecessor Company" and formerly John Hancock Freedom
Securities Corporation). Until November 29, 1996, the Predecessor Company was a
wholly-owned subsidiary of John Hancock Mutual Life Insurance Company
("Hancock").
Under terms of a Contribution Agreement dated October 4, 1996 and
consummated on November 29, 1996 among Hancock, the Company, two private
investor groups and selected employee investors, Hancock contributed 100% of the
issued and outstanding capital stock of the Predecessor Company to the Company
in exchange for 4.999% of the issued and outstanding capital stock of the
Company and an aggregate consideration of $180 million. With the consummation of
the transactions under the Contribution Agreement, the Predecessor Company
became a wholly owned subsidiary of the Company as of the close of business
November 29, 1996. Through November 29, 1996, the consolidated financial
statements present the financial condition, results of operations and cash flows
of the Predecessor Company and its subsidiaries.
The Acquisition has been 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 by $28.2
million and the excess was recorded as goodwill.
Wexford Arrangement
Tucker Anthony and Sutro clear their securities transactions on a fully
disclosed basis through Wexford Clearing Services Corporation ("Wexford" or the
"clearing broker"), a guaranteed wholly owned subsidiary of Prudential
Securities, Inc. ("Prudential"). Prior to April 3, 1996, Tucker Anthony and
Sutro cleared their securities transactions through a wholly owned subsidiary of
the Predecessor Company. This subsidiary
F-7
<PAGE> 83
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
subsequently withdrew its broker-dealer registration but continues to perform
certain liaison functions and provides data processing and communications
support to its affiliates.
Securities
Securities transactions and related revenues and expenses are recorded on a
trade date basis. Securities owned and securities sold, not yet purchased are
stated at market value with related changes in unrealized appreciation or
depreciation reflected in principal transactions revenues. Securities sold, not
yet purchased, represent obligations to deliver specified securities at
predetermined prices. The Company is obligated to acquire the securities sold
short at prevailing market prices in the future to satisfy these obligations.
Arbitrage positions included in securities owned and securities sold, not yet
purchased result from buying or selling a security subject to exchange,
conversion or reorganization and selling or buying the security or securities to
be received upon completion of the exchange, conversion or reorganization. The
Company may from time to time enter into futures and options on futures
contracts. These contracts are valued at market with related changes in
unrealized appreciation or depreciation reflected in principal transactions
revenues.
Investment Banking
Investment banking revenues are recorded as follows: management fees as of
the offering date; sales commissions on trade date and underwriting fees at the
time the underwriting is completed and the income is reasonably determinable.
Asset Management Fees
The Company earns investment advisory fees for services rendered to its
clients based on either a percentage of the average net assets managed or on a
percentage of quarter-end market value of assets managed, depending upon the
type of client account. These fees are recorded as earned and billed monthly or
quarterly.
Fixed Assets
Furniture and fixtures are depreciated on a straight-line basis over their
estimated useful lives, generally three to ten years. Leasehold improvements are
amortized on a straight-line basis over the lesser of the economic useful life
of the improvements or the terms of the respective leases. Fixed assets are
stated at cost net of accumulated depreciation and amortization of $0.6 million
and $2.4 million at December 31, 1996 and 1997, respectively.
Intangibles
Intangibles related to the Acquisition include debt issuance costs ($2.9
million and $2.4 million at December 31, 1996 and 1997, respectively) which are
reported in other assets, and goodwill. Goodwill and debt issuance costs are
stated at cost net of accumulated amortization and are amortized on a
straight-line basis over fifteen and five years, respectively.
The accumulated amortization of intangibles totaled $0.2 million and $2.7
million at December 31, 1996 and 1997, respectively.
Income Taxes
Through November 29, 1996, the Predecessor Company was included in the
consolidated U.S. Federal income tax return of Hancock. Pursuant to an agreement
with Hancock, the Predecessor Company's share of
F-8
<PAGE> 84
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
combined Federal income taxes was equivalent to the total provision or benefit
the Predecessor Company would have recorded for such taxes had they been
determined on a stand-alone basis. Pursuant to an agreement relating to the
Acquisition, Hancock assumed responsibility for all Federal, state and local
taxes of the Predecessor Company through 1995.
Subsequent to the Acquisition, the Company and its subsidiaries file a
consolidated U. S. Federal income tax return. State and local taxes are computed
on a separate company basis. The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". Under this method, the Company recognizes taxes payable or
refundable for the current year and deferred tax liabilities and assets for
future consequences of events that have been recognized in the Company's
financial statements or tax returns.
Cash Flows
For purposes of reporting cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. Cash flows for the one month ended December 31, 1996 are shown net
of the effects of the purchase of the Predecessor Company.
Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 introduced the
financial-components approach which focuses on the recognition of financial
assets that an entity controls and the derecognition of financial assets for
which control has been transferred. The FASB, under SFAS No. 127 "Deferral of
the Effective Date of Certain Provisions of SFAS No. 125," has deferred the
effective date of accounting for other types of transfers of financial assets,
including repurchase agreements and securities lending transactions, until
January 1, 1998. The Company does not expect the adoption of this statement to
have a material impact on the Company's consolidated financial statements.
2. RECEIVABLES FROM AND PAYABLES TO BROKERS, DEALERS AND OTHERS
Included in the receivables from brokers, dealers and others are unsettled
proprietary trades and certain overnight funds with a Wexford affiliate.
Included in payables to brokers, dealers and others are the amounts due to
Wexford for collateralized financing of proprietary positions and to Freedom
Capital's transfer agent for money market funds. The Company's principal source
of short-term financing is provided by Wexford, from which the Company can
borrow on an uncommitted basis against its proprietary inventory positions,
subject to collateral maintenance requirements.
The Company conducts business with brokers and dealers that are members of
the major securities exchanges. The Company monitors the credit standing of such
brokers and dealers, monitors the market value of collateral and requests
additional collateral as deemed appropriate.
F-9
<PAGE> 85
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECEIVABLES FROM AND PAYABLES TO BROKERS, DEALERS AND OTHERS (CONTINUED)
Amounts receivable from and payable to brokers, dealers and others at
December 31, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
RECEIVABLES FROM BROKERS, DEALERS AND OTHERS
Receivable from Prudential................................ $47,230 $46,129
Unsettled proprietary trades, net......................... 18,104 24,189
Receivables from other brokers and dealers................ 70 3,996
------- -------
$65,404 $74,314
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
PAYABLES TO BROKERS, DEALERS AND OTHERS
Payable to Wexford........................................ $32,599 $16,633
Payable to transfer agent................................. 40,947 42,088
Payables to other brokers and dealers..................... 585 341
------- -------
$74,131 $59,062
======= =======
</TABLE>
3. TRANSACTIONS WITH CUSTOMERS
For transactions in which the Company, through Wexford, extends credit to
customers, the Company seeks to control the risks associated with these
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The Company and Wexford monitor
required margin levels daily and, pursuant to such guidelines, request customers
to deposit additional collateral or reduce securities positions when necessary.
The Company has agreed to indemnify Wexford for losses that it may sustain
in connection with customer accounts introduced by the Company. At December 31,
1996 and 1997, there were no amounts to be indemnified to Wexford for these
accounts since the customers were able to fulfill their obligations.
4. SHORT-TERM LOANS
In periods prior to 1997, short-term loans with banks and a Hancock
affiliate were used to finance securities purchased by customers on margin and
proprietary inventory positions. Borrowings from the Hancock affiliate were on
an uncollateralized basis and bore interest at a rate approximating the
commercial paper rate of such affiliate. Interest expense related to these loans
was $7.7 million for the year ended December 31, 1995 and $12.1 million for the
eleven months ended November 29, 1996.
5. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as collateralized financing transactions,
and are carried at amounts at which the securities will be subsequently resold
or reacquired plus accrued interest. At December 31, 1996 and 1997 these
agreements matured within 13 days. Securities sold under agreements to
repurchase had a weighted-average interest rate of 6.0% at December 31, 1996. It
is the Company's policy to take possession or control of securities purchased
under agreements to resell. The Company is required to provide securities to
counterparties in order to collateralize repurchase agreements. The Company
minimizes credit risk associated with these activities by
F-10
<PAGE> 86
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE (CONTINUED)
monitoring credit exposure and collateral values on a daily basis and requiring
additional collateral to be deposited or returned when deemed appropriate.
6. TRANSACTIONS WITH AFFILIATES
During 1995, the Predecessor Company distributed its $5.8 million ownership
interest in JHM Capital Management Corp. to Hancock as a dividend. The earnings
prior to such distribution were not significant.
Prior to November 29, 1996, the Predecessor Company had outstanding notes
payable to a Hancock affiliate which incurred interest at rates approximating
such affiliate's average cost of borrowing and were payable on demand. These
notes were repaid on November 29, 1996. Interest expense incurred relating to
these notes was $1.8 million for the year ended December 31, 1995 and $1.7
million for the eleven months ended November 29, 1996.
The Predecessor Company participated in group insurance arrangements
arranged through Hancock and also received certain shared services. The
Predecessor Company paid Hancock its allocable share of the cost of such
insurance and other items, which amounted to $11.6 million and $11.1 million
during the year ended December 31, 1995 and the eleven months ended November 29,
1996, respectively. Subsequent to the Acquisition, the Company continued to
participate in the group insurance arrangements through Hancock until June 30,
1997 when the Company obtained its own insurance arrangements. The Company paid
its allocable share of the cost of such insurance which amounted to $0.8 million
and $6.1 million for the one month period ended December 31, 1996 and the six
month period ended June 30, 1997, respectively.
Effective with the Acquisition, the Company entered into management
agreements, with certain shareholders, and has agreed to pay annual management
fees totaling $0.3 million. These agreements terminate by the mutual consent of
the parties or upon an initial public offering of the Company's common stock.
F-11
<PAGE> 87
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SECURITIES
Securities owned and securities sold, not yet purchased are recorded at
market value and consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
<S> <C> <C>
OWNED:
Obligations of the U.S. government or its agencies.......... $ 23,650 $ 27,396
State and municipal obligations............................. 56,057 38,222
Arbitrage securities........................................ 84,967 291,023
Other corporate obligations................................. 73,127 51,709
Other corporate stocks and warrants......................... 15,305 15,172
-------- --------
$253,106 $423,522
======== ========
SOLD, NOT YET PURCHASED:
Obligations of the U.S. government or its agencies.......... $ 37,663 $ 22,890
State and municipal obligations............................. 1,476 1,519
Arbitrage securities........................................ 51,671 322,316
Other corporate obligations................................. 6,055 1,356
Other corporate stocks and warrants......................... 4,275 6,484
-------- --------
$101,140 $354,565
======== ========
</TABLE>
8. NOTES PAYABLE TO BANKS
Included in notes payable to banks is the Company's borrowing for fixed
asset financing of approximately $25.8 million and $21.4 million at December 31,
1996 and 1997, respectively, which bears interest at 8.02% annually and is
payable in equal monthly installments through December 2001. This note is
collateralized by furniture, fixtures and leasehold improvements.
The Company entered into a Revolving Credit Agreement (the "credit
agreement") with certain participating banks. Borrowings under the credit
agreement equaled $85 million and $80 million at December 31, 1996 and 1997,
respectively. These borrowings bear interest, approximately 7.06% and 6.97% at
December 31, 1996 and 1997, respectively, at the current Eurodollar Rate plus
applicable margin, as defined, ranging from 0.75% to 2.00% based on a calculated
leverage ratio in accordance with the credit agreement. Interest expense related
to the credit agreement is shown in the consolidated statements of income as
acquisition interest expense. Subject to the terms and conditions as set forth
in this credit agreement, the Company may borrow, repay and reborrow from time
to time up to the maturity date, December 31, 2001, of this credit agreement.
The credit agreement also includes certain financial covenants (see note 10) and
a mandatory reduction of the participating banks' commitment at the end of
various calendar quarters.
The aggregate amount of principal repayment requirements on notes payable
is as follows by year (in thousands):
<TABLE>
<CAPTION>
FIXED ASSET BORROWINGS UNDER THE
YEAR FINANCING CREDIT AGREEMENT
<S> <C> <C>
1998........................................... $4,737 $10,000
1999........................................... 5,131 12,500
2000........................................... 5,558 25,000
2001........................................... 6,020 32,500
</TABLE>
F-12
<PAGE> 88
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The components of income tax expense (benefit) are (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS ONE MONTH ENDED YEAR ENDED
DECEMBER 31, ENDED NOVEMBER 29, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Federal:
Current............... $ 6,969 $ 9,422 $ 581 $ 7,693
Deferred.............. (1,456) (3,930) (148) 1,482
State:
Current............... 4,116 4,784 300 4,501
Deferred.............. (409) (1,432) (53) 61
------- ------- ----- -------
$ 9,220 $ 8,844 $ 680 $13,737
======= ======= ===== =======
</TABLE>
The effective income tax differs from the amount computed by applying the
Federal statutory income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS ENDED ONE MONTH ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 29, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Federal statutory income tax.......... $7,799 $7,136 $497 $11,352
State and local incomes taxes, net of
federal tax benefit................. 2,410 2,179 160 2,965
Tax exempt interest, net.............. (840) (570) (53) (770)
Other, net............................ (149) 99 76 190
------ ------ ---- -------
Effective income tax.................. $9,220 $8,844 $680 $13,737
====== ====== ==== =======
</TABLE>
The temporary differences which created deferred tax assets and liabilities
are included as a net amount in other assets at December 31, 1996 and 1997 as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Deferred Tax Assets:
Deferred compensation..................................... $ 6,122 $ 5,990
Reserves.................................................. 2,759 2,042
Other..................................................... 3,240 2,118
Less valuation allowance.................................. (1,131) --
------- -------
Total deferred tax assets.............................. 10,990 10,150
------- -------
Deferred Tax Liabilities:
Net unrealized appreciation on investments and other...... 185 887
------- -------
Total deferred tax liabilities......................... 185 887
------- -------
Net deferred tax asset...................................... $10,805 $ 9,263
======= =======
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards
("NOLs") related to the original acquisition of Sutro of $3.2 million for which
it had recorded a valuation allowance against the full amount of the deferred
tax asset. These NOLs were fully utilized in 1997 resulting in a reduction to
taxes payable but without a reduction to reported income tax expense as the
offset was reported as an adjustment to goodwill.
F-13
<PAGE> 89
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. 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 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.
Tucker Anthony is a registered broker and dealer. At December 31, 1997,
Tucker Anthony had net capital of approximately $47.0 million which was $46.0
million in excess of the $1 million amount required to be maintained at that
date.
Sutro is a registered broker and dealer. At December 31, 1997, Sutro had
net capital of approximately $10.8 million which was $9.8 million in excess of
the $1.0 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. At December 31, 1997,
FTC's regulatory capital, as defined, was $1.1 million and FTC was in compliance
with all such requirements.
Under the clearing arrangement with Wexford, Tucker Anthony and Sutro are
required to maintain certain minimum levels of net capital and comply with other
financial ratio requirements. At December 31, 1997, Tucker Anthony and Sutro
were in compliance with all such requirements.
In accordance with the provisions of the credit agreement (see note 8), the
Company and its principal subsidiaries have executed agreements to guarantee the
borrowings to the benefit of the participating banks. The stock of the Company's
subsidiaries currently is pledged as security under the terms of the credit
agreement. Under the financial covenants of this credit agreement, the maturity
of amounts borrowed may be accelerated if the Company breaches certain
provisions of the credit agreement, among which are requirements for the Company
and its principal subsidiaries to maintain minimum levels, as defined, including
leverage ratio and net capital. The Company was in compliance with these
covenants at December 31, 1997.
11. 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. Rent expense was $18.1 million for the year
ended December 31, 1995, $22.5 million for the eleven month period ended
November 29, 1996, $1.5 million for the one month period ended December 31, 1996
and $15.9 million for the year ended 1997. Included in rent expense for the
eleven month period ended November 29, 1996 is $4.7 million of expense related
to the present value of future rent costs for space no longer required due
primarily to the outsourcing of clearing services.
F-14
<PAGE> 90
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1997, the Company's future minimum rental commitments based
upon original terms (including escalation costs) under noncancelable leases
which have an initial or remaining term of one year or more are as follows (in
thousands):
<TABLE>
<S> <C>
1998.............................................. $ 17,204
1999.............................................. 16,915
2000.............................................. 15,025
2001.............................................. 14,350
2002.............................................. 13,586
Thereafter........................................ 26,184
--------
Sub-total....................................... 103,264
Less aggregate sublease income.................... (3,847)
--------
$ 99,417
========
</TABLE>
The Company is a defendant or co-defendant in legal actions primarily
relating to its broker-dealer activities. It is the opinion of management, after
consultation with counsel, that the resolution of these actions will not have a
material adverse effect on the consolidated financial position and results of
operations of the Company. Included in other operating expenses, for the eleven
month period ended November 29, 1996, is $6.3 million of insurance recoveries
relating to certain litigation costs that were incurred in prior years.
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 December 31, 1997, such
transactions settled at no loss.
12. BENEFITS
Certain subsidiaries of the Company have qualified profit-sharing plans
which cover substantially all their full-time employees. Each plan includes a
salary reduction agreement and a matching contribution subject to certain
limitations. In addition, a subsidiary may contribute additional amounts to its
plan, at its discretion, based upon its profits for the year.
The aggregate contributions to these plans for the year ended December 31,
1995, the eleven month period ended November 29, 1996, the one month period
ended December 31, 1996 and the year ended December 31, 1997 were $6.4 million,
$5.5 million, $0.5 million and $7.1 million, respectively.
Freedom Capital has a noncontributory defined benefit pension plan covering
substantially all of its employees. Effective August 1, 1997, the plan was
amended to provide that no new pension benefits will accrue and no new
participants will be admitted after August 1, 1997. Amounts related to the plan
are not material to the consolidated financial statements.
Compensation cost recognized for Common Stock and stock options issued to
employees during 1997 was $1.4 million.
13. FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments are carried at
fair value or amounts approximating fair value. Assets, including cash and cash
equivalents, securities owned, securities purchased under agreements to resell
and certain receivables are carried at fair value or contracted amounts which
approximate fair value. Similarly, liabilities including securities sold, not
yet purchased, securities sold under agreements to repurchase and certain
payables are carried at fair value or contracted amounts approximating fair
value.
F-15
<PAGE> 91
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of the fixed asset financing estimated using the Company's
incremental borrowing rate, approximated its carrying value at December 31, 1997
and 1996. The carrying value of the Company's debt under the variable rate
credit agreement approximates its fair value.
In the normal course of business, the Company may enter into transactions
in financial instruments to manage its exposure to market risks. There were no
open contracts outstanding at December 31, 1996. At December 31, 1997, the
Company had open options on futures contracts outstanding approximating $34.5
million (notional amount). The notional amounts are not reflected on the
Consolidated Statements of Financial Condition and are indicative only of the
volume of activity at December 31, 1997. They do not represent amounts subject
to market risks, and in many cases, limit the Company's overall exposure to
market losses by hedging other on-balance sheet and off-balance sheet
transactions. The volume of activity in these contracts was not significant
during the years ended December 31, 1995, 1996 and 1997.
The following table summarizes the Company's principal transactions
revenues by business activity for the applicable periods reflected.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, ELEVEN MONTHS ENDED ONE MONTH ENDED DECEMBER 31,
1995 NOVEMBER 29, 1996 DECEMBER 31, 1996 1997
------------ ------------------- ----------------- ------------
<S> <C> <C> <C> <C>
Equities............................. $ 39,814 $35,545 $2,831 $39,181
Fixed Income......................... 52,289 47,731 3,990 47,641
Arbitrage............................ 13,686 12,205 1,529 12,447
-------- ------- ------ -------
$105,789 $95,481 $8,350 $99,269
======== ======= ====== =======
</TABLE>
14. EARNINGS PER COMMON SHARE
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>
ONE MONTH ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ------------------
BASIC DILUTED BASIC DILUTED
<S> <C> <C> <C> <C>
NUMERATOR:
Net income........................................ $ 740 $ 740 $18,698 $18,698
------- ------- ------- -------
DENOMINATOR:
Weighted average shares outstanding............... 14,313 14,313 14,287 14,287
Dilutive effect of:
Stock options and other exercisable shares..... -- -- -- 446
------- ------- ------- -------
Adjusted weighted average shares outstanding...... 14,313 14,313 14,287 14,733
------- ------- ------- -------
Earnings per share.................................. $ 0.05 $ 0.05 $ 1.31 $ 1.27
======= ======= ======= =======
</TABLE>
15. STOCK OPTIONS
The Company's 1996 Stock Option Plan ("the Plan") provides for granting
officers and other key employees options to purchase shares of common stock at
the fair market value of the stock on the date of grant or such other prices as
provided by the Plan, and expire within either nine and one half years of
November 29, 1996, or ten years from the date of grant. The options vest over
periods from five to six years
F-16
<PAGE> 92
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. STOCK OPTIONS (CONTINUED)
from November 29, 1996. Certain options issued under performance-based
agreements may be exercisable earlier, vesting over three years for individual
performance-based options and five years for Company performance-based options,
if certain individual and Company performance-based goals are met. Regardless of
whether these performance based targets are attained, the options will vest no
later than six years from November 29, 1996. During 1997, the Company granted
options on 2,336,652 shares, no options were exercised, and options on 202,764
shares were forfeited. All options have an exercise price of $5.50. At December
31, 1997, 2,181,600 shares were authorized for issuance under options and
options on 2,133,888 shares were outstanding, with a weighted-average remaining
contractual life of 8.6 years. At December 31, 1997, options on 276,247 shares
were exercisable, with a weighted-average remaining contractual life of 8.6
years.
The Company accounts for stock option grants in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 25 "Accounting for
Stock Issued to Employees." Had compensation expense for the Company's stock
options been determined on the fair value at the date of grant for awards under
the Plan, consistent with the method of SFAS 123 "Accounting for Stock Based
Compensation," the Company's net income and earnings per share would have been
reduced to pro forma amounts presented below (in thousands except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
<S> <C> <C>
Net income........................................ As reported $18,698
Pro forma $18,318
Basic earnings per share.......................... As reported $ 1.31
Pro forma $ 1.28
Diluted earnings per share........................ As reported $ 1.27
Pro forma $ 1.26
</TABLE>
The pro forma information presented is not representative of the effect
stock options will have on net income or earnings per share for future years.
The fair value of each option granted during the year ended December 31,
1997 is the estimated present value at grant date using the minimum value model
with the following assumptions: (i) dividend yield of 0.8%, (ii) expected life
of 6 years, and (iii) risk free interest rate of 5.4%. The weighted-average fair
value of the options on 2,127,696 shares granted January 31, 1997 whose exercise
price equals the fair market value of the Company's stock on grant date was
$1.30. The weighted-average fair value of the options on 208,956 shares granted
subsequent to January 31, 1997 whose exercise price is less than the fair market
value of the Company's stock on grant date was $4.37.
F-17
<PAGE> 93
FREEDOM SECURITIES CORPORATION AND
FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------------------
THREE MONTHS ENDED TWO ONE
-------------------------------------- MONTHS ENDED MONTH ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, NOVEMBER 29, DECEMBER 31,
1996 1996 1996 1996 1996
<S> <C> <C> <C> <C> <C>
Net revenues................... $89,281 $88,168 $ 81,034 $ 62,546 $ 28,796
Income before income taxes..... 6,440 5,361 4,480 4,106 1,420
Net income..................... 3,677 3,029 2,517 2,320 740
Basic earnings per share....... -- -- -- -- $ 0.05
Diluted earnings per share..... -- -- -- -- $ 0.05
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
<S> <C> <C> <C> <C> <C>
Net revenues................... $84,448 $85,129 $103,579 $102,599
Income before income taxes..... 6,043 5,040 10,464 10,888
Net income..................... 3,493 2,918 5,967 6,320
Basic earnings per share....... $ 0.24 $ 0.20 $ 0.42 $ 0.45
Diluted earnings per share..... $ 0.24 $ 0.20 $ 0.41 $ 0.42
</TABLE>
17. SUBSEQUENT EVENTS
On March 10, 1998, the Company's Board of Directors approved an increase in
the authorized Capital Stock of the Company to 60,000,000 shares of Common
Stock, $.01 par value per share, and 1,000,000 shares of Preferred Stock, $.01
par value per share, of which none of the preferred stock has been issued. In
addition, the Company's Board of Directors approved a 1.818-for-1 Common Stock
split to be distributed in the form of a stock dividend payable to existing
stockholders immediately prior to the consummation of the Company's public
offering of Common Stock. All references throughout the financial statements to
number of shares, per share amounts and stock options data of the Company's
Common Stock reflect the stock split.
The Company has agreed to acquire, through a merger with a wholly owned
subsidiary of the Company, the regional brokerage firm of Cleary Gull Reiland &
McDevitt Inc. ("Cleary Gull") pursuant to an Agreement and Plan of Merger dated
March 9, 1998. The following is a summary of certain financial information of
Cleary Gull at and for the year ended December 31, 1997 (in thousands):
<TABLE>
<S> <C> <C>
Total assets................................................ $20,698
Stockholders' equity........................................ 7,198
Total revenues.............................................. $26,414
Net income.................................................. 1,251
</TABLE>
F-18
<PAGE> 94
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................... 3
Recent Developments.................. 8
Risk Factors......................... 9
Use of Proceeds...................... 20
Dividend Policy...................... 20
Capitalization....................... 21
Dilution............................. 22
Selected Historical Consolidated
Financial and Other Data........... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 25
Business............................. 36
Management........................... 50
Principal and Selling Stockholders... 59
Certain Relationships and Related
Transactions....................... 61
Description of Capital Stock......... 65
Shares Eligible for Future Sale...... 67
Underwriting......................... 69
Tax Consequences to Non-U.S.
Holders............................ 71
Legal Matters........................ 73
Experts.............................. 74
Additional Information............... 74
Index to Financial Statements........ F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENT OR SUBSCRIPTIONS.
======================================================
======================================================
6,700,000 SHARES
[FREEDOM SECURITIES(SM) CORPORATION LOGO]
COMMON STOCK
-------------------------
P R O S P E C T U S
-------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CREDIT SUISSE FIRST BOSTON
SUTRO & CO. INCORPORATED
TUCKER ANTHONY
INCORPORATED
======================================================
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses (other than underwriting discount and commissions) payable in
connection with the sale of the Common Stock offered hereby (including the
Common Stock which may be sold pursuant to the Underwriters' over-allotment
option) are as follows, all of which will be paid by the Company:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
Commission registration fee................................. $ 43,187.00
NASD filing fee............................................. 15,140.00
NYSE fee.................................................... 94,075.00
Printing expenses........................................... 400,000.00
Legal fees and expenses..................................... 300,000.00
Accounting fees and expenses................................ 100,000.00
Blue sky fees and expenses (including legal fees and
expenses)................................................. 20,000.00
Transfer agent and registrar fees and expenses.............. 10,000.00
Miscellaneous............................................... 17,598.00
-------------
Total.................................................. $1,000,000.00
=============
</TABLE>
- ------------------------------
* All amounts are estimated, except Commission registration, NASD and NYSE fees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware provides as
follows:
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect to any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly
II-1
<PAGE> 96
and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
In addition, pursuant to its Articles of Organization and Bylaws, the
Company shall indemnify its directors and officers against expenses (including
judgments or amounts paid in settlement) incurred in any action, civil or
criminal, to which any such person is a party by reason of any alleged act or
failure to act in his capacity as such, except as to a matter as to which such
director or officer shall have been finally adjudged not to have acted in good
faith in the reasonable belief that his action was in the best interest of the
corporation.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act. Reference is made to the form of Underwriting Agreement
filed as Exhibit 1.1 hereto.
The Company maintains directors and officers liability insurance for the
benefit of its directors and certain of its officers and has entered into
indemnification agreements with its directors and certain of its officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued the following
securities, none of which have been registered under the Securities Act:
(a) On November 29, 1996, the Company sold an aggregate of 826,281
shares of Common Stock for an aggregate consideration of $4,545,000 in
transactions exempt from registration pursuant to Rule 701 under the
Securities Act.
(b) On November 29, 1996, in transactions exempt from registration
pursuant to Section 4(2) of the Securities Act, the Company sold an
aggregate of 13,526,200 shares of Common Stock to accredited investors for
an aggregate consideration of $74,401,540.
(c) During 1997 the Company granted options to purchase 2,336,652
shares of Common Stock to certain employees of the Company, each with an
exercise price of $5.50, in transactions exempt from registration pursuant
to Section 4(2) and Rule 701 under the Securities Act.
(d) During 1997, in transactions exempt from registration pursuant to
Section 4(2) of the Securities Act, the Company sold an aggregate of
488,148 shares of Common Stock for aggregate consideration of $3,265,061 to
employees of the Company and its Subsidiaries who were accredited
investors. In addition, Hancock has exercised its pre-emptive right to
purchase an aggregate of 31,099 shares of Common Stock for aggregate
consideration of $208,006.
(e) During 1998, in transactions exempt from registration pursuant to
section 4(2) of the Securities Act, the Company has sold an aggregate of
42,723 shares of Common Stock for aggregate consideration of $296,710 to
employees of the Company's Subsidiaries.
II-2
<PAGE> 97
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
NO. DESCRIPTION OF DOCUMENTS
- -------- ------------------------
<C> <S>
+1.1 Form of Underwriting Agreement
+3.1 Restated Certificate of Incorporation of the Registrant
+3.2 Bylaws of the Registrant to be effective prior to
effectiveness of the Registration Statement
+4.1 Form of Stock Certificate
+5.1 Form of Opinion of Hutchins, Wheeler & Dittmar, A
Professional Corporation
+10.1 Contribution Agreement by and among the Registrant, Hancock,
THL and SCP, dated as of October 4, 1996
+10.2 Stockholders Agreement by and among the Registrant and the
persons listed on the signature pages thereof as the Initial
Investors, SCP Initial Investor, Employee Investors and
Seller Initial Investor dated as of November 30, 1996
+10.3 Revolving Credit Agreement by and among the Registrant and
The First National Bank of Boston, as agent for the lenders
listed on Schedule 1 thereto, dated as of November 29, 1996
+10.4 Additional Share Agreement by and between the Registrant and
Hancock, dated as of November 29, 1996
+10.5 Tax Matters Agreement by and between the Registrant and
Hancock, dated as of November 29, 1996
+10.6 Contribution and Indemnity Agreement by and between the
Registrant and John H. Goldsmith, dated as of November 29,
1996
+10.7 Management Agreement by and between the Registrant and THL,
dated as of November 29, 1996
+10.8 Management Agreement by and between the Registrant and SCP,
dated as of November 29, 1996
+10.9 1996 Stock Option Plan
+10.10 Employment Agreement by and between the Registrant and John
H. Goldsmith, dated as of November 29, 1996
+10.11 Employment Agreement by and between the Registrant and
Gregory N. Thomas, dated as of December 3, 1997
+10.12 Letter Agreement by and between the Registrant and William
C. Dennis, Jr., dated as of April 2, 1997
**+10.13 Agreement, by and among Prudential Securities Incorporated,
John Hancock Clearing Corporation, Tucker Anthony
Incorporated and Sutro & Co. Incorporated
+10.14 Form of TAMP Incentive Plan Limited Partnership Limited
Partnership Agreement, dated as of July 1, 1989
+10.15 Form of TAMP II Incentive Plan Limited Partnership Limited
Partnership Agreement, dated as of February 28, 1995
+10.16 Form of TAMM II Incentive Plan Limited Partnership Limited
Partnership Agreement, dated April 8, 1984
+10.17 Form of Sutro Venture Partners I, L.P. Limited Partnership
Agreement, dated as of March 21, 1996
+10.18 Form of Sutro Venture Partners II, L.P. Limited Partnership
Agreement, dated as of March 21, 1996
+10.19 Form of Operating Agreement for Sutro Investment Partners
IV, LLC dated as of June 30, 1997
+10.20 Agreement and Plan of Merger, by and among the Registrant,
CGRM Merger Corp. and Cleary Gull Reiland & McDevitt Inc.,
dated March 9, 1998.
</TABLE>
II-3
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBITS
NO. DESCRIPTION OF DOCUMENTS
- -------- ------------------------
<C> <S>
+10.21 Cleary Gull Registration Rights Agreement.
+10.22 Chattel Leasing Security Agreement by and between T.A.
Leasing, Inc. and BancBoston Leasing, Inc., dated November
29, 1996.
+10.23 Amended and Restated Chattel Leasing Promissory Note, by and
between T.A. Leasing, Inc. and BancBoston Leasing, Inc.,
dated February 28, 1997.
+10.24 Chattel Leasing Security Agreement by and between Sutro
Leasing Inc. and BancBoston Leasing, Inc., dated February
28, 1997.
+10.25 Chattel Leasing Promissory Note by and between Sutro Leasing
Inc. and BancBoston Leasing, Inc., dated February 28, 1997.
+10.26 1998 Long Term Incentive Plan.
+10.27 1998 Executive Performance Bonus Plan.
+10.28 Form of Amendment No. 1 to the Stockholders Agreement.
+10.29 Amendment No. 2 to the Stockholders Agreement, as of March
10, 1998.
+10.30 Form of Amendment No. 3 to the Stockholders Agreement, dated
as of March 25, 1998.
+21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
+23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional
Corporation (included in Exhibit 5.1)
+24.1 Power of Attorney (included on page II-6)
+24.2 Power of Attorney, signed by Gregory N. Thomas and dated
March 10, 1998.
+27.1 Financial Data Schedule
+99.1 Consent of Mr. Thomas to be named as Director
+99.2 Consent of Mr. Prokupek to be named as Director.
</TABLE>
- ---------------
** Confidential Treatment Requested as to certain portions, which portions have
been omitted and filed separately with the Commission.
+ Previously filed with the Commission.
Schedules and exhibits to certain exhibits to this Registration Statement
have been omitted, which schedules shall be furnished to the Commission upon
request.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing the specified in the underwriting agreement, certificates in such
denomination and registered in such names as required by the underwriter to
permit proper delivery to each purchaser.
The undersigned registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of his registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 99
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amended registration statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in Boston,
Massachusetts, on April 1, 1998.
FREEDOM SECURITIES CORPORATION
By: /s/ JOHN H. GOLDSMITH
------------------------------------
Name: John H. Goldsmith
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ JOHN H. GOLDSMITH Chairman, Director and Chief Executive April 1, 1998
- ------------------------------------------ Officer as well as Chief Executive
John H. Goldsmith Officer of Tucker Anthony and Chairman
of Sutro
/s/ WILLIAM C. DENNIS, JR. Chief Financial Officer April 1, 1998
- ------------------------------------------
William C. Dennis, Jr.
* Director April 1, 1998
- ------------------------------------------
David V. Harkins
* Director April 1, 1998
- ------------------------------------------
C. Hunter Boll
* Director April 1, 1998
- ------------------------------------------
Thomas M. Hagerty
* Director April 1, 1998
- ------------------------------------------
Seth W. Lawry
* Director April 1, 1998
- ------------------------------------------
Winston J. Churchill
* Director April 1, 1998
- ------------------------------------------
John F. Luikart
* Director April 1, 1998
- ------------------------------------------
Robert H. Yevich
* Director April 1, 1998
- ------------------------------------------
Gregory N. Thomas
*By /s/ JOHN H. GOLDSMITH April 1, 1998
-------------------------------------
Attorney-In-Fact
</TABLE>
II-6
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
NO. DESCRIPTION OF DOCUMENTS PAGE
- -------- ------------------------ ----
<C> <S> <C>
+1.1 Form of Underwriting Agreement
+3.1 Restated Certificate of Incorporation of the Registrant
+3.2 Bylaws of the Registrant to be effective prior to
effectiveness of the Registration Statement
+4.1 Form of Stock Certificate
+5.1 Form of Opinion of Hutchins, Wheeler & Dittmar, A
Professional Corporation
+10.1 Contribution Agreement by and among the Registrant, Hancock,
THL and SCP, dated as of October 4, 1996
+10.2 Stockholders Agreement by and among the Registrant and the
persons listed on the signature pages thereof as the Initial
Investors, SCP Initial Investor, Employee Investors and
Seller Initial Investor dated as of November 30, 1996
+10.3 Revolving Credit Agreement by and among the Registrant and
The First National Bank of Boston, as agent for the lenders
listed on Schedule 1 thereto, dated as of November 29, 1996
+10.4 Additional Share Agreement by and between the Registrant and
Hancock, dated as of November 29, 1996
+10.5 Tax Matters Agreement by and between the Registrant and
Hancock, dated as of November 29, 1996
+10.6 Contribution and Indemnity Agreement by and between the
Registrant and John H. Goldsmith, dated as of November 29,
1996
+10.7 Management Agreement by and between the Registrant and THL,
dated as of November 29, 1996
+10.8 Management Agreement by and between the Registrant and SCP,
dated as of November 29, 1996
+10.9 1996 Stock Option Plan
+10.10 Employment Agreement by and between the Registrant and John
H. Goldsmith, dated as of November 29, 1996
+10.11 Employment Agreement by and between the Registrant and
Gregory N. Thomas, dated as of December 3, 1997
+10.12 Letter Agreement by and between the Registrant and William
C. Dennis, Jr., dated as of April 2, 1997
*+10.13 Agreement, by and among Prudential Securities Incorporated,
John Hancock Clearing Corporation, Tucker Anthony
Incorporated and Sutro & Co. Incorporated
+10.14 Form of TAMP Incentive Plan Limited Partnership Limited
Partnership Agreement, dated as of July 1, 1989
+10.15 Form of TAMP II Incentive Plan Limited Partnership Limited
Partnership Agreement, dated as of February 28, 1995
+10.16 Form of TAMM II Incentive Plan Limited Partnership Limited
Partnership Agreement, dated April 8, 1984
+10.17 Form of Sutro Venture Partners I, L.P. Limited Partnership
Agreement, dated as of March 21, 1996
+10.18 Form of Sutro Venture Partners II, L.P. Limited Partnership
Agreement, dated as of March 21, 1996
+10.19 Form of Operating Agreement for Sutro Investment Partners
IV, LLC dated as of June 30, 1997
+10.20 Agreement and Plan of Merger, by and among the Registrant,
CGRM Merger Corp. and Cleary Gull Reiland & McDevitt Inc.,
dated March 9, 1998.
+10.21 Cleary Gull Registration Rights Agreement
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBITS
NO. DESCRIPTION OF DOCUMENTS PAGE
- -------- ------------------------ ----
<C> <S> <C>
+10.22 Chattel Leasing Security Agreement by and between T.A.
Leasing, Inc. and BancBoston Leasing, Inc., dated November
29, 1996.
+10.23 Amended and Restated Chattel Leasing Promissory Note, by and
between T.A. Leasing, Inc. and BancBoston Leasing, Inc.,
dated February 28, 1997.
+10.24 Chattel Leasing Security Agreement by and between Sutro
Leasing Inc. and BancBoston Leasing, Inc., dated February
28, 1997.
+10.25 Chattel Leasing Promissory Note by and between Sutro Leasing
Inc. and BancBoston Leasing, Inc., dated February 28, 1997.
+10.26 1998 Long Term Incentive Plan.
+10.27 1998 Executive Performance Bonus Plan.
+10.28 Amendment No. 1 to the Stockholders Agreement dated January
30, 1998.
+10.29 Form of Amendment No. 2 to the Stockholders Agreement.
+10.30 Form of Amendment No. 3 to the Stockholders Agreement.
+21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
+23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional
Corporation (included in Exhibit 5.1)
+24.1 Power of Attorney (included on page II-6)
+24.2 Power of Attorney, signed by Gregory N. Thomas and dated
March 10, 1998.
+27.1 Financial Data Schedule
+99.1 Consent of Mr. Thomas to be named as Director
+99.2 Consent of Mr. Prokupek to be named as Director.
</TABLE>
- ---------------
* Confidential Treatment Requested as to certain portions, which portions have
been omitted and filed separately with the Commission.
+ Previously filed with the Commission.
Schedules and exhibits to certain exhibits to this Registration Statement
have been omitted, which schedules shall be furnished to the Commission upon
request.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Historical Consolidated Financial and Other Data" and "Experts" and to the use
of our report dated March 10, 1998, in the Amendment No. 3 to Registration
Statement (Form S-1 No. 333-44931) and related Prospectus of Freedom Securities
dated April 1, 1998.
/s/ Ernst & Young LLP
New York, New York
April 1, 1998
