UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X
- ------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________
TO _________________
Commission File Number 1-13993
FREEDOM SECURITIES CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-4019175
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Beacon Street
Boston, Massachusetts 02108
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 725-2000
--------------
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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As of August 10, 1998, the Company has 20,003,145 shares of common stock
outstanding.
TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION
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Item 1.
Financial Statements
Consolidated Statements of Financial Condition -
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income - Three and six
months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows - Six months
ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
<PAGE> 2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share amounts)
<TABLE>
June 30, December 31,
1998 1997
(unaudited)
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 9,374 $ 12,936
Receivables from brokers, dealers and others 83,379 74,314
Securities purchased under agreements to resell 81,451 113,335
Securities owned, at market 349,217 423,522
Fixed assets, net of accumulated
depreciation and amortization 19,722 20,464
Goodwill, net of accumulated amortization 36,267 24,861
Exchange memberships, owned at cost 5,939 5,939
Deferred taxes 9,415 9,263
Other assets 60,702 42,953
------- -------
Total assets $655,466 $727,587
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payables to brokers, dealers and others $ 65,761 $ 59,062
Securities sold under agreements to repurchase 6,846 -
Securities sold, not yet purchased, at market 241,372 354,565
Accrued compensation and benefits 61,508 65,653
Accounts payable and accrued expenses 48,183 44,535
Notes payable to banks 19,125 101,446
------- -------
Total liabilities 442,795 625,261
------- -------
Stockholders' equity:
Common stock (60,000,000 shares authorized,
19,993,833 and 14,840,627 shares issued in
1998 and 1997, respectively, $.01 par value) 200 147
Additional paid-in capital 181,645 83,654
Retained earnings 30,826 19,438
Subscribed stock (136,532 shares in 1997) - (913)
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Total stockholders' equity 212,671 102,326
------- -------
Total liabilities and stockholders' equity $655,466 $727,587
======= =======
</TABLE>
See accompanying notes.
<PAGE> 3
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Commissions $ 48,176 $ 37,592 $ 94,482 $ 77,690
Principal transactions 25,690 22,561 50,943 44,570
Investment banking 32,047 12,416 45,759 21,985
Asset management 6,078 4,660 11,891 9,540
Other 4,222 3,058 6,903 6,445
------- ------ ------- -------
Total operating revenues 116,213 80,287 209,978 160,230
Interest income 12,603 10,725 25,870 21,136
------- ------ ------- -------
Total revenues 128,816 91,012 235,848 181,366
Interest expense 7,032 5,883 14,046 11,789
------- ------ ------- -------
Net revenues 121,784 85,129 221,802 169,577
Non-interest expenses
Compensation and benefits 79,885 55,261 146,337 109,737
Occupancy and equipment 6,942 6,321 13,129 12,840
Communications 4,920 4,362 9,043 8,551
Brokerage and clearance 3,420 2,914 6,176 5,618
Promotional 3,728 2,378 6,484 4,472
Other 9,521 7,314 17,319 14,243
------- ------ ------- -------
Total non-interest expenses 108,416 78,550 198,488 155,461
Operating pre-tax income 13,368 6,579 23,314 14,116
Acquisition interest expense 130 1,539 1,480 3,033
------- ------ ------- -------
Income before income taxes 13,238 5,040 21,834 11,083
Income taxes 5,603 2,122 9,170 4,672
------- ------ ------- -------
Net income before extraordinary item 7,635 2,918 12,664 6,411
Extraordinary item (net of applicable
taxes of $922) 1,276 - 1,276 -
------- ------ ------- -------
Net income after extraordinary item $ 6,359 $ 2,918 $ 11,388 $ 6,411
======= ====== ======= =======
Net income per share:
Basic before extraordinary item $ 0.39 $ 0.20 $ 0.73 $ 0.45
Basic after extraordinary item $ 0.32 $ 0.20 $ 0.66 $ 0.45
Diluted before extraordinary item $ 0.36 $ 0.20 $ 0.69 $ 0.44
Diluted after extraordinary item $ 0.30 $ 0.20 $ 0.62 $ 0.44
Weighted average common
shares outstanding:
Basic 19,792 14,244 17,322 14,273
Diluted 21,190 14,464 18,478 14,445
</TABLE>
See accompanying notes.
<PAGE> 4
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
Six Months Ended
June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 11,388 $ 6,411
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation 2,307 2,503
Amortization 4,803 3,376
Non-cash compensation 549 86
Changes in assets and liabilities, net of purchase
of Cleary Gull
(Increase) decrease in operating assets:
Receivables from brokers, dealers and others (2,828) 13,827
Securities purchased under agreements to resell 33,388 3,721
Securities owned, at market 78,375 (33,744)
Deferred taxes (152) (465)
Other assets (14,807) (11,699)
Increase (decrease) in operating liabilities:
Payables to brokers, dealers and others 6,699 2,221
Securities sold under agreements to repurchase 6,846 (34,912)
Securities sold, not yet purchased, at market (116,215) 67,241
Accrued compensation and benefits (6,807) (15,940)
Accounts payable and accrued expenses 1,754 2,957
------- -------
Net cash from operating activities 5,300 5,583
Cash flows from investing activities
Purchases of fixed assets (1,762) (943)
Proceeds from sale of fixed assets - 711
Payment for Cleary Gull, net of cash acquired (2,860) -
------- -------
Net cash used in investing activities (4,622) (232)
Cash flows from financing activities
Proceeds from sale of common stock, net 1,347 -
Proceeds from initial public offering, net 76,734 -
Purchases of treasury stock - (611)
Repayment of notes payable to banks (82,321) (2,143)
------- -------
Net cash used in financing activities (4,240) (2,754)
Increase (decrease) in cash and cash equivalents (3,562) 2,597
Cash and cash equivalents, beginning of period 12,936 7,248
------- -------
Cash and cash equivalents, end of period $ 9,374 $ 9,845
======= =======
Supplemental disclosure of cash flow information
Cash paid for:
Income taxes $ 7,943 $ 7,306
Interest $ 15,230 $ 14,703
</TABLE>
See accompanying notes.
<PAGE> 5
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(UNAUDITED)
1. Basis of Presentation
Freedom Securities Corporation is a holding company which together with its
wholly owned subsidiaries (collectively, the "Company") is a full-service,
regionally focused retail brokerage and investment banking firm. The Company
is engaged primarily in the retail and institutional brokerage business
including corporate finance and underwriting services. The consolidated
financial statements include the accounts of the Company and its primary
operating subsidiaries Tucker Anthony Incorporated ("Tucker Anthony"),
Sutro & Co. Incorporated ("Sutro"), Cleary Gull Reiland & McDevitt Inc.
("Cleary Gull") and Freedom Capital Management Corporation ("Freedom Capital").
The Company was formed in November 1996 to effect the acquisition (the
"Acquisition") of Freedom Securities Holding Corporation and its subsidiaries
from John Hancock Mutual Life Insurance Company ("Hancock"). The consideration
paid to Hancock was financed with equity contributions from two private investor
groups and certain employee investors, bank financing and excess cash of the
Company.
The Acquisition was accounted for as a purchase and, accordingly, the purchase
price was allocated to the assets and liabilities acquired based upon their fair
values at the date of the Acquisition. The purchase price, including
acquisition costs, exceeded the fair value of net assets acquired and the excess
was recorded as goodwill.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1998. The information included in this Form 10-Q
should be read in conjunction with the Risk Factors and Management's Discussion
and Analysis of Financial Condition and Results of Operations sections and the
1997 financial statements and notes thereto included in the Company's
Registration Statement on Form S-1, File #333-44931, and the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1998.
2. Initial Public Offering
On April 2, 1998, the Company completed its 7.4 million share initial public
offering (the "Offering"), including 4.2 million shares of $.01 par value common
stock ("Common Stock") sold by the Company. The Offering raised approximately
$76.7 million for the Company after deducting underwriting discounts,
commissions and expenses. The Company used the proceeds and available cash to
repay the existing debt (see Note 4).
3. Acquisition of Cleary Gull Reiland & McDevitt Inc.
On April 16, 1998, the Company closed into escrow and funded its previously
announced acquisition of Cleary Gull, a privately-held investment banking,
institutional brokerage and investment advisory firm headquartered in Milwaukee,
Wisconsin. The acquisition was completed on May 1, 1998 after appropriate
notification was made to the New York Stock Exchange and was accounted for under
the purchase method of accounting. The consolidated financial statements
include the results of Cleary Gull's operations from the date of acquisition.
The purchase price was $24.9 million which included 889,878 shares of the
Company's Common Stock valued at $17.8 million (valued at a price equal to the
initial public offering price) and $4.4 million in cash.In addition, stock
<PAGE> 6
options to purchase shares of Cleary Gull capital stock with a value of $2.7
million have been converted into options to purchase the Company's Common Stock.
The excess of the purchase price over the estimated fair value of net assets
acquired was $12.5 million and is being amortized over 15 years using the
straight-line method of amortization. The Company has also granted new options
to Cleary Gull employees to purchase up to an additional 239,250 shares of the
Company's Common Stock with an exercise price equal to the initial public
offering price.
4. Notes Payable to Banks
In 1996, the Company entered into a revolving credit agreement (the "Credit
Agreement") with certain participating banks and borrowed $85 million.
Borrowings under the Credit Agreement were $77.5 million and $80.0 million at
March 31, 1998 and December 31, 1997, respectively. The balance outstanding
under the Credit Agreement was repaid in full on April 7, 1998 with the
Company's net proceeds from the Offering and available cash. The consolidated
statements of income include an extraordinary item of $1.2 million resulting
from the write-off of capitalized debt costs related to the Credit Agreement.
5. Net Capital Requirements
Certain subsidiaries of the Company are subject to the net capital requirements
of the New York Stock Exchange ("Exchange") and the Uniform Net Capital
requirements of the Securities and Exchange Commission ("Commission") under Rule
15c3-1. The Exchange and the Commission rules also provide that equity capital
may not be withdrawn or cash dividends paid if certain minimum net capital
requirements are not met. The Company's principal regulated subsidiaries
are discussed below.
Under a clearing arrangement with Wexford Clearing Services Corporation
("Wexford"), Tucker Anthony, Sutro and Cleary Gull are required to maintain
certain minimum levels of net capital and comply with other financial ratio
requirements. At June 30, 1998, Tucker Anthony, Sutro and Cleary Gull were in
compliance with all such requirements.
Tucker Anthony is a registered broker and dealer. At June 30, 1998, Tucker
Anthony had net capital of approximately $41.1 million which was $40.1 million
in excess of the $1.0 million amount required to be maintained at that date.
Sutro is a registered broker and dealer. At June 30, 1998, Sutro had net capital
of approximately $12.3 million which was $11.3 million in excess of the $1.0
million amount required to be maintained at that date.
Cleary Gull is a registered broker and dealer. At June 30, 1998, Cleary Gull had
net capital of approximately $3.0 million which was $2.4 million in excess of
the $0.6 million amount required to be maintained at that date.
Freedom Trust Company ("FTC") is a subsidiary of Freedom Capital and is a
limited purpose trust company. Pursuant to state regulations, FTC is required
to meet and maintain certain capital minimums and ratios. At June 30, 1998,
FTC's regulatory capital, as defined, was $1.4 million and FTC was in
compliance with all such requirements.
6. Commitments and Contingencies
The Company leases office space and various types of equipment under
noncancelable leases generally varying from one to ten years, with certain
renewal options for like terms.
The Company is a defendant or co-defendant in legal actions primarily relating
to its broker-dealer activities. It is the opinion of management 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.
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 June 30, 1998, such transactions
settled at no loss.
<PAGE> 7
7. Earnings Per Share
The Company computes its earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") 128 "Earnings Per Share." The following
table sets forth the computation for basic and diluted earnings per share
(in thousands, except per share amounts):
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator
Net income before extraordinary item $ 7,635 $ 2,918 $12,664 $ 6,411
Extraordinary item 1,276 - 1,276 -
----- ----- ------ -----
Net income after extraordinary item $ 6,359 $ 2,918 $11,388 $ 6,411
Denominator
Weighted average shares outstanding 19,792 14,244 17,322 14,273
Dilutive effect of:
Stock options and other
exercisable shares 1,398 220 1,156 172
------ ------ ------ ------
Adjusted weighted average
shares outstanding 21,190 14,464 18,478 14,445
Basic earnings per share before
extraordinary item $ 0.39 $ 0.20 $ 0.73 $ 0.45
Less: Extraordinary item (0.07) - (0.07) -
---- ---- ---- ----
Basic earnings per share after
extraordinary item $ 0.32 $ 0.20 $ 0.66 $ 0.45
Diluted earnings per share before
extraordinary item $ 0.36 $ 0.20 $ 0.69 $ 0.44
Less: Extraordinary item (0.06) - (0.07) -
---- ---- ---- ----
Diluted earnings per share after
extraordinary item $ 0.30 $ 0.20 $ 0.62 $ 0.44
</TABLE>
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing in Item 1 of this
report. This Form 10-Q may contain or incorporate by reference statements which
may constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Prospective investors are cautioned that any
such forward-looking statements are not guarantees for future performance and
involve risks and uncertainties, and that actual results may differ materially
from those contemplated by such forward-looking statements.
Business Environment
The Company's retail securities brokerage activities, as well as its investment
banking, investment advisory, institutional sales and trading and equity
research services, are highly competitive and subject to various risks including
volatile trading markets and fluctuations in the volume of market activity.
These markets are affected by general economic and market conditions,
including fluctuations in interest rates, volume and price levels of securities
and flows of investor funds into and out of mutual funds and pension plans and
by factors that apply to particular industries such as technological advances
and changes in the regulatory environment. Declining interest rates and a
favorable economic environment contributed to a significant increase in activity
in the equity markets in the United States since the latter part of 1995. The
Company's financial results have been and may continue to be subject to
fluctuations due to these and other factors. Consequently, the results of
operations for a particular period may not be indicative of results to be
expected for other periods.
Equity Participation of Employees
In connection with the April Offering, employees sold no shares of the Company's
common stock and purchased their entire allocation of 335,000 shares. As of
June 30, 1998, the Company's employees, including senior management and
investment executives, owned in excess of 31% of the Company's outstanding
Common Stock. Management believes that significant employee ownership has
resulted in progressively higher levels of employee motivation, confidence
and commitment.
Incentive equity programs have been established pursuant to which employees have
acquired or may acquire additional equity of the Company, which when added to
shares previously owned would result in employees owning approximately 45%
of the shares of Common Stock outstanding.
Components of Revenues and Expenses
Revenues. Commission revenues include retail and institutional commissions
received by the Company as an agent in securities transactions, including all
exchange listed, over-the-counter agency, mutual fund, insurance and annuity
transactions. Principal transactions revenues include 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 and amortization of furniture, fixtures, business equipment,
<PAGE> 9
computer equipment and leasehold improvements. Promotional expense includes
travel, entertainment and advertising. Other expenses include general and
administrative expenses, including professional services, litigation expenses,
goodwill amortization, data processing and other miscellaneous expenses.
Acquisition interest expense represents the interest expense incurred under
the Credit Agreement.
Results of Operations
The following table compares second quarter results (dollars in millions)
between 1998 and 1997:
<TABLE>
Three Months Period to Period Percentage of
Ended June 30, Increase/(Decrease) Net Revenues
1998 1997 Amount Percent 2Q98 2Q97
---- ---- ------ ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions $ 48.2 $ 37.6 $ 10.6 28 40 44
Principal transactions 25.7 22.6 3.1 14 21 26
Investment banking 32.0 12.4 19.6 158 26 15
Asset management 6.1 4.7 1.4 30 5 5
Other 4.2 3.0 1.2 38 4 4
----- ----- ----- --- --- ---
Total operating revenues 116.2 80.3 35.9 45 96 94
Interest income 12.6 10.7 1.9 18 10 13
----- ----- ----- --- --- ---
Total revenues 128.8 91.0 37.8 42 106 107
Interest expense 7.0 5.9 1.1 20 6 7
----- ----- ----- --- --- ---
Net revenues 121.8 85.1 36.7 43 100 100
Non-interest expenses:
Compensation and benefits 79.9 55.3 24.6 45 66 65
Occupancy and equipment 7.0 6.3 0.7 10 6 7
Communications 4.9 4.4 0.5 13 4 5
Brokerage and clearance 3.4 2.9 0.5 17 3 3
Promotional 3.8 2.4 1.4 57 3 3
Other 9.5 7.3 2.2 30 7 9
----- ----- ----- --- --- ---
Total non-interest expenses 108.5 78.6 29.9 38 89 92
Operating pre-tax income 13.3 6.5 6.8 103 11 8
Acquisition interest expense 0.1 1.5 (1.4) (92) - 2
----- ----- ----- --- --- ---
Income before income taxes 13.2 5.0 8.2 163 11 6
Income taxes 5.6 2.1 3.5 164 5 3
----- ----- ----- --- --- ---
Net income before
extraordinary item 7.6 2.9 4.7 162 6 3
Extraordinary item (net of tax) 1.2 - 1.2 100 1 -
----- ----- ----- --- --- ---
Net income $ 6.4 $ 2.9 $ 3.5 118 5 3
===== ===== ===== === === ===
</TABLE>
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
The Company achieved record operating results in the three months ended June 30,
1998. When compared with the same period in 1997, revenues increased in all of
the Company's operating subsidiaries and total non-interest expenses declined as
a percentage of net revenues. Net income increased $3.5 million or 118% to $6.4
million in the 1998 quarter from net income of $2.9 million in the comparable
1997 period even after deducting an after-tax extraordinary item of $1.2 million
in 1998. The extraordinary item was related to the write-off of capitalized debt
costs resulting from the early retirement of $77 million in debt with the
proceeds from the Company's initial public offering in April. Management
believes that these financial results are attributable to three principal
factors. First, favorable conditions which generally continued to prevail in
the industry reflecting investor optimism had a significant impact on the
Company's retail brokerage businesses. Second, the Company's renewed focus on
its equity capital markets groups and the favorable industry environment for
corporate finance and underwriting activities resulted in increased
investment banking revenues. Third, the Company also benefited in the second
quarter of 1998 from the first-time inclusion of financial results of Cleary
Gull, the acquisition of which was closed during the second quarter.
Total operating revenues increased $35.9 million or 45% to $116.2 million in the
three months ended June 30, 1998 from $80.3 million in the quarter ended
June 30, 1997. Net revenues, including the effect of interest income and
interest expense, other than Acquisition interest expense, increased $36.7
million or 43% to $121.8 million in the three months ended June 30, 1998
versus $85.1 million in the comparable period in 1997.
Commission revenues increased $10.6 million or 28% to $48.2 million in the three
months ended June 30, 1998 from $37.6 million in the three months ended
June 30, 1997, primarily due to a higher level of market activity, an increase
in the number of investment executives and improvements in retail
productivity per investment executive.
Principal transactions revenues increased $3.1 million or 14% to $25.7 million
in the three months ended June 30, 1998 from $22.6 million in the three months
ended June 30, 1997, mainly due to higher risk arbitrage and fixed income
trading profits. The increase over last year was also impacted by the absence
<PAGE> 10
in the second quarter 1998 of a mortgage-backed securities trading loss of
$1.1 million experienced by the Company in the second quarter of 1997.
Investment banking revenues increased $19.6 million or 158% to $32.0 million in
the three months ended June 30, 1998 from $12.4 million in the three months
ended June 30, 1997. The increase reflected higher revenues from mergers and
acquisitions activity as well as higher fees from public offerings. During the
second quarter 1998, the Company managed or co-managed 14 equity deals raising
$900 million for clients versus 9 deals and $400 million in the comparable 1997
period.
Asset management revenues increased $1.4 million or 30% to $6.1 million in the
three months ended June 30, 1998 from $4.7 million in the three months ended
June 30, 1997 reflecting overall growth in assets under management which reached
more than $6.2 billion by the end of the 1998 second quarter.
Other income increased $1.2 million or 38% to $4.2 million in the three months
ended June 30, 1998 from $3.0 million in the three months ended June 30, 1997.
This increase resulted primarily from portfolio investment gains during the
quarter, partially offset by the mid-1997 expiration of a contract with a
Hancock subsidiary under which the Company recovered mutual fund sales charges.
Interest income increased $1.9 million or 18% to $12.6 million in the three
months ended June 30, 1998 from $10.7 million in the three months ended
June 30, 1997, due primarily to the combination of higher interest income on
customer margin balances and greater stock borrow activity. Interest expense,
excluding those expenses associated with financing the Acquisition, increased
$1.1 million or 20% to $7.0 million in the three months ended June 30, 1998
from $5.9 million in the three months ended June 30, 1997, primarily reflecting
higher average inventory balances.
Operating pre-tax margin increased to 11% in the second quarter of 1998 up from
8% in the same period last year. The Company's focus on cost optimization
continued to yield benefits in the second quarter of 1998. The Company
experienced a non-compensation expense growth rate of 23% over the second
quarter of 1997 compared with net revenue growth of over 43% in the same period.
Compensation and benefits expense increased $24.6 million or 45% to $79.9
million in the three months ended June 30, 1998 from $55.3 million in the
three months ended June 30, 1997, primarily due to increased incentive and
production-related compensation attributable to higher revenues. Compensation
and benefits as a percentage of net revenues increased to 66% in the second
quarter of 1998 from 65% in the comparable period in 1997, in part due to
aggressive new hiring in our retail and equity capital markets groups.
All other operating expenses increased an aggregate of $5.3 million or 23% to
$28.6 million in the three months ended June 30, 1998 from $23.3 million in
the three months ended June 30, 1997. All other operating expenses as a
percentage of net revenues declined to 23% in the three months ended June 30,
1998 from 27% in the three months ended June 30, 1997. Promotional expenses
increased $1.4 million or 57% to $3.8 million in the second quarter of 1998 from
$2.4 million in the comparable 1997 period primarily due to REIT and healthcare
research conferences hosted by the Company during 1998 as well as higher
advertising, business development and recruiting-related travel expenses.
Other expenses, which includes recruiting fees, professional fees, information
systems expenses, printing charges and postage expenses increased $2.2 million
or 30% to $9.5 million in the three months ended June 30, 1998 from
$7.3 million in the three months ended June 30, 1997.
The Company's income tax provisions for the three months ended June 30, 1998 and
the three months ended June 30, 1997 were $5.6 million and $2.1 million,
respectively, which represented a 42% effective tax rate in each period.
<PAGE> 11
The following table compares the first half results (dollars in millions)
between 1998 and 1997:
<TABLE>
Six Months Peiord to Period Percentage of
Ended June 30, Increase/(Decrease) Net Revenues
1998 1997 Amount Percent 1998 1997
---- ---- ------ ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions $ 94.5 $ 77.7 $ 16.8 22 43 46
Principal transactions 50.9 44.6 6.3 14 23 26
Investment banking 45.8 22.0 23.8 108 21 13
Asset management 11.9 9.5 2.4 25 5 6
Other 6.9 6.4 0.5 7 3 4
----- ----- ----- --- --- ---
Total operating revenues 210.0 160.2 49.8 31 95 95
Interest income 25.8 21.2 4.6 22 11 12
----- ----- ----- --- --- ---
Total revenues 235.8 181.4 54.4 30 106 107
Interest expense 14.0 11.8 2.2 19 6 7
----- ----- ----- --- --- ---
Net revenues 221.8 169.6 52.2 31 100 100
Non-interest expenses:
Compensation and benefits 146.4 109.7 36.7 33 66 65
Occupancy and equipment 13.1 12.9 0.2 2 6 8
Communications 9.0 8.6 0.4 6 4 5
Brokerage and clearance 6.2 5.6 0.6 10 3 3
Promotional 6.5 4.5 2.0 45 3 3
Other 17.3 14.2 3.1 22 7 8
----- ----- ----- --- --- ---
Total non-interest expenses 198.5 155.5 43.0 28 89 92
Operating pre-tax income 23.3 14.1 9.2 65 11 8
Acquisition interest expense 1.5 3.0 (1.5) (51) 1 2
----- ----- ----- --- --- ---
Income before income taxes 21.8 11.1 10.7 97 10 6
Income taxes 9.2 4.7 4.5 96 4 2
----- ----- ----- --- --- ---
Net income before
extraordinary item 12.6 6.4 6.2 98 6 4
Extraordinary item (net of tax) 1.2 - 1.2 100 1 -
----- ----- ----- --- --- ---
Net income $ 11.4 $ 6.4 $ 5.0 78 5 4
===== ===== ===== === === ===
</TABLE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
The Company experienced strong operating results in the first six months of 1998
compared to the first six months of 1997. Revenues increased in all of the
Company's operating subsidiaries and total non-interest expenses declined as a
percentage of net revenues. Net income increased $5.0 million or 78% to $11.4
million in the first half of 1998 from net income of $6.4 million in the
comparable 1997 period, even after deducting the after-tax extraordinary
item of $1.2 million in the 1998 period.
Total operating revenues increased $49.8 million or 31% to $210.0 million in the
six months ended June 30, 1998 from $160.2 million in the same period in 1997.
Net revenues increased $52.2 million or 31% in the 1998 period compared with
1997.
Commission revenues increased $16.8 million or 22% to $94.5 million in the first
six months of 1998 from $77.7 million in the first six months of 1997, due to
increased volume in the Company's retail businesses, reflecting a higher level
of market activity, a greater number of investment executives and increased
average production per retail investment executive. During the first half of
1998, the Company added 57 new investment executives averaging over $450
thousand of annualized production which is above the Company's existing overall
average retail production levels.
Principal transactions revenues increased $6.3 million or 14% to $50.9 million
in the first half of 1998 from $44.6 million in the comparable 1997 period
primarily due to higher risk arbitrage and fixed income trading profits in 1998.
In addition, the first half 1997 trading results were negatively impacted by a
mortgage-backed securities trading loss of $1.3 million.
The Company had strong investment banking results in the first half of 1998
evidenced by an increase in revenues of $23.8 million or 108% to $45.8 million
from $22.0 million in the first half of 1997. The improved investment banking
revenues resulted from higher public offering fees and increased fees from
merger and acquisition activities.
Asset management revenues increased $2.4 million or 25% to $11.9 million in the
first six months of 1998 from $9.5 million in the first six months of 1997.
This revenue increase reflected the overall growth in assets under management,
which resulted from both new money added to the funds as well as asset
appreciation arising from equity market performance.
<PAGE> 12
Interest income increased $4.6 million or 22% to $25.8 million in the first six
months of 1998 from $21.2 million in the first six months of 1997, due primarily
to the combination of higher interest income on customer margin balances and
greater stock borrow activity. Interest expense, excluding those expenses
associated with financing the Acquisition, increased $2.2 million or 19% to
$14.0 million in the first half of 1998 from $11.8 million in the comparable
1997 period mainly reflecting higher average inventory balances.
In 1998 the Company has shown considerable improvement in overall productivity,
as well as expense management, evidenced by the increase in operating pre-tax
margin to 11% in the first half of 1998 from 8% in the first half of 1997. On
the expense side, total non-interest expenses increased $43.0 million or 28% to
$198.5 million in the first half of 1998 from $155.5 million in the comparable
1997 period primarily due to higher compensation expenses. The Company
experienced a lower non-compensation expense growth rate of 14% compared to net
revenue growth of 31% in 1998 versus the first six months of 1997.
Compensation and benefits expense increased $36.7 million or 33% to $146.4
million in the six months ended June 30, 1998 from $109.7 million in the same
period in 1997, primarily due to increased incentive and production-related
compensation attributable to higher revenues. Compensation and benefits as a
percentage of net revenues increased to 66% in the first six months of 1998
compared to 65% the first six months of 1997 reflecting aggressive new hiring
in our retail and equity capital markets groups and provisions for non-cash
compensation related to employee stock purchases.
All other operating expenses increased an aggregate of $6.3 million or 14% to
$52.1 million for the first six months of 1998 from $45.8 million in the first
six months of 1997. In addition, all other operating expenses as a percentage
of net revenues declined to 23% in 1998 from 27% in 1997. Promotional expenses
increased $2.0 million or 45% to $6.5 million in the first half of 1998 from
$4.5 million in the comparable 1997 period due to increased spending on research
conferences, advertising, business development and travel in 1998. Other
expenses increased $3.1 million or 22% to $17.3 million for the six months
ended June 30, 1998 from $14.2 million in the comparable 1997 period.
The Company's income tax provisions for the six months ended June 30, 1998
and 1997 were $9.2 million and $4.7 million, respectively, which represented
a 42% effective tax rate in each six month period.
Liquidity and Capital Resources
The Company receives dividends, interest on loans and other payments from its
subsidiaries which are the Company's primary source of funds to pay expenses,
service debt and pay dividends. Distributions and interest payments to the
Company from its registered broker-dealer subsidiaries, which are expected to be
the Company's primary sources of liquidity, are restricted as to amounts which
may be paid by applicable law and regulations. The Net Capital Rules are the
primary regulatory restrictions regarding capital resources
(See Note 5 of the financial statements). The Company's rights to participate in
the assets of any subsidiary are also subject to prior claims of the
subsidiary's creditors, including customers of the broker-dealer subsidiaries.
On April 2, 1998, the Company completed a 7,400,000 share Offering of its Common
Stock, including 4,200,000 shares sold by the Company.
Borrowings under the Credit Agreement were repaid in full with the net proceeds
of the Offering to the Company, leaving the Company with $19.1 million of
indebtedness under a fixed asset credit facility secured by the Company's
fixed assets.
The assets of the Company's primary operating subsidiaries are highly liquid
with the majority of such assets consisting of securities inventories and
collateralized receivables, both of which fluctuate depending on the levels of
customer business. Collateralized receivables consist mainly of securities
purchased under agreements to resell which are secured by U.S. government and
agency securities. A relatively small percentage of total assets is fixed or
held for a period of longer than one year.
The majority of the subsidiaries' assets are financed through Wexford, by
securities sold under repurchase agreements and by securities sold,
not yet purchased. The Company's principal source of short-term financing is
based on its clearing arrangement with Wexford under which the Company can
borrow on an uncommitted collateralized basis against its proprietary inventory
positions. This financing generally is obtained from Wexford at rates based upon
prevailing market conditions. The Company monitors overall liquidity by tracking
the extent to which unencumbered marketable assets exceed short-term unsecured
borrowings.
<PAGE> 13
Repurchase agreements are used primarily for customer accommodation purposes and
to finance the Company's inventory positions in U.S. government and agency
securities. These positions provide products and liquidity for customers and are
not maintained for the Company's investment or market speculation. The level of
activity fluctuates depending on customer needs; however, these fluctuations
have not materially affected liquidity or capital resources. The Company
monitors the collateral position and counterparty risk on these transactions
daily.
The subsidiaries' total assets and short-term liabilities and the individual
components thereof may vary significantly from period to period because of
changes relating to customer needs and economic and market conditions.
The Company's operating activities generate cash resulting from net income
earned during the period and fluctuations in the Company's current assets and
liabilities. The most significant fluctuations have resulted from changes in the
level of customer activity and changes in proprietary arbitrage trading
strategies dictated by prevailing market conditions.
In addition to normal operating requirements, capital is required to satisfy
financing and regulatory requirements on securities inventories and investment
banking commitments. The Company's overall capital needs are continually
reviewed to ensure that its capital base can appropriately support the
anticipated capital needs of the subsidiaries. Management believes that
existing capital funds provided from operations, the current credit arrangements
with Wexford and unutilized credit facilities from banks will be sufficient to
finance the operating subsidiaries' ongoing businesses.
Cash Flows
Cash and cash equivalents at June 30, 1998 and 1997 totaled $9.4 million and
$9.8 million, respectively. For the six months ended June 30, 1998, funds
generated from operating activities of $5.3 million, including net income of
$11.4 million, along with available cash were used primarily for purchases of
fixed assets and the Cleary Gull acquisition.
Net proceeds of approximately $76.7 million from the sale of 4,200,000 shares of
Common Stock in the Offering on April 2, 1998 and available cash were used to
repay the full amount of existing bank debt under the Credit Agreement.
Net cash from operating activities decreased $0.3 million in the six months
ended June 30, 1998 compared with the same period in 1997.
Year 2000 Compliance
The securities industry is, to a significant extent, technologically driven and
dependent. In addition to internally utilized technological applications, the
Company's financial services businesses are materially dependent upon the
performance of exchanges, market centers, counterparties, customers and vendors
(collectively "the Company's material third parties") who, in turn, may be
heavily reliant on technological applications. In sum, the securities industry
is pervasively interdependent with each "link of the chain" strengthened or
weakened by the quality and performance of its attendant information and
embedded technology.
The Company is aware that the Year 2000 provides potential problems with the
programming code in existing computer systems. The "Year 2000 problem" is
extensive and complex as virtually every computer operation will be affected
to some degree by the change of the two digit year value to 00. The issue is
whether computer systems will properly recognize date-sensitive information
when the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or fail.
The failure or faulty performance of computer systems could potentially have a
far ranging impact on the Company's businesses such as a diminution in its
ability to (a) ascertain information vital to strategic decision making by both
the Company and its customers; (b) perform interest rate and pricing
calculations; (c) execute and settle proprietary and customer transactions;
(d) undertake regulatory surveillance and risk management; (e) maintain
accurate books and records and provide timely reports; (f) maintain
appropriate internal financial operation and accounting; and (g) access
credit facilities for both the Company and its customers. Accordingly it is
necessary for the Company, to the extent reasonably practicable, to identify
the internal computer systems and software which are likely to have a
critical impact on its operations, make an assessment of its Year 2000
<PAGE> 14
readiness and modify or replace information and embedded technology as
needed. In addition, the Company must make a Year 2000 readiness assessment
for the Company's material third parties.
In the fourth quarter of 1995, the Company began to strategically assess the
need for renovation, replacement or retirement of all business applications.
This assessment was coincident with the conversion of the Company's principal
broker-dealer subsidiaries to clear securities transactions through Wexford
Clearing Services Corporation ("Wexford"), an unaffiliated broker-dealer.
During the first half of 1996, in connection with the conversion to Wexford, a
substantial portion of all application and vendor code were modified to
be Year 2000 compliant and these changes were tested and verified in 1998 to be
materially effective.
Although Wexford is the contracting party for the provision of clearing
services, it in fact delivers those services through the operations of its
guaranteeing parent company, Prudential Securities Incorporated
("Prudential"), a leading registered broker and dealer. Consequently, it is
the readiness of Prudential that is critical when assessing the Year 2000
compliance of the clearing and operations capacity of the Company's active
broker-dealer subsidiaries. Prudential has been assessed, by internal
industry standards established by the Securities Industry Association, to be
within the top tier of Year 2000 readiness. In recent industry-wide testing
conducted by the Securities Industry Association, in which Prudential took
part, Prudential and other participants were able to input transactions and
send them to the appropriate markets for execution, confirmation and
clearance under simulated Year 2000 conditions.
Additionally, the Company has assessed the state of readiness of all known
technologically oriented service vendors and believes, based on letters of
certification, that the vast majority of these vendors are Year 2000 compliant
with the remainder expected to be compliant by December 1998. This determination
does not mean that the vast majority of the Company's material third parties
pose no Year 2000 risk to the Company. First, the Company is relying in large
measure on these parties' assessments of their readiness. Second, there are
several vendors, which account for a substantial portion of the Company's
mission critical operations, which may be partially or largely, but not fully,
Year 2000 compliant. Finally, certain critical third parties, such as exchanges,
clearing houses, depositories and other service vendors have no direct
functional contact with the Company (as they operate directly with Wexford) but
may impact the Company's operations.
At this juncture the Company is in the process of establishing a strategic plan
for the remainder of its Year 2000 remediation efforts which would include (1)
identification, modification and testing of any remaining non-compliant Year
2000 code; (2) identification, inventory, assessment and, if necessary,
modification of internal ad hoc systems or applications that may be material
to the Company's operations; (3) with the exception of counterparties and
customers, documentation of the assessment of the readiness of the Company's
material third parties; and (4) a timetable for completion of the plan. The
Company intends to complete its written plan by December 1998 while
concomitantly proceeding to assess, and taking measures to enhance, Year 2000
readiness. To date, the Company's Year 2000 costs have been minimal. The
Company believes that, going forward, it will incur Year 2000 costs of
approximately $500,000 which will be funded out of its working capital. Provided
there is an absence of unanticipated critical events, the Company does not
expect Year 2000 costs to have a material effect on its operating results,
financial condition or cash flows.
At this stage the Company has not developed any Year 2000 contingency plans
because of the following reasons: (1) the Company has substantially modified, to
the extent it can ascertain the problem, most mission critical code and
embedded technology; (2) the Company's vendors have represented that they are
either currently Year 2000 compliant or will become so by the second quarter of
1999; (3) there are no alternatives in the event the exchanges or other market
centers fail to perform; and (4) the Company believes it is highly likely that
the factors which may prevent a particular clearing firm from performing would
similarly affect all other clearing firms which would either preclude the
availability of alternative clearing service providers or overwhelm the
resources of surviving alternative clearing service providers. In other words,
the Year 2000 presents a problem which is not likely to be susceptible to
remediation at a future date if it is not fixed in advance. The Company will,
however, continue to consider the viability of a contingency plan.
The Company is cautiously optimistic about its current state of readiness and
its ability to make any further necessary modifications to internal systems in
time for the Year 2000. The Company also believes that its major third party
service provider, Prudential, has undertaken a systematic approach to the
Year 2000 problem and will complete its plan which is designed to achieve a
state of readiness. However, there are factors outside the control of the
Company which make certainty impossible such as: (1) the inability to assess the
readiness of market counterparties and customers; (2) the inability to achieve
assurance as to any material third parties' representations of readiness; (3)
the global exposure of material third parties to Year 2000 problems outside the
<PAGE> 15
United States which have a "knock-on" effect within the domestic securities
markets and operations; and (4) the limitations in anticipating all aspects of
a problem with which there is no prior historical experience. The presence of
any or all of these and other factors may well have a material adverse effect
on the Company's businesses, operating results, financial condition and
cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Yet Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 June 30, 1998, there were 39 lawsuits and
arbitrations pending against the Company and its subsidiaries. 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.
Item 2. Changes in Securities and Use of Proceeds
(c) Unregistered Securities:
During the period covered by this report, the Company issued 6,882 shares upon
exercise of employee stock options in transactions which were exempt as private
placements under section 4(2) of the Securities Act. The Company received
$ 34,596 as proceeds from the exercise of the employee stock options.
During the period covered by this report, the Company issued an aggregate of
889,878 shares of Common Stock to the former owners of Cleary Gull to acquire
their firm in a private placement transaction exempt under section 4(2) of the
Securities Act.
Additionally, the Company issued 876 shares of Common Stock to John Hancock
Subsidiaries, Inc. pursuant to the Additional Share Agreement.
(d) Initial Public Offering:
As previously reported, the effective date of the Form S-1, SEC File
No. 333-44931, Registration Statement, registering 7,400,000 shares (4,200,000
primary shares) of Common Stock of the Company, was April 1, 1998. The date of
commencement of the offering of such registered shares was April 2, 1998. The
Company received the proceeds from the sale of primary shares. The managing
underwriters in the offering were Donaldson, Lufkin & Jenrette Securities
Corporation, Credit Suisse First Boston, Sutro and Tucker Anthony.
Information concerning the registered shares as of the date of this report is
set forth below:
<TABLE>
<S> <C>
Title of Security: Common Stock
Amount Registered: 7,400,000
Aggregate Price of the
Offering Amount Registered: $148,000,000
Amount Sold by the Company: 4,200,000
Aggregate Offering Price of
Amount Sold by the Company: $ 84,000,000
</TABLE>
The expenses incurred by the Company in connection with the issuance and
distribution of the registered shares were as follows:
<TABLE>
<S> <C>
Underwriting Discounts and Commissions: $5,670,000
Other Expenses: 1,596,000
---------
Total $7,266,000
</TABLE>
<PAGE> 16
All of the expenses listed above were direct or indirect payments to others and
not payments to directors, officers, affiliates (except in the case of Tucker
Anthony and Sutro) or 10% stockholders (or their associates) of the Company. The
amount of net offering proceeds to the Company after the total expenses listed
above was approximately $76,734,000. The Company used the proceeds and available
cash to repay $77,500,000 million of existing debt on April 7, 1998 and none of
such payments were made to directors, officers, affiliates or 10% stockholders
(or their associates) of the Company.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Cleary Gull Acquisition
As part of its growth strategy, the Company acquired, during the second quarter
through a merger with a wholly owned subsidiary of the Company, the regional
investment banking firm of Cleary Gull, headquartered in Milwaukee, Wisconsin,
pursuant to an Agreement and Plan of Merger dated March 9, 1998 (the "Merger").
The consideration paid in the Merger was a combination of 889,878 shares of the
Company's Common Stock with a value (valued at a price equal to the Offering
price in the Company's initial public offering) of $17.8 million and $4.4
million in cash. In addition, stock options to purchase shares of Cleary Gull
capital stock with a value of $2.7 million have been converted into options
to purchase the Company's Common Stock. The Company committed to register for
resale the Company's shares issued in connection with the Merger pursuant to a
shelf registration statement. The Company agreed to use its best efforts to
cause the registration statement to become effective on or about 180 days
following the closing date of the Offering. The Company has entered into
employment agreements with Cleary Gull's senior management that became
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are included herein or are incorporated
by reference.
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K - The company filed no reports on Form 8-K during the
quarter ended June 30,1998.
<PAGE> 17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FREEDOM SECURITIES CORPORATION
(REGISTRANT)
DATE: AUGUST 14, 1998 BY: /s/ JOHN H. GOLDSMITH
--------------------------
JOHN H. GOLDSMITH
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
DATE: AUGUST 14, 1998 BY: /s/ WILLIAM C. DENNIS, JR.
--------------------------
WILLIAM C. DENNIS, JR.
CHIEF FINANCIAL OFFICER
<PAGE> 18
EXHIBIT INDEX
-------------
ITEM NO. DESCRIPTION SEQUENTIAL PAGE NO.
-------- ----------- -------------------
11 Computation of Earnings Per Share 20
27 Financial Data Schedule 21
<PAGE> 19
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>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR
Net income before extraordinary item $ 7,635 $ 2,918 $ 12,664 $ 6,411
Extraordinary item 1,276 - 1,276 -
----- ----- ------ -----
Net income after extraordinary item $ 6,359 $ 2,918 $ 11,388 $ 6,411
DENOMINATOR
Weighted average shares
outstanding 19,792 14,244 17,322 14,273
Dilutive effect of:
Stock options and other
exercisable shares 1,398 220 1,156 172
------ ------ ------ ------
Adjusted weighted average shares
outstanding 21,190 14,464 18,478 14,445
Basic earnings per share before
extraordinary item $ 0.39 $ 0.20 $ 0.73 $ 0.45
Less: Extraordinary item (0.07) - (0.07) -
---- ---- ---- ----
Basic earnings per share after
extraordinary item $ 0.32 $ 0.20 $ 0.66 $ 0.45
Diluted earnings per share before
extraordinary item $ 0.36 $ 0.20 $ 0.69 $ 0.44
Less: Extraordinary item (0.06) - (0.07) -
---- ---- ---- ----
Diluted earnings per share after
extraordinary item $ 0.30 $ 0.20 $ 0.62 $ 0.44
==== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<CIK> 0001029267
<NAME> FREEDOM SECURITIES CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,374
<RECEIVABLES> 83,379
<SECURITIES-RESALE> 81,451
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 349,217
<PP&E> 19,722
<TOTAL-ASSETS> 655,466
<SHORT-TERM> 0
<PAYABLES> 175,452
<REPOS-SOLD> 6,846
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 241,372
<LONG-TERM> 19,125
0
0
<COMMON> 200
<OTHER-SE> 212,471
<TOTAL-LIABILITY-AND-EQUITY> 655,466
<TRADING-REVENUE> 50,943
<INTEREST-DIVIDENDS> 25,870
<COMMISSIONS> 94,482
<INVESTMENT-BANKING-REVENUES> 45,759
<FEE-REVENUE> 11,891
<INTEREST-EXPENSE> 15,526
<COMPENSATION> 146,337
<INCOME-PRETAX> 21,834
<INCOME-PRE-EXTRAORDINARY> 12,664
<EXTRAORDINARY> 1,276
<CHANGES> 0
<NET-INCOME> 11,388
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.62
</TABLE>
