<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1998
REGISTRATION NO. 333-44931
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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=================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTRATION
TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
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Common Stock, $.01 par value per
share.............................. 7,705,000 shares $19.00 $146,395,000 $43,187.00
=================================================================================================================================
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(1) Includes an aggregate of 1,005,000 shares which the Underwriters have the
option to purchase from the Selling Stockholders solely to cover
over-allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
(3) $40,710.00 previously paid in connection with the initial filing of this
Registration Statement.
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 MARCH 11, 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
- ----------------------------------------------------------------------------------------------------------------------------
<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
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 55% 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 18% to 19% 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
<PAGE> 7
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...... 19,074,260 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 2,147,523 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 278,974
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."
6
<PAGE> 8
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 years ago 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.
8
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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 from Tucker Anthony clients, primarily located in the northeastern
United States and approximately 35% was generated from Sutro clients, 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.
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 $80 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
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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 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 Company intends to apply for listing of the
Common Stock on the NYSE, there can be no assurance that an active public market
will develop or, if developed, will be sustained following the Offering. See
"Underwriting."
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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 19,074,260 shares of
Common Stock outstanding immediately 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,
17
<PAGE> 19
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."
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.
POTENTIAL 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. Certain conflicts of interest may result from Tucker Antony and Sutro
acting as Underwriters in the Offering. 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 employees of the Company make investments in, or make
investments together with, certain of the Company's clients. See "Certain
Relationships and Related Transactions -- Other Transactions with
Management -- Investment Partnerships." Conflicts of interest could exist in
situations where the interests of such employees are not aligned with 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.
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
18
<PAGE> 20
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".
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, $80 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 day issuances of stock, other than in connection with the Offering,
after December 31, 1997. At December 31, 1997, there were 2,147,523 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 33,633 shares of Common Stock to employees and allocated up
to 9,090 shares for issuance to an other employee 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
additional 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 increased
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.
34
<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.
35
<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 47% 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 53%
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 55% 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 18% to
19% 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
37
<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.
40
<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.
43
<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
44
<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."
46
<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
47
<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
48
<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 Company in 1988 and has served
as Chairman, Director and Chief Executive Officer of the Company, Chief
Executive Officer of Tucker Anthony and Chairman of Sutro since that time. Prior
to joining the 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
Company and promoted to President of Tucker Anthony in 1995. 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 Company and
appointed Chief Executive Officer of Sutro in October 1995. 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.
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
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<PAGE> 52
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 Company in 1994 and has served as
General Counsel and Secretary since that time. Prior to joining the 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., HomeSide, 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 HomeSide, Inc., 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, 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
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<PAGE> 53
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 $400,000.
The following table sets forth certain information regarding the option
grants made during Fiscal 1997 to each of the Company's named executive officers
in the Summary Compensation Table above. The Company issued no stock
appreciation rights in 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------------------- VALUE
PERCENT OF AT ASSUMED ANNUAL
TOTAL RATES
OPTIONS OF STOCK PRICE
NUMBER OF GRANTED TO MARKET APPRECIATION FOR
SECURITIES EMPLOYEES VALUE ON OPTION
UNDERLYING IN EXERCISE OR DATE OF TERM(1)
OPTIONS FISCAL YEAR BASE PRICE GRANT EXPIRATION --------------------
NAME GRANTED (#) (%) ($/SHARE) ($/SHARE) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C> <C>
John H. Goldsmith.... 17,998 5.50 5.50 01/31/07 62,261 157,781
36,542 5.50 5.50 05/31/06 116,014 288,746
------
54,540 2.54
------
William C. Dennis,
Jr................. 11,999 5.50 6.31 05/01/07 41,507 105,186
24,361 5.50 6.31 05/31/06 74,744 184,598
------
36,360 1.69
------
Kevin J. McKay....... 9,599 5.50 5.50 01/31/07 33,206 84,150
19,489 5.50 5.50 05/31/06 61,874 153,998
------
29,088 1.35
------
Robert H. Yevich..... 14,699 5.50 5.50 01/31/07 50,846 128,854
29,842 5.50 5.50 05/31/06 94,745 235,809
------
44,541 2.07
------
John F. Luikart...... 14,699 5.50 5.50 01/31/07 50,846 128,854
29,842 5.50 5.50 05/31/06 94,745 235,809
------
44,541 2.07
------
</TABLE>
- ------------------------------
(1) In accordance with the rules of the Commission, shown are the gains or
"option spreads" that would exist for the respective options granted. These
gains are based on the assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the option was granted over the
full option term. These assumed annual compound rates of stock price
appreciation are mandated by the rules of the Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
53
<PAGE> 55
Year End Option Table. The following table sets forth information
regarding exercise of options and the number and value of options held at
December 31, 1997, by each of the Company's named executive officers in the
Summary Compensation Table above:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS AT MONEY OPTIONS AT
ACQUIRED FISCAL YEAR END FISCAL YEAR-END(1)
ON VALUE ---------------------------- -------------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($) ($)
<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 2,147,523 shares were granted
under the 1996 Plan of which options to purchase 460,430 shares vest based on
time at the rate of 20% per year for five years following the date of grant and
options to purchase 1,687,093 shares vest on the sixth anniversary of the date
of grant, of which options to purchase 934,441 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 2,288,911 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 2,288,911 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 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. 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).......................... 9,693,394 65.7% 2,310,000 7,383,394 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 Plan.
(5) Includes 7,272 shares of Common Stock which Mr. Dennis has the right to
acquire pursuant to the 1996 Stock Plan.
(6) Includes 5,818 shares of Common Stock which Mr. McKay has the right to
acquire pursuant to the 1996 Stock Plan.
(7) Includes 8,908 shares of Common Stock which Mr. Yevich has the right to
acquire pursuant to the 1996 Stock Plan.
(8) Includes 8,908 shares of Common Stock which Mr. Luikart has the right to
acquire pursuant to the 1996 Stock 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. Ball 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 $32,400,000. Approximately
$25,800,000 of the debt was paid with bank financing and approximately
$6,600,000 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, up to 88,609 shares of Common Stock in connection
with the issuance of shares pursuant to any incentive stock plan adopted by the
Company prior to November 29, 1998.
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.
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 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
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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..................................... 160,416 51,593 106,861
Robert H. Yevich................................... 113,065 238,239 26,667
John F. Luikart.................................... 105,194 13,944 70,678
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 19,074,260 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 12,374,260
million 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
19,074,260 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 12,374,260 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
11,698,451 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 12,374,260 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 5,177,035 shares) will be eligible for sale pursuant to
Rule 144(k). In addition, 278,974 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 190,743 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 938,088 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 387,216 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 12,374,260 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.
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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.
Application will be made to list the Common Stock on the NYSE. 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....... 487 4 4,693 4,697
Net income................. 18,698 18,698
Acquisition of treasury
stock.................... (96) (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 $9.7 million which was $8.7 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..... -- -- -- 448
------- ------- ------- -------
Adjusted weighted average shares outstanding...... 14,313 14,313 14,287 14,735
------- ------- ------- -------
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 189,129
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 2,147,523 shares were outstanding, with a weighted-average remaining
contractual life of 8.6 years. At December 31, 1997, options on 278,974 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
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....................................................
Printing expenses...........................................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue sky fees and expenses (including legal fees and
expenses).................................................
Transfer agent and registrar fees and expenses..............
Miscellaneous...............................................
-------------
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.
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 Articles of Organization of the Registrant to be
effective prior to effectiveness of the Registration
Statement
+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 to the Stockholders Agreement, as of March 10,
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>
- ---------------
* To be filed by amendment.
** 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 March , 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 March , 1998
- ------------------------------------------ Executive Officer as well as Chief
John H. Goldsmith Executive Officer of Tucker Anthony
and Chairman of Sutro
/s/ WILLIAM C. DENNIS, JR. Chief Financial Officer March , 1998
- ------------------------------------------
William C. Dennis, Jr.
* Director March , 1998
- ------------------------------------------
David V. Harkins
* Director March , 1998
- ------------------------------------------
C. Hunter Boll
* Director March , 1998
- ------------------------------------------
Thomas M. Hagerty
* Director March , 1998
- ------------------------------------------
Seth W. Lawry
* Director March , 1998
- ------------------------------------------
Winston J. Churchill
* Director March , 1998
- ------------------------------------------
John F. Luikart
* Director March , 1998
- ------------------------------------------
Robert H. Yevich
* Director March , 1998
- ------------------------------------------
Gregory N. Thomas
*By /s/ JOHN H. GOLDSMITH March , 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 Articles of Organization of the Registrant to be
effective prior to effectiveness of the Registration
Statement
+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 to the Stockholders Agreement, as of March
10, 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>
- ---------------
* To be filed by amendment.
** 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 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
FREEDOM SECURITIES CORPORATION
Freedom Securities Corporation, a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY as follows:
The date of filing of its original Certificate of
Incorporation with the Secretary of State of the State of Delaware was
August 29, 1996 and was amended on November 15, 1996 and January 26,
1998.
The Board of Directors of the Corporation, by Unanimous
Written Consent of Directors dated March 10, 1998, duly adopted
resolutions setting forth the Amended and Restated Certificate of
Incorporation herein contained, declaring its advisability and
directing that such Amended and Restated Certificate of Incorporation
be submitted to the holders of the issued and outstanding Common Stock,
$.01 par value ("Common Stock") for approval in accordance with the
applicable provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware and the Corporation's
Certificate of Incorporation, as previously amended. The Amended and
Restated Certificate of Incorporation was duly adopted, after having
been declared advisable by the Board of Directors of the Corporation,
by in excess of a majority of the outstanding shares of Common Stock,
all in accordance with the
<PAGE> 2
applicable provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware and the Corporation's
Certificate of Incorporation.
The text of the Amended and Restated Certificate of
Incorporation of the Corporation, as restated and amended (herein
called the "Restated Certificate of Incorporation") shall read in its
entirety as follows: FIRST: The name of the Corporation shall be:
FREEDOM SECURITIES CORPORATION
SECOND: The registered office of the Corporation in the State of
Delaware is located at 1209 Orange Street, in the City of Wilmington, County of
New Castle, 19801, and its registered agent at such address is The Corporation
Trust Company.
THIRD: The purpose or purposes of the Corporation shall be to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is 61,000,000 shares, which shares shall be divided into
two classes consisting of: (i) 60,000,000 shares of Common Stock (with $.01 par
value per share) ("Common Stock") and (ii) 1,000,000 shares of Preferred Stock
(with $.01 par value per share) ("Blank Check Preferred Stock").
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions of the Common Stock and the
Preferred Stock shall be as follows:
A. COMMON STOCK
1. VOTING RIGHTS. Except as otherwise required by law or this Restated
Certificate of Incorporation, each holder of Common Stock shall have one vote in
respect of each share of Common Stock held by him of record on the books of the
Corporation for the election of directors and on all matters submitted to a vote
of stockholders of the Corporation.
2. DIVIDENDS. The holders of shares of Common Stock shall be entitled
to receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property or in shares of capital stock, subject, however, to the
limitations contained in Part B below.
- 2 -
<PAGE> 3
3. DISSOLUTION, LIQUIDATION OR WINDING UP. After distribution in full
of the preferential amount, if any, to be distributed to the holders of series
of the Blank Check Preferred Stock (in accordance with the relative preferences
among such series) in the event of involuntary liquidation, distribution,
dissolution or winding-up, of the Corporation, the holders of the Common Stock
shall be entitled to receive all of the remaining assets of the Corporation,
tangible and intangible, or whatever kind available for distribution to
stockholders, ratably in proportion to the number of shares of Common Stock held
by them respectively.
B. BLANK CHECK PREFERRED STOCK
1. ISSUANCE. Shares of Blank Check Preferred Stock may be issued from
time to time in one or more series as may from time to time be determined by the
Board of Directors, each of said series to be distinctly designated. All shares
of any one series of the Blank Check Preferred Stock shall be alike in every
particular, except that there may be different dates from which dividends, if
any, thereon shall be cumulative, if made cumulative. The voting powers, if any,
and the designations, relative preferences, participating, optional or other
special rights or privileges of each such series, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time outstanding.
2. AUTHORITY OF THE BOARD OF DIRECTORS. The Board of Directors is
authorized, subject to limitations prescribed by law and the provisions of this
Article FOURTH, to provide for the issuance of the shares of the Blank Check
Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix in the
resolution or resolutions providing for the issue of such stock adopted by the
Board of Directors of the Corporation the voting powers, if any, and the
designations, relative preferences, participating, optional or other special
rights or privileges, and the qualifications, limitations or restrictions of
such series, including, but without limiting the generality of the foregoing,
the following:
(a) The distinctive designation of, and the number of shares
of the Blank Check Preferred Stock which shall constitute such
series. The designation of a series of preferred stock need
not include the words "preferred" or "preference" and may be
designated "special" or other distinctive term. Unless
otherwise provided in the resolution issuing such series, the
number of shares of any series of the Blank Check Preferred
Stock may be increased or decreased (but not below the number
of shares thereof then outstanding) by the Board of Directors
in the manner prescribed by law;
(b) The rate and times at which, and the terms and conditions
upon which, dividends, if any, on the Blank Check Preferred
Stock of such series shall be paid, the extent of the
preference or relation, if any, of such dividends to the
- 3 -
<PAGE> 4
dividends payable on any other class or classes, or series of
the same or other classes of stock and whether such dividends
shall be cumulative or non-cumulative and, if cumulative, the
date from which such dividends shall be cumulative;
(c) Whether the series shall be convertible into, or
exchangeable for, at the option of the holders of the Blank
Check Preferred Stock of such series or the Corporation or
upon the happening of a specified event, shares of any other
class or classes or any other series of the same or any other
class or classes of stock of the Corporation, and the terms
and conditions of such conversion or exchange, including
provisions for the adjustment of any such conversion rate in
such events as the Board of Directors shall determine;
(d) Whether or not the Blank Check Preferred Stock of such
series shall be subject to redemption at the option of the
Corporation or the holders of such series or upon the
happening of a specified event, and the redemption price or
prices and the time or times at which, and the terms and
conditions upon which, the Blank Check Preferred Stock of such
series may be redeemed;
(e) The rights, if any, of the holders of the Blank Check
Preferred Stock of such series upon the voluntary or
involuntary liquidation, merger, consolidation, distribution
or sale of assets, dissolution or winding-up, of the
Corporation;
(f) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for the Blank Check Preferred
Stock of such series; and
(g) Subject to subparagraph 5 of Paragraph C hereof, whether
such series of the Blank Check Preferred Stock shall have
full, limited or no voting powers including, without limiting
the generality of the foregoing, whether such series shall
have the right, voting as a series by itself or together with
other series of the Blank Check Preferred Stock or all series
of the Blank Check Preferred Stock as a class, to elect one or
more directors of the Corporation if there shall have been a
default in the payment of dividends on any one or more series
of the Blank Check Preferred Stock or under such other
circumstances and on such conditions as the Board of Directors
may determine.
C. OTHER PROVISIONS.
1. No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series or any
additional shares of any class or series to be issued by
- 4 -
<PAGE> 5
reason of any increase of the authorized capital stock of the Corporation of any
class or series, or bonds, certificates of indebtedness, debentures or other
securities convertible into or exchangeable for stock of the Corporation of any
class or series, or carrying any right to purchase stock of any class or series,
but any such unissued stock, additional authorized issue of shares of any class
or series of stock or securities convertible into or exchangeable for stock, or
carrying any right to purchase stock, may be issued and disposed of pursuant to
resolution of the Board of Directors to such persons, firms, corporations or
associations (including such holders or others) and upon such terms as may be
deemed advisable by the Board of Directors in the exercise of its sole
discretion.
2. The relative powers, preferences and rights of each series of the
Blank Check Preferred Stock in relation to the powers, preferences and rights of
each other series of the Blank Check Preferred Stock shall, in each case, be as
fixed from time to time by the Board of Directors in the resolution or
resolutions adopted pursuant to authority granted in Paragraph B hereof. The
consent, by class or series vote or otherwise, of the holders of such of the
series of the Blank Check Preferred Stock as are from time to time outstanding
shall not be required for the issuance by the Board of Directors of any other
series of the Blank Check Preferred Stock whether or not the powers, preferences
and rights of such other series shall be fixed by the Board of Directors as
senior to, or on a parity with, the powers, preferences and rights of such
outstanding series, or any of them; provided, however, that the Board of
Directors may provide in the resolution or resolutions as to any series of the
Blank Check Preferred Stock adopted pursuant to Paragraph B hereof, the
conditions, if any, under which the consent of the holders of a majority (or
such greater proportion as shall be fixed therein) of the outstanding shares of
such series shall be required for the issuance of any or all other series of the
Blank Check Preferred Stock.
3. Subject to the provisions of subparagraph 2 of this Paragraph C,
shares of any series of the Blank Check Preferred Stock may be issued from time
to time as the Board of Directors of the Corporation shall determine and on such
terms and for such consideration as shall be fixed by the Board of Directors.
4. Shares of authorized Common Stock may be issued from time to time as
the Board of Directors of the Corporation shall determine and on such terms and
for such consideration as shall be fixed by the Board of Directors.
5. The number of authorized shares of Common Stock and of the Blank
Check Preferred Stock, without a class or series vote, may be increased or
decreased from time to time (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the stock
of the Corporation entitled to vote thereon.
- 5 -
<PAGE> 6
FIFTH:
A. NUMBER, ELECTION AND TERMS OF DIRECTORS. The number of directors
shall be fixed from time to time exclusively by the Board of Directors pursuant
to a resolution adopted by the Board of Directors.
B. REMOVAL. Any Director or the entire Board of Directors may be
removed with or without cause by the holders of a majority of the shares then
entitled to vote at an election of Directors, or a majority vote of the Board of
Directors.
C. AMENDMENT, REPEAL OR ALTERATION. Notwithstanding any other
provisions of the Restated Certificate of Incorporation or the Restated By-Laws
of the Corporation or the fact that a lesser percentage may be specified by law,
the affirmative vote of the holders of greater than fifty percent (50%) of the
combined voting power of the outstanding stock of the Corporation entitled to
vote generally in the election of Directors, voting together as a single class,
shall be required to amend, alter, adopt any provision inconsistent with or to
repeal this Article FIFTH.
SIXTH: The Corporation hereby affirmatively elects in this Restated
Certificate of Incorporation to be governed by Section 203 of the General
Corporation Law of Delaware.
SEVENTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
EIGHTH: No director shall be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a director
notwithstanding
- 6 -
<PAGE> 7
any provision of law imposing such liability; PROVIDED that, to the extent
provided by applicable law, this provision shall not eliminate the liability of
a director (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit. No
amendment to or repeal of this provision shall apply to or have any effect on
the liability or alleged liability of any director for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
NINTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware.
A. The Board of Directors of the Corporation is expressly authorized to
adopt, amend, or repeal the By-laws of the Corporation.
B. Elections of directors need not be by written ballot unless the
By-laws of the Corporation shall so provide.
C. The books of the Corporation may be kept at such place within or
without the State of Delaware as the By-laws of the Corporation may provide or
as may be designated from time to time by the Board of Directors of the
Corporation.
TENTH: Except as otherwise stated elsewhere in this Restated
Certificate of Incorporation, the Corporation reserves the right to amend or
repeal any provision contained in this Restated Certificate of Incorporation, in
the manner now or hereafter prescribed by statute, and all rights conferred upon
a stockholder herein are granted subject to this reservation.
ELEVENTH: The Corporation is to have perpetual existence.
[Remainder of Page Intentionally Left Blank]
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, Freedom Securities Corporation has caused this
Restated Certificate of Incorporation to be signed by William C. Dennis, Jr.,
its Chief Financial Officer, who hereby acknowledges under penalties of perjury
that the facts herein stated are true and that this Restated Certificate of
Incorporation is his act and deed, as of the ___ day of March, 1998.
Freedom Securities Corporation
By:
------------------------------
Name: William C. Dennis, Jr.
Title: Chief Financial Officer
- 8 -
<PAGE> 1
EXHIBIT 10.20
AGREEMENT AND PLAN OF MERGER
by and among
FREEDOM SECURITIES CORPORATION,
a Delaware corporation,
CGRM MERGER CORP.,
a Delaware corporation,
and
CLEARY GULL REILAND & MCDEVITT INC.,
a Delaware corporation
Dated as of March 9, 1998
<PAGE> 2
TABLE OF CONTENTS
Page
----
ARTICLE I
THE MERGER
1.1. The Merger............................................................. 1
1.2. Closing................................................................ 2
1.3. Effective Time of the Merger........................................... 2
1.4. Effects of the Merger.................................................. 2
1.5. Certificate of Incorporation; By-Laws.................................. 2
1.6. Directors.............................................................. 2
1.7. Officers............................................................... 3
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS
2.1. Effect on Capital Stock................................................ 3
2.2. Distribution of Merger Consideration................................... 5
2.3. Post Closing Adjustment of Merger Consideration........................ 6
2.4. Stock Plans............................................................ 8
2.5. Escrow Shares.......................................................... 8
2.6. Fractional Shares...................................................... 9
2.7. Tax Consequences....................................................... 10
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1. Organization, Standing and Corporate Power............................. 10
3.2. Subsidiaries........................................................... 10
3.3. Capital Structure...................................................... 10
3.4. Authority; Noncontravention............................................ 11
3.5. Financial Statements................................................... 12
3.6. Absence of Undisclosed Liabilities..................................... 13
3.7. Absence of Certain Changes or Events................................... 13
3.8. Litigation; Labor Matters; Compliance with Laws........................ 13
3.9. Employee Benefit Plans................................................. 14
3.10. Tax Returns and Tax Payments 17
- i -
<PAGE> 3
3.11. Medical Contracts .................................................. 18
3.12. Brokers ............................................................ 18
3.13. Board Recommendation ............................................... 18
3.14. Required Company Vote .............................................. 18
3.15. State Takeover Statutes ............................................ 19
3.16. Intellectual Property .............................................. 19
3.17. Related Party Transactions ......................................... 19
3.18. Brokerage Clients .................................................. 19
3.19. Investment Advisory Clients ........................................ 20
3.20. Investment Fund Clients ............................................ 20
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
FREEDOM SECURITIES AND MERGER SUB
4.1. Corporate Organization ............................................. 21
4.2. Qualification to do Business ....................................... 21
4.3. Corporate Power .................................................... 21
4.4. Corporate Authority ................................................ 21
4.5. Authorization for Freedom Securities Common Shares and Options ..... 21
4.6. Consents and Approvals; No Violation ............................... 22
4.7. Absence of Certain Changes or Events ............................... 22
4.8. Private Placement .................................................. 22
4.9. Capital Structure .................................................. 22
4.10. Corporate Approvals ................................................ 23
4.11. SEC Filings ........................................................ 23
4.12. Financial Statements ............................................... 23
4.13. No Adverse Change .................................................. 24
4.14. Litigation; Compliance with Laws ................................... 24
4.15. Brokers ............................................................ 24
4.16. Ineligible Persons ................................................. 24
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER
5.1. Conduct of Business of the Company ................................. 25
5.2. Changes in Employment Arrangements ................................. 27
5.3. Severance .......................................................... 27
5.4. WARN ............................................................... 27
5.5. Tax Elections ...................................................... 28
5.6. Conduct of Business by Freedom Securities Pending the Merger ....... 28
- ii -
<PAGE> 4
5.7. Control of the Company's Business .................................. 28
5.8. Control of Freedom Securities' Business ............................ 28
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1. Access to Information; Confidentiality ............................. 29
6.2. Best Efforts ....................................................... 29
6.3. Registration on Form S-1 ........................................... 30
6.4. Public Announcements ............................................... 30
6.5. No Solicitation .................................................... 30
6.6. Election of Director ............................................... 31
6.7. Directors' and Officers' Indemnification ........................... 31
6.8. Freedom Securities Benefit Plans ................................... 31
6.9. Freedom Securities Options ......................................... 31
6.10. Options ............................................................ 32
6.11. Company Bonus Plan ................................................. 32
6.12. Capitalization ..................................................... 33
6.13. Tax Matters ........................................................ 33
ARTICLE VII
CONDITIONS PRECEDENT
7.1. Conditions to Each Party's Obligation .............................. 34
7.2. Conditions to Obligations of Freedom Securities and Merger Sub ..... 35
7.3. Conditions to Obligation of the Company ............................ 36
ARTICLE VIII
INDEMNIFICATION
8.1. Survival of Representations and Warranties ......................... 36
8.2. Indemnification .................................................... 37
8.3. Procedures for Indemnification ..................................... 37
8.4. Net Benefits ....................................................... 37
8.5. Basket; Maximum Amount ............................................. 38
- iii -
<PAGE> 5
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1. Termination ........................................................ 38
9.2. Effect of Termination .............................................. 39
9.3. Amendment .......................................................... 39
9.4. Extension; Waiver .................................................. 39
9.5. Procedure for Termination, Amendment, Extension or Waiver .......... 39
ARTICLE X
GENERAL PROVISIONS
10.1. Fees and Expenses .................................................. 39
10.2. Notices ............................................................ 39
10.3. Definitions ........................................................ 40
10.4. Interpretation ..................................................... 41
10.5. Counterparts ....................................................... 41
10.6. Entire Agreement; No Third-Party Benefits .......................... 41
10.7. Governing Law ...................................................... 41
10.8. Assignment ......................................................... 41
10.9. Enforcement ........................................................ 42
INDEX OF SCHEDULES
Schedule 1.6: Directors
Schedule 1.7: Officers
Schedule 2.5(a): Indemnity Escrow Fund
Schedule 3.1: Organization, Standing and Corporate Power
Schedule 3.2: Subsidiaries
Schedule 3.3: Capital Structure
Schedule 3.4: Authority; Noncontravention
Schedule 3.6: Absence of Undisclosed Liabilities
Schedule 3.7: Absence of Certain Changes or Events
Schedule 3.8: Litigation; Labor Matters; Compliance with Laws
Schedule 3.9: Employee Benefit Plans
Schedule 3.10: Tax Returns and Tax Payments
Schedule 3.11: Material Contracts
Schedule 3.17: Related Party Transactions
Schedule 3.18: Brokerage Clients
Schedule 5.1: Conduct of Business of the Company
Schedule 8.2: Indemnification
- iv -
<PAGE> 6
INDEX OF EXHIBITS
Exhibit A: Certificate of Incorporation of Merger Sub (Section 1.5(a))
Exhibit B: By-laws of Merger Sub (Section 1.5(b))
Exhibit C: Escrow Agreement (Section 2.1(e))
Exhibit D: Indemnification Agreement (Section 2.5(a))
Exhibit E: Registration Rights (Section 6.3)
- v -
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of March 9, 1998, by and among
Freedom Securities Corporation ("Freedom Securities"), a Delaware corporation,
CGRM Merger Corp., a Delaware corporation and a wholly owned subsidiary of
Freedom Securities ("Merger Sub"), and Cleary Gull Reiland and McDevitt Inc., a
Delaware corporation (the "Company").
WHEREAS, the respective Boards of Directors of the Company, Freedom
Securities and Merger Sub have determined that the merger of the Company with
and into Merger Sub (the "Merger"), upon the terms and subject to the conditions
set forth in this Agreement, would be advisable and in the best interests of
their respective companies and stockholders, and such Boards of Directors have
approved such Merger, pursuant to which holders of shares of Class A and Class B
common stock, par value $1.00 per share, of the Company ("Company Common Stock")
issued and outstanding immediately prior to the Effective Time will be entitled
to receive, in the aggregate, subject to the terms hereof, a number of shares of
common stock, $.01 par value per share, of Freedom Securities ("Freedom
Securities Common Stock") equal to $17,600,000 divided by the Stock Price (as
defined herein) and $4,400,000, and the outstanding options to acquire shares of
Company Common Stock will be converted into the right to receive options to
acquire shares of Freedom Securities Common Stock;
WHEREAS, the Merger and this Agreement require the vote of a majority of
the issued and outstanding shares of the Company's Class A Common Stock for the
approval thereof (the "Company Stockholder Approval");
WHEREAS, Freedom Securities, Merger Sub and the Company desire to make
certain representations, warranties, covenants and agreements in connection with
the Merger and also to prescribe various conditions to the Merger; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to the terms and conditions of this Agreement, at
the Effective Time (as hereinafter defined), the Company and Merger Sub shall
consummate the Merger in which (i) the Company shall be merged with and into
Merger Sub and the separate corporate existence of the Company shall thereupon
cease, (ii) Merger Sub shall be the
<PAGE> 8
successor or surviving corporation in the Merger and shall continue to be
governed by the laws of the State of Delaware and (iii) the separate corporate
existence of Merger Sub with all its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Merger. The corporation surviving
the Merger is sometimes hereinafter referred to as the "Surviving Corporation".
The Merger shall have the effects specified in the Delaware General Corporation
Law (the "DGCL").
1.2 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
9.1 and subject to the satisfaction or waiver of the conditions set forth in
Article VII, the closing of the Merger (the "Closing") will take place at 10:00
a.m. on the business day following satisfaction or waiver of the conditions set
forth in Article VII (the "Closing Date"), at the offices of Hutchins, Wheeler &
Dittmar, 101 Federal Street, Boston, Massachusetts, unless another date, time or
place is agreed to in writing by the parties hereto.
1.3 EFFECTIVE TIME. On the Closing Date, the parties shall file a
certificate of merger and other appropriate documents (the "Certificate of
Merger") executed in accordance with the relevant provisions of the DGCL and
shall make all other filings or recordings required under the DGCL in connection
with the Merger. The Merger shall become effective at such time as the
Certificate of Merger is duly filed with the Secretary of State of the State of
Delaware, or at such other time as is specified in the Certificate of Merger in
accordance with the DGCL and as the Company, Freedom Securities and Merger Sub
shall agree should be specified in the Certificate of Merger (the time the
Merger becomes effective being the "Effective Time"). At the Effective Time,
Merger Sub will file the appropriate documents with the Secretary of State of
the State of Delaware to change the name of the Surviving Corporation to "Cleary
Gull Reiland & McDevitt Inc."
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the DGCL.
1.5 CERTIFICATE OF INCORPORATION; BY-LAWS.
(a) The Certificate of Incorporation of Merger Sub as in effect
immediately prior to the Effective Time, a copy of which is attached hereto as
EXHIBIT A, shall be the Certificate of Incorporation of Merger Sub as the
Surviving Corporation following the Merger, until thereafter amended as provided
therein and under the DGCL.
(b) The By-laws of Merger Sub as in effect at the Effective Time, a
copy of which is attached hereto as EXHIBIT B, shall be the By-laws of Surviving
Corporation following the Merger until thereafter changed or amended as provided
therein or by applicable law.
1.6 DIRECTORS. Those persons listed on SCHEDULE 1.6 hereto shall be the
initial directors of Merger Sub following the Merger, until the earlier of their
resignation or removal
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or until their respective successors are duly elected and qualified, as the case
may be; it being agreed that the Chief Financial Officer and General Counsel of
Freedom Securities shall have the right to attend any meetings of the Board of
Directors of the Surviving Corporation. If, at any time prior to the third
anniversary of the Effective Time, any one or more of David P. Prokupek, John R.
Peterson or the third person to be named by the Company prior to the Closing
Date or their successors as hereinafter described (collectively, the "Cleary
Gull Directors") are unable or unwilling to serve or are removed as a director
of the Surviving Corporation, Freedom Securities agrees to cause to be elected
or appointed to the Board of Directors of the Surviving Corporation, an
individual or individuals named by those Cleary Gull Director(s) who continue to
serve from time to time on such Board of Directors to serve as a director or
directors of the Surviving Corporation and such individual or individuals shall
then be one or more of the Cleary Gull Directors. It is the intent of the
parties hereto that prior to the third anniversary of the Effective Time the
Board of Directors of the Surviving Corporation shall consist of at least three
members who were employees or directors of the Company prior to the Effective
Time or individuals who were named to serve on the Surviving Corporation's Board
of Directors by one or more of such employees or directors. The Board of
Directors of the Surviving Corporation shall initially consist of five members
and Freedom Securities agrees that the Board of Directors of the Surviving
Corporation shall at all times prior to the third anniversary of the Effective
Time consist of at least three members, it being understood that the Board of
Directors of the Surviving Corporation may, at any time, be expanded in the sole
discretion of Freedom Securities.
1.7 OFFICERS. Those persons listed on SCHEDULE 1.7 shall be the officers
of Merger Sub following the Merger, until the earlier of their resignation or
removal or until their respective successors are duly elected and qualified, as
the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS
2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of Company
Common Stock or any shares of capital stock of Merger Sub or Freedom Securities:
(a) Common Stock of Merger Sub. Each share of common stock of Merger
Sub issued and outstanding immediately prior to the Effective Time shall remain
issued and outstanding.
(b) Cancellation of Treasury Stock. Each share of Company Common Stock
owned by the Company shall automatically be canceled and retired and shall cease
to exist, and no cash or other consideration shall be delivered or deliverable
in exchange therefor.
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(c) Conversion of Company Common Stock. Other than Dissenting Shares
(as defined in Section 2.1(e)) and subject to Section 2.3 below, the issued and
outstanding shares of Company Common Stock shall be converted into an aggregate
of $4,400,000 (the "Total Cash Consideration") and a number of shares of Freedom
Securities Common Stock (the "Total Stock Consideration") equal to $17,600,000
divided by the Stock Price (as defined below). The Total Cash Consideration and
the Total Stock Consideration is collectively referred to as the "Merger
Consideration."
(d) Valuation. Each share of Freedom Securities Common Stock shall be
ascribed a value (the "Stock Price") equal to the per share price at which
shares of Freedom Securities Common Stock are sold to the public in connection
with the initial public offering (the "IPO") of shares of Freedom Securities
Common Stock. The holders of Company Common Stock shall be entitled to receive
with respect to each share of Company Common Stock a combination of shares of
Freedom Securities Common Stock and cash equal to the quotient of (A) (x) the
Total Cash Consideration plus (y) the Total Stock Consideration multiplied by
the Stock Price divided by (B) the total number of outstanding shares of Company
Common Stock at the Effective Time (such quotient being referred to as the "Per
Share Consideration"), subject to the provisions of Sections 2.1(e), 2.2 and
2.3.
(e) Dissenting Shares. Notwithstanding anything in this Agreement to
the contrary, shares of Company Common Stock issued and outstanding immediately
prior to the Effective Time held by a holder who has exercised the right to
demand payment for and an appraisal of such shares in accordance with Section
262 of the DGCL (or any successor provision) ("Dissenting Shares") shall not be
converted into the right to receive any portion of the Merger Consideration
unless such holder fails to perfect or otherwise withdraws, forfeits or loses
such holder's right to such payment or appraisal, if any. If there are any
Dissenting Shares at the Effective Time, an amount of cash shall be placed in
escrow equal to the number of Dissenting Shares multiplied by $175.00 (the
"Dissenting Share Amount") pursuant to the Escrow Agreement attached hereto as
EXHIBIT C (the "Escrow Agreement"). If, after the Effective Time, such holder
fails to perfect or withdraws, forfeits or loses any such right to appraisal,
each share of such holder shall be treated as a share of Company Common Stock
that had been converted as of the Effective Time into the right to receive the
Per Share Consideration in accordance with this Section 2.1. The Company shall
give prompt notice to Freedom Securities of any demands received by the Company
for appraisal of shares of Company Common Stock, and Freedom Securities shall
have the right to participate in all negotiations and proceedings with respect
to such demands. The Company shall not, except with the prior written consent of
Freedom Securities, which consent shall not be unreasonably withheld, make any
payment with respect to, or settle or offer to settle, any such demands.
(f) Cancellation and Retirement of Company Common Stock. As of the
Effective Time, all shares of Company Common Stock issued and outstanding
immediately prior to the Effective Time shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each holder
of a Certificate representing any such
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<PAGE> 11
shares of Company Common Stock shall, to the extent such Certificate represents
such shares, cease to have any rights with respect thereto, except the right to
receive the Merger Consideration applicable thereto, upon surrender of such
Certificate on the Closing Date.
2.2 DISTRIBUTION OF MERGER CONSIDERATION.
(a) For purposes of this Section 2.2, the following terms shall be
defined as follows:
(i) "Cash Out Amount" shall mean the aggregate amount of cash paid
to the Minority Stockholders (as defined below) pursuant to Section 2.2(b);
(ii) "Total Adjusted Cash Consideration" shall mean the Total Cash
Consideration minus the Dissenting Share Cash Amount and minus $500,000;
(iii) "Adjusted Merger Consideration" shall mean the Total
Adjusted Cash Consideration plus Total Stock Consideration;
(iv) "Adjusted Per Share Consideration" shall mean (i) the
Adjusted Merger Consideration divided by (ii)(A) the number of shares of
Company Common Stock outstanding at the Effective Time minus (B) the number
of Dissenting Shares; and
(v) "Remaining Cash" shall mean the Total Adjusted Cash
Consideration minus the Cash Out Amount.
(b) Each holder of Company Common Stock who owns two hundred fifty
(250) or fewer shares of Company Common Stock (each, a "Minority Stockholder")
shall receive on the Closing Date an amount of cash equal to the Adjusted Per
Share Consideration multiplied by the number of shares of Company Common Stock
held by such Minority Stockholder at the Effective Time ("Minority Shares").
(c) Each holder of Company Common Stock who is not a Minority
Stockholder or a holder of Dissenting Shares (a "Holder") shall receive on the
Closing Date:
(i) an amount of cash equal to such Holder's Allocable Percentage
(as defined below) multiplied by the Remaining Cash; and
(ii) a number of shares of Freedom Securities Common Stock equal
to such Holder's Allocable Percentage multiplied by the Total Stock
Consideration divided by the Stock Price.
For purposes of this Section 2, "Allocable Percentage" shall mean the quotient
of (A) the shares of Company Common Stock owned at the Effective Time by a
Holder divided by
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(B) the total number of outstanding shares of Company Common Stock at the
Effective Time minus the sum of (x) the aggregate number of Dissenting Shares
and (y) the aggregate number of Minority Shares.
(d) Notwithstanding Section 2.2(c) above, the Holders may, not
later than two business days prior to the Closing Date, reallocate the
distribution of the Merger Consideration among themselves with the consent of
Freedom Securities, which consent shall not be unreasonably withheld.
2.3 POST CLOSING ADJUSTMENT OF MERGER CONSIDERATION.
(a) The Merger Consideration shall be adjusted by:
(i) Adding thereto the amount by which the Closing Date Net Worth
(as hereinafter defined) exceeds Eight Million Two Hundred Thousand Dollars
($8,200,000); or
(ii) Subtracting therefrom the amount by which the Closing Date
Net Worth is less than Eight Million Two Hundred Thousand Dollars
($8,200,000).
(b) For purposes hereof, the "Closing Date Net Worth" shall mean an
amount equal to the difference between (A) the book value of all assets of the
Company as reflected on the balance sheet of the Company as of the Closing Date
(the "Closing Date Balance Sheet"); and (B) the book value of all liabilities of
the Company reflected on the Closing Date Balance Sheet. Except as provided
herein, the Closing Date Balance Sheet shall be prepared in accordance with
generally accepted accounting principles and the Company's past practice.
Notwithstanding the foregoing, for purposes of determining the amount of the
adjustment to the Merger Consideration, the Closing Date Balance Sheet shall
reflect: (v) the value of the shares of NationPage, Inc. ("NationPage") common
stock owned by the Company on the Closing Date Balance Sheet as $360,000; (w) a
benefit on the Closing Date Balance Sheet attributable to the net income of the
Company for the quarter ending March 31, 1998 of not more than $170,000; (x) the
sale of shares of Company Common Stock to employees of the Company after the
date of this Agreement and prior to the Closing Date, including any deferred tax
asset, reduction in taxes payable or tax refund receivable (a "Tax Benefit") as
a result of any such sales occurring at a price per share less than the Per
Share Consideration; (y) an accrual of 75% of any Tax Benefit that would have
been recorded if restricted shares of Company Common Stock previously granted or
issued to employees of the Company become vested and had a fair market value
equal to the Per Share Consideration as of the day before the Closing Date; and
(z) the fair market value of any investments of the Company as of the Closing
Date.
(c) The Company shall prepare and deliver to Freedom Securities the
Closing Date Balance Sheet within thirty (30) days of the Closing Date. There
shall
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accompany the Closing Date Balance Sheet a statement (the "Statement") by the
Chief Financial Officer of the Company setting forth the final determination of
the Closing Date Net Worth and the resulting adjustment to the Merger
Consideration, if any. Freedom Securities shall have thirty (30) days after
delivery of the Statement to notify the Company in writing of any discrepancy or
disagreement with the Statement. If no objection is made during such thirty (30)
day period, the Statement and the resulting calculation of the adjusted Merger
Consideration shall be deemed to be accepted in the form presented to Freedom
Securities. If Freedom Securities provides such notice and the parties cannot
agree upon the Statement within ten (10) days after the date of such notice, the
dispute shall be submitted to Coopers & Lybrand LLP (Chicago office) (or such
other firm as is acceptable to the Company and Freedom Securities) (the
"Independent Accounting Firm") for determination in light of the terms and
provisions of this Section 2.3. The determination of the Independent Accounting
Firm shall be made as promptly as practicable and shall be binding on the
parties hereto for all purposes hereof. The fees and expenses of the Independent
Accounting Firm shall be paid by the parties hereto as follows: (i) Freedom
Securities shall pay an amount equal to the product of the total amount of such
fees and expenses multiplied by the amount determined by dividing (x) the
difference between the Closing Date Net Worth calculated by Freedom Securities
(the "Freedom Securities Calculation") and the Closing Date Net Worth determined
by the Independent Accounting Firm, by (y) the difference between the Closing
Date Net Worth on the Statement and the Freedom Securities Calculation and (ii)
the Company shall pay the balance of such fees and expenses. Any payment
obligations allocated to the Company hereunder shall be paid from the Shortfall
Escrow Fund established pursuant to Section 2.5(c).
(d) In the event the adjusted Merger Consideration determined pursuant
to this Section 2.3 exceeds the original Merger Consideration, the amount of
such excess (the "Excess Merger Consideration") shall be converted into (A) a
number of shares of Freedom Securities Common Stock equal to the product
obtained by multiplying the amount of the Excess Merger Consideration by 80% and
dividing such product by the Stock Price (the "Excess Stock Consideration"), and
(B) an amount of cash equal to the product obtained by multiplying the amount of
the Excess Merger Consideration by 20% (the "Excess Cash Consideration"). For
purposes hereof, "Excess Per Share Consideration" shall mean the Excess Merger
Consideration divided by the total number of shares of Company Common Stock
outstanding at the Effective Time minus the aggregate number of Dissenting
Shares.
(e) Each Minority Stockholder shall receive an amount of cash equal to
the Excess Per Share Consideration multiplied by the number of his or her
Minority Shares. Each Holder shall receive (i) an amount of cash equal to such
Holder's Allocable Percentage multiplied by the Remaining Excess Cash
Consideration (as defined below) and (ii) a number of shares of Freedom
Securities Common Stock equal to such Holder's Allocable Percentage multiplied
by the Excess Stock Consideration. For purposes hereof, "Remaining Excess Cash
Consideration" shall mean the Excess Cash Consideration minus the amount of
Excess Cash Consideration paid to the Minority Stockholders. Any additional
shares of Freedom Securities
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<PAGE> 14
Common Stock shall be issued and cash distributed to the holders of Company
Common Stock within ten (10) days after the final determination of the Closing
Date Net Worth.
(f) In the event the original Merger Consideration exceeds the
adjusted Merger Consideration (the "Shortfall"), the amount of such Shortfall
shall be paid to Freedom Securities from the cash held in the Shortfall Escrow
Fund pursuant to Section 2.5(c) and the balance of the cash held in the
Shortfall Escrow Fund, if any, shall continue to be held in accordance with the
Escrow Agreement.
2.4 STOCK PLANS.
(a) As soon as practicable following the date of this Agreement, the
Board of Directors of the Company shall adopt such resolutions or take such
other actions as may be required to effect the following:
(i) deliver written notice at least 30 days prior to the Effective
Time to each holder of an employee stock option to purchase shares of
Company Common Stock granted under the 1996 Executive Stock Option Plan
(the "Stock Plan" and the options issued thereunder the "Options"), to the
effect that at the Effective Time each Option that shall remain unexercised
and outstanding immediately prior to the Effective Time shall be converted
into options to purchase shares of Freedom Securities Common Stock
("Freedom Options") pursuant to Freedom Securities' 1998 Stock Option Plan
in accordance with Section 6.10;
(ii) prior to the Effective Time, make any adjustments to the
terms of the Options that may be necessary to effect the transaction
contemplated in Section 2.4(a)(i) above; and
(iii) except as provided herein or otherwise agreed to by the
parties, cause the Stock Plan and any other plan, program or arrangement
providing for the issuance or grant of any other interest in respect of the
Company Common Stock to terminate as of the Effective Time.
(b) The Company hereby represents and warrants that upon taking of the
actions specified above, immediately following the Effective Time, no holder of
an Option nor any participant in the Stock Plan shall have the right thereunder
to acquire equity securities of the Company after the Merger.
2.5 ESCROW FUNDS.
(a) Indemnity/Share Retention Escrow Fund. Each holder of Company
Common Stock listed on SCHEDULE 2.5(a) hereto shall place a number of shares of
Freedom Securities Common Stock determined by dividing the dollar amount
indicated opposite his
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<PAGE> 15
name on SCHEDULE 2.5(a) by the Stock Price in an escrow fund (the
"Indemnity/Share Retention Fund") to be governed by the terms of the Escrow
Agreement. Subject to the terms of the Indemnification Agreement attached hereto
as EXHIBIT D (the "Indemnification Agreement"), the parties hereto acknowledge
and agree that the shares of Freedom Securities Common Stock held in the
Indemnity/Share Retention Fund shall be treated at all times for federal and
state income tax purposes as a portion of the Merger Consideration and Freedom
Securities agrees to take positions on all of its tax returns consistent with
the treatment of such shares as part of the Merger Consideration.
(b) Dissenting Share Escrow Fund. If there are any Dissenting Shares
pursuant to Section 2.1(e) hereof, the Company shall place the Dissenting Share
Cash Amount in an escrow fund to be governed by the terms of the Escrow
Agreement.
(c) Shortfall Escrow Fund. Immediately prior to the Effective Time,
Freedom Securities shall place the sum of five hundred thousand dollars
($500,000) (the "Shortfall Amount") in an escrow fund (the "Shortfall Escrow
Fund") to be governed by the terms of the Escrow Agreement, which amount shall
be used to satisfy any Shortfall pursuant to Section 2.3(f). Freedom Securities
agrees that it will pay into the Shortfall Escrow Fund additional amounts,
pursuant to the Escrow Agreement, in connection with (i) the resolution of the
value of the NationPage common stock set forth on the Closing Date Balance Sheet
and (ii) the value of the realization of the Tax Benefit described in Section
2.3(b)(y).
(d) Earnings Escrow. To the extent that the Company's after-tax net
income for the fiscal quarter ending March 31, 1998 exceeds $170,000, any such
excess (the "First Quarter Excess") shall be placed into an escrow fund to be
governed by the terms of the Escrow Agreement. The parties hereto acknowledge
and agree that in calculating net income, the Company shall exclude therefrom
(i) charges and expenses relating to the sale of shares of Company Common Stock
after the date of this Agreement and prior to the Closing Date and (ii) fees and
expenses incurred by the Company in connection with the Merger and the other
transactions contemplated by this Agreement, but shall include costs and
expenses relating to the opening of the Company's Denver office (collectively,
the "Extraordinary Items"). The First Quarter Excess, if any, shall be paid to
the holders of the Company Common Stock as provided in Section 2.3 to the extent
that the Company's net income (after giving effect to the Extraordinary Items
and without taking into account the First Quarter Excess) for the fiscal year
ending December 31, 1998 (as reflected on the internal Freedom Securities
financial statements provided that such financial statements with respect to the
Company are prepared on a basis consistent with the Closing Date Balance Sheet)
exceeds $2,264,000 (the "Annual Target").
2.6 FRACTIONAL SHARES. No certificates representing fractional shares of
Freedom Securities Common Stock shall be issued in the Merger and no stock
dividend, stock split or interest shall relate to any fractional security, and
such fractional share interests shall not entitle the owner thereof to vote or
to any other rights of a security holder. In lieu of any such fractional shares,
each holder of Company Common Stock, who would otherwise have been
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<PAGE> 16
entitled to receive a fractional share of Freedom Securities Common Stock upon
surrender of a Certificate for exchange pursuant to this Article II, shall be
entitled to receive from Freedom Securities a cash payment equal to the product
of (i) the fractional share interest to which such holder would otherwise be
entitled multiplied by (ii) the Stock Price.
2.7 TAX CONSEQUENCES. For Federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368(a) of
the Code, and this Agreement shall constitute a "plan of reorganization" within
the meaning of Section 368(a) of the Code.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Freedom Securities and Merger
Sub as follows (subject to such exceptions as may be disclosed in the Disclosure
Schedules delivered to Freedom Securities and Merger Sub by the Company) (the
"Disclosure Schedules")):
3.1 ORGANIZATION, STANDING AND CORPORATE POWER. The Company is duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated and has the requisite corporate power
and authority to carry on its business as it is now being conducted. Except as
set forth on SCHEDULE 3.1, the Company is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
or licensing necessary, other than in such jurisdictions where the failure to be
so qualified or licensed (individually or in the aggregate) would not have a
Material Adverse Effect with respect to the Company. The Company has delivered
to Merger Sub and Freedom Securities complete and correct copies of the
certificate of incorporation and by-laws of the Company, as amended to the date
of this Agreement.
3.2 SUBSIDIARIES. The Company has no subsidiaries. Except for the
ownership interests set forth in SCHEDULE 3.2 or proprietary ownership positions
in publicly-traded securities purchased in the ordinary course of business, the
Company does not own, directly or indirectly, any capital stock or other
ownership interest in any corporation, partnership, business association, joint
venture or other entity which is material to the Company.
3.3 CAPITAL STRUCTURE. The authorized capital stock of the Company
consists of (i) 70,000 shares of Class A Common Stock, par value $1.00 per
share, and (ii) 180,000 shares of Class B Common Stock, par value $1.00 per
share. Subject to any Permitted Changes (as defined in Section 5.1(d)) there
are, as of the date hereof: (i) 30,000 shares of Class A Common Stock issued and
outstanding; (ii) 94,279 shares of Class B Common Stock issued and outstanding;
(iii) 11,700 shares of Class B Common Stock held in the treasury of the Company;
(iv) 26,755 shares of Company Common Stock reserved for issuance upon
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<PAGE> 17
exercise of authorized but unissued Company Stock Options pursuant to the Stock
Plan; and (v) 23,245 shares of Company Common Stock issuable upon exercise of
outstanding Company Stock Options. SCHEDULE 3.3 sets forth the exercise price
for the outstanding Company Stock Options. Except as set forth above or on
SCHEDULE 3.3, as of February 28, 1998, no shares of capital stock or other
equity securities of the Company are issued, reserved for issuance or
outstanding. All outstanding shares of capital stock of the Company are, and all
shares which may be issued pursuant to the Stock Plan will be, when issued, duly
authorized, validly issued, fully paid and nonassessable (except as provided in
Section 180.0622 of the Wisconsin Statutes) and not subject to preemptive
rights. There are no outstanding bonds, debentures, notes or other indebtedness
or other securities of the Company having the right to vote (or convertible
into, or exchangeable for, securities having the right to vote) on any matters
on which stockholders of the Company may vote. Except as set forth above or on
SCHEDULE 3.3, there are no outstanding securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which the Company is a party or by which it is bound obligating the Company to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock or other equity or voting securities of the Company or
obligating the Company to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement, arrangement or undertaking.
Other than with respect to indebtedness disclosed in the most recent balance
sheet of the Company or on SCHEDULE 3.3, no indebtedness for borrowed money of
the Company contains any restriction upon the incurrence of indebtedness for
borrowed money by the Company or restricts the ability of the Company to grant
any liens on its properties or assets. Other than the Company Stock Options and
other than as disclosed in SCHEDULE 3.3, (i) there are no outstanding
contractual obligations, commitments, understandings or arrangements of the
Company to repurchase, redeem or otherwise acquire or make any payment in
respect of any shares of capital stock of the Company and (ii) to the knowledge
of the Company and except for the Agreement executed by the holders of the Class
A Company Common Stock, there are no irrevocable proxies with respect to shares
of capital stock of the Company. SCHEDULE 3.3 sets forth the record and
beneficial ownership of, and voting power in respect of, Company Common Stock
held by the Company's directors, executive officers and stockholders owning five
percent or more of the Company Common Stock. Except as set forth above, there
are no agreements or arrangements pursuant to which the Company is or could be
required to register shares of Company Common Stock or other securities under
the Securities Act of 1933, as amended (the "Securities Act"), or other
agreements or arrangements with or among any security holders of the Company
with respect to securities of the Company.
3.4 AUTHORITY; NONCONTRAVENTION. Except as set forth on SCHEDULE 3.4 with
respect to certain regulatory approvals, the Company has the requisite corporate
and other power and authority to enter into this Agreement and, subject to the
Company Stockholder Approval and the termination or expiration of the waiting
period under the HSR Act (as defined below), to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the Company
and the consummation by the Company of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of
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<PAGE> 18
the Company, subject to the Company Stockholder Approval. This Agreement has
been duly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except as may be limited by (1) any bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights, (2) general equity principles, (3) the law of
fraudulent conveyance, (4) public policy, (5) applicable law relating to
fiduciary duties and (6) judicial imposition of any implied covenant of good
faith and fair dealing. Except as disclosed in SCHEDULE 3.4, the execution and
delivery of this Agreement does not, and the consummation of the transactions
contemplated by this Agreement and compliance with the provisions hereof will
not, conflict with, or result in any breach or violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of or "put" right with respect to any
obligation or to loss of a material benefit under, or result in the creation of
any lien upon any of the properties or assets of the Company under, (i) the
Certificate of Incorporation, as amended, or By-laws, as amended, of the
Company, (ii) any loan or credit agreement, note, note purchase agreement, bond,
mortgage, indenture, lease or other agreement, instrument, permit, concession,
franchise or license applicable to the Company or its properties or assets or
(iii) subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule,
regulation or arbitration award applicable to the Company or its properties or
assets, other than, in the case of clauses (i), (ii) and (iii) any such
conflicts, breaches, violations, defaults, rights, losses or Liens that
individually or in the aggregate would not have a Material Adverse Effect with
respect to the Company or would not prevent, hinder or materially delay the
ability of the Company to consummate the transactions contemplated by this
Agreement if not cured or waived by the Closing Date. No consent, approval,
order or authorization of, or registration, declaration or filing with, or
notice to, any, Federal, state or local government or any court, administrative
agency or commission or other governmental authority or agency, domestic or
foreign (a "Governmental Entity"), is required by or with respect to the Company
in connection with the execution and delivery of this Agreement by the Company
or the consummation by the Company of the transactions contemplated hereby,
except for (i) the filing of a pre-merger notification and report form by the
Company and Freedom Securities under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (ii) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware, and
appropriate documents with the relevant authorities of other states in which the
Company is qualified to do business and (iii) such other consents, approvals,
orders, authorizations, registrations, declarations, filings or notices as are
set forth in SCHEDULE 3.4.
3.5 FINANCIAL STATEMENTS. There have been made available to Freedom
Securities the following financial statements (collectively the "Financial
Statements"): (i) audited statements of financial condition, income, changes in
stockholders' equity and cash flows as of and for the six months ended June 30,
1996 and December 31, 1996 and the year ended December 31, 1997 for the Company
(the "Audited Financial Statements"); and (ii) unaudited statements of financial
condition, income, changes in stockholders' equity, and cash flows (the "Most
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<PAGE> 19
Recent Financial Statements") as of and for the one-month ended January 31, 1998
for the Company. The Financial Statements (including the notes thereto) have
been prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby and present fairly the financial condition of the
Company as of such dates and the results of operations of the Company for such
periods, subject, in the case of the Most Recent Financial Statements, to normal
year-end adjustments (which will not be material individually or in the
aggregate) and the absence of footnotes and other presentation items.
3.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on SCHEDULE
3.6 or reflected in the Financial Statements, there are no liabilities of the
Company except for (i) liabilities which have arisen in the ordinary course of
business of the Company since the date of the Audited Financial Statements, (ii)
liabilities which, when added to the Net Out of Balance Account (as defined in
this Section 3.6) would not have a Material Adverse Effect on the Company and
(iii) liabilities which, because of their contingent nature (but without regard
to their materiality), would not be required to be reflected in the Financial
Statements in accordance with GAAP. No "out of balance" or other similar
reconciliation condition exists with respect to the financial records of the
Company or the account of any client of the Company (whether or not such account
is maintained by the Company) except where the sum of the Net Out of Balance
Account plus liabilities described in clause (ii) above would not have a
Material Adverse Effect on the Company. The term "Net Out of Balance Account"
means the net amount, if any, by which the net amount owed by the Company to
customers with respect to account imbalances exceeds the net amount, if any,
owed by customers to the Company on account of such imbalances.
3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the Company's
Most Recent Financial Statements and except as disclosed in SCHEDULE 3.7, the
Company has conducted its business only in the ordinary course consistent with
past practice, and there is not and has not been: (i) any Material Adverse
Change with respect to the Company; (ii) any condition, event or occurrence
which, individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect or give rise to a Material Adverse Change with respect
to the Company; (iii) any event which, if it had taken place following the
execution of this Agreement, would not have been permitted by Section 5.1
without the prior consent of Freedom Securities; or (iv) any condition, event or
occurrence which would reasonably be expected to prevent, hinder or materially
delay the ability of the Company to consummate the transactions contemplated by
this Agreement.
3.8 LITIGATION; LABOR MATTERS; COMPLIANCE WITH LAWS.
(a) Except as disclosed in SCHEDULE 3.8, there is (i) no suit, action
or proceeding or investigation pending and (ii) to the knowledge of the Company,
no suit, action or proceeding or investigation threatened against or affecting
the Company that, individually or in the aggregate, would reasonably be expected
to have a Material Adverse Effect with respect to the Company or prevent, hinder
or materially delay the ability of the Company to
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consummate the transactions contemplated by this Agreement, nor is there any
judgment, decree, injunction, rule or order of any governmental entity or
arbitrator outstanding against the Company having or which in the future could
have, any such effect.
(b) Except as disclosed in SCHEDULE 3.8, (i) the Company is not a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization; (ii) there
is no strike, work stoppage or other labor dispute involving the Company pending
or, to its knowledge, threatened; and (iii) the Company is not liable for any
severance pay or other payments to any employee or former employee arising from
the termination of employment under any benefit or severance policy, practice,
agreement, plan, or program of the Company, nor will the Company have any
liability which exists or arises, or may be deemed to exist or arise, under any
applicable law or otherwise, as a result of or in connection with the
transactions contemplated hereunder or as a result of the termination by the
Company of any persons employed by the Company on or prior to the Effective
Time.
(c) The conduct of the business of the Company complies with all
statutes, laws, regulations, ordinances, rules, judgments, orders, decrees or
arbitration awards applicable thereto, except for violations or failures so to
comply, if any, that, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect with respect to the Company.
3.9 EMPLOYEE BENEFIT PLANS.
(a) General. Except as listed on SCHEDULE 3.9, neither the Company nor
any trade or business, whether or not incorporated ("ERISA Affiliate"), that
together with the Company would be deemed to be a "single employer" within the
meaning of section 4001 of the Employee Retirement Income Security Act of 1974,
as amended, and the rules and regulations promulgated thereunder ("ERISA"), is a
party to, participates in, contributes to or has any liability or contingent
liability with respect to:
(i) any "employee welfare benefit plan" or "employee pension
benefit plan" as those terms are respectively defined in sections 3(1) and
3(2) of ERISA; or
(ii) any retirement or deferred compensation plan, incentive
compensation plan, stock plan, unemployment compensation plan, vacation
pay, severance pay, bonus or benefit arrangement, medical insurance or
hospitalization program or any other fringe benefit arrangements for any
current or former employee, director, consultant or agent, whether pursuant
to contract, arrangement, custom or informal understanding, which does not
constitute an "employee benefit plan" (as defined in section 3(3) of ERISA)
(collectively, the "Employee Benefit Plans").
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<PAGE> 21
(b) Plan Documents and Reports. A true and correct copy of each of the
Employee Benefit Plans listed on SCHEDULE 3.9 has been supplied to Freedom
Securities. A true and correct copy of the most recent annual report, summary
plan description, summary of material modifications and Internal Revenue Service
determination letter with respect to each Employee Benefit Plan, to the extent
applicable, has been supplied to Freedom Securities, and there has been no
material change in the financial condition in the respective plan from that
stated in the annual reports supplied.
(c) Compliance With Laws; Liabilities. As to all Employee Benefit
Plans:
(i) All Employee Benefit Plans that are employee pension benefit
plans (as defined in section 3(2) of ERISA) which are intended to qualify
under section 401(a) of the Code and the trusts which are intended to be
exempt from tax under section 501(a) of the Code comply in all material
respects in form and in operation with such sections; there have been no
material amendments to such plans which are not the subject of a
determination letter issued with respect thereto by the Internal Revenue
Service or for which application for such letter has not been, or will not
be, timely filed with the Internal Revenue Service; and to the knowledge of
the Company and its ERISA Affiliates, no event has occurred which would
likely give rise to disqualification of any such plan under such sections
or to a tax under section 511 of the Code.
(ii) There have been no non-exempt "prohibited transactions" (as
described in section 406 of ERISA or section 4975 of the Code) with respect
to any Employee Benefit Plan for which the Company may be liable.
(iii) No amounts payable under the Employee Benefit Plans will
fail to be deductible for federal income tax purposes by virtue of section
280G of the Code.
(iv) No Employee Benefit Plan is or has been subject to Title IV
of ERISA and no plan is a multiemployer plan (as defined in Section 3(37)
of ERISA). No liability under Title IV of ERISA has been incurred by the
Company or any ERISA Affiliate since the effective date of ERISA that has
not been satisfied in full, and no condition exists that presents a risk to
the Company or any ERISA Affiliate of incurring a liability under Title IV.
(v) Each Employee Benefit Plan which constitutes a "group health
plan" (as defined in section 607(l) of ERISA of section 4980(g) (2) of the
Code), including any plans of current and former Affiliates which must be
taken into account under sections 4980B and 414(t) of the Code or section
601 of ERISA, has been operated in material compliance with applicable law,
including coverage requirements of section 4980B of the Code and section
601 of ERISA to the extent such requirements are applicable.
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<PAGE> 22
(vi) Except as reflected in the Financial Statements, neither the
Company nor any ERISA Affiliate has any liability or contingent liability
for providing, under any Employee Benefit Plan or otherwise, any medical,
life insurance or other employee benefits beyond termination of employment
(including retirement), other than statutory liability for providing group
health plan continuation coverage under Part 6 of Title I of ERISA and
section 4980B of the Code.
(vii) Full payment has been made, or will be made in accordance
with the Code, of all amounts which the Company or any ERISA Affiliate is
required to pay under the terms of each Employee Benefit Plan as of the
last day of the most recent plan year thereof ended prior to the date of
this Agreement, and all such amounts accrued through the Closing Date with
respect to the current plan year thereof will be paid by the Company on or
prior to the Closing Date, or will be properly recorded on the Closing
Balance Sheet.
(viii) Except as set forth on SCHEDULE 3.9, there has been no act
or omission that would impair the ability of the Company (or any successor
thereto) unilaterally to amend or terminate any Employee Benefit Plan
without further liability.
(ix) No "Leased Employee," as that term is defined in section
414(n) of the Code, performs services for the Company or any ERISA
Affiliate. All persons who are or have previously been characterized as
"independent contractors" of the Company or any ERISA Affiliate are
properly characterized as such and are not entitled to any benefits under
any Employee Benefit Plan.
(x) Any medical, dental, long-term disability or life insurance
benefits provided under the Employee Benefit Plans are funded solely
through insurance policies under which there will be no liability to the
Company or any ERISA Affiliate, as of the Closing Date, in the nature of a
retroactive rate adjustment, loss sharing arrangement or other actual or
contingent liability arising wholly or partially out of events occurring
prior to the Closing Date.
(xi) Except as set forth on SCHEDULE 3.9, the consummation of the
Merger will not (A) entitle any current or former employee or officer of
the Company or any ERISA Affiliate to severance pay, unemployment
compensation, or any other payment, (B) accelerate the time of payment or
vesting or increase the amount of compensation due any such employee of
officer or (C) result in any prohibited transaction described in section
406 of ERISA or section 4975 of the Code for which an exemption is not
available.
(xii) Neither the Company, nor any ERISA Affiliate, has any formal
plan or commitment, whether legally binding or not, to create any
additional Employee
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<PAGE> 23
Benefit Plan or modify or change any existing Employee Benefit Plan, that
would affect any employee or terminated employee of the Company or any
ERISA Affiliate.
3.10 TAX RETURNS AND TAX PAYMENTS.
(a) Except as disclosed in SCHEDULE 3.10, the Company (i) has timely
filed all material Tax Returns required to be filed by it on or before the date
hereof and (ii) has paid all Taxes shown thereon to be due and has provided
adequate reserves (other than reserves for deferred taxes to reflect timing
differences between book and tax) in the Financial Statements for any Taxes that
have not been paid, whether or not shown as being due on any returns and such
unpaid Taxes will not exceed such reserves as adjusted for operations and
transactions through the Closing Date in accordance with the Company's past
practice. All such Tax Returns are correct and complete in all material
respects.
(b) Except as set forth in SCHEDULE 3.10 hereto, there are no actions
or proceedings currently pending or, to the best knowledge of the Company,
threatened against the Company by any Governmental Entity for the assessment or
collection of Taxes being asserted against the Company, and there are no matters
under discussion with any Governmental Entity regarding claims for the
assessment or collection of Taxes. Any Taxes that have been claimed or imposed
as a result of any examination of any Tax Return of the Company by any
Governmental Entity are being contested in good faith and have been disclosed in
writing to Freedom Securities. Except as set forth in SCHEDULE 3.10, there are
no agreements or applications by the Company for an extension of time for the
assessment or payment of any Taxes nor any waiver of the statute of limitations
in respect of Taxes. There are no Tax liens on any of the assets of the Company,
except for liens for Taxes not yet due or payable that are being contested in
good faith in appropriate proceedings.
(c) The Company has not, with regard to any assets or property held,
acquired or to be acquired by the Company, filed a consent to the application of
Section 341(f) of the Code.
(d) None of the stockholders of the Company is a foreign person within
the meaning of Section 1445 of the Code and the Treasury Regulations promulgated
thereunder.
(e) The Company is not and has never been a party to or bound by any
tax indemnity agreement, tax sharing agreement, tax allocation agreement or
similar agreement or arrangement and none of them has any liability for Taxes of
any person (other than the Company) under Treasury Regulations Section 1.1502-6
(or any similar provision of state, local or foreign law).
(f) The Company has withheld amounts from its employees and other
persons required to be withheld under the tax, social security, unemployment and
other withholding provisions of all federal, state, local and foreign laws.
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<PAGE> 24
(g) None of the Company or any of its stockholders has taken any
action that would cause the Merger to not qualify as a reorganization under
Section 368(a) of the Code.
(h) As used herein, "Taxes" shall mean all taxes of any kind,
including, without limitation, those on or measured by or referred to as income,
gross receipts, sales, use, ad valorem, franchise, profits, license,
withholding, back-up withholding, payroll, employment, excise, severance, stamp,
occupation, premium, value added, property or windfall profits taxes, customs,
duties or similar fees, assessments or charges of any kind whatsoever, together
with any interest and any penalties, additions to tax or additional amounts
imposed by any governmental authority, domestic or foreign, with respect to the
foregoing. As used herein, "Tax Return" shall mean any return (including an
information return), report or statement required to be filed with any
governmental authority, with respect to Taxes.
3.11 MATERIAL CONTRACTS. The Company has provided or made available to
Freedom Securities (i) true and complete copies of all written contracts,
agreements, commitments, arrangements, leases (including with respect to
personal property), policies and other instruments to which it is a party or by
which it is bound which (A) require payments to be made in excess of $100,000
per year for goods and/or services, or (B) do not by their terms expire and are
not subject to termination within six months from the date of the execution and
delivery thereof and require payments to be made in excess of $100,000
("Material Contracts"), or (ii) with respect to such Material Contracts that
have not been reduced to writing, a written description thereof, each of which
is listed on SCHEDULE 3.11. The Company has not received any notice and has no
knowledge that any other party is, in default in any respect under any such
Material Contract, except for those defaults which would not reasonably be
likely either individually or in the aggregate, to have a Material Adverse
Effect with respect to the Company; and there has not occurred any event that
with the lapse of time or the giving of notice or both would constitute such a
material default.
3.12 BROKERS. No broker, investment banker, financial advisor or other
person, the fees and expenses of which will be paid by the Company, is entitled
to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company.
3.13 BOARD RECOMMENDATION. The Board of Directors of the Company, at a
meeting duly called and held, has (a) determined that this Agreement and the
transactions contemplated hereby, taken together, are advisable and in the best
interests of the Company and its stockholders, and (b) subject to the other
provisions hereof, resolved to recommend that the holders of the shares of
Company Common Stock approve this Agreement and the transactions contemplated
hereby, including the Merger.
3.14 REQUIRED COMPANY VOTE. The Company Stockholder Approval, being the
affirmative vote of a majority of the shares of the Company's Class A Common
Stock, is the
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only vote of the holders of any class or series of the Company's securities
necessary to approve this Agreement, the Merger and the other transactions
contemplated hereby.
3.15 STATE TAKEOVER STATUTES. The Board of Directors has taken such action
so that no state takeover statute or similar statute or regulation of the State
of Delaware or the State of Wisconsin (and, to the knowledge of the Company
after due inquiry, of any other state or jurisdiction) applies to this
Agreement, the Merger, or any of the other transactions contemplated hereby. The
Company does not have any rights plan, preferred stock or similar arrangement
which have any of the aforementioned consequences in respect of the transactions
contemplated hereby.
3.16 INTELLECTUAL PROPERTY. The Company owns or possesses adequate licenses
or other rights to use, all trademarks, trade names, service marks, copyrights,
licenses and product licenses or registrations (including applications for any
of the foregoing), as are used or useful in connection with its business the
lack of which would reasonably be expected to have a Material Adverse Effect
with respect to the Company; and the Company has not (i) received any written
notice asserting that its trademarks, trade names, service marks, copyrights, or
licenses violate the rights of others, (ii) no knowledge of any conflict with
the proprietary intellectual property rights of the Company therein or (iii) any
knowledge of any conflict by the Company with the rights of others therein
which, in the case of any of the items described in clause (i), (ii) or (iii)
would have a Material Adverse Effect with respect to the Company.
3.17 RELATED PARTY TRANSACTIONS. Except as set forth in SCHEDULE 3.17
hereto, no director, officer, partner, employee, "affiliate" or "associate" (as
such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) of the Company (i) has borrowed any monies from
or has outstanding any indebtedness or other similar obligations to the Company;
(ii) owns any direct or indirect interest of any kind in, or is a director,
officer, employee, partner, affiliate or associate of, or consultant or lender
to, or borrower from, or has the right to participate in the management,
operations or profits of, any person or entity which is (1) a competitor,
supplier, customer, distributor, lessor, tenant, creditor or debtor of the
Company, (2) engaged in a business related to the business of the Company, (3)
participating in any transaction to which the Company is a party or (iii) is
otherwise a party to any contract, arrangement or understanding with the
Company.
3.18 BROKERAGE CLIENTS. The Company is duly registered as a broker-dealer
with the Securities and Exchange Commission (the "SEC") under the Exchange Act,
is a member in good standing of the National Association of Securities Dealers,
Inc. ("NASD") and is duly registered, licensed or qualified as a broker or
dealer under the laws of each jurisdiction listed on SCHEDULE 3.18 hereto. The
Company is and at all times since March 1, 1993 has been in compliance with the
Exchange Act and the rules and regulations thereunder applicable to it, the
rules and regulations of the NASD applicable to it (including the NASD's rules
of fair practice), and since each date on which it was initially registered as a
broker dealer in each
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<PAGE> 26
jurisdiction listed on SCHEDULE 3.18 hereto or March 1, 1993, whichever is
later, the laws of each such jurisdiction except for such instances of
non-compliance (i) that relate to a matter set forth on SCHEDULE 3.18 or (ii)
the correction of which would not interfere significantly with the ability of
the Company to conduct its business substantially as currently conducted or
significantly diminish the value of the Company. The Company has previously made
available to Freedom Securities a complete copy of the Company's Uniform
Application for Broker-Dealer Registration on Form BD, as amended to date, and
complete copies of the Company's quarterly Focus Reports and annual statements
of financial condition which have been requested by Freedom Securities. The
Company acts as a broker-dealer for its customers pursuant to written agreements
and related documentation (collectively, the "Broker-dealer Agreements") with
parties to whom it provides broker-dealer services. The Broker-dealer Agreements
have not been modified by any terms that are not included in the Company's
files, and the Company has neither violated nor is it in default under, any
Broker-dealer Agreement, except for such violations or defaults that (i) relate
to a matter set forth on SCHEDULE 3.18 or (ii) relate to the actions of a
registered representative of the Company where the total liability, cost and
expense relating to all actions or complaints which may be asserted at any time
after the date of this Agreement with respect to the conduct of such registered
representative do not exceed $100,000.
3.19 INVESTMENT ADVISORY CLIENTS. The Company is and at all times since
September 27, 1996 has been in compliance with the Investment Advisers Act of
1940, as amended, (the "Advisors Act") and the rules and regulations thereunder
applicable to it, and, since each date on which it was initially registered as
an investment adviser in each jurisdiction in which it conducts investment
advisory operations, the laws of each such jurisdiction where it is registered
as an investment advisor, except for such instances of non-compliance the
correction of which would not interfere significantly with the ability of the
Company to conduct its business substantially as currently conducted or
significantly diminish the value of the Company. The Company has previously made
available to Freedom Securities a complete copy of its Uniform Application for
Investment Advisor Registration on Form ADV, as amended to date. The Company
acts pursuant to written advisory agreements (collectively, the "Advisory
Agreements") with parties to whom it provides investment advisory services. Each
Advisory Agreement complies as to form with the requirements of the Advisors
Act. The Advisory Agreements have not been modified by any terms, oral or
otherwise, that are not included in the Company's files and the Company has not
violated, nor is it in default under, any Advisory Agreement, except for such
violations or defaults the correction of which would not interfere significantly
with the ability of the Company to conduct its business substantially as
currently conducted or significantly diminish the value of the Company.
3.20 INVESTMENT FUND CLIENTS. The Company does not have any investment
advisory contracts with any registered investment company, as defined in the
Investment Company Act of 1940, as amended.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
FREEDOM SECURITIES AND MERGER SUB
Freedom Securities and Merger Sub each represents and warrants to the
Company that:
4.1 CORPORATE ORGANIZATION. Each of Freedom Securities and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. True and correct copies of the Certificate of
Incorporation and By-Laws of Freedom Securities and Merger Sub in effect as of
the date of this Agreement have been provided to the Company.
4.2 QUALIFICATION TO DO BUSINESS. Each of Freedom Securities and Merger
Sub is duly qualified or licensed to do business as a foreign corporation in
each jurisdiction wherein the nature of its activities or of its properties
owned or leased makes such qualification necessary and failure to be so
qualified or licensed would have a Material Adverse Effect with respect to
Freedom Securities.
4.3 CORPORATE POWER. Each of Freedom Securities and Merger Sub has the
requisite power and authority (corporate or otherwise) to own and operate its
properties, to carry on its business as now being conducted, to execute, deliver
and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby.
4.4 CORPORATE AUTHORITY. The execution, delivery and performance of this
Agreement by Freedom Securities and Merger Sub, and the consummation of the
transactions contemplated hereby, have been duly authorized by all necessary
corporate action on the part of Freedom Securities and Merger Sub. This
Agreement and all other instruments required hereby to be executed and delivered
by Freedom Securities or Merger Sub have been, or will be, duly executed and
delivered by authorized officers of Freedom Securities or Merger Sub, as the
case may be, and are, or when delivered will be, legal, valid and binding
obligations of Freedom Securities and Merger Sub, enforceable against Freedom
Securities and Merger Sub in accordance with their terms, subject, as to
enforceability, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to general
principles of equity.
4.5 AUTHORIZATION FOR FREEDOM SECURITIES COMMON SHARES AND OPTIONS.
Freedom Securities has taken all necessary action to permit it to issue the
number of shares of Freedom Securities Common Stock required to be issued
pursuant to Article II and to issue the Freedom Options. The Freedom Securities
Common Shares issued pursuant to Article II and the Freedom Securities Common
Shares issuable upon exercise of the Freedom Options will, when issued, be
validly issued, fully paid and nonassessable and no shareholder of Freedom
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<PAGE> 28
Securities has or will have any preemptive right of subscription or purchase in
respect thereof.
4.6 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution nor
delivery of this Agreement nor the consummation by Freedom Securities and Merger
Sub of the transactions contemplated hereby will (i) conflict with or result in
any breach of any provision of the certificate of incorporation or by-laws of
Freedom Securities or Merger Sub; (ii) require any consent, approval,
authorization or permit of, or filing with or notification to, any Governmental
Entity, except (A) filings by Freedom Securities, pursuant to the applicable
requirements of the Exchange Act and under the Securities Act and applicable
state securities laws, (B) the filing of a premerger notification and report
form under the HSR Act, and (C) the filing of the Certificate of Merger pursuant
to the DGCL and appropriate documents with the relevant authorities of other
states in which the Company is authorized to do business; (iii) result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration or lien or other charge or encumbrance) under any of the terms,
conditions or provisions of any note, license agreement or other instrument or
obligation to which Freedom Securities or Merger Sub or any of their assets may
be bound, except for such violations, breaches and defaults (or rights of
termination, cancellation or acceleration or lien or other charge or
encumbrance) as to which requisite waivers or consents have been obtained; or
(iv) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Freedom Securities or Merger Sub or to any of their respective
assets.
4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. The business of Freedom
Securities and its subsidiaries have been carried on only in the ordinary and
usual course, and there has been no material adverse change in the financial
condition, operations, results of operations, management or business of Freedom
Securities and its subsidiaries since December 31, 1997.
4.8 PRIVATE PLACEMENT. The issuance of the Freedom Securities Common
Shares to the Company Shareholders in the Merger is exempt from the registration
requirements of the Securities Act.
4.9 CAPITAL STRUCTURE. The authorized capital stock of Freedom Securities
consists of 12,000,000 shares of Freedom Securities Common Stock, par value $.01
per share. Following the IPO, the authorized capital stock of Freedom Securities
will be as set forth in the Form S-1 Registration Statement (as defined below).
As of December 31, 1997, there were: (i) 8,163,161 shares of Freedom Securities
Common Stock issued and outstanding; (ii) no shares of Freedom Securities Common
Stock held in the treasury of Freedom Securities; (iii) 75,100 shares of Freedom
Securities Common Stock for which subscription agreements had been executed but
for which payment had not yet been made; (iv) 1,200,000 shares of Freedom
Securities Common Stock reserved for issuance upon exercise of authorized but
unissued Freedom Options pursuant to the Freedom Securities 1998 Stock Option
Plan; and (v) 1,181,256 shares of Freedom Securities Common Stock issuable upon
exercise of outstanding Freedom Options. Except as set forth above, as of
December 31, 1997, no shares of capital stock or other equity securities of
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<PAGE> 29
Freedom Securities are issued, reserved for issuance or outstanding. All
outstanding shares of capital stock of Freedom Securities are, and all shares
which may be issued pursuant to the Freedom Securities 1996 Stock Option Plan
will be, when issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights.
4.10 CORPORATE APPROVALS. The Board of Directors of each of Freedom
Securities and Merger Sub have taken all corporate action necessary to authorize
the execution of this Agreement and the consummation of the transactions
contemplated hereby. No approval of the shareholders of Freedom Securities is
required to approve this Agreement, the Merger or the transactions contemplated
hereby.
4.11 SEC FILINGS. Freedom Securities has made available to the Company, a
copy of the following documents filed with the SEC (collectively, the "SEC
Filings") (i) its Registration Statement on Form S-1 as filed with the SEC on
January 26, 1998, all amendments filed to such Registration Statement and any
final form of prospectus or prospectus supplement filed in connection therewith
(the "S-1 Registration Statement"), (ii) any filings made by Freedom Securities
under the Exchange Act ("Exchange Act Filings") and (iii) Forms BD and ADV filed
for Freedom Securities and each of its Subsidiaries which have been requested by
the Company. As of the date of filing with the SEC of the SEC Filings, each such
document did not contain any untrue statement of a material fact or omission of
any material fact required to be stated therein in order to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading. At the date of filing of each of the SEC Filings, each such document
complied in all material respects with the published rules and regulations of
the SEC with respect thereto.
4.12 FINANCIAL STATEMENTS. Freedom Securities has made available to the
Company the following financial statements (collectively, "Freedom Financial
Statements"): (i) audited (a) consolidated statement of financial condition as
of December 31, 1997 and 1996, (b) consolidated statements of income, changes in
stockholders' equity and cash flows of Freedom Securities and its predecessor
company for the year ended December 31, 1997 and the one-month period ended
December 31, 1996, and, for the predecessor company, for the eleven month period
ended November 29, 1996 and the year ended December 31, 1995; and (ii) unaudited
consolidated statements of financial condition, statements of income, changes in
stockholders' equity and cash flows of Freedom Securities as of and for the
period ending January 31, 1998 (the "Freedom Most Recent Financial Statements").
The Freedom Financial Statements (including the notes thereto) have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby and present fairly the financial condition of Freedom
Securities and its subsidiaries as of such dates and the results of operations
of the Company and its subsidiaries for such periods, subject, in the case of
the Freedom Most Recent Financial Statements, to normal year end adjustments
(which will not be material individually or in the aggregate) and the absence of
footnotes and other presentation items.
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4.13 NO ADVERSE CHANGE. Since the date of the Freedom Most Recent Financial
Statements, there has not been: (i) any Material Adverse Change with respect to
Freedom Securities, (ii) any condition, event, or occurrence which, individually
or in the aggregate, would reasonably be expected to have a Material Adverse
Effect or give rise to a Material Adverse Effect with respect to Freedom
Securities; and (iii) any condition, event or occurrence which would reasonably
be expected to prevent, hinder or materially delay the ability of Freedom
Securities to consummate the transactions contemplated by this Agreement.
4.14 LITIGATION; COMPLIANCE WITH LAWS.
(a) There is (i) no suit, action or proceeding or investigation pending
and (ii) to the knowledge of Freedom Securities, no suit, action or proceeding
or investigation threatened against or affecting Freedom Securities or any of
its subsidiaries that, individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect with respect to Freedom Securities or
prevent, hinder or materially delay the ability of Freedom Securities to
consummate the transactions contemplated by this Agreement, nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against Freedom Securities or any of its subsidiaries
having or which in the future could have, any such effect.
(b) The conduct of the business of Freedom Securities and its subsidiaries
complies with all statutes, laws, regulations, ordinances, rules, judgments,
orders, decrees or arbitration awards applicable thereto, except for such
violations or failures to so comply, if any, that, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect
with respect to Freedom Securities.
4.15 BROKERS. No broker, investment banker, financial adviser or other
person, the fees and expenses of which will be paid by Freedom Securities, is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
(other than the IPO) based upon arrangements made by or on behalf of Freedom
Securities.
4.16 INELIGIBLE PERSONS. Neither Freedom Securities nor any "associated
person" (as defined in the Exchange Act) is ineligible pursuant to Section 15(b)
of the Exchange Act to serve as a registered broker-dealer or any associated
person of a registered broker-dealer. Neither Freedom Securities nor any
"associated person" (as defined in the Advisors Act) is ineligible pursuant to
Section 203 of the Advisors Act to serve as an investment adviser or as an
associated person to a registered investment adviser.
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ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER
5.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as set forth in the
Disclosure Schedules, during the period from the date of this Agreement to the
Effective Time (except as otherwise specifically required by the terms of this
Agreement), the Company shall act and carry on its business in the usual,
regular and ordinary course of business consistent with past practice and use
its reasonable best efforts to (i) preserve intact its current business
organization, (ii) keep available the services of its current officers and
employees, (iii) preserve its relationships with customers, suppliers,
advertisers, and others having business dealings with the Company and (iv)
preserve goodwill. The Company shall confer on a regular and frequent basis with
one or more representatives of Freedom Securities to report business matters of
materiality and the general status of ongoing business, although the Company
shall not be required to disclose any confidential or proprietary information in
such conferences. Without limiting the generality of the foregoing, except as
set forth in the Disclosure Schedules or otherwise contemplated by this
Agreement, during the period from the date of this Agreement to the Effective
Time or earlier termination of this Agreement, the Company shall not, without
the prior consent of Freedom Securities, which consent shall not be unreasonably
withheld:
(a) declare, set aside or pay any dividends on, or make any other
distributions in respect of its capital stock;
(b) split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of, or in
substitution for, shares of its capital stock;
(c) purchase, redeem or otherwise acquire any shares of capital stock
of the Company or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities, except for the
acquisition of shares of Company Common Stock from holders of Options in full or
partial payment of the exercise price payable by such holder upon exercise of
Options outstanding on the date of this Agreement or except as may be required
by the terms of the Company's Stockholders Agreement in connection with the
termination of employment of any stockholder;
(d) authorize for issuance, issue, deliver, sell, pledge or otherwise
encumber any shares of its capital stock, any other voting securities or any
securities convertible into, or any rights, warrants or options to acquire, any
such shares, voting securities or convertible securities or any other securities
or equity equivalents (including without limitation stock appreciation rights)
other than (i) the issuance of Company Common Stock upon the exercise of Options
outstanding on the date of this Agreement and in accordance with their present
terms and (ii) the sale of shares of Company Common Stock to those employees and
in the
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amounts described on SCHEDULE 5.1 (such issuances, together with the
acquisitions of shares of Company Common Stock permitted under clause (c) above,
being referred to herein as "Permitted Changes");
(e) amend its certificate of incorporation or by-laws;
(f) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the stock or assets of, or by any other
manner, any business or any corporation, partnership, joint venture, association
or other business organization or division thereof material to the Company;
(g) sell, lease, license, mortgage or otherwise encumber or subject to
any lien or otherwise dispose of any of its properties or assets, except for
transactions in the ordinary course of business consistent with past practice
and except that prior to the Closing Date the Company will sell the Company's
partnership interest (i) in CGRM Investment Partnership ("CGRM Partnership") at
its book value to either (A) CGRM Partnership, (B) other general partners of
CGRM Partnership or (C) employees of the Company and (ii) in CGRM Limited
Partnership No. 1 ("CGRM No. 1") at its book value to either (A) CGRM No. 1 or
(B) the limited partners of CGRM No. 1;
(h) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or warrants or
other rights to acquire any debt securities of the Company, guarantee any debt
securities of another person, enter into any "keep well" or other agreement to
maintain any financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing, except for
short-term borrowings and for lease obligations, in each case incurred in the
ordinary course of business consistent with past practice;
(i) make any loans, advances or capital contributions to, or
investments in, any other person other than loans to employees in connection
with the sale of shares of Company Common Stock as described on SCHEDULE 5.1 or
purchases of securities and underwriting activities in the ordinary course of
business;
(j) acquire or agree to acquire any assets that are material,
individually or in the aggregate, to the Company or make or agree to make any
capital expenditure other than the expenditure of up to $350,000 in connection
with the opening of the Company's Chicago and Denver offices;
(k) pay, discharge or satisfy any claims (including claims of
stockholders), liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), except for the payment, discharge or
satisfaction, of (a) liabilities or obligations in the ordinary course of
business consistent with past practice or in accordance with their terms as in
effect on the date hereof or (b) claims settled or compromised to the extent
permitted by
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Section 5.1(o), or waive, release, grant, or transfer any rights of material
value or modify or change in any material respect any existing license, lease,
contract or other document, other than in the ordinary course of business
consistent with past practice;
(l) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization;
(m) enter into any new collective bargaining agreement except in the
ordinary course of business;
(n) change any material accounting principle used by it;
(o) settle or compromise any litigation (whether or not commenced
prior to the date of this Agreement) other than settlements or compromises of
litigation where the amount paid (after giving effect to insurance proceeds
actually received) in settlement or compromise is not material to the Company;
(p) accelerate receivables, delay payables or liquidate inventory,
except in the ordinary course of business consistent with past practices;
(q) authorize any of, or commit or agree to take any of, the foregoing
actions; or
(r) amend any tax return in such a manner as would have a Material
Adverse Effect on the Company.
5.2 CHANGES IN EMPLOYMENT ARRANGEMENTS. Except as set forth on any
Disclosure Schedule, the Company shall not adopt or amend (except as may be
required by law) any bonus, profit sharing, compensation, stock option, pension,
retirement, deferred compensation, employment or other employee benefit plan,
agreement, trust, fund or other arrangement (including any Employee Benefit
Plan) for the benefit or welfare of any employee, director or former director or
former employee, other than increases for individuals other than officers and
directors in the ordinary course of business consistent with past practice, or
increase the compensation or fringe benefits of any director, employee or former
director or former employee, or pay any benefit not required by any existing
plan, arrangement or agreement, other than the payment of cash bonuses of up to
an aggregate of $300,000 to certain employees of the Company after the date of
this Agreement and prior to the Closing Date, which payments shall be taken into
account for purposes of Section 2.3 hereof.
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5.3 SEVERANCE. The Company shall not grant any new or modified severance
or termination arrangement or increase or accelerate any benefits payable under
its severance or termination pay policies in effect on the date hereof.
5.4 WARN. The Company shall not effectuate a "plant closing" or "mass
layoff", as those terms are defined in the Worker Adjustment and Retraining
Notification Act of 1988 ("WARN"), affecting in whole or in part any site of
employment, facility, operating unit or employee of the Company without
notifying Freedom Securities in advance and without complying with the notice
requirements and other provisions of WARN.
5.5 TAX ELECTIONS. Except in the ordinary course of business and
consistent with past practice, the Company shall not make any tax election or
settle or compromise any material federal, state, local or foreign Tax liability
including information return obligations.
5.6 CONDUCT OF BUSINESS BY FREEDOM SECURITIES PENDING THE MERGER. Except
as otherwise contemplated by this Agreement, after the date hereof and prior to
the Closing Date or earlier termination of this Agreement, unless the Company
shall otherwise agree in writing, Freedom Securities shall, and shall cause its
subsidiaries, including Merger Sub, to:
(a) not split, combine or reclassify their outstanding capital stock
in a manner which would reduce the value of the Merger Consideration,
unless appropriate adjustment is made to the Merger Consideration to avoid
such reduction in value;
(b) use all commercially reasonable efforts to preserve intact their
respective business organizations and goodwill, keep available the services
of their respective present officers and key employees and preserve their
goodwill and business relationships with customers and others having
business relationships with them and not engage in any action, directly or
indirectly, with the intent to adversely impact the transactions
contemplated by this Agreement;
(c) confer on a regular and frequent basis with one or more
representatives of the Company to report business matters of materiality
and the general status of ongoing business, but Freedom Securities shall
not be required to disclose any confidential or proprietary information in
such conferences; and
(d) maintain with adequately capitalized insurance companies insurance
coverage for their assets and their businesses in such amounts and against
such risks and losses as are consistent with past practice.
5.7 CONTROL OF THE COMPANY'S BUSINESS. Nothing contained in this Agreement
shall give to Freedom Securities, directly or indirectly, rights to control or
direct the Company's business prior to the Effective Time. Prior to the
Effective Time, the Company shall exercise,
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consistent with and subject to the terms and conditions of this Agreement,
complete control and supervision of its business.
5.8 CONTROL OF FREEDOM SECURITIES' BUSINESS. Nothing contained in this
Agreement shall give to the Company, directly or indirectly, rights to control
or direct Freedom Securities' business prior to the Effective Time. Prior to the
Effective Time, Freedom Securities shall exercise, consistent with and subject
to the terms and conditions of this Agreement, complete control and supervision
of its business.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) The Company shall, and shall cause its officers, employees,
counsel, financial advisors and other representatives to, afford to Freedom
Securities and its representatives reasonable access during normal business
hours, in a manner initially coordinated with the chief executive officer of the
Company, and thereafter coordinated with those persons designated by the chief
executive officer, during the period prior to the Effective Time to its
properties, books, contracts, commitments, personnel and records and, during
such period, the Company shall, and shall cause its officers, employees and
representatives to, furnish promptly to Freedom Securities (i) a copy of each
report, schedule, registration statement and other document filed by it during
such period pursuant to the requirements of federal or state securities laws and
(ii) all other information concerning its business, properties, financial
condition, operations and personnel as Freedom Securities may from time to time
reasonably request. Except as required by law, each of the Company and Freedom
Securities will hold, and will cause its respective directors, officers,
employees, accountants, counsel, financial advisors and other representatives
and affiliates to hold, any nonpublic information in confidence to the extent
required by, and in accordance with, the provisions of the agreement dated
February 13, 1998, between Freedom Securities and the Company.
(b) No investigation pursuant to this Section 6.1 shall affect any
representations or warranties of the parties herein or the conditions to the
obligations of the parties hereto.
6.2 BEST EFFORTS.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use its best efforts to take, or cause
to be taken, all actions, and to do, or cause to be done, and to assist and
cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by this
Agreement.
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Freedom Securities and the Company will use their best efforts and cooperate
with one another (i) in promptly determining whether any filings are required to
be made or consents, approvals, waivers, licenses, permits or authorizations are
required to be obtained (or, which if not obtained, would result in an event of
default, termination or acceleration of any agreement or any put right under any
agreement) under any applicable law or regulation or from any governmental
authorities or third parties, including parties to loan agreements or other debt
instruments, in connection with the transactions contemplated by this Agreement,
including the Merger and (ii) in promptly making any such filings, in furnishing
information required in connection therewith and in timely seeking to obtain any
such consents, approvals, permits or authorizations.
(b) The Company shall make, subject to the condition that the
transactions contemplated herein actually occur, any undertakings (including
undertakings to make divestitures, provided, in any case, that such undertakings
or divestitures need not themselves be effective or made until after the
transactions contemplated hereby actually occur) required in order to comply
with the antitrust requirements or laws of any governmental entity, including
the HSR Act, in connection with the transactions contemplated by this Agreement;
provided that no such divestiture or undertaking shall be made unless reasonably
acceptable to Freedom Securities.
6.3 REGISTRATION ON FORM S-1. Freedom Securities agrees (a) to provide the
holders of Company Common Stock with the registration rights set out on EXHIBIT
E attached hereto and (b) to comply with all of the terms and conditions of such
EXHIBIT E.
6.4 PUBLIC ANNOUNCEMENTS. Neither Merger Sub nor Freedom Securities, on
the one hand, nor the Company, on the other hand, will issue any press release
or public statement with respect to the transactions contemplated by this
Agreement, including the Merger, without the other party's prior consent (which
shall not be unreasonably withheld), except as may be required by applicable law
or court process. In addition to the foregoing, Freedom Securities and the
Company will consult with each other before issuing, and provide each other the
opportunity to review and comment upon, any such press release or other public
statements with respect to such transactions. The parties agree that the initial
press release or releases to be issued with respect to the transactions
contemplated by this Agreement shall be mutually agreed upon prior to the
issuance thereof.
6.5 NO SOLICITATION. From and after the date hereof until May 31, 1998,
neither the Company, nor any of its officers, directors, employees,
representatives, agents or affiliates (including, without limitation, any
investment banker, attorney or accountant retained by the Company) will directly
or indirectly initiate, solicit or knowingly encourage (including by way of
furnishing non-public information or assistance), or take any other action to
facilitate knowingly, any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to any Transaction Proposal
or enter into or maintain or continue discussions or negotiate with any person
or entity in furtherance of such inquiries or to obtain a
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Transaction Proposal or agree to or endorse any Transaction Proposal or
authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or other
representative to take any such action. For purposes of this Agreement,
"Transaction Proposal" shall mean any of the following (other than the
transactions between the Company, Merger Sub and Freedom Securities) involving
the Company: (i) any merger, consolidation, share exchange, recapitalization,
business combination, or other similar transaction involving 50% or more of the
assets of the Company; (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of 50% or more of the assets of the Company in a
single transaction or series of transactions; (iii) any tender offer or exchange
offer for 50% or more of the outstanding shares of capital stock of the Company
or the filing of a registration statement under the Securities Act in connection
therewith; or (iv) any public announcement of a proposal, plan or intention to
do any of the foregoing or any agreement to engage in any of the foregoing.
6.6 ELECTION OF DIRECTOR. Immediately following the Closing, Freedom
Securities agrees that David P. Prokupek shall be appointed to the Board of
Directors of Freedom Securities.
6.7 DIRECTORS' AND OFFICERS' INDEMNIFICATION. The Surviving Corporation
shall observe and maintain, and Freedom Securities shall cause the Surviving
Corporation to observe and maintain, any indemnification provisions now existing
in the Certificate of Incorporation or By-Laws of the Company for the benefit of
any individual who served as a director or officer of the Company at any time
prior to the Effective Time.
6.8 FREEDOM SECURITIES BENEFIT PLANS. Freedom Securities agrees to provide
benefit plans of general applicability which will be made available to employees
of the Company beginning at the Effective Time and for a period of not less than
one year after the Effective Time, the terms of which shall provide
substantially equivalent economic value as those found in the Company's employee
benefit plans in effect for the benefit of such employees prior to the Effective
Time. Freedom Securities also agrees to give the Company's employees credit for
all eligibility and vesting they have accrued during their respective terms of
employment with the Company. In addition, the Company's Retirement Savings Plan
will continue in effect after the Effective Time until Freedom Securities shall
have established a comparable retirement plan for all employees of Freedom
Securities and its subsidiaries, including the Surviving Corporation.
6.9 FREEDOM SECURITIES OPTIONS. Freedom Securities agrees to grant on the
Closing Date Freedom Options to those employees of the Company and covering the
number of shares of Freedom Securities Common Stock, as agreed by Freedom
Securities and the company at an exercise price equal to the Stock Price. In
addition, Freedom Securities agrees to make available additional Freedom Options
covering 10,500 shares of Freedom Securities Common Stock to be granted after
the Effective Time on such terms and conditions as may be determined
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by the Company's Board of Directors, subject, however, to the terms and
conditions of the stock option plan under which such Freedom Options are to be
issued. The parties hereto acknowledge and agree that these additional Freedom
Options are to be granted in connection with the Company's efforts to recruit,
hire and retain new employees. Freedom Securities shall (a) reserve for issuance
the number of shares of Freedom Securities Common Stock that will become
issuable upon the exercise of the Freedom Options issued under this Section 6.9
and converted pursuant to Section 2.4 and (b) promptly after the Effective Time,
issue to each holder of a Freedom Option a document evidencing the same. Freedom
Securities agrees to file with the SEC a Registration Statement on Form S-8 or
other appropriate form under the Act relating to the shares of Freedom
Securities Common Stock issuable upon exercise of the Freedom Options on or
before the date which is 181 days after the date of the consummation of the IPO
and use its commercially reasonable efforts to cause such Registration Statement
to remain effective until the exercise or expiration of all such Freedom
Options. Freedom Securities agrees that the Freedom Options issued at the
Closing pursuant to this Section 6.9 will fully vest on the third anniversary of
the Closing Date and that any Freedom Options issued to employees of the Company
after the Closing Date shall fully vest on the third anniversary of the date of
their issuance and in either case, such Freedom Options shall be subject to
acceleration upon a change of control pursuant to the terms of the Freedom
Securities 1998 Long-Term Incentive Plan.
6.10 OPTIONS.
(a) Each unexpired Option which by its terms becomes at the Effective
Time a Freedom Option, shall automatically and without any action on the part of
the holder thereof be converted into a Freedom Option to purchase the number of
shares of Freedom Securities Common Stock equal to the number of shares of
Company Common Stock which could be acquired upon the exercise of such Option
multiplied by the Exchange Ratio (as defined below), at an exercise price per
share of Freedom Securities Common Stock equal to the per share exercise price
of such Option divided by the Exchange Ratio. For purposes hereof, the "Exchange
Ratio" shall be the ratio obtained by dividing the Per Share Consideration by
the Stock Price (rounded down to the nearest whole number).
(b) Subject to Section 2.4(a)(i), and the vesting and exercise price
of Freedom Options described in Section 6.9 above, the terms of the agreements
covering the Freedom Options issuable under this Section 6.10 shall be
substantially similar to the terms of options granted under the Freedom
Securities 1998 Long-Term Incentive Plan.
6.11. COMPANY BONUS PLAN. Freedom Securities agrees to maintain, and shall
cause the Surviving Corporation to maintain, for a period of not less than three
(3) years following the Effective Time, the Cleary Gull Reiland & McDevitt Inc.
1998 Incentive Compensation Plan and the Cleary Gull Partners Profit Sharing
Bonus and Deferred Compensation Plan (collectively, the "Cleary Gull Bonus
Plans"), copies of which have previously been provided to Freedom Securities,
providing incentive compensation to the Equity Group Committee and the
Management Committee and employees in the following departments: (a)
Institutional Sales, (b)
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Fixed Income, (c) Research, (d) Listed Trading, (e) Over-the-Counter Trading,
(f) Syndicate, (g) Investment Banking, (h) Private Client Group and (i)
Administration; PROVIDED, HOWEVER, that the terms and conditions of the Cleary
Gull Bonus Plans and the eligibility and rights to participate of Cleary Gull
employees after the Closing Date may be modified or amended by Freedom
Securities only with the consent of a majority of the Cleary Gull Directors.
6.12. CAPITALIZATION. Freedom Securities agrees to establish, and shall
cause the Surviving Corporation to establish, for a period of three (3) years
following the Effective Time, net capital of not less than $8,200,000; subject,
however, (i) to the provisions of the next sentence and (ii) to being increased
by the amount of any profits generated by the Company after the Closing Date or
being decreased by the amount of losses sustained by the Company after the
Closing Date, all of which shall be determined on a cumulative basis.
Notwithstanding the foregoing, Freedom Securities shall not be required to
maintain (i) net capital in excess of $8,200,000 at any time or (ii) the
foregoing net capital if either (a) the Board of Directors of Freedom Securities
determines in its good faith judgment that the maintenance of such net capital
would render Freedom Securities or any of its subsidiaries incapable of meeting
any of their obligations as they become due or would be prohibited by or
contrary to any rule, regulation or law applicable to the Company or result in a
default under any loan, credit or note purchase agreement or indenture to which
the Company is a party, it being understood and agreed that Freedom Securities
will negotiate any such agreement or indenture so as to permit the Company to
maintain such net capital (except following an event of default declared by the
lender or the indenture trustee under any such agreement) or (b) a majority of
the Cleary Gull Directors agrees to any change or modification to such net
capital.
6.13 TAX MATTERS.
(a) TAX RETURNS. The Company shall prepare and file, consistent with
past practices, all Tax Returns of the Company due on or before the Closing Date
(determined with regard to extensions). At Freedom Securities' request such Tax
Returns shall be subject to the review and comments of Freedom Securities.
Freedom Securities shall prepare and file on behalf of the Company all other Tax
Returns of the Company.
(b) COOPERATION ON TAX MATTERS.
(i) Freedom Securities, the Company and the stockholders of the
Company shall cooperate fully, as and to the extent reasonably requested by
the other party, in connection with the filing of Tax Returns and any
audit, litigation or other proceeding with respect to Taxes. Such
cooperation shall include the retention and (upon the other party's
request) the provision of records and information which are reasonably
relevant to any such Tax Returns, audit, litigation or other proceeding.
The stockholders of the Company shall promptly send copies of any notices
received by any Tax authority with respect to the Company to Freedom
Securities.
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(ii) Freedom Securities, the Company and the stockholders of the
Company further agree, upon written request, to use their best efforts to
obtain any certificate or other document from any Governmental Entity or
any other person as may be necessary to mitigate, reduce or eliminate any
Tax that could be imposed (including, but not limited to, with respect to
the transactions contemplated hereby).
(c) CERTAIN TAXES. Any transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement, shall be paid by the
stockholders of the Company when due, and will, at their expense, file all
necessary Tax Returns and other documentation with respect to all such transfer,
documentary, sales, use, stamp, registration and other Taxes and fees, and, if
required by applicable law, the Company will, and will cause its affiliates to,
join in the execution of any such Tax Returns and other documentation. The
stockholders of the Company shall deliver to Freedom Securities Forms W-8 and
W-9, as applicable, on the Closing Date and prior to any payment of cash for
shares of Company Common Stock. The Company shall have the right to withhold
from payments for any shares of Company Common Stock or Options any withholding
taxes required by law.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION. The respective obligation of
each party to effect the Merger is subject to the satisfaction or waiver on or
prior to the Closing Date of the following conditions:
(a) Company Stockholder Approval. The Company Stockholder Approval
shall have been obtained.
(b) HSR Act. The waiting period (and any extension thereof) applicable
to the Merger under the HSR Act shall have been terminated or shall have
expired.
(c) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect; provided, however, that the
parties hereto shall use their best efforts to have any such injunction, order,
restraint or prohibition vacated.
(d) Consummation of IPO. The IPO shall have been consummated.
(e) Certificate of Merger. The Certificate of Merger shall have been
filed with the Delaware Secretary of State in accordance with the DGCL.
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(f) Escrow Agreement. The Escrow Agreement shall have been executed
and delivered by all parties thereto. All deposits of cash and/or shares of
Freedom Securities Common Stock required under the Escrow Agreement shall have
been made.
7.2 CONDITIONS TO OBLIGATIONS OF FREEDOM SECURITIES AND MERGER SUB. The
obligations of Merger Sub and Freedom Securities to effect the Merger are
further subject to the following conditions:
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement shall be true and correct in all
material respects in each case as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date. Merger Sub and
Freedom Securities shall have received a certificate signed on behalf of the
Company by the chief executive officer and the chief financial officer of the
Company to the effect set forth in this paragraph.
(b) Performance of Obligations of the Company. The Company shall have
performed the obligations required to be performed by it under this Agreement at
or prior to the Closing Date.
(c) Consents, etc. Merger Sub and Freedom Securities shall have
received evidence, in form and substance reasonably satisfactory to it, that all
licenses, permits, consents, approvals, authorizations, qualifications and
orders of governmental authorities and other third parties necessary to
consummate the transactions contemplated hereby shall have been obtained;
provided, however, that the Company's failure to obtain consent to the
assignment of its advisory contracts with its clients representing in the
aggregate less than thirty percent (30%) in annual advisory fee revenue for 1997
shall not be required provided the Company has used its best efforts to obtain
the consent of all such advisory clients.
(d) No Litigation. There shall not be pending or threatened by any
Governmental Entity any suit, action or proceeding (or by any other person any
suit, action or preceding which has a reasonable likelihood of success) (i)
challenging or seeking to restrain or prohibit the consummation of the Merger or
any of the other transactions contemplated by this Agreement, (ii) seeking to
prohibit or limit the ownership or operation by the Company of any material
portion of the business or assets of the Company, to dispose of or hold separate
any material portion of the business or assets of the Company, as a result of
the Merger or any of the other transaction contemplated by this Agreement or
(iii) seeking to impose limitations on the ability of Merger Sub or Freedom
Securities (or any designee of Merger Sub), to acquire or hold, or exercise full
rights of ownership of, any shares of Company Common Stock, including, without
limitation, the right to vote the Company Common Stock on all matters properly
presented to the stockholders of the Company.
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(e) Opinion. Freedom Securities and Merger Sub shall have received an
opinion of Godfrey & Kahn, S.C., counsel to the Company, regarding such legal
matters as Freedom Securities and Merger Sub may reasonably request.
(f) Escrow Deposit. Those holders of Company Common Stock listed on
SCHEDULE 2.5(a) shall have deposited into the Indemnity/Share Retention Fund a
number of shares of Freedom Securities Common Stock determined by dividing the
amount indicated opposite his name on SCHEDULE 2.5(a) by the Stock Price.
7.3 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the Company
to effect the Merger is further subject to the following conditions:
(a) Representations and Warranties. The representations and warranties
of Merger Sub and Freedom Securities set forth in this Agreement shall be true
and correct in all material respects, in each case as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date. The Company shall have received a certificate signed on behalf of Merger
Sub and Freedom Securities by an authorized officer of Merger Sub and Freedom
Securities to the effect set forth in this paragraph.
(b) Performance of Obligations of Merger Sub and Freedom Securities.
Merger Sub and Freedom Securities shall have performed the obligations required
to be performed by them under this Agreement at or prior to the Closing Date.
(c) No Litigation. There shall not be pending or threatened by any
party any suit, action or proceeding challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement or seeking to obtain from the Company (or any of
its directors) any significant damages.
(d) Merger Consideration. All shares of Freedom Securities Common
Stock constituting the Total Stock Consideration shall have been issued and,
except as provided in Article II, all cash constituting the Total Cash
Consideration shall have been paid by wire transfer of immediately available
funds or cashier's check to the holders of the Company Common Stock in
accordance with the terms of Article II.
(e) Indemnification Agreement. Freedom Securities shall have executed
and delivered to the holders of Company Common Stock identified on SCHEDULE
2.5(a) the Indemnification Agreement.
(f) Opinion. The Company shall have received an opinion of Hutchins,
Wheeler & Dittmar, counsel to Freedom Securities and Merger Sub, on such matters
as the Company may reasonably request.
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<PAGE> 43
ARTICLE VIII
INDEMNIFICATION
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except for the
representations and warranties set forth in Section 3.10 which shall survive
until the fourth anniversary of the Closing Date, none of the representations
and warranties in this Agreement or in any instrument delivered pursuant to this
Agreement shall survive the Effective Time and all such representations and
warranties will be extinguished on consummation of the Merger and neither the
Company nor any officer, director or employee or shareholder shall be under any
liability whatsoever with respect to any such representation or warranty after
such time. This Section 8.1 shall not limit any covenant or agreement of the
parties which by its terms contemplates performance after the Effective Time.
8.2 INDEMNIFICATION. Each stockholder of the Company identified on
SCHEDULE 2.5(a) hereto, by virtue of his or her execution of the Escrow
Agreement and the Indemnification Agreement, severally agrees to indemnify and
hold harmless Freedom Securities and the Surviving Corporation from and after
the Effective Time and until the fourth anniversary of the Effective Date
against and with respect to any and all loss, injury, damage or deficiency
resulting from (i) any misrepresentation or breach of warranty on the part of
the Company under Section 3.10 hereof and (ii) those matters set forth on
SCHEDULE 8.2 hereto.
8.3 PROCEDURES FOR INDEMNIFICATION. Promptly after receipt by an
indemnified party pursuant to the provisions of Section 8.2 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provision, such indemnified party shall, if a claim thereof is to be
made against an indemnifying party pursuant to the provisions of Section 8.2,
promptly notify such indemnifying party of the commencement thereof; provided,
however, that failure to give such notice shall not affect the indemnifying
party's obligation to provide indemnification hereunder unless such failure
actually prejudices the indemnifying party's ability to defend adequately such
action. In case such action is brought against an indemnified party and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party shall have the right to participate in, and, to the extent that it may
wish, to assume the defense thereof, with satisfactory counsel (of the
indemnifying party's choice); provided, however, if the defendants in any action
include both the indemnified party and the indemnifying party, and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it which are different from or additional to those
available to the indemnifying party, the indemnified party shall have the right,
at its own expense, to select separate counsel to participate in the defense of
such action on behalf of such indemnified party. After notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party shall not be liable to the indemnified
party pursuant to the provisions of such Section 8.2 for any legal or other
expense subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party, in the
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<PAGE> 44
defense of any such claim or litigation, shall, except with the consent of each
indemnified party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the release of the
indemnified party from all liability in respect to such claim or litigation.
8.4 NET BENEFITS. The determination of any liability, claim, lien,
encumbrance, charge, fine or penalty for which indemnification may be claimed
under Section 8.2 shall be net of any tax or other benefit derived, insurance
proceeds or third party reimbursements received (but adjusted for any tax
incurred as a result of the receipt of such amounts) by the party bearing such
liability, claim, lien, encumbrance, charge, fine or penalty as a result
thereof.
8.5 BASKET; MAXIMUM AMOUNT.
(a) The Company shall not be required to provide indemnification under
Section 8.2 unless the indemnified party's damages for all such claim(s) of
indemnification exceed in the aggregate two hundred fifty thousand dollars
($250,000) (the "Basket Amount"), and then only for amounts in excess of the
Basket Amount.
(b) In no event shall the Company's liability with respect to all
claims of indemnification under Section 8.2 exceed the aggregate amount of two
million five hundred thousand dollars ($2,500,000).
(c) Any indemnification amounts payable under this Article VIII shall
be treated by Freedom Securities, the Company and the stockholders of the
Company as an adjustment to the Merger Consideration under Article II.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1 TERMINATION. This Agreement may be terminated and abandoned at any
time prior to the Effective Time, whether before or after approval of matters
presented in connection with the Merger by the voting stockholders of the
Company;
(a) by mutual written consent of Merger Sub, Freedom Securities and
the Company; or
(b) by any of Merger Sub, Freedom Securities or the Company if any
Governmental Entity shall have issued an order, decree or ruling or taken any
other action permanently enjoining, restraining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have become final
and nonappealable; or
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<PAGE> 45
(c) by any of Merger Sub, Freedom Securities or the Company if the
Merger shall not have been consummated on or before May 31, 1998 (other than due
to the failure of the party seeking to terminate this Agreement to perform its
obligations under this Agreement required to be performed at or prior to the
Effective Time); or
(d) by any of Merger Sub, Freedom Securities or the Company, if the
Company Stockholder Approval shall not have been obtained.
9.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either the Company, Freedom Securities or Merger Sub as provided in Section
9.1, this Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of Merger Sub or the Company, other than the
provisions of Section 3.12, the last sentence of Section 6.1(a), this Section
9.2, Section 10.2 and Section 10.7.
9.3 AMENDMENT. This Agreement may be amended by the parties at any time
before or after the Company Stockholder Approval; provided, however, that after
any such approval, there shall be made no amendment that by law requires further
approval by such stockholders without the further approval of such stockholders.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties.
9.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement and (c) subject to the proviso of Section
9.3, waive compliance with any of the agreements or conditions contained in this
Agreement. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party. The failure of any party to this Agreement to assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of such
rights.
9.5 PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR WAIVER. A
termination of this Agreement pursuant to Section 9.1, an amendment of this
Agreement pursuant to Section 9.3 or an extension or waiver pursuant to Section
9.4 shall, in order to be effective, be in writing and require in the case of
Merger Sub, Freedom Securities or the Company action by its Board of Directors
or the duly authorized designee of its Board of Directors.
ARTICLE X
GENERAL PROVISIONS
10.1 FEES AND EXPENSES. All costs and expenses incurred in connection with
this Agreement, and the transactions contemplated hereby shall be paid by the
party incurring such expenses.
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<PAGE> 46
10.2 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered by facsimile transmission (with electronic confirmation),
personally or sent by overnight courier (providing proof of delivery) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Freedom Securities or Merger Sub:
c/o Freedom Securities Corporation
One Beacon Street
Boston, MA 02108
Attn: Gregory N. Thomas
Facsimile: (617) 725-1789
with a copy to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Attn: James Westra, Esq.
Facsimile: (617) 951-1295
(b) if to the Company:
Cleary Gull Reiland & McDevitt Inc.
100 East Wisconsin Avenue, Suite 2400
Milwaukee, WI 53202
Attn: David P. Prokupek
Facsimile: (414) 291-4558
with copies to:
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
Attn: Christopher B. Noyes, Esq.
Facsimile: (414) 273-5198
10.3 DEFINITIONS. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly or
indirectly, through one of more intermediaries, controls, is controlled by, or
is under control with, such first person;
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<PAGE> 47
(b) "knowledge", with respect to the Company means the actual
knowledge, after due inquiry, of the following officers and employees of the
Company: Michael J. Cleary, David P. Prokupek, John R. Peterson and Martin G.
Pembroke.
(c) "Material Adverse Change" or "Material Adverse Effect" means, when
used in connection with the Company or Freedom Securities, any change or effect
that either individually or in the aggregate with all other such changes or
effects is materially adverse to the business, financial condition or results of
operations of the Company or Freedom Securities and its subsidiaries, as the
case may be, taken as a whole and the terms "material' and "materially" shall
have correlative meanings;
(d) "person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity; and
(e) a "subsidiary" of any person means another person, an amount of
the voting securities, other voting ownership or voting partnership interest
which is sufficient to elect at least a majority of its Board of Directors (or
other governing body) or, if there are no such voting interests, 50% or more of
the equity interests of which is owned directly or indirectly by such first
person.
10.4 INTERPRETATION. When a reference is made in this Agreement to a
Section, Exhibit or Schedule, such reference shall be to a section of, or an
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
10.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
10.6 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFITS. This Agreement and the
other agreements referred to herein constitute the entire agreement, and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter of this Agreement.
10.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF THE LAWS THAT
MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS.
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<PAGE> 48
10.8 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise by any of the parties without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
10.9 ENFORCEMENT. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached, and it is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement.
[Remainder of Page Intentionally Left Blank]
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<PAGE> 49
IN WITNESS WHEREOF, the parties below have caused this Agreement to be duly
executed by persons duly authorized, all as of the date first written above.
FREEDOM SECURITIES CORPORATION
By: /s/ John H. Goldsmith
----------------------------------
Name: John H. Goldsmith
Title: President
CGRM MERGER CORP.
By: /s/ John H. Goldsmith
----------------------------------
Name: John H. Goldsmith
Title: President
CLEARY GULL REILAND &
MCDEVITT INC.
By: /s/ David Prokupek
----------------------------------
Name: David Prokupek
Title: CEO
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<PAGE> 1
EXHIBIT 10.21
EXHIBIT E
REGISTRATION RIGHTS
This Exhibit sets forth the registration rights which apply to holders of
Company Common Stock who receive Freedom Securities Common Stock upon the
consummation of the transactions contemplated by the Agreement or upon exercise
of Freedom Options after the Closing Date and prior to the effectiveness of the
S-8 Registration Statement referred to in Section 6.9 of the Agreement. Terms
not otherwise defined in this Exhibit shall have the meanings ascribed to them
in the Agreement.
SECTION 1. REGISTRATION RIGHTS. On or before the 120th day following the
closing date of the IPO, Freedom Securities shall file a registration statement
on Form S-1 (the "Registration Statement") with the SEC covering all of the (a)
shares of Freedom Securities Common Stock issued in connection with the Merger
(other than those shares of Freedom Securities held pursuant to the Escrow
Agreement) and (b) any shares of Freedom Securities Common Stock which holders
of Company Common Stock have received pursuant to the exercise of Freedom
Options after the Closing Date and prior to the effectiveness of the S-8
Registration Statement referred to in Section 6.9 of the Agreement (all such
shares being referred to herein as the "Covered Stock"). Freedom Securities
agrees to include in the Registration Statement all information which holders of
Covered Stock shall reasonably request. Freedom Securities shall pay all
expenses incurred in connection with the Registration Statement pursuant to this
Section 1, including, without limitation, registration and filing fees, all fees
and expenses of complying with state securities or blue sky laws, listing fees,
duplicating and printing expenses (including the cost of furnishing copies of
each preliminary prospectus, each final prospectus and each amendment or
supplement thereto to brokers, dealers and purchasers of the Covered Stock),
fees and expenses of its counsel and counsel to the holders of the Covered
Stock, fees and expenses of the independent accountants to Freedom Securities
and all other expenses incident to the preparation, printing and filing of the
Registration Statement under this Section 1 and all supplements and amendments
thereto.
SECTION 2. REGISTRATION PROCEDURES. (a) In connection with the filing of
the Registration Statement, Freedom Securities shall promptly:
(i) prepare and file the Registration Statement with the SEC
on or before the 120th day following the closing date of the IPO and
thereafter use its best efforts to cause the Registration Statement to
become effective on or before the 181st date after the closing date of
the IPO and remain effective for a period of 365 days after the Closing
Date; PROVIDED, HOWEVER, that before filing the Registration Statement
or any amendments thereto, Freedom Securities shall furnish to counsel
selected by the holders of Covered Stock, copies of all such documents
proposed to be filed, which documents will be subject to the review by
and approval of such counsel;
<PAGE> 2
(ii) prepare and file with the SEC such amendments and
supplements to the Registration Statement and the prospectus used in
connection therewith as may be necessary to keep the Registration
Statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by the
Registration Statement until the expiration of (i) 365 days after the
Closing Date or (ii) until the distribution of the Covered Stock is
complete, whichever shall be first to occur;
(iii) furnish to each holder of Covered Stock such number of
copies of the Registration Statement and of each amendment and
supplement thereto (in each case including all exhibits), such number of
copies of the prospectus contained in the Registration Statement
(including each preliminary prospectus and any summary prospectus) and
any other prospectus filed under Rule 424 under the Securities Act, in
conformity with the Securities Act, and such other documents as such
holder may reasonably request in order to facilitate the public sale or
other disposition of the Covered Stock owned by such holder;
(iv) use its best efforts to cause all Covered Stock to be
registered with or approved by such other governmental agencies or
authorities as may be necessary to enable the holder or holders thereof
to consummate the disposition of such Covered Stock;
(v) furnish to the holders of Covered Stock a signed
counterpart, addressed to such holders of an opinion of counsel for
Freedom Securities, dated the effective date of the Registration
Statement reasonably satisfactory in form and substance to counsel to
such holders covering substantially the same matters with respect to the
Registration Statement as are customarily covered in opinions of
issuer's counsel delivered to underwriters in firm commitment
underwritings of securities;
(vi) notify the holders of Covered Stock promptly and confirm
such advice in writing promptly thereafter:
(A) when the Registration Statement, the
prospectus or any prospectus supplement related thereto or
post-effective amendment to the Registration Statement has been
filed, and, with respect to the Registration Statement or any
post-effective amendment thereto, when the same has become
effective;
(B) of any request by the SEC for amendments
or supplements to the Registration Statement or the prospectus
or for additional information;
(C) of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement
or the initiation of any proceedings by any person for that
purpose; and
2
<PAGE> 3
(D) of the receipt by Freedom Securities of
any notification with respect to the suspension of the
qualification of any Covered Stock for sale under the securities
laws of any jurisdiction or the initiation or threat of any
proceedings for such purpose;
(vii) notify each holder of Covered Stock at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, upon Freedom Securities' discovery that, or upon the
happening of any event as a result of which, the prospectus included in
the Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing, and
at the request of any such holder promptly prepare and furnish to such
holder a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered
to the purchasers of such Covered Stock, such prospectus shall not
include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing;
(viii) use its best efforts to obtain the withdrawal of any
order suspending the effectiveness of the Registration Statement at the
earliest possible moment;
(ix) make available for inspection by a representative of the
holders of Covered Stock and any attorney retained by such holders
(each, a "Representative"), all financial and other records, pertinent
corporate documents and properties of Freedom Securities (the
"Records"), and cause Freedom Securities' officers, directors and
employees to supply all information reasonably requested by any such
Representative in connection with such registration; provided, however,
that Freedom Securities shall not be required to comply with this
subsection (x) if there is a reasonable likelihood, in the judgment of
Freedom Securities, that such delivery could result in the loss of any
attorney-client privilege related thereto; and provided further that
Records which Freedom Securities determines, in good faith, to be
confidential and which it notifies the Representatives are confidential
shall not be disclosed by the Representatives (other than to any holder
of Covered Stock) unless (A) such Records have become generally
available to the public or (B) the disclosure of such Records may be
necessary or appropriate (1) to comply with any law, rule, regulation or
order applicable to any such Representatives or holder of Covered Stock,
(2) in response to any subpoena or other legal process or (3) in
connection with any litigation to which such Representatives or any
holder of Covered Stock is a party (provided that Freedom Securities is
provided with reasonable notice of such proposed disclosure and a
reasonable opportunity to seek a protective order or other appropriate
remedy with respect to such Records); and
(x) use its best efforts to list all Covered Stock on any
securities exchange on which Freedom Securities Common Stock is then
listed.
3
<PAGE> 4
Freedom Securities may require each holder of Covered Stock to furnish Freedom
Securities with such information regarding such holder and the distribution of
such Covered Stock as Freedom Securities may from time to time reasonably
request in writing for purposes of preparing the Registration Statement and
amendments and supplements thereto.
(b) Subject to Section 3, below, each holder agrees by acquisition
of Covered Stock that, upon receipt of any notice from Freedom Securities of the
occurrence of any event of the kind described in Section 2(a)(vii), such holder
will forthwith discontinue such holder's disposition of Covered Stock pursuant
to the Registration Statement until such holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 2(a)(vii).
(c) If the Registration Statement refers to any holder of Covered
Stock by name or otherwise as the holder of any securities of Freedom
Securities, then such holder shall have the right to require, in the event that
such reference to such holder by name or otherwise is not required by the
Securities Act or any similar federal statute then in force, the deletion of the
reference to such holder.
SECTION 3. SUSPENSION OF SALES UNDER REGISTRATION STATEMENT. On not more
than one occasion, and only upon notice to the holders of Covered Stock, Freedom
Securities shall be entitled to suspend the ability of such holders to sell
Covered Stock pursuant to the Registration Statement (a "Suspension") if the
Board of Directors of Freedom Securities determines in its good faith judgment
based on the advice of outside legal counsel that such suspension is necessary
because shares cannot be sold under the Registration Statement without amending
the Registration Statement or preparing a supplement to the prospectus to
reflect the occurrence of any event of the kind described in Section 2(a)(vii);
PROVIDED, HOWEVER, that, at such time as the Board of Directors of Freedom
Securities determines, in its good faith judgment based upon the advice of
outside legal counsel, that a Suspension is no longer necessary, Freedom
Securities shall promptly so notify the holders of Covered Stock and permit the
sale of shares of Covered Stock pursuant to the Registration Statement. The
Board of Directors shall use its best efforts to minimize the length of time
during which a Suspension is imposed pursuant to this Section 3.
SECTION 4. EXERCISE OF REGISTRATION RIGHTS BY THOMAS H. LEE EQUITY FUND
III, L.P., THOMAS H. LEE FOREIGN FUND III, L.P. AND THL-CCI LIMITED PARTNERSHIP.
Upon notice to holders of Covered Stock, Freedom Securities shall be entitled to
terminate the effectiveness of the Registration Statement no more than 20 days
prior to the anticipated effectiveness of a registration statement filed by the
Company on behalf of Thomas H. Lee Equity Fund III, L.P., Thomas H. Lee Foreign
Fund III, L.P. and THL-CCI Limited Partnership (the "Lee Holders") pursuant to
that certain Stockholders Agreement dated as of November 30, 1996 (the "Lee
Registration Statement"); provided, however, that upon the request of any holder
with respect to shares of Covered Stock which have not been sold pursuant to the
Registration Statement, such shares of Covered Stock shall be included in the
Lee Registration Statement. Holders of Covered Stock which is included in the
Lee Registration Statement shall enter into an underwriting
4
<PAGE> 5
agreement with the managing underwriter of the Freedom Securities Common Stock
included in the Lee Registration Statement upon substantially the same terms as
the Lee Holders.
SECTION 5. INDEMNIFICATION. (a) Freedom Securities agrees to indemnify
and hold harmless each holder of Covered Stock against any losses, claims,
damages or liabilities, joint or several, to which any such indemnified party
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement under which Covered Stock was registered under the
Securities Act, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
Freedom Securities will reimburse each such indemnified party for any legal or
any other expenses reasonably incurred by them in connection with investigating
or defending any such loss, claim, liability, action or proceeding; provided,
however, that Freedom Securities shall not be liable in any such case to the
extent that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information finished to Freedom Securities by or on behalf of such
holder specifically for use in the preparation thereof. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of such holder and shall survive the transfer of Covered Stock by such
holder.
(b) Each holder of Covered Stock shall indemnify and hold harmless
(in the same manner and to the same extent as set forth in subdivision (a) of
this Section 5) Freedom Securities, each director of Freedom Securities, each
officer of Freedom Securities and each other person, if any, who controls
Freedom Securities within the meaning of the Securities Act, with respect to any
statement or alleged statement in or omission or alleged omission from the
Registration Statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereof, if such
statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to Freedom
Securities by or on behalf of such holder specifically for use in the
preparation of the Registration Statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement. Any such indemnity
shall remain in full force and effect, regardless of any investigation made by
or on behalf of Freedom Securities or any such director, officer or controlling
person and shall survive the transfer of such securities by such holder. The
amount payable by any holder of Covered Stock with respect to the
indemnification set forth in this subsection (b) in connection with any offering
of securities will not exceed the amount of net proceeds received by such holder
pursuant to such offering.
5
<PAGE> 6
(c) Promptly after receipt by an indemnified party of notice of the
commencement of any action or proceeding involving a claim referred to in the
preceding subdivisions of this Section 5, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party, give
written notice to the latter of the commencement of such action; provided,
however, that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligations under the
preceding subdivisions of this Section 5, except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice. In
case any such action is brought against an indemnified party, unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, the
indemnifying party shall be entitled to participate in and to assume the defense
thereof, jointly with any other indemnifying party similarly notified, to the
extent that the indemnifying party may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
for any legal or other expenses subsequently incurred by the latter in
connection with the defense thereof. No indemnifying party shall, without the
consent of the indemnified party, consent to entry of any judgment or enter into
any settlement of any such action which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect to such claim or litigation. No
indemnified party shall consent to entry of any judgment or enter into any
settlement of any such action the defense of which has been assumed by an
indemnifying party without the consent of such indemnifying party.
(d) If for any reason the foregoing indemnification is unavailable
or insufficient to hold any indemnified party harmless, then the indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such loss, claim, damage or liability in such proportion as is
appropriate to reflect not only the relative benefits received or receivable by
the indemnifying party, on the one hand, and such indemnified party, on the
other hand, but also the relative fault of the indemnifying party and any
indemnified party, as well as any other relevant equitable considerations. The
reimbursement, indemnity and contribution obligations of the indemnifying party
under this Section 5 shall be in addition to any liability which the
indemnifying party may otherwise have at law or equity.
Freedom Securities and the holders agree that it would not be just and equitable
if contribution pursuant to this subdivision (d) were determined by pro rata
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph
and subdivision (c) of this Section 5. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim.
6
<PAGE> 7
Notwithstanding the provisions of this subdivision (d), a holder of Covered
Stock shall not be required to contribute any amount in excess of the amount by
which the net proceeds received by such holder from the sale of Covered Stock
exceeds the amount of any damages that such holder has by reason of such untrue
or alleged untrue statement or omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
SECTION 6. ASSIGNABILITY. The rights and obligations of each holder of
Covered Stock hereunder may be assigned by it to any person to whom such holder
transfers any shares of Covered Stock.
7
<PAGE> 1
EXHIBIT 10.22
CHATTEL LEASING
SECURITY AGREEMENT
This Chattel Leasing Agreement ("Agreement") is entered into as of November
29, 1996 by and between T. A. Leasing Corp. c/o Tucker Anthony Incorporated, One
Beacon Street, Boston, Massachusetts 02108 (hereinafter called "Borrower") and
BANCBOSTON LEASING INC., 100 Federal Street, Boston, Massachusetts 02110
(hereinafter called "BancBoston"). Borrower hereby grants to BancBoston to
secure the payment of $25,818,941.00 plus interest and other charges as provided
in a certain Chattel Leasing Promissory Note of even date herewith from Borrower
to the order of BancBoston (the "Note") and also to secure the payment and
performance of all obligations of Borrower hereunder and the payment and
performance of all other obligations of Borrower to BancBoston whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, including in connection with any FUTURE ADVANCES (all of the
foregoing, being hereinafter called the "Obligations"), a continuing security
interest in the following personal property of Borrower wherever located,
whether now owned or hereafter acquired or arising, and any and all additions,
substitutions, accessions and proceeds thereto or thereof together with the
right to any and all manuals and other materials that contain technical data
relating to the use, operation or structure of the following (all of the same
being hereinafter called the "Collateral"):
All personal and fixture property of every kind and nature including
without limitation all furniture, fixtures, equipment, raw materials, inventory,
goods, accounts, contract rights (including rights under operating leases
wherein Borrower is lessor), rights to the payment of money, insurance refund
claims and all other insurance claims and proceeds, tort claims, chattel paper,
documents, instruments (including certified securities), deposit accounts and
all general intangibles including, without limitation, all uncertificated
securities, tax refund claims, license fees, patents, patent applications,
trademarks, trademark applications, trade names, copyrights, copyright
applications, rights to sue and recover for past infringement of patents,
trademarks and copyrights, computer programs, computes software, engineering
drawings, service marks, customer lists, goodwill, and all licenses, permits,
agreements of any kind or nature pursuant to which Borrower possesses, uses or
has authority to possess or use property (whether tangible or intangible) of
others or others possess, use or have authority to possess or use property
(whether tangible or intangible) of Borrower, and all recorded data of any kind
or nature, regardless of the medium of recording including, without limitation,
all software, writings, plans, specifications and schematics.
Borrower hereby warrants and covenants that:
1. LOCATION. The Collateral will be kept at the locations listed on
SCHEDULE 1 hereto and Borrower will not remove the Collateral from such
locations without providing at least 30 days prior written notice to BancBoston.
2. LIENS. Except for the security interest granted hereby, Borrower is
the sole legal and equitable owner of the Collateral free from all encumbrances
and will defend the same against the claims and demand of all persons claiming
the same interests or any interests adverse to BancBoston. Borrower has good
right and legal authority to create a security interest in the Collateral in the
manner herein contemplated. Borrower will not pledge, mortgage or create, or
suffer to exist, a security interest in the Collateral in favor of any person
other than BancBoston, except for liens to secure taxes, assessments and other
government
<PAGE> 2
-2-
charges in respect of obligations not overdue or liens on properties to secure
claims for labor, materials or supplies in respect of obligations not overdue,
and will promptly notify BancBoston of any lien or security interest asserted or
any attachment, levy, execution or other legal process levied against or
involving the Collateral, and will not sell or transfer the Collateral or any
interest therein without the prior written consent of BancBoston.
3. PERSONAL PROPERTY. The Collateral shall remain personal property and
not be deemed to be a fixture irrespective of the manner of its attachment to
any real estate. If the Collateral is attached to real estate, Borrower will
promptly notify BancBoston, and will, on demand of BancBoston, use commercially
reasonable efforts to furnish to BancBoston a waiver or disclaimer signed by
each person having an interest in the real estate, of any interest in the
Collateral. Borrower will notify BancBoston in writing of any intended sale,
mortgage or of the terms and conditions of this Agreement to any prospective
purchaser, mortgagee, grantee or other transferee of the real estate or any
interest therein. Borrower will use commercially reasonable efforts to deliver
to BancBoston, no later than ninety (90) days after the date hereof, a waiver in
the form of SCHEDULE 3(a) hereto executed by each record owner and mortgagee of
real estate where the Collateral is located. The Collateral shall be used solely
by Borrower and its affiliates, and if the Collateral is used by an affiliate of
Borrower, Borrower shall lease the Collateral to such person pursuant to a
written lease in the form of SCHEDULE 3(b) hereto containing terms satisfactory
to BancBoston, shall deliver a manually signed original of such executed lease
to BancBoston, shall obtain and file signed financing statements in form and
substance satisfactory to BancBoston covering the Collateral so leased and shall
assign such financing statements to BancBoston.
4. CHANGE OF ADDRESS; FURTHER ASSURANCES. Borrower will promptly notify
BancBoston in writing of any change in address from that shown in this
Agreement, shall at all reasonable times and from time to time allow BancBoston,
by or through any of its officers, agents, attorneys or accountants, to examine,
inspect or make extracts from Borrower's books and records or inspect the
Collateral wherever located, and shall do, make, execute and deliver all such
additional and further acts, things, deeds, assurances and instruments as
BancBoston may reasonably require more completely to vest in and assure to
BancBoston its rights hereunder or in any of the Collateral.
5. INSURANCE. Borrower will keep the Collateral at all times insured by
such insurance satisfactory to BancBoston, and in any event and without specific
request by BancBoston, will insure the Collateral on an "all-risk" basis
including so-called extended coverage against fire, theft, and, in the case of
any motor vehicle, collision, and, without limiting the requirements of this
Section 5, in accordance with the insurance requirements set forth on SCHEDULE 5
hereto. All policies of insurance shall be with such insurance companies
satisfactory to BancBoston, and shall state that loss thereon is payable to
BancBoston (as loss payee and additional insured) and Borrower as their
respective interests may appear. All policies of insurance shall provide for not
less than thirty (30) days' notice of cancellation or change in form or
nonrenewal to BancBoston and shall insure the interest of BancBoston regardless
of any breach or violation by the Borrower or other person of the warranties,
declarations or covenants contained in such policies and, if requested by
BancBoston, shall be delivered to and held by it until all of the Obligations
have been fully performed. Borrower expressly authorizes BancBoston, after a
default under Section 8 of this Agreement, to adjust and settle claims under any
insurance policy relating to the Collateral. After a default under Section 8 of
this Agreement, BancBoston may act as attorney for Borrower in making and
settling claims under any insurance covering the Collateral.
6. MAINTENANCE; TAXES. Borrower will keep the Collateral in good order
and repair, reasonable wear and tear excepted, and will not use the same in
violation of law or any policy of
<PAGE> 3
-3-
insurance thereon. Borrower will pay promptly when due all taxes and assessments
upon the Collateral or for its use or operation or upon this Agreement, except
for taxes and assessments being contested by Borrower in good faith and with
respect to which adequate reserves have been established.
7. DISCHARGE OF ENCUMBRANCES. In the exercise of its reasonable
discretion, BancBoston may pay or discharge taxes and other encumbrances at any
time levied or placed on the Collateral, make repairs thereof and place and pay
for insurance thereon and pay any necessary filing fees. Borrower agrees to
reimburse BancBoston on demand for any and all expenditures so made, and until
paid the amount thereof shall be an Obligation secured by the Collateral and
bear interest until paid at the rate for overdue payments under the Note.
BancBoston shall have no obligation to Borrower to make any such expenditures
nor shall the making thereof relieve Borrower of any default.
8. DEFAULT; REMEDIES. Borrower may have possession and use of the
Collateral until default. Upon the happening of any of the following events or
conditions (each a "default"), namely: (a) default (i) in the payment of any
installment of principal or interest under the Note when the same becomes due
and payable, whether on the scheduled date or any accelerated date, (ii) in the
payment of any Obligation (other than those in the preceding clause (i)) within
three (3) days after the same becomes due and payable, whether when ordinarily
payable or upon acceleration, (iii) in the payment to BancBoston of any monetary
obligation within three (3) days after the same becomes due by any endorser,
guarantor or surety of or for any of the Obligations, (iv) in the performance by
Borrower of any covenant contained herein or in the Note (other than the
covenants in ss.ss.5, 10 and 12 hereof, as to which no grace period shall
apply), which default remains unremedied for twenty (20) days, (v) in the
performance by any guarantor of the Obligations of any covenant in such
guarantor's guaranty, after giving effect to all applicable grace periods, (vi)
in the performance of any obligation or covenant of Borrower to BancBoston under
any other note or security agreement, or any obligation to BancBoston of any
endorser, guarantor or surety for any of Borrower's obligations thereunder,
after giving effect to all applicable grace periods, (b) default in the payment
or performance of (i) any promissory note, credit agreement, loan agreement,
conditional sales contract, guaranty, lease, indenture, bond, debenture or other
material obligation whatsoever to which Borrower is a party or by which Borrower
is bound in excess of $3,000,000 as a result of which default a party thereto or
a holder thereof is entitled to accelerate the obligations of Borrower
thereunder, and such default has not been waived or cured in accordance with the
terms of the contract pursuant to which it is payable, or (ii) any trade, tax or
other current obligation of Borrower in excess of $3,000,000 as they mature,
unless such obligations are being contested diligently and in good faith; (c)
any representation or warranty of Borrower in this Agreement proves false,
erroneous or misleading in any material respect; (d) loss, theft, material
damage or destruction of or to any of the Collateral to the extent not covered
by insurance (provided that the occurrence of the events described in this
clause (d) shall not constitute a default for purposes of this clause (d) until
such time as the aggregate book value of Collateral subject to events described
in this clause (d) which is not covered by insurance equals or exceeds
$1,000,000, and in such event shall constitute a default only if after such
aggregate book value of Collateral not covered by insurance exceeds such amount
Borrower does not immediately prepay the Obligations under the Note in an amount
equal to the amount of the loss, theft, damage or destruction or replace such
Collateral with assets of equivalent value reasonably acceptable to BancBoston);
(e) involuntary liens on any Collateral which do not secure any obligation which
is otherwise prohibited by this Agreement and which are removed or discharged
within thirty (30) days so long as (i) Borrower immediately (and in any event
within ten days of imposition of the lien) gives BancBoston written notice of
the lien, (ii) Borrower in BancBoston's reasonable judgment is taking all
reasonable steps to remove the lien, (iii) in BancBoston's reasonable judgment
there is a reasonable likelihood the lien will be removed and (iv) no
foreclosure proceedings are
<PAGE> 4
-4-
instituted or execution levied; (f) dissolution, termination of existence,
insolvency, business failure, appointment of a receiver of any part of the
property of, assignment for the benefit of creditors by, or the commencement of
any proceeding under any bankruptcy or insolvency laws by or against Borrower,
any lessee of Collateral pursuant to a lease described in Section 3, or any
endorser, guarantor or surety of or for any Obligation (provided that nothing
herein shall be deemed to cause a default if any lessee of Collateral or
endorser, guarantor (other than JHFSC Acquisition Corp.) or surety of or for any
Obligation terminates its existence or dissolves and such action is, in the
judgment of Borrower, desirable and does not have a material adverse effect on
the business, operations or condition (financial or otherwise) of Borrower) and,
in the case of any bankruptcy or insolvency proceeding commenced against
Borrower, any lessee of Collateral pursuant to a lease described in Section 3,
or any endorser, guarantor or surety of or for any Obligation, Borrower or any
such other person shall indicate its approval thereof, consent thereto or
acquiescence therein or such proceeding shall not have been dismissed within
sixty (60) days following the filing thereof; (g) such a change in the ownership
of Borrower by JHFSC Acquisition Corp. as in the opinion of BancBoston increases
its risk; (h) any default under any lease entered into by Borrower pursuant to
Section 3 hereof (provided that so long as no default exists hereunder or would
exist after giving effect to any such waiver, Borrower may waive defaults (other
than insolvency defaults) under any such lease); or (i) any Event of Default
under and as defined in that certain Revolving Credit Agreement dated as of
November 29, 1996, by and among JHFSC Acquisition Corp., the other lenders named
therein and The First National Bank of Boston for itself and as agent shall have
occurred; thereupon, and as long as such event continues, BancBoston may
immediately without notice or demand declare all of the Obligations to be due
and payable, and BancBoston shall then have in any jurisdiction where
enforcement hereof is sought, in addition to all other rights and remedies, the
rights and remedies of a secured party under the Uniform Commercial Code of
Massachusetts, including without limitation, the right to take immediate
possession of the Collateral, and for such purpose BancBoston may, so far as
Borrower can give authority therefor, enter upon any premises on which the
Collateral, or any part thereof, may be situated and remove the same therefrom
without liability to Borrower for damages related thereto.
In addition, after the occurrence of a default, the following provisions
shall apply: Borrower will upon demand make the Collateral available to
BancBoston at a place and time designated by BancBoston which is reasonably
convenient to both parties. BancBoston may sell, lease or otherwise dispose of
the Collateral at public or private sale with or without having the Collateral
at the place of sale and upon terms and in such manner as BancBoston may
determine and, unless prohibited by applicable law, BancBoston may purchase any
Collateral at such sale. Upon such sale the Collateral shall be held by the
purchaser absolutely free of any claims or rights whatsoever, all such rights or
claims hereof being waived and released by the Borrower. Prior to disposition of
Collateral pursuant to this Agreement, BancBoston may, at its option, cause any
of the Collateral to be repaired or reconditioned, but not upgraded unless
mutually agreed, in such manner and to such extent as to make such Collateral
saleable, and all reasonable sums expended therefor by BancBoston shall be
repaid by Borrower and be part of the Obligations secured hereby. Unless the
Collateral threatens to decline rapidly in value, BancBoston will give Borrower
at least five days' prior written notice of the time and place of any public
sale of the Collateral or of the time after which any private sale thereof is to
be made. From the proceeds of the sale, BancBoston shall be entitled to retain
(i) all sums secured hereby, (ii) its reasonable expenses of retaking, holding,
preparing for sale and selling, and (iii) reasonable legal expenses incurred by
it in connection herewith and with such sale.
9. WAIVERS. Borrower waives demand, notice, protest, notice of acceptance
of this Agreement, notice of loans made, credit extended, Collateral received or
delivered or other action taken in reliance hereon and all other demands and
notices of any description. With respect both to the Obligations and the
Collateral, Borrower assents to any extension or
<PAGE> 5
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postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of Collateral, to the addition or release of
any party or person primarily or secondarily liable, to the acceptance of
partial payment thereon and the settlement, compromising or adjusting of any
thereof, all in such manner and at such time or times as BancBoston may deem
advisable. BancBoston shall have no duty (other than the duty of reasonable
care) as to the collection or protection of the Collateral or any income
thereon, nor as to the preservation of rights against prior parties or relating
to the Collateral. BancBoston may exercise its rights with respect to the
Collateral without resorting or regard to other collateral or sources of
reimbursement for liability. BancBoston shall not be deemed to have waived any
of its rights relating to the Obligations or the Collateral unless such waiver
is in writing and signed by BancBoston. No delay or omission on the part of
BancBoston in exercising any right shall operate as a waiver of such right or
any other right. A waiver on any one occasion shall not be construed as a bar to
or waiver of any right on any future occasion. All rights and remedies of
BancBoston relating to the Obligations or the Collateral, whether evidenced
hereby or by any other instrument or papers, shall be cumulative and may be
exercised separately or concurrently. At any time upon written request of
BancBoston, at the sole expense of the Borrower, the Borrower will promptly and
duly execute and deliver any and such further instruments and documents and take
such further action as BancBoston may reasonably deem desirable in obtaining the
full benefit of this Agreement and of the rights and powers herein granted. The
Borrower also authorizes BancBoston to act as Borrower's agent in order to file
any financing statement or continuation statement under the Uniform Commercial
Code without the signature of Borrower in order to effectuate the purposes of
this Agreement.
10. CHANGE IN NAME OR CORPORATE STRUCTURE. Borrower is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts, has all requisite corporate power to own its
property and conduct its business as now conducted and as presently
contemplated, and is in good standing as a foreign corporation and is duly
authorized to do business in each jurisdiction where such qualification is
necessary. Borrower will not change its name, identity or corporate structure in
any manner which might make any financing or continuation statement filed
hereunder seriously misleading within the meaning of Section 9-402(7) of the
Uniform Commercial Code (or any other then applicable provision of the Code)
unless Borrower shall have given BancBoston at least thirty (30) days' prior
written notice thereof or shall have delivered to BancBoston acknowledgment
copies of UCC-3 Financing Statements reflecting such change duly executed and
duly filed in each jurisdiction in which UCC-1 filings were required in order to
perfect the security interest granted by this Agreement in the Collateral and
shall have taken all action (or made arrangements to take such action
concurrently with such change if it is impossible to take such action in
advance) necessary or reasonably requested by BancBoston to amend such financing
statement or continuation statement so that it is not seriously misleading.
11. SECURITY INTEREST. The Borrower represents that this Agreement
constitutes a valid and continuing first lien on and first perfected security
interest in favor of BancBoston in the Collateral, prior to all other liens,
encumbrances, security interests and rights of others and is enforceable as such
against creditors of the Borrower, any owner of the real property where any of
the Collateral is located, any purchaser of such real property and any present
or future creditor obtaining a lien on such real property. Other than Uniform
Commercial Code financing statements executed in favor of BancBoston in
connection with this Agreement, no financing statements under the Uniform
Commercial Code of any state or other instrument evidencing a lien which names
Borrower as debtor is on file and Borrower has not signed any such document or
any security agreement authorizing any secured party thereunder to file any such
financing statement or instrument. Borrower agrees that if Borrower wishes to
enter into additional financing arrangements for capital assets BancBoston shall
have the opportunity to provide such financing arrangements before Borrower
shall seek financing from another lender. If
<PAGE> 6
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BancBoston declines to provide such financing on terms reasonably satisfactory
to Borrower, BancBoston will release, pursuant to documents satisfactory to
BancBoston, from the lien of this Agreement the capital assets to be so financed
by the other lender; PROVIDED that the terms of any such other financing shall
be no more unfavorable to Borrower than the terms offered by BancBoston.
12. FINANCIAL STATEMENTS. Borrower shall annually, within ninety (90)
days after the close of the fiscal year for Borrower, furnish to BancBoston
financial statements of Borrower and JHFSC Acquisition Corp., including a
balance sheet as of the close of such year and statements of income and retained
earnings for such year, prepared in accordance with generally accepted
accounting principles, consistently applied from year to year, and certified by
Borrower's chief financial officer, in the case of Borrower's statements, and by
independent public accountants for JHFSC Acquisition Corp., in the case of its
financial statements. If requested by BancBoston, Borrower shall also provide
quarterly financial statements of Borrower, similarly prepared for each of the
first three quarters of each fiscal year, certified (subject to normal year-end
audit adjustments and the absence of footnotes) by the chief financial officer
of Borrower and furnished to BancBoston within sixty (60) days following the end
of the quarter, and such other financial information as may be reasonably
requested by BancBoston.
13. MISCELLANEOUS. This Agreement and all rights and obligations
hereunder, including matters of construction, validity and performance, shall be
governed by the laws of The Commonwealth of Massachusetts. This Agreement is
intended to take effect as a sealed instrument. Captions are intended for
convenience only and are not to be considered as part of the text of this
Agreement. If any provision of this Agreement shall be held by any court of
competent jurisdiction to be unenforceable, such holding shall not affect or
impair any other provision hereof.
IN WITNESS WHEREOF, Borrower has duly executed four original counterparts
of this Agreement as of the date first written above.
T. A. Leasing Corp.
By:
--------------------------------------
Title:
-----------------------------------
Hereunto Duly Authorized
Accepted:
BancBoston Leasing Inc.
By:
-----------------------------------
Title:
<PAGE> 7
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SCHEDULE 1
Collateral Locations
<PAGE> 1
EXHIBIT 10.23
EXHIBIT A
AMENDED AND RESTATED
CHATTEL LEASING PROMISSORY NOTE
T.A. LEASING CORP.
$13,331,907.43 Dated: November 29, 1996
Restated: February 28, 1997
For value received, the undersigned hereby promises to pay to BANCBOSTON
LEASING INC. ("BancBoston"), or order, at its head office at 100 Federal Street,
Boston, Massachusetts 02110 or at such other place as BancBoston may designate,
the principal amount of Thirteen Million Three Hundred Thirty One Thousand Nine
Hundred Seven and 43/100ths Dollars ($13,331,907.43) with interest thereon,
payable in fifty-eight (58) equal installments of principal and interest of
$278,040.07 each, payable monthly in arrears beginning on March 1, 1997, with a
final payment due and payable on December 1, 2001. Monthly payments shall be
applied first to accrued interest and the remaining portion to principal. All
payments hereunder shall be made in lawful money of the United States of America
and in immediately available funds to the account of BancBoston at said head
office. Interest on the unpaid principal amount outstanding hereunder shall be
payable at a rate per annum equal to eight and 02/100ths percent (8.02%).
Interest shall be computed on the basis of a 360-day year. Overdue payments
of principal (whether at stated maturity, by acceleration or otherwise), and, to
the extent permitted by law, overdue interest, shall bear interest, compounded
monthly and payable on demand in lawful money of the United States of America
and in immediately available funds, at a rate per annum equal to the interest
rate applicable to this Chattel Leasing Promissory Note ("Promissory Note") plus
2%.
Whenever payment hereunder is to be made on a day other than BancBoston's
business day, such payment shall be due and payable on the immediately following
business day for BancBoston.
This Promissory Note has been issued as a replacement and in exchange for
(but does not evidence payment or satisfaction of) the Chattel Leasing
Promissory Note issued to BancBoston by the undersigned in the original
principal amount of $25,818,941.00 (the "Original Note"). This Promissory Note
will not become effective and the Original Note will remain in full force and
effect unless and until BancBoston receives from the undersigned all payments
due on or before the date hereof under the Original Note.
This Promissory Note is issued pursuant to, and entitled to the benefits
of, and is subject to, and the obligations of the undersigned hereunder are
secured by, the provisions of a certain Security Agreement dated as of November
29, 1996, by and between the undersigned and BancBoston (herein, as the same may
from time to time be amended or extended, referred to as the "Agreement"), but
neither this reference to the Agreement nor any provision thereof shall
affect or impair the absolute and unconditional obligation of the undersigned
maker of this Promissory Note to pay the principal of and interest on this
Promissory Note as herein provided.
In case a default (as defined in Section 8 of the Agreement) in the
payment of any amounts under this Promissory Note or any other default under
Section 8 of the Agreement shall occur, the aggregate unpaid principal of and
accrued interest on this Promissory Note may
<PAGE> 2
-2-
become or may be declared to be due and payable in the manner and with the
effect provided in the Agreement and BancBoston may exercise any rights or
pursue any remedies provided for herein, in the Agreement or under applicable
law.
If a proceeding is brought or efforts made to collect this Promissory Note,
BancBoston shall be entitled to collect all reasonable costs and expenses of
such collection efforts or proceedings, including but not limited to reasonable
attorney's fees.
The undersigned may at its option prepay all or any part of the principal
of this Promissory Note before maturity, which payments shall be applied in the
inverse order of the maturity of installments of principal hereunder, provided,
however, that if any portion of the principal amount of this Promissory Note is
prepaid for any reason, whether voluntarily or as a result of acceleration of
the indebtedness evidenced hereby or otherwise, the undersigned shall pay to
BancBoston simultaneously with each such prepayment a premium with respect to
each such prepayment in an amount determined in accordance with the following
formula:
P = (A divided by B) times C
P = amount of premium payable with respect to the prepayment in question;
A = amount of principal prepaid;
B = total principal outstanding before giving effect to such prepayment,
and
C = the positive difference, if any, of: (1) the present value of the
remaining monthly payments on the Promissory Note as of the date of
such prepayment discounted at the U.S. Treasury Note Rate (as
published in the Wall Street Journal for such date with a maturity
equal to the remaining term of the loan) plus 185 basis points minus
(2) the present value of the remaining monthly payments as of the date
of such prepayment discounted at the interest rate in the Promissory
Note.
All funds advanced hereunder which have been repaid may not be
reborrowed.
The undersigned maker hereby waives presentment, demand, notice of
dishonor, protest and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Promissory Note. No
delay or omission on the part of the holder of this Promissory Note shall
operate as a waiver of such right or any other right under this Promissory Note.
No waiver shall be effective unless in writing and signed by the holder of this
Promissory Note, and any such waiver shall not be construed as a bar to or
waiver of any right on any future occasion.
This instrument shall have the effect of an instrument executed under seal
and shall be governed by the laws of The Commonwealth of Massachusetts without
giving effect to the conflicts of law provisions thereof.
T.A. LEASING CORP.
By: /s/ John Goldsmith
--------------------------------
Title: President
-----------------------------
Address: One Beacon Street
Boston, Massachusetts 02108
<PAGE> 1
EXHIBIT 10.24
CHATTEL LEASING
SECURITY AGREEMENT
SUTRO LEASING
This Chattel Leasing Agreement ("Agreement") is entered into as of
February 28, 1997 by and between Sutro Leasing, 201 California Street, San
Francisco, CA 94111 (hereinafter called "Borrower") and BANCBOSTON LEASING INC.,
100 Federal Street, Boston, Massachusetts 02110 (hereinafter called
"BancBoston"). Borrower hereby grants to BancBoston to secure on a pro rata
basis (a) the payment of $11,782,274.97 plus interest and other charges as
provided in a certain Chattel Leasing Promissory Note of even date herewith from
Borrower to the order of BancBoston (as amended and in effect from time to time,
the "Note"), (b) the payment and performance of all of Borrower's obligations to
BancBoston under that certain Guaranty, dated as of the date hereof (as amended
and in effect from time to time, the "Guaranty"), delivered by Borrower to
BancBoston to guarantee the payment and performance of certain obligations of
T.A. Leasing Corp. to BancBoston, and (c) the payment and performance of all
other obligations of Borrower hereunder and the payment and performance of all
other obligations of Borrower to BancBoston whether direct or indirect, absolute
or contingent, due or to become due, now existing or hereafter arising,
including in connection with any FUTURE ADVANCES (all of the foregoing, being
hereinafter called the "Obligations"), a continuing security interest in the
following personal property of Borrower wherever located, whether now owned or
hereafter acquired or arising, and any and all additions, substitutions,
accessions and proceeds thereto or thereof together with the right to any and
all manuals and other materials that contain technical data relating to the use,
operation or structure of the following (all of the same being hereinafter
called the "Collateral"):
All personal and fixture property of every kind and nature including
without limitation all furniture, fixtures, equipment, raw materials, inventory,
goods, accounts, contract rights (including rights under operating leases
wherein Borrower is lessor), rights to the payment of money, insurance refund
claims and all other insurance claims and proceeds, tort claims, chattel paper,
documents, instruments (including certified securities), deposit accounts and
all general intangibles including, without limitation, all uncertificated
securities, tax refund claims, license fees, patents, patent applications,
trademarks, trademark applications, trade names, copyrights, copyright
applications, rights to sue and recover for past infringement of patents,
trademarks and copyrights, computer programs, computes software, engineering
drawings, service marks, customer lists, goodwill, and all licenses, permits,
agreements of any kind or nature pursuant to which Borrower possesses, uses or
has authority to possess or use property (whether tangible or intangible) of
others or others possess, use or have authority to possess or use property
(whether tangible or intangible) of Borrower, and all recorded data of any kind
or nature, regardless of the medium of recording including, without limitation,
all software, writings, plans, specifications and schematics.
All amounts owing with respect to the Obligations shall be secured pro
rata by the Collateral without distinction as to whether some Obligations are
then due and payable and other Obligations are not then due and payable.
BOS-BUS:341415.4
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Borrower hereby warrants and covenants that:
1. LOCATION. The Collateral will be kept at the locations listed on
SCHEDULE 1 hereto and Borrower will not remove the Collateral from such
locations without providing at least 30 days prior written notice to BancBoston.
2. LIENS. Except for the security interest granted hereby, Borrower is
the sole legal and equitable owner of the Collateral free from all encumbrances
and will defend the same against the claims and demand of all persons claiming
the same interests or any interests adverse to BancBoston. Borrower has good
right and legal authority to create a security interest in the Collateral in the
manner herein contemplated. Borrower will not pledge, mortgage or create, or
suffer to exist, a security interest in the Collateral in favor of any person
other than BancBoston, except for liens to secure taxes, assessments and other
government charges in respect of obligations not overdue or liens on properties
to secure claims for labor, materials or supplies in respect of obligations not
overdue, and will promptly notify BancBoston of any lien or security interest
asserted or any attachment, levy, execution or other legal process levied
against or involving the Collateral, and will not sell or transfer the
Collateral or any interest therein without the prior written consent of
BancBoston.
3. PERSONAL PROPERTY. The Collateral shall remain personal property and
not be deemed to be a fixture irrespective of the manner of its attachment to
any real estate. If the Collateral is attached to real estate, Borrower will
promptly notify BancBoston, and will, on demand of BancBoston, use commercially
reasonable efforts to furnish to BancBoston a waiver or disclaimer signed by
each person having an interest in the real estate, of any interest in the
Collateral. Borrower will notify BancBoston in writing of any intended sale,
mortgage or of the terms and conditions of this Agreement to any prospective
purchaser, mortgagee, grantee or other transferee of the real estate or any
interest therein. Borrower will use commercially reasonable efforts to deliver
to BancBoston, no later than ninety (90) days after the date hereof, a waiver in
the form of SCHEDULE 3(a) hereto executed by each record owner and mortgagee of
real estate where the Collateral is located. The Collateral shall be used solely
by Borrower and its affiliates, and if the Collateral is used by an affiliate of
Borrower, Borrower shall lease the Collateral to such person pursuant to a
written lease in the form of SCHEDULE 3(b) hereto containing terms satisfactory
to BancBoston, shall deliver a manually signed original of such executed lease
to BancBoston, shall obtain and file signed financing statements in form and
substance satisfactory to BancBoston covering the Collateral so leased and shall
assign such financing statements to BancBoston.
4. CHANGE OF ADDRESS; FURTHER ASSURANCES. Borrower will promptly notify
BancBoston in writing of any change in address from that shown in this
Agreement, shall at all reasonable times and from time to time allow BancBoston,
by or through any of its officers, agents, attorneys or accountants, to examine,
inspect or make extracts from Borrower's books and records or inspect the
Collateral wherever located, and shall do, make, execute and deliver all such
additional and further acts, things, deeds, assurances and instruments as
BancBoston may reasonably require more completely to vest in and assure to
BancBoston its rights hereunder or in any of the Collateral.
5. INSURANCE. Borrower will keep the Collateral at all times insured by
such insurance satisfactory to BancBoston, and in any event and without specific
request by BancBoston, will insure the Collateral on an "all-risk" basis
including so-called extended coverage against fire, theft, and, in the case of
any motor vehicle, collision, and, without limiting the requirements of this
Section 5, in accordance with the insurance requirements set forth on SCHEDULE 5
hereto. All policies of insurance shall be with such insurance companies
satisfactory to BancBoston, and shall state that loss thereon is payable to
BancBoston (as loss
BOS-BUS:341415.4
<PAGE> 3
-3-
payee and additional insured) and Borrower as their respective interests may
appear. All policies of insurance shall provide for not less than thirty (30)
days' notice of cancellation or change in form or nonrenewal to BancBoston and
shall insure the interest of BancBoston regardless of any breach or violation by
the Borrower or other person of the warranties, declarations or covenants
contained in such policies and, if requested by BancBoston, shall be delivered
to and held by it until all of the Obligations have been fully performed.
Borrower expressly authorizes BancBoston, after a default under Section 8 of
this Agreement, to adjust and settle claims under any insurance policy relating
to the Collateral. After a default under Section 8 of this Agreement, BancBoston
may act as attorney for Borrower in making and settling claims under any
insurance covering the Collateral.
6. MAINTENANCE; TAXES. Borrower will keep the Collateral in good order
and repair, reasonable wear and tear excepted, and will not use the same in
violation of law or any policy of insurance thereon. Borrower will pay promptly
when due all taxes and assessments upon the Collateral or for its use or
operation or upon this Agreement, except for taxes and assessments being
contested by Borrower in good faith and with respect to which adequate reserves
have been established.
7. DISCHARGE OF ENCUMBRANCES. In the exercise of its reasonable
discretion, BancBoston may pay or discharge taxes and other encumbrances at any
time levied or placed on the Collateral, make repairs thereof and place and pay
for insurance thereon and pay any necessary filing fees. Borrower agrees to
reimburse BancBoston on demand for any and all expenditures so made, and until
paid the amount thereof shall be an Obligation secured by the Collateral and
bear interest until paid at the rate for overdue payments under the Note.
BancBoston shall have no obligation to Borrower to make any such expenditures
nor shall the making thereof relieve Borrower of any default.
8. DEFAULT; REMEDIES. Borrower may have possession and use of the
Collateral until default. Upon the happening of any of the following events or
conditions (each a "default"), namely: (a) default (i) in the payment of any
installment of principal or interest under the Note when the same becomes due
and payable, whether on the scheduled date or any accelerated date, (ii) in the
payment of any Obligation (other than those in the preceding clause (1)) within
three (3) days after the same becomes due and payable, whether when ordinarily
payable or upon acceleration, (iii) in the payment to BancBoston of any monetary
obligation within three (3) days after the same becomes due by any endorser,
guarantor or surety of or for any of the Obligations, (iv) in the performance by
Borrower of any covenant contained herein or in the Note (other than the
covenants in ss.ss.5, 10 and 12 hereof, as to which no grace period shall
apply), which default remains unremedied for twenty (20) days, (v) in the
performance by any guarantor of the Obligations of any covenant in such
guarantor's guaranty, after giving effect to all applicable grace periods, (vi)
in the performance of any obligation or covenant of Borrower to BancBoston under
the Guaranty or any other note or security agreement, or any obligation to
BancBoston of any endorser, guarantor or surety for any of Borrower's
obligations thereunder, after giving effect to all applicable grace periods,
(vii) in the performance of any obligation or covenant of T.A. Leasing Corp. to
BancBoston under that certain Amended and Restated Chattel Leasing Promissory
Note dated November 29, 1996 and amended and restated as of February 28, 1997,
as the same may be amended and in effect from time to time, (b) default in the
payment or performance of (i) any promissory note, credit agreement, loan
agreement, conditional sales contract, guaranty, lease, indenture, bond;
debenture or other material obligation whatsoever to which Borrower is a party
or by which Borrower is bound in excess of $3,000,000 as a result of which
default a party thereto or a holder thereof is entitled to accelerate the
obligations of Borrower thereunder, and such default has not been waived or
cured in accordance with the terms of the contract pursuant to which it is
payable, or (ii) any trade, tax or other current obligation of Borrower in
excess of $3,000,000 as they mature, unless
BOS-BUS:341415.4
<PAGE> 4
-4-
such obligations are being contested diligently and in good faith; (c) any
representation or warranty of Borrower in this Agreement or the Guaranty proves
false, erroneous or misleading in any material respect; (d) loss, theft,
material damage or destruction of or to any of the Collateral to the extent not
covered by insurance (provided that the occurrence of the events described in
this clause (d) shall not constitute a default for purposes of this clause (d)
until such time as the aggregate book value of Collateral subject to events
described in this clause (d) which is not covered by insurance equals or exceeds
$1,000,000, and in such event shall constitute a default only if after such
aggregate book value of Collateral not covered by insurance exceeds such amount
Borrower does not immediately prepay the Obligations under the Note in an amount
equal to the amount of the loss, theft, damage or destruction or replace such
Collateral with assets of equivalent value reasonably acceptable to BancBoston);
(e) involuntary liens on any Collateral which do not secure any obligation which
is otherwise prohibited by this Agreement and which are removed or discharged
within thirty (30) days so long as (i) Borrower immediately (and in any event
within ten days of imposition of the lien) gives BancBoston written notice of
the lien, (ii) Borrower in BancBoston's reasonable judgment is taking all
reasonable steps to remove the lien, (iii) in BancBoston's reasonable judgment
there is a reasonable likelihood the lien will be removed and (iv) no
foreclosure proceedings are instituted or execution levied; (f) dissolution,
termination of existence, insolvency, business failure, appointment of a
receiver of any part of the property of, assignment for the benefit of creditors
by, or the commencement of any proceeding under any bankruptcy or insolvency
laws by or against Borrower, any lessee of Collateral pursuant to a lease
described in Section 3, or any endorser, guarantor or surety of or for any
Obligation (provided that nothing herein shall be deemed to cause a default if
any lessee of Collateral or endorser, guarantor (other than JHFSC Acquisition
Corp.) or surety of or for any Obligation terminates its existence or dissolves
and such action is, in the judgment of Borrower, desirable and does not have a
material adverse effect on the business, operations or condition (financial or
otherwise) of Borrower) and, in the case of any bankruptcy or insolvency
proceeding commenced against Borrower, any lessee of Collateral pursuant to a
lease described in Section 3, or any endorser, guarantor or surety of or for any
Obligation, Borrower or any such other person shall indicate its approval
thereof, consent thereto or acquiescence therein or such proceeding shall not
have been dismissed within sixty (60) days following the filing thereof; (g)
such a change in the ownership of Borrower by JHFSC Acquisition Corp. as in the
opinion of BancBoston increases its risk; (h) any default under any lease
entered into by Borrower pursuant to Section 3 hereof (provided that so long as
no default exists hereunder or would exist after giving effect to any such
waiver, Borrower may waive defaults (other than insolvency defaults) under any
such lease); or (i) any Event of Default under and as defined in that certain
Revolving Credit Agreement dated as of November 29, 1996, by and among JHFSC
Acquisition Corp., the other lenders named therein and The First National Bank
of Boston for itself and as agent shall have occurred; thereupon, and as long as
such event continues, BancBoston may immediately without notice or demand
declare all of the Obligations to be due and payable, and BancBoston shall then
have in any jurisdiction where enforcement hereof is sought, in addition to all
other rights and remedies, the rights and remedies of a secured party under the
Uniform Commercial Code of Massachusetts, including without limitation, the
right to take immediate possession of the Collateral, and for such purpose
BancBoston may, so far as Borrower can give authority therefor, enter upon any
premises on which the Collateral, or any part thereof, may be situated and
remove the same therefrom without liability to Borrower for damages related
thereto.
In addition, after the occurrence of a default, the following
provisions shall apply: Borrower will upon demand make the Collateral available
to BancBoston at a place and time designated by BancBoston which is reasonably
convenient to both parties. BancBoston may sell, lease or otherwise dispose of
the Collateral at public or private sale with or without having the Collateral
at the place of sale and upon terms and in such manner as BancBoston may
determine and, unless prohibited by applicable law, BancBoston may purchase any
Collateral at
BOS-BUS:341415.4
<PAGE> 5
-5-
such sale. Upon such sale the Collateral shall be held by the purchaser
absolutely free of any claims or rights whatsoever, all such rights or claims
hereof being waived and released by the Borrower. Prior to disposition of
Collateral pursuant to this Agreement, BancBoston may, at its option, cause any
of the Collateral to be repaired or reconditioned, but not upgraded unless
mutually agreed, in such manner and to such extent as to make such Collateral
saleable, and all reasonable sums expended therefor by BancBoston shall be
repaid by Borrower and be part of the Obligations secured hereby. Unless the
Collateral threatens to decline rapidly in value, BancBoston will give Borrower
at least five days' prior written notice of the time and place of any public
sale of the Collateral or of the time after which any private sale thereof is to
be made. From the proceeds of the sale, BancBoston shall be entitled to retain
(i) all sums secured hereby, (ii) its reasonable expenses of retaking, holding,
preparing for sale and selling, and (iii) reasonable legal expenses incurred by
it in connection herewith and with such sale.
9. WAIVERS. Borrower waives demand, notice, protest, notice of
acceptance of this Agreement, notice of loans made, credit extended, Collateral
received or delivered or other action taken in reliance hereon and all other
demands and notices of any description. With respect both to the Obligations and
the Collateral, Borrower assents to any extension or postponement of the time of
payment or any other indulgence, to any substitution, exchange or release of
Collateral, to the addition or release of any party or person primarily or
secondarily liable, to the acceptance of partial payment thereon and the
settlement, compromising or adjusting of any thereof, all in such manner and at
such time or times as BancBoston may deem advisable. BancBoston shall have no
duty (other than the duty of reasonable care) as to the collection or protection
of the Collateral or any income thereon, nor as to the preservation of rights
against prior parties or relating to the Collateral. BancBoston may exercise its
rights with respect to the Collateral without resorting or regard to other
collateral or sources of reimbursement for liability. BancBoston shall not be
deemed to have waived any of its rights relating to the Obligations or the
Collateral unless such waiver is in writing and signed by BancBoston. No delay
or omission on the part of BancBoston in exercising any right shall operate as a
waiver of such right or any other right. A waiver on any one occasion shall not
be construed as a bar to or waiver of any right on any future occasion. All
rights and remedies of BancBoston relating to the Obligations or the Collateral,
whether evidenced hereby or by any other instrument or papers, shall be
cumulative and may be exercised separately or concurrently. At any time upon
written request of BancBoston, at the sole expense of the Borrower, the Borrower
will promptly and duly execute and deliver any and such further instruments and
documents and take such further action as BancBoston may reasonably deem
desirable in obtaining the full benefit of this Agreement and of the rights and
powers herein granted. The Borrower also authorizes BancBoston to act as
Borrower's agent in order to file any financing statement or continuation
statement under the Uniform Commercial Code without the signature of Borrower in
order to effectuate the purposes of this Agreement.
10. CHANGE IN NAME OR CORPORATE STRUCTURE. Borrower is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California, has all requisite corporate power to own its property and
conduct its business as now conducted and as presently contemplated, and is in
good standing as a foreign corporation and is duly authorized to do business in
each jurisdiction where such qualification is necessary. Borrower will not
change its name, identity or corporate structure in any manner which might make
any financing or continuation statement filed hereunder seriously misleading
within the meaning of Section 9-402(7) of the Uniform Commercial Code (or any
other then applicable provision of the Code) unless Borrower shall have given
BancBoston at least thirty (30) days' prior written notice thereof or shall have
delivered to BancBoston acknowledgment copies of UCC-3 Financing Statements
reflecting such change duly executed and duly filed in each jurisdiction in
which UCC-1 filings were required in order to perfect the security interest
granted by this Agreement in the Collateral and shall have taken all action (or
made arrangements to take such
BOS-BUS:341415.4
<PAGE> 6
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action concurrently with such change if it is impossible to take such action in
advance) necessary or reasonably requested by BancBoston to amend such financing
statement or continuation statement so that it is not seriously misleading.
11. SECURITY INTEREST. The Borrower represents that this Agreement
constitutes a valid and continuing first lien on and first perfected security
interest in favor of BancBoston in the Collateral, prior to all other liens,
encumbrances, security interests and rights of others and is enforceable as such
against creditors of the Borrower, any owner of the real property where any of
the Collateral is located, any purchaser of such real property and any present
or future creditor obtaining a lien on such real property. Other than Uniform
Commercial Code financing statements executed in favor of BancBoston in
connection with this Agreement, no financing statements under the Uniform
Commercial Code of any state or other instrument evidencing a lien which names
Borrower as debtor is on file and Borrower has not signed any such document or
any security agreement authorizing any secured party thereunder to file any such
financing statement or instrument. Borrower agrees that if Borrower wishes to
enter into additional financing arrangements for capital assets BancBoston shall
have the opportunity to provide such financing arrangements before Borrower
shall seek financing from another lender. If BancBoston declines to provide such
financing on terms reasonably satisfactory to Borrower, BancBoston will release,
pursuant to documents satisfactory to BancBoston, from the lien of this
Agreement the capital assets to be so financed by the other lender; PROVIDED
that the terms of any such other financing shall be no more unfavorable to
Borrower than the terms offered by BancBoston.
12. FINANCIAL STATEMENTS. Borrower shall annually, within ninety (90)
days after the close of the fiscal year for Borrower, furnish to BancBoston
financial statements of Borrower and JHFSC Acquisition Corp., including a
balance sheet as of the close of such year and statements of income and retained
earnings for such year, prepared in accordance with generally accepted
accounting principles, consistently applied from year to year, and certified by
Borrower's chief financial officer, in the case of Borrower's statements, and by
independent public accountants for JHFSC Acquisition Corp., in the case of its
financial statements. If requested by BancBoston, Borrower shall also provide
quarterly financial statements of Borrower, similarly prepared for each of the
first three quarters of each fiscal year, certified (subject to normal year-end
audit adjustments and the absence of footnotes) by the chief financial officer
of Borrower and furnished to BancBoston within sixty (60) days following the end
of the quarter, and such other financial information as may be reasonably
requested by BancBoston.
13. MISCELLANEOUS. This Agreement and all rights and obligations
hereunder, including matters of construction, validity and performance, shall be
governed by the laws of The Commonwealth of Massachusetts. This Agreement is
intended to take effect as a sealed instrument. Captions are intended for
convenience only and are not to be considered as part of the text of this
Agreement. If any provision of this Agreement shall be held by any court of
competent jurisdiction to be unenforceable, such holding shall not affect or
impair any other provision hereof.
BOS-BUS:341415.4
<PAGE> 7
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IN WITNESS WHEREOF, Borrower has duly executed four original
counterparts of this Agreement as of the date first written above.
SUTRO LEASING
By: /s/ Mary Jane Delaney
-----------------------------------
Title: CFO, Secretary
--------------------------------
Hereunto Duly Authorized
Accepted:
BANCBOSTON LEASING INC.
By:___________________________
Title:
BOS-BUS:341415.4
<PAGE> 8
-7-
IN WITNESS WHEREOF, Borrower has duly executed four original
counterparts of this Agreement as of the date first written above.
SUTRO LEASING
By:
-----------------------------------
Title:
--------------------------------
Hereunto Duly Authorized
Accepted:
BANCBOSTON LEASING INC.
By: /s/ Annemarie L. Wamen
------------------------
Title: Assistant Vice President
BOS-BUS:341415.4
<PAGE> 1
EXHIBIT 10.25
EXHIBIT B
CHATTEL LEASING PROMISSORY NOTE
SUTRO LEASING
$11,782,274.97 February 28, 1997
For value received, the undersigned hereby promises to pay to
BANCBOSTON LEASING INC. ("BancBoston"), or order, at its head office at 100
Federal Street, Boston, Massachusetts 021 10 or at such other place as
BancBoston may designate, the principal amount of Eleven Million Seven Hundred
Eighty Two Thousand Two Hundred Seventy Four and 97/100ths Dollars
($11,782,274.97) with interest thereon, payable in fifty-eight (58) equal
installments of principal and interest of $245,722.12 each, payable monthly in
arrears beginning on March 1, 1997, with a final payment due and payable on
December 1, 2001. Monthly payments shall be applied first to accrued interest
and the remaining portion to principal. All payments hereunder shall be made in
lawful money of the United States of America and in immediately available funds
to the account of BancBoston at said head office. Interest on the unpaid
principal amount outstanding hereunder shall be payable at a rate per annum
equal to eight and 02/100ths percent (8.02%).
Interest shall be computed on the basis of a 360-day year. Overdue
payments of principal (whether at stated maturity, by acceleration or
otherwise), and, to the extent permitted by law, overdue interest, shall bear
interest, compounded monthly and payable on demand in lawful money of the United
States of America and in immediately available funds, at a rate per annum equal
to the interest rate applicable to this Chattel Leasing Promissory Note
("Promissory Note") plus 2%.
Whenever payment hereunder is to be made on a day other than
BancBoston's business day, such payment shall be due and payable on the
immediately following business day for BancBoston.
This Promissory Note is issued pursuant to, and entitled to the
benefits of, and is subject to, and the obligations of the undersigned hereunder
are secured by, the provisions of a certain Security Agreement of even date
herewith by and between the undersigned and BancBoston (herein, as the same may
from time to time be amended or extended, referred to as the "Agreement"), but
neither this reference to the Agreement nor any provision thereof shall affect
or impair the absolute and unconditional obligation of the undersigned maker of
this Promissory Note to pay the principal of and interest on this Promissory
Note as herein provided.
In case a default (as defined in Section 8 of the Agreement) in the
payment of any amounts under this Promissory Note or any other default under
Section 8 of the Agreement shall occur, the aggregate unpaid principal of and
accrued interest on this Promissory Note may become or may be declared to be due
and payable in the manner and with the effect provided in the Agreement and
BancBoston may exercise any rights or pursue any remedies provided for herein,
in the Agreement or under applicable law.
If a proceeding is brought or efforts made to collect this Promissory
Note, BancBoston shall be entitled to collect all reasonable costs and expenses
of such collection efforts or proceedings, including but not limited to
reasonable attorney's fees.
BOS-BUS:341412.2
<PAGE> 2
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The undersigned may at its option prepay all or any part of the
principal of this Promissory Note before maturity, which payments shall be
applied in the inverse order of the maturity of installments of principal
hereunder, provided, however, that if any portion of the principal amount of
this Promissory Note is prepaid for any reason, whether voluntarily or as a
result of acceleration of the indebtedness evidenced hereby or otherwise, the
undersigned shall pay to BancBoston simultaneously with each such prepayment a
premium with respect to each such prepayment in an amount determined in
accordance with the following formula:
P = (A divided by B) times C
P = amount of premium payable with respect to the prepayment in
question;
A = amount of principal prepaid;
B = total principal outstanding before giving effect to such
prepayment, and
C = the positive difference, if any, of: (1) the present value of the
remaining monthly payments on the Promissory Note as of the date of
such prepayment discounted at the U.S. Treasury Note Rate (as
published in the Wall Street Journal for such date with a maturity
equal to the remaining term of the loan) plus 185 basis points
minus (2) the present value of the remaining monthly payments as of
the date of such prepayment discounted at the interest rate in the
Promissory Note.
All funds advanced hereunder which have been repaid may not be
reborrowed.
The undersigned maker hereby waives presentment, demand, notice of
dishonor, protest and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Promissory Note. No
delay or omission on the part of the holder of this Promissory Note shall
operate as a waiver of such right or any other right under this Promissory Note.
No waiver shall be effective unless in writing and signed by the holder of this
Promissory Note, and any such waiver shall not be construed as a bar to or
waiver of any right on any future occasion.
This instrument shall have the effect of an instrument executed under
seal and shall be governed by the laws of The Commonwealth of Massachusetts
without giving effect to the conflicts of law provisions thereof.
SUTRO LEASING
By: /s/ Mary Jane Delaney
-------------------------------------
Title: Secretary, Executive V.P.
----------------------------------
BOS-BUS:341412.2
<PAGE> 1
Exhibit 10.26
Freedom Securities Corporation
Freedom Securities 1998 Long-Term Incentive Plan
<PAGE> 2
Freedom Securities Corporation
Freedom Securities 1998 Long-Term Incentive Plan
- --------------------------------------------------------------------------------
SECTION CONTENTS PAGE
Purpose and Definitions
Administration
Stock Subject to Plan
Eligibility
Stock Options
Stock Appreciation Rights
Restricted Stock and Restricted
Stock Units
Long-Term Performance Awards
Code Section 162(m) Provisions
Change-in-Control Provisions
Amendments and Termination
Unfunded Status of Plan
General Provisions
Effective Date of Plan
Term of Plan
ii
<PAGE> 3
Freedom Securities Corporation
Freedom Securities 1998 Long-Term Incentive Plan
- --------------------------------------------------------------------------------
SECTION 1. PURPOSE AND DEFINITIONS.
The name of this plan is the Freedom Securities 1998 Long-Term Incentive Plan
(the "Plan"). The purpose of the Plan is to enable employees of Freedom
Securities Corporation (the "Corporation" or the "Company") to (i) own shares of
stock in the Corporation, (ii) participate in the shareholder value which has
been created, (iii) have a mutuality of interest with other shareholders and
(iv) enable the Corporation to attract, retain and motivate key employees.
For the purposes of the Plan, the following terms shall be defined as set forth
below.
a. "Affiliate" means a corporation or other business entity in which the Company
directly or indirectly has an ownership interest of 10 percent or more.
b. "Award" shall mean a grant of a Stock Option; Stock Appreciation Right both
in tandem and free-standing; Restricted Stock, Restricted Stock Units; and/or
Long-Term Performance Awards.
c. "Board" means the Board of Directors of the Corporation.
d. "Cause" means a felony conviction of a Participant or the failure of a
Participant to contest prosecution for a felony, or a Participant's willful
misconduct or dishonesty, any of which is directly and materially harmful to the
business or reputation of the Corporation.
e. "Code" means the Internal Revenue Code of 1986, as amended from time to time,
and any successor thereto.
f. "Committee" means the Committee referred to in Section 2 of the Plan. If the
Company's shares are registered for and traded on a public stock exchange ("The
Exchange") and at any time no Committee shall be in office, then the functions
of the Committee specified in the Plan shall be exercised by the Board. If the
Company is private and its shares are not registered for public trading, the
Company's Board of Directors or individual or individuals so designated by the
Board shall function as the Committee.
g. "Company" or "Corporation" means Freedom Securities Corporation, a
corporation organized under the laws of the State of Delaware or any successor
organization, and its Subsidiaries and Affiliates.
h. "Disability" shall be determined by the Committee, in its sole discretion, on
the basis of such medical evidence as it may reasonably require, that the
Participant is totally incapable of performing his assigned duties with the
Company and is therefore unable to continue in the employ of the Company by
reason of his sickness or disability (whether mental or physical)
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which is causing such total incapacity; provided, however, that with respect to
an exercise period applicable to an Incentive Stock Option, the definition of
disability contained in Section 22(e)(3) of the Code, or its successor, shall
apply.
i. "Early Retirement" means retirement, with consent of the Committee, of a
Participant who at the time of retirement has attained age 55 and has completed
10 years of continuous Company service, or as otherwise determined by the
Committee in its sole discretion.
j. "Fair Market Value" means, as of any given date, the mean of the highest and
lowest quoted selling prices of the stock on the Exchange on which the Company's
shares are listed for trading (consolidated trading) or, if no such sale occurs
on the Exchange on such date or the Company is private, the fair market value of
the Stock as determined by the Committee in good faith based on the best
available facts and circumstances at the time.
k. "Incentive Stock Option" means any Stock Option intended to be and designated
as an "Incentive Stock Option" within the meaning of Section 422 of the Code.
l. "Insider" means a Participant who is subject to the requirements of the Rules
(as defined below).
m. "Long-Term Performance Award" or "Long-Term Award" means an award made
pursuant to Section 8 below that is payable in cash and/or Stock (including
Restricted Stock) in accordance with the terms of the grant, based on
Corporation, business unit and/or individual performance over a period of at
least two years.
n. "Non-Employee Director" shall have the meaning set forth in Rule 16b as
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934 (the "Exchange Act") or an successor definition adopted by
the Securities and Exchange Commission.
o. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive
Stock Option.
p. "Normal Retirement" means retirement of a Participant who at the time of
retirement has attained age 62 and has completed 10 years of continuous Company
service, or as otherwise determined by the Committee in its sole discretion.
q. "Participant" means an employee to whom an Award is granted pursuant to the
Plan.
r. "Plan" means the Freedom Securities 1997 Long-Term Incentive Plan, as herein
set forth and as hereafter amended from time to time.
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s. "Restricted Stock" or "Restricted Stock Units" means an award of shares of
Stock or an award of Stock Units, respectively, that is subject to restrictions
pursuant to Section 7 below.
t. "Retirement" means Normal or Early Retirement.
u. "Rules" means Section 16 of the Exchange Act and the regulations promulgated
thereunder.
v. "Securities Broker" means the registered securities broker acceptable to the
Corporation who agrees to effect the cashless exercise of an Option pursuant to
Section 5(m) hereof.
w. "Stock" means the Common Stock $0.01 par value per share, of the Corporation.
x. "Stock Appreciation Right" or "SAR" means the right, whether granted as free
standing, granted in tandem with a stock option granted pursuant to Section 6
below, or granted on a limited basis, to surrender to the Corporation all (or a
portion) of a that right in exchange for an amount equal to the difference
between (i) the Fair Market Value, as of the date such SAR (or such portion
thereof) is surrendered, of the shares of Stock covered by such SAR (or such
portion thereof), and (ii) the aggregate exercise price of such SAR (or such
portion thereof).
y. "Stock Option" or "Option" means any option to purchase shares of Stock
(including Restricted Stock, if the Committee so determines) granted pursuant to
Section 5 below.
z. "Subsidiary" means a corporation or other business entity in which the
Company directly or indirectly has an ownership interest of more than 50
percent.
In addition, the terms "Change-in-Control," "Potential Change-in-Control" and
"Change-in-Control Price" shall have meanings set forth, respectively, in
Sections 10(b), (c) and (d) below.
SECTION 2. ADMINISTRATION
The Plan shall be administered by a Committee. The Committee shall be selected
by the Board, and shall consist of two or more members of the Board. If the
shares of Company stock are registered for trading on the Exchange, it is
intended that the directors appointed to serve on the Committee shall qualify
(i) as "non-employee directors" (within the meaning of Rule 16b), as "outside
directors" (within the meaning of Code section 162(m) and the regulations
thereunder), and (iii) under any similar statute or rule; in each case to the
extent applicable. The fact that a Committee member shall fail to qualify under
any of these requirements shall not invalidate any Award made by the Committee
which Award is otherwise validly made under the Plan.
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The Committee shall have the authority to grant to eligible employees, pursuant
to the terms of the Plan: (i) Stock Options, (ii) Stock Appreciation Rights,
whether granted as free standing, in tandem with a Stock Option, or on a limited
basis; (iii) Restricted Stock and Restricted Stock Units, and/or (iv) Long Term
Performance Awards.
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of the Company to whom Stock
Options, Stock Appreciation Rights, Restricted Stock and Restricted Stock Units,
and Long Term Performance Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock and
Restricted Stock Units, and Long-Term Performance Awards, or any combination
thereof, are to be granted hereunder,
(iii) to determine the number of shares to be covered by each such award granted
hereunder,
(iv) to determine the terms and conditions, not inconsistent with the terms of
the Plan, of any award granted hereunder: including, but not limited to
establishing: the share price; any restriction or limitation; any vesting
schedule or acceleration thereof; forfeiture waiver regarding any Stock Option
or other award and/or the shares of Stock relating thereto; or any performance
criteria relating to a performance award, all based on such factors as the
Committee shall determine, in its sole discretion;
(v) to determine whether and under what circumstances a Stock Option may be
settled in cash or stock, including Restricted Stock under Section 5(l);
(vi) to determine whether and under what circumstances a Stock Option may be
exercised without a payment of cash under Section 5(m); and
(vii) to determine whether, to what extent and under what circumstances Stock
and other amounts payable with respect to an award under this Plan shall be
deferred either automatically or at the election of the Participant.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the Plan shall
be final and binding on all persons, including the Corporation and Plan
Participants. To the full extent
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permitted by law, (i) no member of the Committee shall be liable for any action
or determination taken or make in good faith with respect to the Plan or any
Award made under the Plan, and (ii) the members of the Committee shall be
entitled to indemnification by the Company with regard to such actions.
SECTION 3. STOCK SUBJECT TO THE PLAN
(a) STOCK SUBJECT TO THE PLAN. Subject to subsection (b) (relating to
adjustments upon changes in corporate structure), as of any date, the total
number of shares of Stock with respect to which Awards may be granted under the
Plan shall equal:
(i) 2,288,911 shares, any or all of which may be granted as Incentive Stock
Options;
(ii) reduced by the sum (without duplication) of: the number of shares of Stock
subject to outstanding Awards; the number of shares of Stock in respect of which
Awards have been exercised; and the number of shares of Stock issued without
forfeiture or similar restrictions or issued with forfeiture or similar
restrictions which have lapsed;
(iii) the number of shares of stock delivered or withheld (or deliverable or
required to be withheld as a condition of exercise of an Award) in payment of
the exercise price, purchase price, or tax withholding requirements of an Award
granted under the Plan or under any other employee benefit plan of the Company.
Pursuant to the foregoing formula, shares of stock subject to previously granted
Awards that have expired, terminated, been canceled or forfeited for any reason
(other than by reason of exercise or vesting) shall be subject to regrant under
Awards. The maximum number of stock options, stock appreciation rights, or
shares of restricted stock that can be granted to the Chairman, Chief Executive
Officer, or any one Participant in any one plan year is 250,000.
(b) OTHER ADJUSTMENT. In the event of any merger, reorganization, consolidation,
recapitalization, Stock dividend, or other change in corporate structure
affecting the Stock, such substitution or adjustment shall be made in the
aggregate number of shares reserved for issuance under the Plan, in the number
and option price of shares subject to outstanding Options granted under the Plan
and in the number and price of shares subject to other Awards made under the
Plan, as may be determined to be appropriate by the Committee in its sole
discretion, provided that the number of shares subject to any award shall always
be a whole number. Such adjusted option price shall also be used to determine
the amount payable by the Corporation upon the exercise of any Stock
Appreciation Right associated with any Stock Option.
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SECTION 4. ELIGIBILITY
Officers and other employees of the Company who are responsible for or
contribute to the management, growth and/or profitability of the business of the
Company and/or its Subsidiaries and Affiliates are eligible to be granted awards
under the Plan, except that Participants who are employees of Affiliates may not
be granted Incentive Stock Options.
SECTION 5. STOCK OPTIONS
Stock Options may be granted alone, in addition to or in tandem with other
awards granted under the Plan. Any Stock Option granted under the Plan shall be
in such form as the Committee may from time to time approve.
Stock Options granted under the Plan may be of two types: (i) Incentive Stock
Options and (ii) Non-Qualified Stock Options.
The Committee shall have the authority to grant any optionee Incentive Stock
Options, Non-Qualified Stock Options, or both types of Stock Options (in each
case with or without Stock Appreciation Rights). To the extent that any Stock
Option does not qualify as an Incentive Stock Option, it shall constitute a
separate Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, once granted, no Incentive
Stock Option's term shall be interpreted, amended or altered, nor shall any
discretion or authority granted under the Plan be so exercised, so as to
disqualify the Plan under Section 422 of the Code, or, without the consent of
the optionee(s) affected, to disqualify any Incentive Stock Option under such
Section 422.
Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem
appropriate:
(a) OPTION PRICE. The option price per share of Stock purchasable under a Stock
Option shall be determined by the Committee at the time of grant and for
Non-Qualified Stock Options, such price shall not be less than 85% of the Fair
Market Value and for Incentive Stock Options, shall be not less than 100% of the
Fair Market Value of the Stock on the day of grant. However, any Incentive Stock
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 stock of the Company or of a
parent or a Subsidiary corporation, shall have an exercise price of no less than
110% of Fair Market Value per share on date of the grant.
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(b) OPTION TERM. The term of each Stock Option shall be fixed by the Committee,
but no Incentive Stock Option shall be exercisable for a period of more than ten
years from the date the Option is granted. However, 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 Stock of the Company or of a Parent or Subsidiary
corporation may not have a term of more than five years from date of grant. No
option may be exercised by any person after expiration of the term of the
option.
(c) EXERCISABILITY. Stock Options shall be exercisable at such time or times and
subject to such terms and conditions as shall be determined by the Committee, in
its sole discretion, at or after grant, provided, however, that, except as
provided in Section 5(g) and Section 9, unless otherwise determined by the
Committee at or after grant, no Stock Option shall be exercisable during the six
months following the date of the granting of the Option. If the Committee
provides, in its discretion, that any Stock Option is exercisable only in
installments (providing that there are no accounting or other restrictions to
the contrary), the Committee may waive such installment exercise provisions at
any time at or after grant in whole or in part, based on such factors as the
Committee shall determine, in its sole discretion. However, if the corporation's
stock is registered for trading on an Exchange, no option may become exercisable
during a period of less than six (6) months from date of grant.
(d) METHOD OF EXERCISE. Subject to whatever installment exercise provisions
apply under Section 5(c), Stock Options may be exercised in whole or in part at
any time and from time to time during the option period, by giving written
notice of exercise to the Company specifying the number of shares to be
purchased.
Such notice shall be accompanied by payment in full of the purchase price,
either by certified or bank check, or such other instrument as determined by the
Committee, in its sole discretion at or after grant. Payment in full or in part
may also be made in the form of Stock already owned by the optionee or, which in
the case of shares acquired through the exercise of a Stock Option or from the
lapsing of restrictions on Restricted Shares subject to an award hereunder,
shares held by the optionee for a period of not less than six (6) months from
the date of option exercise or lapsing of restrictions so that the exercise does
not constitute a pyramid exercise. In the case of shares acquired through the
exercise of an Incentive Stock Option, the right to make a payment in the form
of already owned shares must have been authorized at the time the option was
granted. Such exchange shall be based, in each case, on the Fair Market Value of
the Stock on the date the option is exercised, as determined by the Committee,
in its sole discretion.
The Committee, in its sole discretion, may at the time of grant or such later
time as it determines, permit payment of the option exercise price of a
Non-Qualified Stock Option to be made in whole or in part in the form of
Restricted Stock on which the restrictions have not
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lapsed. If such payment is permitted, then such Restricted Stock (and any
replacement shares relating thereto) shall remain (or be) restricted in
accordance with the original terms of the Restricted Stock award in question,
and any additional Stock received upon the exercise, shall be subject to the
same forfeiture restrictions, unless otherwise determined by the Committee, in
its sole discretion, at or after grant.
No shares of Stock shall be issued until full payment therefore has been made.
An optionee shall generally have the rights to dividends or other rights of a
shareholder with respect to shares subject to the Option when the optionee has
given written notice of exercise, has paid in full for such shares, and, if
requested, has given the representation described in Section 12(a).
(e) REPLACEMENT OPTIONS. If an Option granted pursuant to the Plan may be
exercised by an optionee by means of a stock-for-stock swap method of exercise
as provided in 5(d) above, then the Committee may, in its sole discretion, at
the time of the original option grant or at such subsequent time during the term
of such option as the Committee, in its sole discretion, shall deem appropriate,
authorized the Participant to automatically receive a replacement option
pursuant to this part of the Plan. This replacement option shall cover a number
of shares determined by the Committee, but in no event more than the number of
shares equal to the difference between the number of shares covered by the
original option exercised and the net shares received by the Participant from
such exercise, plus any shares withheld by the Company to satisfy mandatory
withholding requirements. The exercise price of the replacement option shall
equal the then current Fair Market Value, and have a term extending to the
expiration date of the original Option.
The Committee shall have the right, in its sole discretion, and at any time, to
discontinue the automatic grant of replacement options if it determines the
continuance of such grants to no longer be in the best interest of the Company
or to set forth such terms and conditions it deems in its sole discretion to be
appropriate for the awarding of a Replacement Option, such as a requirement that
the Participant retain shares obtained form the exercise of a Stock Option for a
designated period of time..
(f) NON-TRANSFERABILITY OF OPTIONS. Except as otherwise determined by the
Committee in its sole discretion, no Stock Option shall be transferable by the
optionee otherwise than by will or by the laws of descent and distribution, and
all Stock Options shall be exercisable, during the optionee's lifetime, only by
the optionee.
(g) TERMINATION BY REASON OF DEATH. Subject to Section 5(k). if an optionee's
employment by the Corporation or any Subsidiary or Affiliate terminates by
reason of death, any Stock Option held by such optionee may, thereafter, by
exercised, to the extent then exercisable or on such accelerated basis as the
Committee may determine at or after grant, by the legal representative of the
estate or by the legatee of the optionee under the will of the optionee, for a
period of
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one year (or such shorter period as the Committee may specify at grant) from the
date of such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter.
(h) TERMINATION BY REASON OF DISABILITY. Subject to Section 5(k), if an
optionee's employment by the Company or any Subsidiary or Affiliate terminates
by reason of Disability, any Stock Option held by such optionee may thereafter
be exercised by the optionee, to the extent it was exercisable at the time of
termination, or on such accelerated basis as the Committee may determine at or
after grant, for a period of two years (or such shorter period as the Committee
may specify at grant) from the date of such termination of employment or until
the expiration of the stated term of such Stock Option, whichever period is the
shorter; provided, however, that if the optionee dies within such two year
period (or such shorter period as the Committee shall specify at grant), any
unexercised Stock Option held by such optionee shall, at the sole discretion of
the Committee, thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of twelve months from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter. In the event of termination of employment by
reason of Disability, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422 of the
Code, such Stock Option will thereafter be treated as a Non-Qualified Stock
Option.
(i) TERMINATION BY REASON OF RETIREMENT. Subject to Section 5(j), if an
optionee's employment by the Corporation terminates by reason of Normal or Early
Retirement, any Stock Option held by such optionee may thereafter be exercised
by the optionee, to the extent it was exercisable at the time of such Retirement
or on such accelerated basis as the Committee may determine at or after grant,
for a period of two years (or such shorter period as Committee may specify at
grant) from the date of such termination of employment or the expiration of the
stated term of such Stock Option, whichever period is the shorter; provided,
however, that, if the optionee dies within such two year period, any unexercised
Stock Option held by such optionee shall, at the sole discretion of the
Committee, thereafter be exercisable, to the extent to which it was exercisable
at the time of death, for a period of twelve months from the date of such death
or until the expiration of the stated term of such Stock Option, whichever
period is the shorter. In the event of termination of employment by reason of
Retirement, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, such
Stock Option will thereafter be treated as a Non-Qualified Stock Option.
(j) OTHER TERMINATION. Unless otherwise determined by the Committee at or after
grant, if an optionee's employment by the Corporation terminates for any reason
other than death, Disability or Normal or Early Retirement, the Stock Option
shall thereupon terminate, except that such Stock Option may be exercised for
the lesser of three months or the balance of such
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Stock Option's term if the optionee is involuntarily terminated by the Company
for reasons other than Cause.
(k) INCENTIVE STOCK OPTION LIMITATIONS. To the extent required for "Incentive
Stock Option" status under Section 422 of the Code, the aggregate Fair Market
Value (determined as of the time of grant) of the stock with respect to which
Incentive Stock Options granted after 1986 are exercisable for the first time by
the optionee during any calendar year under the Plan and/or any other stock
option plan of the Company (within the meaning of Section 424 of the Code) after
1986 shall not exceed $100,000.
To the extent (if any) permitted under Section 422 of the Code, if (i) a
Participant's employment with the Company is terminated by reason of death,
Disability or Retirement and (ii) the portion of any Incentive Stock Option that
is otherwise exercisable during the post termination period specified under
Section 5(g), (h) or (i), applied without regard to this Section 5(k), is
greater than the portion of such option that is exercisable as an "Incentive
Stock Option" during such post termination period under Section 422, such
post-termination period shall automatically be extended (but not beyond the
original option term) to the extent necessary to permit the optionee to exercise
such Incentive Stock Option. The Committee is also authorized to provide at
grant for a similar extension of the post termination exercise period in the
event of a Change Control.
(l) CASH-OUT OF OPTION: SETTLEMENT OF SPREAD VALUE IN RESTRICTED STOCK. On
receipt of written notice to exercise, the Committee may, in it sole discretion,
elect to cash out all or part of the portion of the option(s) to be exercised by
paying the optionee an amount, in cash or Stock equal to the excess of the Fair
Market Value of the Stock over the option price (the "Spread Value") on the
effective date of such cashout.
In addition, if the option agreement so provides at grant or is amended after
grant and prior to exercise to so provide (with the optionee's consent), the
Committee may require that all or part of the shares to be issued with respect
to the Spread Value of an exercised option take the form of Restricted Stock,
which shall be valued on the date of exercise on the basis of the Fair Market
Value of such Restricted Stock determined without regard to the forfeiture
restrictions involved.
(m) CASHLESS EXERCISE. To the extent permitted under the applicable laws and
regulations under Section 16 of the Exchange Act, as amended, and the Rules
promulgated thereunder, and with the consent of the Committee, the Company
agrees to cooperate in a "cashless exercise" of an Option. The cashless exercise
shall be effected by the Participant delivering to the securities broker
instructions to sell a sufficient number of shares of Common Stock to cover the
costs and expenses associated therewith.
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SECTION 6. STOCK APPRECIATION RIGHTS
(a) GRANT AND EXERCISE. Awards may be granted in the form of Stock Appreciation
Rights ("SARs"). SARs may be granted in tandem with all or part of a portion of
a related stock option under the Plan ("Tandem SARs"), granted separately
("Freestanding SARs"), or granted on a limited basis ("Limited SARs"). In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Stock Option. In the case of an Incentive
Stock Option, such rights may be granted only at the time of the grant of such
Stock Option.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to such
terms and conditions, not inconsistent with the provisions of the Plan, as shall
be determined from time to time by the Committee, including the following:
(i) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation Rights shall be
exercisable only at such time or times and to the extent that the Stock Options
to which they relate shall be exercisable in accordance with the provisions of
Section 5 and this Section 6 of the Plan; provided, however, that any Stock
Appreciation Right granted subsequent to the grant of the related Stock Option
shall not become exercisable for a period of six months from its date of grant.
Upon the exercise of a Tandem Stock Appreciation Right, an optionee shall be
entitled to receive up to, but not more than, an amount in cash and/or shares of
Stock equal in value to the excess of the Fair Market Value of one share of
Stock on the date of the exercise over the option price per share specified in
the related Stock Option, multiplied by the number of shares in respect of which
the Stock Appreciation Right shall have been exercised, with the Committee
having the right to determine the form of payment.
Tandem Stock Appreciation Rights shall be transferable only when and to the
extent that the underlying Stock Option would be transferable under Section 5 of
the Plan.
Upon the exercise of a Tandem Stock Appreciation Right, the Stock Option or part
thereof to which such Stock Appreciation Right is related shall be deemed to
have been exercised for the purpose of the limitation set forth in Section 3 of
the Plan on the number of shares of Stock to be issued under the Plan, but only
to the extent of the number of shares issued under the Stock Appreciation Right
at the time of exercise based on the value of the Stock Appreciation Right at
such time.
A Tandem Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, except that,
unless otherwise determined by the
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Committee, in its sole discretion, at the time of grant, a Stock Appreciation
Right granted with respect to less than the full number of shares covered by a
related Stock Option shall not be reduced until the number of shares covered by
an exercise or termination of the related Stock Option exceeds the number of
shares not covered by the Stock Appreciation Right.
A Tandem Stock Appreciation Right may be exercised by an optionee, in accordance
with Section 6(b), by surrendering the applicable portion of the related Stock
Option. Upon such exercise and surrender, the optionee shall be entitled to
receive an amount determined in the manner prescribed in Section 6(b), and Stock
Options which have been so surrendered, in whole or in part, shall no longer be
exercisable to the extent the related Stock Appreciation Rights have been
exercised.
A Tandem Stock Appreciation Right granted in connection with an Incentive Stock
Option may be exercised only if and when the market price of the Stock subject
to the Incentive Stock Option exceeds the exercise price of such Incentive Stock
Option.
(ii) FREESTANDING STOCK APPRECIATION RIGHTS. Freestanding SARs shall be
exercisable only at such time or times as set forth in the SAR grant agreement.
Upon the exercise of a Freestanding SAR, a Participant shall be entitled to
receive up to, but not more than, an amount in cash and/or shares of Stock equal
to the excess of the Fair Market Value of one share of Stock on the date of the
of the exercise over the price specified in the SAR grant agreement, multiplied
by the number of shares in respect of which the SAR shall have been exercised,
with the Committee having the right to determine the form of payment.
(iii) LIMITED STOCK APPRECIATION RIGHTS. The Committee in its sole discretion
may grant, at the time of the grant of a Stock Option under Section 5, a Tandem
Stock Appreciation Right that is a Limited Stock Appreciation Right in that it
can be exercised only in the event of a Change-in-Control and/or a Potential
Change-in-Control, subject to such terms and conditions as the Committee may
specify at grant.
The Committee, in its sole discretion, may also provide that, in the event of a
Change-in-Control and/or a Potential Change-in-Control, the amount to be paid
upon the exercise of a Stock Appreciation Right shall be based on the
Change-in-Control Price, subject to such terms and conditions as the Committee
may specify at grant.
SECTION 7. RESTRICTED STOCK AND RESTRICTED STOCK UNITS
(a) ADMINISTRATION. Shares of Restricted Stock or Restricted Stock Units may be
issued either alone or in tandem with other awards granted under the Plan. The
Committee shall determine the officers and key employees of the Company and its
subsidiaries and affiliates to whom, and the time or times at which, grants of
Restricted Stock and/or Restricted Stock Units will be
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made, the number of shares or share equivalents to be granted as units to be
awarded, the price (if any) to be paid by the recipient of Restricted Stock or
Restricted Stock Unit (subject to Section 7(b)), the time or times within which
such awards may be subject to forfeiture, and all other conditions of the
awards.
The Committee may condition the grant of Restricted Stock upon the attainment of
specified performance goals or such other factors as the Committee may
determine, in its sole discretion.
The provisions of Restricted Stock and Restricted Stock Unit awards need not be
the same with respect to each recipient.
(b) AWARDS AND CERTIFICATES. The prospective recipient of a Restricted Stock or
Restricted Stock Unit award shall not have any rights with respect to such
award, unless and until such recipient has executed an agreement evidencing the
award and has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the applicable terms and conditions of such award.
(i) The purchase price for shares of Restricted Stock shall be equal to or less
than their par value and may be zero.
(ii) Awards of Restricted Stock or Restricted Stock Units must be accepted
within a period of 60 days (or such shorter period as the Committee may specify
at grant) after the award date, by executing the applicable agreement and paying
whatever price (if any) is required under Section 7(b)(i).
(iii) Each Participant receiving an Award under this Section 7 shall receive
either a certificate or agreement evidencing such award in respect of such
shares of Restricted Stock or Restricted Stock Units, as applicable.
Certificates evidencing Restricted Stock Awards shall be registered in the name
of such Participant, and shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such award, substantially in
the following form:
"The transferability of this Restricted Stock certificate and the shares of
stock represented hereby are subject to the terms and conditions (including
forfeiture) of the Freedom Securities Corporation 1997 Long-Term Incentive Plan
and an Agreement entered into between the registered owner and Freedom
Securities Corporation. Copies of such Plan and Agreement are available at
Freedom Securities Corporation, One World Financial Center, New York, New York
10281, Attention: Kevin J. McKay."
(iv) The Committee shall require that the stock certificates evidencing such
shares be held in custody by the Company until the restrictions thereon shall
have lapsed, and that, as a
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condition of any Restricted Stock award, the Participant shall have delivered a
stock power, endorsed in blank, relating to the Stock covered by such award.
(c) RESTRICTIONS AND CONDITIONS. The shares of Restricted Stock and/or
Restricted Stock Units awarded pursuant to this Section 7 shall be subject to
the following restrictions and conditions:
(i) Subject to the provisions of this Plan and the award agreement, during a
period set by the Committee commencing with the date of such award (the
"Restriction Period"), the Participant shall not be permitted to sell, transfer,
pledge, assign or otherwise encumber shares of Restricted Stock awarded under
the Plan. Within these limits, the Committee, in its sole discretion, may
provide for the lapse of such restrictions in installments and may accelerate or
waive such restrictions in whole or in part, based on service, performance
and/or such other factors or criteria as the Committee may determine, in its
sole discretion.
(ii) Except as provided in this paragraph (ii) and Section 7(c)(i), the
Participant shall have, with respect to the shares of Restricted Stock, all of
the rights of a shareholder of the Company, including the right to vote the
shares, and the right to receive any cash dividends. The Committee, in its sole
discretion, as determined at the time of award, may permit or require the
payment of cash dividends, or dividend equivalents with respect to Restricted
Stock Units, to be deferred and, if the Committee so determines, reinvested in
additional shares of Restricted Stock to the extent shares are available under
Section 3, and/or Restricted Stock Units.
(iii) Subject to the applicable provisions of the award agreement and this
Section 7, upon termination of a Participant's employment with the Company for
any reason during the Restriction Period, all shares or share units still
subject to restriction shall be forfeited by the Participant.
(iv) In the event of hardship or other special circumstances of a Participant
whose employment with the Company is involuntarily terminated (other than for
Cause), the Committee may, in it sole discretion, waive in whole or in part any
or all remaining restrictions with respect to any Award granted pursuant to this
Section 7, based on such factors as the Committee may deem appropriate.
(v) If and when the Restriction Period expires without a prior forfeiture of the
Restricted Stock subject to such Restriction Period, the certificates for such
shares shall be delivered to the Participant promptly.
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SECTION 8. LONG-TERM PERFORMANCE AWARDS
(a) AWARDS AND ADMINISTRATION. Long-Term Performance Awards may be awarded
either alone or in addition to other awards granted under the Plan. The
Committee shall determine the nature, length and starting date of the
performance period (the "Performance Period") for each Long-Term Performance
Award, which shall be at least two years (subject to Section 10 below), and
shall determine the performance objectives to be used in valuing Long-Term
Performance Awards and determining the extent to which such Long-Term
Performance Awards have been earned. Performance objectives may vary from
Participant to Participant and between groups of Participants and shall be based
upon such Company, business unit and/or individual performance factors and
criteria as the Committee may deem appropriate, including, but not limited to,
earnings per share or return on equity. Performance Periods may overlap and
Participants may participate simultaneously with respect to Long-Term
Performance Awards that are subject to different Performance Periods and/or
different performance factors and criteria
At the beginning of each Performance Period, the Committee shall determine for
each Long-Term Performance Award subject to such Performance period the range of
dollar values or number of shares of Stock to be awarded to the Participant at
the end of the performance Period if and to the extent that the relevant
measure(s) of performance for such Long-Term Performance Award is (are) met.
Such dollar values or number of shares of Stock may be fixed or may vary in
accordance with such performance and/or other criteria as may be specified by
the Committee, in its sole discretion.
(b) ADJUSTMENT OF AWARDS. In the event of special or unusual events or
circumstances affecting the application of one or more performance objectives to
a Long-Term Performance Award, the Committee may revise the performance
objectives and/or underlying factors and criteria applicable to the Long-Term
Performance Awards affected, to the extent deemed appropriate by the Committee,
in its sole discretion, to avoid unintended windfalls or hardship.
(c) TERMINATION OF EMPLOYMENT. Subject to Section 10 below and unless otherwise
provided in the applicable award agreement(s), if a Participant terminates
employment with the Corporation during a Performance Period because of death,
Disability or Retirement, such Participant shall be entitled to a payment with
respect to each outstanding Long-Term Performance Award at the end of the
applicable Performance Period:
(i) based, to the extent relevant under the terms of the award, upon the
Participant's performance for the portion of such Performance Period ending on
the date of termination and the performance of the applicable business unit(s)
for the entire Performance Period, and
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(ii) prorated, where deemed appropriate by the Committee, for the portion of the
Performance Period during which the Participant was employed by the Corporation,
all as determined by the Committee, in its sole discretion.
However, the Committee may provide for an earlier payment in settlement of such
award in such amount and under such terms and conditions as the Committee deems
appropriate.
Subject to Section 10 below, if a Participant terminates employment with the
Company during a Performance Period for any other reason, then such Participant
shall not be entitled to any payment with respect to the Long-Term Performance
Awards subject to such Performance Period, unless the Committee shall otherwise
determine, in its sole discretion.
(d) FORM OF PAYMENT. The earned portion of a Long-Term Performance Award may be
paid currently or on a deferred basis with such interest or earnings equivalent
as may be determined by the Committee, in its sole discretion. Payment shall be
made in the form of cash or whole shares of Stock, including Restricted Stock,
either in a lump sum payment or in annual installments commencing as soon as
practicable after the end of the relevant Performance Period, all as the
Committee shall determine at or after grant. If and to the extent a Long-Term
Performance Award is payable in Stock and the full amount of such value is not
paid in Stock, then the shares of Stock representing the portion of the value of
the Long-Term Performance Award not paid in Stock shall again become available
for award under the Plan.
Section 9. PROVISIONS APPLICABLE TO CODE SECTION 162(M) PARTICIPANTS.
If the shares of Company Stock are registered on the Exchange, this Section 9
shall apply.
(a) DESIGNATION OF PARTICIPANTS AND GOALS. Within 90 days after the start of
each fiscal year (or by such other time as may be required or permitted by
Section 162(m) of the Code), the Committee shall in writing: (i) designate the
Participants for whom the grant of Awards shall be subject to this Section 9;
(ii) select the performance goal or goals applicable to the fiscal year or years
included within the performance period; (iii) establish the number or amount of
Awards that may be earned for such year or such years within a performance
period by each such Participant; (iv) specify the relationship between
performance goals and the amount or number of Awards to be earned by each such
Participant for such year or period; and (v) the method for computing the amount
or number of such Awards if the performance goals are attained.
The Committee may specify that the amount or number of Awards will be earned if
the applicable target is achieved for one goal or for any one of a number of
goals for a fiscal year or years within a performance period. The Committee may
also provide that the amount of number of Awards for a given fiscal year or
years within a performance period will be based upon different levels of
achievement for the applicable performance targets.
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(b) PERFORMANCE CRITERIA. For the purposes of this Section 9, performance goals
shall be limited to one or more of the following: (i) future economic value per
share of Common Stock; (ii) earnings per share, as it may apply to the Company,
its subsidiaries, or affiliates; (iii) return on average common equity; (iv)
pre-tax income; (v) pre-tax operating income; (vi) net revenue; (vii) net
income; (viii) profits before taxes; (ix) book value per share; (x) stock price;
and (xi) earnings available to common stockholders.
(c) ANNUAL PAYMENT. Following the completion of each fiscal year or completion
of a performance period, the Committee shall certify in writing whether the
applicable performance goals have been achieved for such year or performance
period and the amount or number of Awards payable to a Participant for such
fiscal year or performance period. The amounts due to a Participant to whom this
Section 9 applies will be paid following the end of the applicable fiscal year
or performance period after such certification by the Committee. In determining
the amount due to a Participant for a given fiscal year of performance period,
the Committee shall have the right to reduce (but not to increase) the amount
payable at a given level of performance to take into account additional factors
that the Committee may deem relevant to the assessment of individual or
corporate performance for the year.
(d) RESTRICTIONS. The maximum value a Participant may receive in any calendar
year under this Section 9 will be $2 million multipled by the number of years in
the relevant measuring period but in no event more than $5 million. Anything in
this Section 9 to the contrary notwithstanding, the maximum annual amount that
may be paid to a Participant under the Plan for (i) the fiscal year in which the
Plan is implemented shall equal no more than $2 million; and (ii) each
subsequent fiscal year shall equal 110% for such maximum amount for the
preceding fiscal year; provided that the maximum annual amount determined under
this Section 9 shall be determined without regard to the value of any stock
options granted to a Participant under the Plan.
e. ADJUSTMENT FOR NON-RECURRING ITEMS. Notwithstanding anything herein to the
contrary, if the Company's financial performance is affected by any event that
is of a non-recurring nature, the Committee in its sole discretionary make such
adjustments in the financial criteria as it shall determine to be equitable and
appropriate in order to make the calculations of Awards, as nearly as
practicable, equivalent to the calculation that would have been made without
regard to such event. In the event of a significant change of the business or
assets of the Company under circumstances involving an acquisition or merger,
consolidation or similar transaction, the Committee shall, in good faith,
recommend to the Board for approval such revisions to the financial criteria and
other terms and conditions used in calculating Awards for the then current Plan
Year as it reasonably deems appropriate in light of any such change.
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f. REPEAL OF SECTION 162(m). Without further action by the Board, the provisions
of this Section 9 shall cease to apply on the effective date of the repeal of
Section 162(m) of the Code (and any successor provision thereto).
SECTION 10. CHANGE IN CONTROL PROVISIONS
(a) IMPACT OF EVENT. In the event of
(1) "Change in Control" as defined in Section 10(b), unless otherwise determined
by the Committee at or after grant, but prior to the occurrence of such Change
in Control, the following acceleration and valuation provisions, if provided for
by the Committee at or after the time of grant but prior to the occurrence of a
Change of Control, shall apply:
(i) Any Stock Appreciation Rights outstanding for at least six months and any
Stock Options awarded under the 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 Plan
shall lapse and such shares and awards shall be deemed fully vested.
(iii) The value of all outstanding Stock Options, Stock Appreciation Rights and
Restricted Stock awards shall, unless otherwise determined by the Committee at
or after grant, be cashed out on the basis of the "Change in Control Price" as
defined in Section 10(d) as of the date such Change in Control is determined to
have occurred or such other date as the Committee may determine prior to the
Change in Control.
(iv) Any outstanding Long-Term Performance Awards shall be vested and paid out
based on the prorated target results for the Performance Periods in question,
unless the Committee provides at or after grant and prior to the Change in
Control event, for a different payment.
(b) DEFINITION OF "CHANGE IN CONTROL." For purposes of Section 10(a), a "Change
in Control" means 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 any Company employee
benefit plan (including any trustee of such plan acting as trustee) 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 percent or
more of the combined voting power of the Company's outstanding securities at
the date of the adoption of this Plan becomes such a beneficial owner without
the consent of a majority of the Board;
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(ii) The occurrence of any transactions 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 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 at least a majority thereof, provided, however, that a director who
was 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
Section 10(b) (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.
(c) CHANGE IN CONTROL PRICE. For purposes of this Section 10, "Change in Control
Price" means, as of any given date, the highest sales price per share paid or
offered in any bona fide transaction related to a Change in Control of the
Company as determined by the Committee.
(d) COMPLIANCE WITH SECTION 280G. No payment shall be made under this Section 10
which, when aggregated with other payments made to the employee, would, as
determined by such person(s) as the Committee 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.
SECTION 11. AMENDMENTS AND TERMINATION
The Committee may amend, alter, or discontinue the Plan at any time and from
time to time, but no amendment, alteration, or discontinuation shall be made
which would impair the rights of an optionee or Participant with respect to a
Stock Option, Stock Appreciation Right, Restricted Stock or Long-Term
Performance Award which has been granted under the Plan, without the optionee's
or Participant's consent, or which, without the approval of the Company's
stockholders, would:
(a) except as expressly provided in this Plan, increase the total number of
shares reserved for the purpose of the Plan;
(b) decrease the option price of (i) any Incentive Stock Option to less than
100% of the Fair Market Value on the date of grant, or (ii) change the pricing
terms of Section 10(a); or
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(c) change the employees or class of employees eligible to participate in the
Plan, or
(d) extend the maximum option period under Section 5(b) of the Plan.
The Committee may amend the terms of any Stock Option or other award theretofore
granted, prospectively or retroactively, but, subject to Section 3 above, no
such amendment shall impair the rights of any holder without the holder's
consent. The Committee may also substitute new Stock Options for previously
granted Stock Options, including previously granted Stock Options having higher
option prices.
Subject to the above provisions, the Committee shall have broad authority to
amend the Plan to take into account changes in applicable tax laws and
accounting rules, as well as other developments.
SECTION 12. UNFUNDED STATUS OF PLAN
The Plan is intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant or
optionee by the Company, nothing contained herein shall give any such
Participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder, provided, however, that, unless the Committee otherwise determines
with the consent of the affected Participant, the existence of such trusts or
other arrangements is consistent with the "unfunded" status of the Plan.
SECTION 13. GENERAL PROVISIONS
(a) The Committee may require each person purchasing shares pursuant to a Stock
Option under the Plan to represent to and agree with the Company in writing that
the optionee or Participant is acquiring the shares without a view to
distribution thereof. The certificates for such shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock or other securities delivered under the
Plan shall be subject to such stock transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations. and other
requirements of the Exchange Act, any stock exchange upon which the Stock is
then listed, and any applicable federal or state securities law, and the
Committee may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.
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(b) Nothing contained in this Plan shall prevent the Board of Directors from
adopting other or additional compensation arrangements, subject to stockholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
(c)The adoption of the Plan shall not confer upon any employee of the
Corporation any right to continued employment with the Company, as the case may
be, nor shall it interfere in any way with the right of the Company to terminate
the employment of any of its employees at any time.
(d) No later than the date as of which an amount first becomes includible in the
gross income of the Participant for Federal income tax purposes with respect to
any award under the Plan, the Participant shall pay to the Company, or make
arrangements satisfactory to the Committee regarding the payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to such amount. Unless otherwise determined by the Committee, the
minimum required withholding obligations may be settled with Stock, including
Stock that is part of the award that gives rise to the withholding requirement.
The obligations of the Company under the Plan shall be conditional on such
payment or arrangements and the Company shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the Participant.
(e) At the time of grant, the Committee may provide in connection with any grant
made under this Plan that the shares of Stock received as a result of such grant
shall be subject to a right of first refusal, pursuant to which the Participant
shall be required to offer to the Company any shares that the Participant wishes
to sell, with the price being the then Fair Market Value of the Stock, subject
to such other terms and conditions as the Committee specify at the time of
grant.
(f) The reinvestment of dividends in additional Restricted Stock (or in other
types of Plan awards) at the time of any dividend payment shall only be
permissible if sufficient shares of Stock are available under Section 3 for such
reinvestment (taking into account then outstanding Stock Options and other Plan
awards).
(g) The Committee shall all establish such procedures as it deems appropriate
for a Participant to designate a beneficiary to whom any amounts payable in the
event of the Participant's death are to be paid.
(h) The Plan and all awards made and actions taken thereunder shall be governed
by and construed in accordance with the laws of the State of Delaware.
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SECTION 14. EFFECTIVE DATE OF PLAN
The Plan was approved by a vote of the holders of a majority of the outstanding
Common Stock on March 10, 1998.
SECTION 15. TERM OF PLAN
No Stock Option, Stock Appreciation Right, Restricted Stock, Restricted Stock
Unit, or Long-Term Performance Award shall be granted pursuant to the Plan on or
after the tenth anniversary of the date of stockholder approval ,
but awards granted prior to such tenth anniversary may extend beyond that date.
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EXHIBIT 10.27
Freedom Securities Corporation
Freedom Securities 1998 Executive Performance Bonus Plan
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FREEDOM SECURITIES CORPORATION
Freedom Securities 1998 Executive Performance Bonus Plan
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Section 1. PURPOSE AND DEFINITIONS.
The name of this plan is the Freedom Securities 1998 Executive Performance Bonus
Plan (the "Plan"). The purpose of the Plan is to provide incentives to the
executive officers of Freedom Securities Corporation (the "Corporation" or the
"Company") to produce a superior return to the shareholders of the Company and
to encourage such executive officers to remain in the employ of the Company.
Amounts paid pursuant to the Plan are intended to qualify as performance-based
compensation within the meaning of Section 162(m) of the Internal Revenue Code,
as amended (the "Code").
For the purposes of the Plan, the following terms shall be defined as set forth
below:
a. "Annual Profits" means pre-tax operating income of the Company for the
Performance Period before accounting for incentive compensation and
extraordinary items.
b. "Award" means a portion of the Award Pool payable to a Participant as
determined pursuant to Section 3.
c. "Award Pool" means a pool of money specified by the Committee, in accordance
with Section 3, and from which all annual incentive Awards are to be made to
Participants.
d. "Board" means the Board of Directors of the Company.
e. "Code" means the Internal Revenue Code of 1986, as amended from time to time,
and any successor thereto.
f. "Committee" means the Committee referred to in Section 2 of the Plan. If the
Company's shares are registered for and traded on a public stock exchange ("The
Exchange") and at any time no Committee shall be in office, then the functions
of the Committee specified in the Plan shall be exercised by the Board.
g. "Effective Date" means the date specified in Section 4.
h. "Eligible Employee" means any executive whose compensation is subject to the
limitations as set forth in Section 162(m) of the Code.
i. "Exchange Act" means the Securities Exchange Act of 1934, as it is amended
from to time, and the regulations promulgated thereunder.
j. "Participant" means an Eligible Employee.
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k. "Performance Period" means the Company's fiscal year or such other
shorter or longer period designated by the Committee, performance during all or
part of which a Participant's entitlement to receive payment of an Award is
based.
Section 2. ADMINISTRATION.
a. The Plan shall be administered by a Committee. All directors appointed to
serve on the Committee shall qualify (i) as "non-employee directors" (within the
meaning of Rule 16b), as "outside directors" (within the meaning of Code section
162(m) and the regulations thereunder), and (iii) under any similar statute or
rule; in each case to the extent applicable. The fact that a Committee member
shall fail to qualify under any of these requirements shall not invalidate any
Award made by the Committee which Award is otherwise validly made under the
Plan.
b. The Committee's interpretation of the Plan and of any Awards made under the
Plan shall be final and binding on all persons with an interest therein. The
Committee shall have the power to establish regulations to administer the Plan
and to change such regulations.
c. To the full extent permitted by law, (i) no member of the Committee shall be
liable for any action or determination taken or make in good faith with respect
to the Plan or any Award made under the Plan, and (ii) the members of the
Committee shall be entitled to indemnification by the Company with regard to
such actions.
Section 3. AWARDS.
a. CREATION OF AWARD POOLS. Within 90 days following the commencement of each
Performance Period, the Committee shall establish an Award Pool from which
Awards may be paid to Eligible Employees in accordance with the Plan. The amount
included in the Award Pool for a particular Performance Period shall be equal to
a percentage of the Annual Profits for the Performance Period to be determined
by the Committee not to exceed 15% of the Annual Profits.
b. ALLOCATION OF AWARD POOLS. Within 90 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.
c. ADJUSTMENTS. 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 Pool or the 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 or any subsidiary or affiliate of the
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Company during the Performance Period, whether due to any termination of
employment (including death, disability, retirement, or termination with or
without cause) or otherwise.
d. PAYMENT OF AWARDS. (i) Following the completion of each Performance Period,
the Committee shall certify in writing the total amount of the Award Pool and
the Awards payable to each Participant.
(ii) Each Participant shall receive payment in cash of his Award as soon as
practicable following its determination. In the sole discretion of the
Committee, partial payments may be made to Participants during the course of a
Performance Period; provided however, that the aggregate of such partial
payments may not exceed the amount of the Award that a Participant would
otherwise receive pursuant to this Section 3.
Section 4. EFFECTIVE DATE OF PLAN
The Plan was approved by a vote of the holders of a majority of the outstanding
Common Stock on March 10, 1998.
Section 5. RIGHT TO TERMINATE EMPLOYMENT.
Nothing in this Plan shall confer upon any Participant the right to continue in
the employment of the Company, any subsidiary, or affiliate, or affect any right
that the Company or any Subsidiary may have to terminate the employment of a
Participant with or without cause.
Section 6. TAX WITHHOLDING.
The Company shall have the right to withhold from cash payments under the Plan
to a Participant or other person an amount sufficient to cover all tax
withholding requirements
Section 7. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN.
The Board may at any time terminate, suspend, or modify the Plan and the terms
and provisions of any Award theretofore awarded to any Participant that has not
been paid. Amendments are subject to the approval of the stockholders of the
Company only if such approval is necessary to maintain the Plan in compliance
with the requirements of Section 162(m) of the Code, its successor provisions or
any other applicable law or regulation. No award may be granted under the Plan
during any period of suspension of the Plan or after its termination.
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Section 9. UNFUNDED STATUS OF PLAN
The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a Participant by the
Company, nothing contained herein shall give any such Participant rights that
are greater than those of a general creditor of the Company. In its sole
discretion, the Committee may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan to deliver payments
in lieu of or with respect to awards hereunder, provided, however, that, unless
the Committee otherwise determines with the consent of the affected Participant,
the existence of such trusts or other arrangements is consistent with the
"unfunded" status of the Plan.
Section 10. OTHER BENEFIT AND COMPENSATION PROGRAMS.
Neither the adoption of the Plan by the Board nor its submission to the
stockholders of the Company shall be construed as creating any limitation on the
power of the Board to adopt such other incentive arrangements as it may deem
necessary. Payments received by a Participant under an Award made pursuant to
the Plan shall not be deemed part of a Participant's regular, recurring
compensation for purposes of the termination, indemnity or severance pay law of
any jurisdiction and shall not be included in, nor have any effect on, the
determination of benefits under any other employee benefit plan, contract, or
similar arrangement provided by the Company or any Subsidiary unless expressly
so provided by such other plan, contract or arrangement, or unless the Committee
expressly determines that an Award or portion of an Award should be included to
accurately reflect competitive compensation practices or to recognize that an
Award has been made in lieu of a portion of competitive cash compensation.
10. GOVERNING LAW.
The Plan and all Awards made and actions taken thereunder shall be governed by
and construed in accordance with the laws of the State of Delaware.
5
<PAGE> 1
EXHIBIT 10.28
FREEDOM SECURITIES CORPORATION
AMENDMENT TO STOCKHOLDERS AGREEMENT
Amendment Number 1, dated January 30, 1998, to that certain Stockholders
Agreement (the "Stockholders Agreement"), dated November 30, 1996, by and among
Freedom Securities Corporation, formerly named JHFSC Acquisition Corp. (the
"Company), Thomas H. Lee Equity Fund III, L.P., Thomas H. Lee Foreign Fund III,
L.P. and THL-CCI Limited Partnership (collectively the "THL Investors"), SCP
Private Equity Partners, L.P. ("SCP"), John Hancock Subsidiaries, Inc.
("Hancock") and certain employees and members of the Company's management (the
"Employee Investors"). Capitalized terms not otherwise defined herein shall have
the meanings set forth in the Stockholders Agreement.
WHEREAS, the Company and the undersigned THL Investors, SCP, and the
Employee Investors desire to amend the Stockholders Agreement;
NOW THEREFORE, in consideration of the mutual promises contained herein,
the sufficiency of which is hereby acknowledged, and holders of at least 55% in
interest of the Company's outstanding shares as required to amend the
Stockholders Agreement as provided in Section 13.2 thereof agree as follows.
1. Section 2.1(i) of the Stockholders Agreement is hereby amended by
deleting the same in its entirety and inserting in place thereof a new
Section 2.1(i) which reads in its entirety as follows:
" (i) fix the number of directors on the Board at a number no greater
than nine (9), including at least four directors designated by the Lee
Majority Holders on one hand and at least four directors designated by
the SCP Majority Holders and the Employee Majority Holders on the
other hand; provided that notwithstanding the foregoing, the number of
directors on the Board shall be fixed at eight (8) upon the written
request of not less than four (4) directors such that following such
written request an equal number of directors would be designated by
the Lee Majority Holders on one hand and the SCP Majority Holders and
the Employee Majority Holders on the other hand."
2. The amendments granted hereunder shall be limited precisely as written
and shall not constitute a waiver or modification of any other
covenants, terms or provisions of the Stockholders Agreement, which
shall remain in full force and effect. Without limiting the foregoing,
this Amendment No. 1 shall not prejudice any right or rights which
each of the Stockholders may otherwise have (now or in the future)
under or in connection with the Stockholders Agreement.
3. This Amendment may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one instrument.
<PAGE> 2
4. This Amendment No. 1 shall be governed by the laws of the State of
Delaware (regardless of the laws that might otherwise govern under
applicable Delaware principles of conflicts law) as to all matters,
including but not limited to matters of validity, construction,
effect, performance and remedies.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment Number
1 to the Stockholders Agreement this 30th day of January, 1998.
/s/ John H. Goldsmith
-----------------------------------------
John H. Goldsmith
CEO, Freedom Securities Corporation
THOMAS H. LEE EQUITY FUND III, L.P.
By: THL Equity Advisors Limited Partnership
III, General Partner
By: THL Equity Trust III,
General Partner
By: /s/ C. Hunter Boll
-----------------------------------------
Title:
THOMAS H. LEE FOREIGN FUND III, L.P.
By: THL Equity Advisors Limited Partnership
III, General Partner
By: THL Equity Trust III,
General Partner
By: /s/ C. Hunter Boll
-----------------------------------------
Title:
THL-CCI LIMITED PARTNERSHIP
By: THL Investment Management Corp.,
General Partner
By: /s/ C. Hunter Boll
-----------------------------------------
Title:
<PAGE> 3
SCP PRIVATE EQUITY PARTNERS, L.P.
By: /s/ Winston J. Churchill
-----------------------------------------
Title: Managing Director
/s/ John H. Goldsmith
--------------------------------------------------
John H. Goldsmith
<PAGE> 1
EXHIBIT 10.29
FREEDOM SECURITIES CORPORATION
AMENDMENT TO STOCKHOLDERS AGREEMENT
Amendment, dated March __, 1998, to that certain Stockholders Agreement
(the "Stockholders Agreement"), dated November 30, 1996, by and among Freedom
Securities Corporation f/k/a JHFSC Acquisition Corp. (the "Company), Thomas H.
Lee Equity Fund III, L.P., Thomas H. Lee Foreign Fund III, L.P. and THL-CCI
Limited Partnership (collectively the "THL Investors"), SCP Private Equity
Partners, L.P. ("SCP"), John Hancock Subsidiaries, Inc. ("Hancock") and certain
employees and members of the Company's management (the "Employee Investors").
Capitalized terms not otherwise defined herein shall have the meanings set forth
in the Stockholders Agreement.
WHEREAS, the Company is currently contemplating an Initial Public Offering
of its Common Stock, $.01 par value per share;
WHEREAS, the parties underwriting the Initial Public Offering have
expressed the view that the Initial Public Offering will likely be more
successful if the Employee Investors do not participate directly in the Public
Offering; and
WHEREAS, the Investors desire to amend the Stockholder's Agreement to
eliminate the ability of the Employee Investors to participate in the Initial
Public Offering.
NOW THEREFORE, in consideration of the mutual promises contained herein,
the sufficiency of which is hereby acknowledged, the holders of at least 55% in
interest of the Company's outstanding shares, and the holders of at least a
majority of the Employee Securities, as required to amend the Stockholders
Agreement as provided in Section 13.2 thereof, agree as follows:
1. A new subparagraph "1.1.20-A" is hereby added to Section 1 of the
Stockholders Agreement which shall read in its entirety as follows:
1.1.20-A "PUBLIC OFFERING" shall mean any registration by the Company
on Forms S-1, S-2 or S-3 (or any successor form) of any shares of
Common Stock for its own or others' account under the Securities Act
for a public offering, including without limitation an Initial Public
Offering.
2. Paragraph 7.1.1 of the Stockholders Agreement is hereby amended by
deleting the same in its entirety and inserting in place thereof a new
7.1.1 which reads in its entirety as follows:
7.1.1 ELECTION.
(a) Whenever the Company proposes to register in an Initial
Public Offering any shares of Common Stock for its own or others'
account, the
<PAGE> 2
Company shall furnish each holder of Fund Securities and Seller
Securities prompt notice of its intent to do so. Upon the request of
any such holder given by notice to the Company within twenty (20) days
after the effectiveness of such notice from the Company, the Company
will use its best efforts to cause to be included in such registration
all of the Fund Securities and Seller Securities which such holder
requests.
(b) Whenever the Company proposes, other than pursuant to its
Initial Public Offering, to register on Form S-1, S-2 or S-3 (or any
successor form) any shares of Common Stock for its own or others'
account under the Securities Act for a public offering, the Company
shall furnish each holder of Registrable Securities prompt notice of
its intent to do so. Upon the request of any such holder given by
notice to the Company within twenty (20) days after the effectiveness
of such notice from the Company, the Company will use its best efforts
to cause to be included in such registration all of the Registrable
Securities which such holder requests.
3. The amendments granted hereunder shall be limited precisely as written
and shall not constitute a waiver or modification of any other
covenants, terms or provisions of the Stockholders Agreement, which
shall remain in full force and effect. Without limiting the foregoing,
this Amendment shall not prejudice any right or rights which each of
the Stockholders may otherwise have (now or in the future) under or in
connection with the Stockholders Agreement.
4. This Amendment may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one instrument.
5. This Amendment No. 1 shall be governed by the laws of the State of
Delaware (regardless of the laws that might otherwise govern under
applicable Delaware principles of conflicts law) as to all matters,
including but not limited to matters of validity, construction,
effect, performance and remedies.
[Remainder of this page intentionally left blank]
2
<PAGE> 3
FREEDOM SECURITIES CORPORATION
COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Stockholders Agreement this ___ day of March, 1998.
FREEDOM SECURITIES CORPORATION
By:
----------------------------------------------
Name: John H. Goldsmith
Title: Chief Executive Officer
THOMAS H. LEE EQUITY FUND III, L.P.
By: THL Equity Advisors Limited Partnership
III, General Partner
By: THL Equity Trust III,
General Partner
By:
----------------------------------------------
Title:
THOMAS H. LEE FOREIGN FUND III, L.P.
By: THL Equity Advisors Limited Partnership
III, General Partner
By: THL Equity Trust III,
General Partner
By:
----------------------------------------------
Title:
THL-CCI LIMITED PARTNERSHIP
By: THL Investment Management Corp.,
General Partner
By:
----------------------------------------------
Title:
SCP PRIVATE EQUITY PARTNERS, L.P.
By:
----------------------------------------------
Title:
EMPLOYEE INVESTORS
-------------------------------------------------
Signature
-------------------------------------------------
Print Name
<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. 1 to Registration
Statement (Form S-1 No. 333-44931) and related Prospectus of Freedom Securities
dated March 11, 1998.
/s/ Ernst & Young LLP
New York, New York
March 10, 1998
<PAGE> 1
Exhibit 24.2
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint John H. Goldsmith
and William C. Dennis, Jr. and each of them singly, his true and lawful
attorney-in-fact and agent of the undersigned, to sign for the undersigned and
in his name as a Director of Freedom Securities Corporation, the Freedom
Securities Corporation Registration Statement on Form S-1 and any and all
pre-effective and post-effective amendments to said Registration Statement, and
in connection with any registration of additional securities pursuant to Rule
462(b) under the Securities Act of 1933, to sign any abbreviated registration
statement and any and all amendments thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, in each case with
the Securities and Exchange Commission, and generally to do all such things in
his name and on his behalf in his capacities with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Securities
and Exchange Commission.
The power of attorney granted herein shall be deemed to be coupled with
an interest and may be exercised by such attorney-in-fact to execute on behalf
of the undersigned the applications, instruments, documents and certificates
referred to above, which applications, instruments, documents and certificates
shall be deemed to be authorized, valid and binding, and enforceable without
further inquiry.
Dated: March 10, 1998 /s/ Gregory N. Thomas
------------------------------------
Gregory N. Thomas
<PAGE> 1
Exhibit 99.1
Freedom Securities Corporation
One Beacon Street
Boston, MA 02108
Attn: John H. Goldsmith, Chairman
Dear John:
I hereby consent to being identified as a director of Freedom Securities
Corporation (the "Company"), effective prior to consummation of the initial
public offering of the Company, in any registration statements filed by the
Company with respect to its initial public offering.
Very truly yours,
/s/ Gregory N. Thomas
<PAGE> 1
EXHIBIT 99.2
CONSENT OF DIRECTOR DESIGNEE
March 10, 1998
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to the references to him as a prospective director of
Freedom Securities Corporation in the Prospectus included in this Registration
Statement.
By: /s/ David P. Prokupek
------------------------------
Name: David P. Prokupek
