UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
X THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
- ---- PERIOD ENDED MARCH 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
- ---- PERIOD FROM ____________ TO ______________
Commission File Number 1-13993
--------------------------------
FREEDOM SECURITIES CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-4019175
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Beacon Street
Boston, Massachusetts 02108
--------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 725-2000
--------------
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of May 11, 1998, the Company has 19,986,498 shares of common
stock outstanding.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 3
March 31, 1998 and December 31, 1997
Consolidated Statements of Income - Three
months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows - Three
months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
-2-
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited)
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,150 $ 12,936
Receivables from brokers, dealers
and others 104,008 74,314
Securities purchased under agreements
to resell 26,306 113,335
Securities owned, at market 315,573 423,522
Fixed assets, net of accumulated
depreciation and amortization 19,690 20,464
Goodwill, net of accumulated
amortization 24,384 24,861
Other assets 64,216 58,155
--------- ---------
Total assets $ 566,327 $ 727,587
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payables to brokers, dealers and
others $ 66,425 $ 59,062
Securities sold, not yet purchased,
at market 212,378 354,565
Accrued compensation and benefits 35,678 65,653
Accounts payable and accrued expenses 44,872 44,535
Notes payable to banks 97,797 101,446
--------- ---------
Total liabilities 457,150 625,261
--------- ---------
Stockholders' equity:
Common stock (21,816,000 shares
authorized, 14,899,183 and 14,840,627
shares issued in 1998 and 1997,
respectively, $.01 par value) 149 147
Additional paid-in capital 84,561 83,654
Retained earnings 24,467 19,438
Subscribed stock (136,532 shares in 1997) (913)
--------- ---------
Total stockholders' equity 109,177 102,326
--------- ---------
Total liabilities and
stockholders' equity $ 566,327 $ 727,587
========= =========
</TABLE>
See accompanying notes.
-3-
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
<S> <C> <C>
Revenues
Commissions $ 46,306 $ 40,098
Principal transactions 25,253 22,009
Investment banking 13,712 9,569
Asset management 5,813 4,880
Other 2,681 3,387
--------- ---------
Total operating revenues 93,765 79,943
Interest income 13,267 10,411
--------- ---------
Total revenues 107,032 90,354
Interest expense 7,014 5,906
--------- ---------
Net revenues 100,018 84,448
Non-interest expenses
Compensation and benefits 66,452 54,476
Occupancy and equipment 6,187 6,519
Communications 4,123 4,189
Brokerage and clearance 2,756 2,704
Promotional 2,756 2,094
Other 7,798 6,929
--------- ---------
Total non-interest expenses 90,072 76,911
Operating pre-tax income 9,946 7,537
Acquisition interest expense 1,350 1,494
--------- ---------
Income before income taxes 8,596 6,043
Income taxes 3,567 2,550
--------- ---------
Net income $ 5,029 $ 3,493
========= =========
Net income per share:
Basic $ 0.34 $ 0.24
Diluted $ 0.32 $ 0.24
Weighted average common shares outstanding:
Basic 14,825 14,301
Diluted 15,730 14,425
</TABLE>
See accompanying notes.
-4-
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 5,029 $ 3,493
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 1,112 1,282
Amortization 1,154 1,603
Non-cash compensation 508 22
Changes in assets and liabilities
(Increase) decrease in operating assets:
Receivables from brokers, dealers and others (29,694) (6,055)
Securities purchased under agreements to resell 87,029 34,263
Securities owned, at market 107,949 (34,161)
Other assets (6,362) (10,094)
Increase (decrease) in operating liabilities:
Payables to brokers, dealers and others 7,363 (15,302)
Securities sold under agreements to repurchase (43,898)
Securities sold, not yet purchased, at market (142,187) 90,143
Accrued compensation and benefits (29,975) (26,124)
Accounts payable and accrued expenses 337 5,432
--------- ----------
Net cash from operating activities 2,263 604
Cash flows from investing activities
Purchases of fixed assets (713) (514)
--------- ----------
Net cash used in investing activities (713) (514)
Cash flows from financing activities
Proceeds from sale of common stock, net 1,313
Purchase of treasury stock (94)
Repayment of notes payable to banks (3,649) (1,061)
--------- ----------
Net cash used in financing activities (2,336) (1,155)
Decrease in cash and cash equivalents (786) (1,065)
Cash and cash equivalents, beginning of period 12,936 7,248
--------- ----------
Cash and cash equivalents, end of period $ 12,150 $ 6,183
========= ==========
Supplemental disclosure of cash flow information
Cash paid for:
Income taxes $ 1,445 $ 1,785
Interest $ 8,272 $ 7,008
</TABLE>
See accompanying notes.
-5-
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(UNAUDITED)
1. Basis of Presentation
Freedom Securities Corporation is a holding company which
together with its wholly owned subsidiaries (collectively, the
"Company") is a full-service, regionally focused retail
brokerage and investment banking firm. The Company is engaged
primarily in the retail and institutional brokerage business
including corporate finance and underwriting services. The
consolidated financial statements include the accounts of the
Company and its primary operating subsidiaries Tucker Anthony
Incorporated ("Tucker Anthony"), Sutro & Co. Incorporated
("Sutro") and Freedom Capital Management Corporation ("Freedom
Capital").
The Company was formed in November 1996 to effect the
acquisition (the "Acquisition") of Freedom Securities Holding
Corporation and its subsidiaries, including Tucker Anthony, Sutro
and Freedom Capital, from John Hancock Mutual Life Insurance
Company ("Hancock"). The consideration paid to Hancock was
financed with equity contributions from two private investor
groups and certain employee investors, bank financing and excess
cash of the Company.
The Acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets and
liabilities acquired based upon their fair values at the date of
the Acquisition. The purchase price, including acquisition
costs, exceeded the fair value of net assets acquired and the
excess was recorded as goodwill.
All significant intercompany accounts and transactions have
been eliminated in consolidation. The preparation of the
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect amounts reported in the consolidated
financial statements and accompanying notes. Actual results could
differ from these estimates.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1998
are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further
information, refer to the consolidated financial statements and
footnotes thereto for the year ended December 31, 1997 included
in the Company Registration Statement on Form S-1, File #333-44931.
2. Initial Public Offering
On April 2, 1998, the Company completed its 7.4 million share
initial public offering (the "Offering"), including 4.2 million
shares of $.01 par value common stock ("Common Stock"). The Offering
raised approximately $77.3 million for the Company after
deducting underwriting discounts, commissions and estimated
expenses. The Company used the proceeds and available cash to
repay $77.5 million of existing debt (see Note 3).
3. Notes Payable to Banks
In 1996, the Company entered into a revolving credit agreement
(the "Credit Agreement") with certain participating banks and
borrowed $85 million. Borrowings under the Credit Agreement
equaled $77.5 million and $80.0 million at March 31, 1998 and
December 31, 1997, respectively. The balance outstanding under
the Credit Agreement was repaid in full on April 7, 1998 with the
Company's net proceeds from the Offering.
-6-
4. Net Capital Requirements
Certain subsidiaries of the Company are subject to the net
capital requirements of the New York Stock Exchange
("Exchange") and the Uniform Net Capital requirements of the
Securities and Exchange Commission ("Commission") under Rule
15c3-1. The Exchange and the Commission rules also provide that
equity capital may not be withdrawn or cash dividends paid if
certain minimum net capital requirements are not met. The
Company's principal regulated subsidiaries are discussed below.
Tucker Anthony is a registered broker and dealer. At March 31,
1998, Tucker Anthony had net capital of approximately $54.0
million which was $53.0 million in excess of the $1 million
amount required to be maintained at that date.
Sutro is a registered broker and dealer. At March 31, 1998,
Sutro had net capital of approximately $11.1 million which was
$10.1 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 March 31, 1998, FTC's regulatory capital,
as defined, was $1.0 million and FTC was in compliance with all
such requirements.
Under a clearing arrangement with Wexford Clearing Services
Corporation ("Wexford"), Tucker Anthony and Sutro are required
to maintain certain minimum levels of net capital and comply with
other financial ratio requirements. At March 31, 1998, Tucker
Anthony and Sutro were in compliance with all such requirements.
5. Commitments and Contingencies
The Company leases office space and various types of equipment
under noncancelable leases generally varying from one to ten
years, with certain renewal options for like terms.
The Company is a defendant or co-defendant in legal actions
primarily relating to its broker-dealer activities. It is the
opinion of management that the resolution of these actions will
not have a material adverse effect on the consolidated financial
position and results of operations of the Company.
The Company has outstanding underwriting agreements and when-
issued contracts which commit it to purchase securities at
specified future dates and prices. The Company presells such
issues to manage risk exposure related to these off-balance sheet
commitments. Subsequent to March 31, 1998, such transactions
settled at no loss.
-7-
6. Earnings Per Share
The Company computes its earnings per share in accordance with
Statement of Financial Accounting Standards ("SFAS") 128
"Earnings Per Share." The following table sets forth the
computation for basic and diluted earnings per share (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Numerator
Net Income $ 5,029 $ 3,493
Denominator
Weighted average shares outstanding 14,825 14,301
Dilutive effect of:
Stock options and other exercisable shares 905 124
------ ------
Adjusted weighted average shares outstanding 15,730 14,425
Basic earnings per share $ 0.34 $ 0.24
Diluted earnings per share $ 0.32 $ 0.24
</TABLE>
7. Acquisition of Cleary Gull Reiland & McDevitt Inc.
On April 16, 1998, the Company closed into escrow and funded
its previously announced acquisition of Cleary Gull Reiland &
McDevitt Inc. ("Cleary Gull"), a privately-held investment
banking, institutional brokerage and investment advisory firm
headquartered in Milwaukee, Wisconsin, with 1997 revenues of
approximately $26 million. The acquisition was completed on May
1, 1998 after the appropriate notification was made to the New
York Stock Exchange. Cleary Gull's financial results are not
included in the Company's first quarter financial statements but
will be included beginning with the second quarter of 1998.
-8-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto
appearing in Item 1 of this report. This Form 10-Q may contain
or incorporate by reference statements which may constitute
"forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Prospective
investors are cautioned that any such forward-looking statements
are not guarantees for future performance and involve risks and
uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements.
Business Environment
The Company's retail securities brokerage activities, as well
as its investment banking, investment advisory, institutional
sales and trading and equity research services, are highly
competitive and subject to various risks including volatile
trading markets and fluctuations in the volume of market
activity. These markets are affected by general economic and
market conditions, including fluctuations in interest rates,
volume and price levels of securities and flows of investor funds
into and out of mutual funds and pension plans and by factors
that apply to particular industries such as technological
advances and changes in the regulatory environment. Declining
interest rates and a favorable economic environment contributed
to a significant increase in activity in the equity markets in
the United States since the latter part of 1995. The Company's financial
results have been and may continue to be subject to fluctuations due
to these and other factors. Consequently, the results of operations for a
particular period may not be indicative of results to be expected
for other periods.
Equity Participation of Employees
As of March 31, 1998, the Company's employees, including senior
management and investment executives, owned in excess of 34% of
the Company's outstanding Common Stock. In connection with
the Offering, employees sold no shares of the Company's common stock
and purchased their entire allocation of 335,000 shares. After giving
effect to the issuance of the additional 3,865,000 shares to the public in
the Offering, employees ownership was over 28%. Management believes that
significant employee ownership has resulted in progressively higher levels
of employee motivation, confidence and commitment.
Incentive equity programs have been established pursuant to
which employees have acquired or may acquire additional equity of
the Company, which, when added to shares previously purchased and
shares issued in connection with the acquisition of Cleary Gull,
would result in employees owning approximately 45% of the shares
of Common Stock outstanding after giving effect to the Offering.
Components of Revenues and Expenses
Revenues. Commission revenues include retail and institutional
commissions received by the Company as an agent in securities
transactions, including all exchange listed, over-the-counter
agency, mutual fund, insurance, and annuity transactions. Principal
transactions revenues include gains and losses from the trading of
securities by the Company as principal including principal sales
credits and dividends. Investment banking revenues include selling
concessions, underwriting fees and management fees received from
the underwriting of corporate or municipal securities as well as fees
earned from providing merger and acquisition and other financial
advisory services. Asset management revenues include fees generated
from providing investment advisory and portfolio management services to
institutional and high net worth investors. Other revenues
primarily consist of transaction fees, retirement plan revenue
and third party correspondent clearing fees. Interest income
primarily consists of interest earned on margin loans made to
customers, securities purchased under agreements to resell and
fixed income securities held in the Company's trading accounts.
Net revenues equal total revenues less interest expense. Interest
expense includes interest paid under its Wexford financing
arrangement and on bank borrowings, securities sold under
agreements to repurchase, fixed asset financing and cash balances
in customer accounts.
Expenses. Compensation and benefits expense includes sales,
trading and incentive compensation, which are primarily variable
based on revenue production and/or business unit profit
contribution, and salaries, payroll taxes, and employee benefits
which are relatively fixed in nature. Incentive compensation,
including bonuses for eligible employees, is accrued proratably
throughout the year based on actual or estimated annual amounts.
Brokerage and
-9-
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 Agreement.
Results of Operations
The following table compares first quarter results (dollars in
millions) between 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Period to Period Percentage of
Ended March 31, Increase/(Decrease) Net Revenues
1998 1997 Amount Percent 1Q98 1Q97
---- ---- ------ ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions................ $46.3 $40.1 $ 6.2 15.5% 46.3% 47.5%
Principal transactions..... 25.2 22.0 3.2 14.7% 25.2% 26.1%
Investment banking......... 13.7 9.5 4.2 43.3% 13.7% 11.3%
Asset management........... 5.8 4.9 0.9 19.1% 5.8% 5.8%
Other...................... 2.7 3.4 (0.7) (20.8%) 2.7% 4.0%
----- ----- ----- ------ -----
Total operating revenues.. 93.7 79.9 13.8 17.3% 93.7% 94.7%
Interest income............ 13.3 10.4 2.9 27.4% 13.3% 12.3%
----- ----- ----- ------ ------
Total revenues............ 107.0 90.3 16.7 18.5% 107.0% 107.0%
Interest expense........... 7.0 5.9 1.1 18.8% 7.0% 7.0%
----- ----- ----- ------ ------
Net revenues.............. 100.0 84.4 15.6 18.4% 100.0% 100.0%
Non-interest expenses:
Compensation and benefits.. 66.4 54.5 11.9 22.0% 66.4% 64.5%
Occupancy and equipment.... 6.2 6.5 (0.3) (5.1%) 6.2% 7.7%
Communications............. 4.1 4.2 (0.1) (1.6%) 4.1% 5.0%
Brokerage and clearance.... 2.8 2.7 0.1 1.9% 2.8% 3.2%
Promotional................ 2.7 2.1 0.6 31.6% 2.8% 2.5%
Other...................... 7.8 6.9 0.9 12.5% 7.8% 8.2%
----- ----- ----- ------ ------
Total non-interest expenses 90.0 76.9 13.1 17.1% 90.1% 91.1%
Operating pre-tax income.... 10.0 7.5 2.5 32.0% 9.9% 8.9%
Acquisition interest expense 1.4 1.5 (0.1) (9.6%) 1.3% 1.8%
----- ----- ----- ------ ------
Income before income taxes.. 8.6 6.0 2.6 42.2% 8.6% 7.1%
Income taxes................ 3.6 2.5 1.1 39.9% 3.6% 3.0%
----- ----- ----- ------ ------
Net income.................. $ 5.0 $ 3.5 $ 1.5 44.0% 5.0% 4.1%
===== ===== ===== ====== ======
</TABLE>
Three months ended March 31, 1998 compared to three months
ended March 31, 1997
The Company experienced stronger operating results for the
three months ended March 31, 1998 when compared with the same
period in 1997. Revenues increased in all of the Company's core
businesses and expenses declined as a percentage of net revenues.
Net income increased $1.5 million or 44% to $5.0 million in the
1998 quarter from net income of $3.5 million in the comparable
1997 period. Management believes that these results are
attributable to two principal factors. First, the favorable
conditions which generally continued to prevail in the industry
reflecting investor optimism concerning inflation, interest rate
stability and a strong U.S. economy had a significant impact on
the Company's retail brokerage businesses. Second, the Company's
renewed focus on its equity capital markets groups and the
favorable industry environment for corporate finance and
underwriting activities resulted in increased investment banking
revenues.
Total operating revenues increased $13.8 million or 17% to
$93.7 million in the three months ended March 31, 1998 from $79.9
million in the quarter ended March 31, 1997. Net revenues,
including the effect of interest income and interest expense,
other than Acquisition interest expense, increased $15.6 million
or 18% to $100.0 million in the three months ended March 31, 1998
versus $84.4 million in the comparable period in 1997. Operating
pre-tax income increased to 10% in the first quarter of 1998, up
from 9% in the same period last year.
Commission revenues increased $6.2 million or 16% to $46.3
million in the three months ended March 31, 1998 from $40.1
million in the three months ended March 31, 1997, primarily due
to improvements in retail productivity per investment executive
as well as new personnel hired in that sector.
-10-
Principal transaction revenues increased $3.2 million or 15% to
$25.2 million in the three months ended March 31, 1998 from $22.0
million in the three months ended March 31, 1997, mainly due to
higher arbitrage trading profits as well as improvements in the
institutional fixed income business.
Investment banking revenues increased $4.2 million or 43% to
$13.7 million in the three months ended March 31, 1998 from $9.5
million in the three months ended March 31, 1997. The increase
reflected higher revenues from public offerings as well as higher
fees from advisory and mergers and acquisitions activity.
Asset management revenues increased $0.9 million or 19% to $5.8
million in the three months ended March 31, 1998 from $4.9
million in the three months ended March 31, 1997 reflecting
overall growth in assets under management which reached more than
$6 billion.
Other income decreased $0.7 million or 21% to $2.7 million in
the three months ended March 31, 1998 from $3.4 million in the
three months ended March 31, 1997. This decline resulted
primarily from the mid-1997 expiration of a contract with a
subsidiary of Hancock under which the Company recovered mutual
fund sales charges.
Interest income increased $2.9 million or 27% to $13.3 million
in the three months ended March 31, 1998 from $10.4 million in
the three months ended March 31, 1997, due primarily to the
combination of higher interest income on customer balances and
greater stock borrow activity. Interest expense, excluding those
expenses associated with financing the Acquisition, increased
$1.1 million or 19% to $7.0 million in the three months ended
March 31, 1998 from $5.9 million in the three months ended March
31, 1997, primarily reflecting higher average inventory balances.
Total non-interest expenses increased $13.1 million or 17% to
$90.0 million in the three months ended March 31, 1998 from $76.9
million in the three months ended March 31, 1997. This increase
was mainly the result of higher production-related compensation
attributable to higher revenues. The Company experienced
continued success in cost optimization, as evidenced by a lower
non-compensation expense growth rate of 5% compared to revenue
growth of over 18% versus the first three months of 1997.
Compensation and benefits expense increased $11.9 million or
22% to $66.4 million in the three months ended March 31, 1998
from $54.5 million in the three months ended March 31, 1997,
primarily due to increased incentive and production-related
compensation. Compensation and benefits as a percentage of net
revenues increased to 66% in the first quarter of 1998 from 65%
in the comparable period in 1997, in part due to a provision for
non-cash compensation expense related to employee stock purchases
and higher payouts resulting from increased productivity.
Despite increased clearing activity, brokerage and clearance
expenses remained virtually unchanged at $2.8 million in the
first three months of 1998 compared with $2.7 million in the
first three months of 1997, primarily as a result of the cost
effective Wexford clearing arrangement.
All other operating expenses increased an aggregate of $1.1
million or 6% to $20.8 million in the three months ended March
31, 1998 from $19.7 million in the three months ended March 31,
1997. All other operating expenses as a percentage of net revenues
declined to 21% in the three months ended March 31, 1998 from 23% in
the three months ended March 31, 1997. There was an increase in
promotional expense of $0.6 million or 32%, largely as a result
of research conferences hosted by the Company. Other expenses
increased $0.9 million to $7.8 million for the three months ended
March 31, 1998, as compared to the three months ended March 31,
1997 when other expenses totaled $6.9 million. Occupancy and
equipment expense decreased $0.3 million, or 5%, and
communications expense decreased $0.1 million, or 2%, partially
offsetting the increase in other expenses.
The Company's income tax provisions in the three months ended
March 31, 1998 and the three months ended March 31, 1997 were
$3.6 million and $2.5 million, respectively, which represented a
41% effective tax rate in the three months ended March 31, 1998
and a 42% effective tax rate in the three months ended March 31,
1997. The lower effective tax rate in the three months ended
March 31, 1998 was due mainly to increases in non-taxable
dividend income and tax exempt municipal interest income.
-11-
Liquidity and Capital Resources
The Company receives dividends, interest on loans and other
payments from its subsidiaries which are the Company's primary
source of funds to pay expenses, service debt, and pay dividends.
Distributions and interest payments to the Company from its
registered broker-dealer subsidiaries, which are expected to be
the Company's primary sources of liquidity, are restricted as to
amounts which may be paid by applicable law and regulations. The
Net Capital Rules are the primary regulatory restrictions
regarding capital resources (See Note 4 of the financial
statements). The Company's rights to participate in the assets of
any subsidiary are also subject to prior claims of the
subsidiary's creditors, including customers of the broker-dealer
subsidiaries.
On April 2, 1998, the Company completed a 7,400,000 share
Offering of its Common Stock, including 4,200,000 shares
sold by the Company.
Borrowings under the Credit Agreement were repaid in full with
the net proceeds of the Offering to the Company, leaving the
Company with $20.3 million of indebtedness under a fixed asset
facility secured by the Company's fixed assets. In addition, $30
million is available under the Credit Agreement.
The assets of Tucker Anthony, Sutro and Freedom Capital, the
Company's primary operating subsidiaries, are highly liquid with
the majority of such assets consisting of securities inventories
and collateralized receivables, both of which fluctuate depending
on the levels of customer business. Collateralized receivables
consist 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.
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 generally is obtained from
Wexford at rates based upon prevailing market conditions. The
Company monitors overall liquidity by tracking the extent to
which unencumbered marketable assets exceed short-term unsecured
borrowings.
Repurchase agreements are used primarily for customer
accommodation purposes and to finance the Company's inventory
positions in U.S. government and agency securities. These
positions provide products and liquidity for customers and are
not maintained for the Company's investment or market
speculation. The level of activity fluctuates depending on
customer needs; however, these fluctuations have not materially
affected liquidity or capital resources. The Company monitors the
collateral position and counterparty risk on these transactions
daily.
The subsidiaries' total assets and short-term liabilities and
the individual components thereof may vary significantly from
period to period because of changes relating to customer needs
and economic and market conditions.
The Company's operating activities generate cash resulting from
net income earned during the period and fluctuations in the
Company's current assets and liabilities. The most significant
fluctuations have resulted from changes in the level of customer
activity and changes in proprietary arbitrage trading strategies
dictated by prevailing market conditions.
In addition to normal operating requirements, capital is
required to satisfy financing and regulatory requirements on
securities inventories and investment banking commitments. The
Company's overall capital needs are continually reviewed to
ensure that its capital base can appropriately support the
anticipated capital needs of the subsidiaries. Management
believes that existing capital funds provided from operations,
the current credit arrangements with Wexford, and the unutilized
facility under the Credit Agreement will be sufficient to finance
the operating subsidiaries' ongoing businesses.
Cash Flows
Cash and cash equivalents at March 31, 1998 and 1997 totaled
$12.2 million and $6.2 million, respectively. For the three
months ended March 31, 1998, funds generated from operating activities
of $2.3 million, including net income of $5.0 million, along with
available cash were used primarily to repay notes payable to banks.
-12-
During the three months ended March 31, 1997, purchases of
fixed assets and repayments of notes payable to banks were funded
from operations and cash on hand.
Net cash from operating activities increased $1.7 million in
the three months ended March 31, 1998 compared with the same
period in 1997 due primarily to the $1.5 million improvement in
net income.
Net proceeds of approximately $77.3 million from the sale of
4,200,000 shares of Common Stock in the Offering on April 2, 1998
and available cash were used to repay the full amount of existing
bank debt under the Credit Agreement.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Not Yet Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to various legal
proceedings which are of an ordinary or routine nature incidental
to the operations of the Company and its subsidiaries. As of
March 31, 1998, there were lawsuits and arbitrations pending
against the Company and its subsidiaries. The Company believes
that it has adequately reserved for such litigation matters and
that they will not have a material adverse effect on the
Company's financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
Unregistered Securities:
During the period covered by this report, the Company has issued, in
transactions exempt from registration pursuant to section 4(2) of the
Securities Act, an aggregate of 56,776 shares of
Common Stock for aggregate consideration of $390,700 to employees of
the Company's subsidiaries. In addition, 8,662 shares have been issued
upon exercise of employee stock options in transactions exempt under
section 4(2) of the Securities Act.
Use of Proceeds:
The effective date of the Form S-1, SEC File No. 333-44931,
Registration Statement, registering 7,400,000 shares (4,200,000
primary shares) of Common Stock of the Company, was April 1,
1998. The date of commencement of the offering of such registered
shares was April 2, 1998. The Company received the proceeds from
the sale of primary shares. The managing underwriters in the
offering were Donaldson, Lufkin & Jenrette Securities
Corporation, Credit Suisse First Boston, Sutro and Tucker
Anthony.
Information concerning the registered shares as of the date of
this report is set forth below:
<TABLE>
<CAPTION>
Title of Security: Common Stock
<S> <C>
Amount Registered: 7,400,000
Aggregate Price of the
Offering Amount Registered: $148,000,000
Amount Sold by the Company: 4,200,000
Aggregate Offering Price of
Amount Sold by the Company: $ 84,000,000
</TABLE>
-13-
A reasonable estimate of the amount of the expenses incurred to
date by the Company in connection with the issuance and
distribution of the registered shares is as follows:
<TABLE>
<S> <C>
Underwriting Discounts and Commissions: $5,670,000
Other Expenses: 1,000,000
----------
Total $6,670,000
</TABLE>
All of the expenses listed above were direct or indirect
payments to others and not payments to directors, officers,
affiliates (except in the case of Tucker Anthony and Sutro) or
10% stockholders (or their associates) of the Company. The amount
of net offering proceeds to the Company after the total expenses listed
above was approximately $77,330,000. The Company used the
proceeds and available cash to repay $77,500,000 million of
existing debt on April 7, 1998 and none of such payments were made to
directors, officers, affiliates or 10% stockholders (or their associates)
of the Company.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Cleary Gull Acquisition
As part of its growth strategy, the Company has acquired
through a merger with a wholly owned subsidiary of the Company,
subsequent to the first quarter, 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 is a combination of
880,000 shares of the Company's Common Stock with a value (valued
at a price equal to the Offering price) of $17.6 million and $4.4
million in cash, subject to adjustment. The Company has committed
to register for resale 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. The Company has entered into
employment agreements with Cleary Gull's senior management that
became effective upon consummation of the Merger.
Cleary Gull was established in 1987 in Milwaukee, Wisconsin as
a private investment bank focusing on the equity capital markets
through institutional research, sales and trading, and investment
banking services. Cleary Gull's twelve research analysts cover
such areas as distribution and logistics, business services,
applied technology (including diagnostics, dental and
filtration/separation) and growth companies in the upper Midwest.
Cleary Gull's equity capital markets practice includes a national
institutional sales force and over-the-counter and listed trading
services. Cleary Gull's investment banking practice is focused
primarily on merger and acquisition advisory services and
financing assignments in both public and private equity and debt
markets. The firm opened its offices in Chicago in 1997 and in
Denver in 1998. Cleary Gull had net income of $1.3 million on
total revenues of $26.4 million in 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are included herein or are
incorporated by reference.
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K - The company filed no reports on Form
8-K during the quarter ended March 31, 1998.
-14-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FREEDOM SECURITIES CORPORATION
(REGISTRANT)
DATE: MAY 15, 1998 BY: /s/JOHN H. GOLDSMITH
---------------------------------------
JOHN H. GOLDSMITH
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
DATE: MAY 15, 1998 BY: /s/WILLIAM C. DENNIS, JR.
---------------------------------------
WILLIAM C. DENNIS, JR.
CHIEF FINANCIAL OFFICER
-15-
EXHIBIT INDEX
-------------
ITEM NO. DESCRIPTION SEQUENTIAL PAGE NO.
11 Computation of Earnings per Share 17
27 Financial Data Schedule 18
-16-
FREEDOM SECURITIES CORPORATION
COMPUTATION OF EARNINGS PER SHARE
The Company computes its earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") 128 "Earnings Per Share." The following
table sets forth the computation for basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Numerator
---------
Net Income $ 5,029 $ 3,493
Denominator
-----------
Weighted average shares outstanding 14,825 14,301
Dilutive effect of:
Stock options and other
exercisable shares 905 124
------ ------
Adjusted weighted average
shares outstanding 15,730 14,425
Basic earnings per share $ 0.34 $ 0.24
Diluted earnings per share $ 0.32 $ 0.24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<CIK> 0001029267
<NAME> FREEDOM SECURITIES CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 12,150
<RECEIVABLES> 104,008
<SECURITIES-RESALE> 26,306
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 315,573
<PP&E> 19,690
<TOTAL-ASSETS> 566,327
<SHORT-TERM> 77,500
<PAYABLES> 146,975
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 212,378
<LONG-TERM> 20,297
0
0
<COMMON> 149
<OTHER-SE> 109,028
<TOTAL-LIABILITY-AND-EQUITY> 566,327
<TRADING-REVENUE> 25,253
<INTEREST-DIVIDENDS> 13,267
<COMMISSIONS> 46,306
<INVESTMENT-BANKING-REVENUES> 13,712
<FEE-REVENUE> 5,813
<INTEREST-EXPENSE> 8,364
<COMPENSATION> 66,452
<INCOME-PRETAX> 8,596
<INCOME-PRE-EXTRAORDINARY> 8,596
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,029
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.32
</TABLE>
