<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 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
TUCKER ANTHONY SUTRO
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3335712
(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 August 10, 2000 the Company had 22,812,117 shares of common stock
outstanding.
<PAGE> 2
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income - Three and six
months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - Six months
ended June 30, 2000 and 1999 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 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES
EXHIBIT INDEX
<PAGE> 3
Item 1. Financial Statements
TUCKER ANTHONY SUTRO
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(unaudited) 1999
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 36,691 $ 24,647
Receivables from brokers and dealers 117,608 103,568
Securities purchased under agreements to resell 52,702 41,250
Securities owned, at market 311,652 414,245
Fixed assets, net of accumulated depreciation and amortization 27,982 24,644
Deferred income taxes 11,213 10,936
Goodwill, net of accumulated amortization 83,849 87,083
Other receivables 72,265 63,755
Other assets 67,334 47,875
--------- ---------
Total assets $ 781,296 $ 818,003
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payables to brokers and dealers $ 92,660 $ 88,811
Securities sold under agreements to repurchase 14,738 10,983
Securities sold, not yet purchased, at market 150,712 234,026
Accrued compensation and benefits 89,498 94,341
Accounts payable and accrued expenses 63,066 56,323
Notes payable to banks 58,822 61,303
--------- ---------
Total liabilities 469,496 545,787
--------- ---------
Stockholders' equity:
Common stock, $.01 par value (60,000,000 shares authorized,
22,750,163 and 21,773,841 shares issued in 2000 and 1999,
respectively) 227 218
Additional paid-in capital 218,141 207,134
Retained earnings 93,555 65,175
Treasury stock (8,679 and 21,967 shares in 2000 and 1999,
respectively, at cost) (123) (311)
--------- ---------
Total stockholders' equity 311,800 272,216
--------- ---------
Total liabilities and stockholders' equity $ 781,296 $ 818,003
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
TUCKER ANTHONY SUTRO
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Commissions $ 66,944 $ 54,942 $157,114 $108,962
Principal transactions 48,370 30,772 136,286 60,688
Investment banking 18,143 16,858 47,995 30,339
Asset management 20,356 16,359 39,457 30,611
Net interest income (1) 12,163 9,188 23,861 18,111
Other 6,097 2,412 10,087 4,459
-------- -------- -------- --------
Net revenues 172,073 130,531 414,800 253,170
Non-interest expenses
Compensation and benefits 110,145 85,013 267,043 164,864
Occupancy and equipment 7,885 7,110 16,149 13,701
Communications 6,637 5,417 13,221 10,603
Brokerage and clearance 6,438 4,876 15,603 9,810
Promotional 5,713 4,388 11,359 8,043
Other 17,762 11,474 38,942 22,438
-------- -------- -------- --------
Total non-interest expenses 154,580 118,278 362,317 229,459
-------- -------- -------- --------
Income before income taxes 17,493 12,253 52,483 23,711
Income taxes 6,889 4,801 21,474 9,461
-------- -------- -------- --------
Net income $ 10,604 $ 7,452 $ 31,009 $ 14,250
======== ======== ======== ========
Earnings per share:
Basic $ 0.47 $ 0.38 $ 1.40 $ 0.72
Diluted (2) $ 0.45 $ 0.36 $ 1.34 $ 0.69
Cash dividends declared per share $ 0.06 $ 0.05 $ 0.11 $ 0.09
Weighted-average common shares outstanding:
Basic 22,486 19,677 22,213 19,750
Diluted 23,641 20,646 23,166 20,698
</TABLE>
(1) Net of interest expense of $20,113 and $8,114 for the quarters ended
June 30, 2000 and 1999, respectively and of $36,571 and $15,094 for the six
months ended June 30, 2000 and 1999, respectively.
(2) Summation of the quarters' earnings per share may not equal the annual
amounts due to the averaging effect of the number of shares and share
equivalents throughout the year.
See accompanying notes.
4
<PAGE> 5
TUCKER ANTHONY SUTRO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 31,009 $ 14,250
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 18,774 10,416
Deferred income taxes (177) (83)
Non-cash compensation 82 82
Changes in assets and liabilities, net of effects of acquisitions
(Increase) decrease in operating assets:
Receivables from brokers and dealers (14,040) 27,361
Securities purchased under agreements to resell (11,452) 59,491
Securities owned, at market 102,593 (24,167)
Other receivables (8,510) (14,454)
Other assets (28,029) (14,233)
Increase (decrease) in operating liabilities:
Payables to brokers and dealers 3,849 (6,544)
Securities sold under agreements to repurchase 3,755 (6,698)
Securities sold, not yet purchased, at market (83,314) 11,078
Accrued compensation and benefits (244) (27,450)
Accounts payable and accrued expenses 8,495 587
--------- ---------
Net cash provided by operating activities 22,791 29,636
Cash Flows from Investing Activities:
Purchases of fixed assets (8,139) (4,276)
Acquisitions, net of cash acquired -- (9,458)
--------- ---------
Net cash used in investing activities (8,139) (13,734)
Cash Flows from Financing Activities:
Proceeds from sale of common stock, net 2,313 546
Purchases of treasury stock -- (19,442)
Payment of dividends (2,440) (1,781)
Repayments of bank borrowings (2,481) (1,826)
--------- ---------
Net cash used in financing activities (2,608) (22,503)
--------- ---------
Increase (decrease) in cash and cash equivalents 12,044 (6,601)
Cash and cash equivalents, beginning of period 24,647 11,292
--------- ---------
Cash and cash equivalents, end of period $ 36,691 $ 4,691
--------- ---------
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Income taxes $ 34,115 $ 11,191
Interest $ 18,873 $ 14,304
</TABLE>
See accompanying notes.
5
<PAGE> 6
TUCKER ANTHONY SUTRO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
Tucker Anthony Sutro (formerly Freedom Securities Corporation) is a holding
company which together with its wholly-owned subsidiaries (collectively, the
"Company") is a full-service retail brokerage, asset management and investment
banking firm. The consolidated financial statements include the accounts of the
Company and its operating subsidiaries: Tucker Anthony Incorporated ("Tucker
Anthony"), a full-service brokerage and investment firm, and its divisions:
Tucker Anthony Capital Markets, an investment banking and institutional
brokerage firm, Gibraltar Securities, a brokerage and investment advisory firm
and Tucker Anthony MidAtlantic, a municipal finance and underwriting brokerage
firm; Sutro & Co. Incorporated ("Sutro"), a West Coast brokerage and investment
banking firm; Hill, Thompson, Magid & Co., Inc. ("Hill Thompson"), a New
Jersey-based wholesale over-the-counter trading firm; Freedom Capital Management
Corporation ("Freedom Capital"), a Boston-based asset management firm; and
Cleary Gull Investment Management Services, Inc. ("Cleary Gull IMS"), a
Milwaukee-based asset management firm.
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. Management believes that the estimates
utilized in preparing its financial statements are reasonable and prudent.
Actual results could differ from these estimates. Certain prior period amounts
have been reclassified to conform with the current period's financial statement
presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for audited
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three and six months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. The
information included in this Form 10-Q should be read in conjunction with the
audited financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
2. NET CAPITAL REQUIREMENTS
Certain subsidiaries of the Company are subject to the net capital
requirements of the New York Stock Exchange, Inc. ("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 June 30, 2000, Tucker
Anthony had net capital of approximately $40.6 million which was $39.6 million
in excess of the $1.0 million amount required to be maintained at that date.
6
<PAGE> 7
2. NET CAPITAL REQUIREMENTS (CONTINUED)
Sutro is a registered broker and dealer. At June 30, 2000, Sutro had net
capital of approximately $12.7 million which was $11.7 million in excess of the
$1.0 million amount required to be maintained at that date.
Hill Thompson is a registered broker and dealer. At June 30, 2000, Hill
Thompson had net capital of approximately $19.8 million which was $18.8 million
in excess of the $1.0 million amount required to be maintained at that date. In
addition, at June 30, 2000, Hill Thompson had $ 0.2 million in cash segregated
in a special reserve bank account for the exclusive benefit of customers
pursuant to the reserve formula requirements of Rule 15c 3-3.
Cleary Gull IMS is a registered broker and dealer. At June 30, 2000, Cleary
Gull IMS had net capital of approximately $0.5 million which was $0.2 million in
excess of the $0.3 million amount required to be maintained at that date.
Freedom Trust Company ("FTC") is a subsidiary of Freedom Capital and is a
limited purpose trust company. Pursuant to state regulations, FTC is required to
meet and maintain certain capital minimums and ratios. At June 30, 2000, FTC's
regulatory capital, as defined, was $1.4 million and FTC was in compliance with
all such requirements.
Under a clearing arrangement with Wexford Clearing Services Corporation
("Wexford"), Tucker Anthony, Sutro and Cleary Gull IMS are required to maintain
certain minimum levels of net capital and comply with other financial ratio
requirements. At June 30, 2000, Tucker Anthony, Sutro and Cleary Gull IMS were
in compliance with all such requirements.
3. COMMITMENTS AND CONTINGENCIES
The Company leases office space and various types of equipment under
noncancelable leases generally varying from one to ten years, with certain
renewal options for like terms.
The Company has been named as defendant in a number of civil actions and
arbitrations primarily relating to its broker-dealer activities. The Company is
also involved, from time to time, in proceedings with, and investigations by,
governmental agencies and self regulatory organizations. While the ultimate
outcome of litigation involving the Company cannot be predicted with certainty,
management believes, based on currently available information, that it has
meritorious defenses to all such actions and intends to defend each of these
vigorously.
While there can be no assurance that such actions, proceedings,
investigations and litigation will not have a material adverse effect on the
financial position or results of operations of the Company in any future period,
it is the opinion of management that the resolution of any such actions,
proceedings, investigations and litigation will not have a material adverse
effect on the consolidated financial position and results of operations of the
Company.
The Company has outstanding 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. Transactions which were open at June 30, 2000 have subsequently
settled and had no material effect on the consolidated statements of income and
financial condition.
7
<PAGE> 8
4. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
NUMERATOR
Net income $10,604 $ 7,452 $31,009 $14,250
DENOMINATOR
Weighted-average shares outstanding 22,486 19,677 22,213 19,750
Dilutive effect of:
Stock options and other exercisable shares (a) 1,155 969 953 948
------- ------- ------- -------
Adjusted weighted-average shares outstanding 23,641 20,646 23,166 20,698
EARNINGS PER SHARE
Basic $ 0.47 $ 0.38 $ 1.40 $ 0.72
Diluted $ 0.45 $ 0.36 $ 1.34 $ 0.69
</TABLE>
(a) Options to purchase 5,500 and 6,500 shares of the Company's common stock
were outstanding at June 30, 2000 and June 30, 1999, respectively but were not
included in the respective computations of diluted earnings per share. The
inclusion of such options would have had an antidilutive effect on the diluted
earnings per share calculation because the options' exercise prices were greater
than the average market price of the Company's common shares for the 2000 second
quarter.
5. SEGMENT REPORTING DATA
The Company has two reportable segments: broker-dealer and asset management.
The Company's broker-dealer segment includes the retail operations, equity
capital markets and trading businesses of Tucker Anthony, Sutro and Hill
Thompson since they generally offer similar products and services and are
subject to uniform regulatory requirements. The Company offers its broker-dealer
clients a wide range of products and services, including retail brokerage,
investment banking, institutional sales and fixed income products. The asset
management segment includes Freedom Capital, Cleary Gull IMS and asset
management business from Tucker Anthony and Sutro. The Company offers its asset
management clients investment advisory, portfolio management and custodial
services. Substantially all of the Company's business is transacted in the
United States. The following table presents information about reported segments
(amounts in thousands):
<TABLE>
<CAPTION>
Asset
Broker-Dealer Management Other (a) Total
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Net revenues $148,155 $20,401 $3,517 $172,073
Income before income taxes 9,791 4,605 3,097 17,493
---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1999
Net revenues $113,419 $16,420 $692 $130,531
Income (loss) before income taxes 8,894 3,585 (226) 12,253
---------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000
Net revenues $370,553 39,548 4,699 $414,800
Income (loss) before income taxes 46,179 9,016 (2,712) 52,483
Total assets 672,649 62,422 46,225 781,296
---------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999
Net revenues 221,164 30,774 1,232 $253,170
Income before income taxes 16,432 7,039 240 23,711
Total assets 486,588 48,034 39,104 573,726
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Other reflects the activities of the Company's holding companies.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing in Item 1 of this
report. This Form 10-Q may contain statements which 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,
including but not limited to those identified in the following paragraph, 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, asset management, institutional sales, trading and equity
research services, are in highly competitive markets 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, 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. 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.
COMPONENTS OF REVENUES AND EXPENSES
REVENUES Commission revenues include retail and institutional commissions
received by the Company as an agent in securities transactions, including all
exchange listed, over-the-counter agency, mutual fund, insurance and annuity
transactions. Principal transactions revenues include principal sales credits as
well as gains and losses from the trading of securities by the Company.
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, portfolio management and custodial
services to clients, as well as managed account fees and 12b-1 distribution
fees. Other revenues primarily consist of retirement plan revenue, third party
correspondent clearing fees and other transaction fees. Net interest income
equals interest income less interest expense. Interest income includes interest
earned on margin loans made to customers, securities purchased under agreements
to resell, fixed income securities held in the Company's trading accounts as
well as dividends earned on proprietary arbitrage positions. Interest expense
includes interest paid under its Wexford financing arrangement and on bank
borrowings, securities sold under agreements to repurchase and cash balances in
customer accounts held by Wexford.
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. Occupancy and equipment
expense includes rent and operating expenses for facilities, expenditures for
repairs and maintenance, and depreciation and amortization of furniture,
fixtures and leasehold improvements. Communications expense includes charges for
telecommunications, news and market data services. Brokerage and clearance
expense includes the cost of securities clearance, floor brokerage and exchange
fees. Promotional expense includes travel, entertainment and advertising. Other
expenses include general and administrative expenses, such as professional
services, litigation expenses, goodwill amortization, data processing and other
miscellaneous expenses.
9
<PAGE> 10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
The following table compares second quarter results (amounts in millions) in
2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS PERIOD TO PERIOD PERCENTAGE OF
ENDED JUNE 30, INCREASE NET REVENUES
-------------------------- -------------------------- --------------------------
2000 1999 (A) AMOUNT PERCENT 2000 1999
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions $ 66.9 $ 54.9 $12.0 22 39 42
Principal transactions 48.4 30.8 17.6 57 28 24
Investment banking 18.1 16.8 1.3 8 11 13
Asset management 20.4 16.4 4.0 24 12 12
Net interest income (b) 12.2 9.2 3.0 32 7 7
Other 6.1 2.4 3.7 153 3 2
------ ------ ----- --- ---
Net revenues 172.1 130.5 41.6 32 100 100
Non-interest expenses:
Compensation and benefits 110.2 85.0 25.2 30 64 65
Occupancy and equipment 7.9 7.1 0.8 11 5 5
Communications 6.6 5.4 1.2 23 4 4
Brokerage and clearance 6.4 4.9 1.5 32 4 4
Promotional 5.7 4.4 1.3 30 3 3
Other 17.8 11.4 6.4 55 10 9
------ ------ ----- --- ---
Total non-interest
expenses 154.6 118.2 36.4 31 90 90
Income before income taxes 17.5 12.3 5.2 43 10 10
Income taxes 6.9 4.8 2.1 43 4 4
------ ------ ----- --- --- ---
Net income $ 10.6 $ 7.5 $ 3.1 42 6 6
====== ====== ===== === === ===
</TABLE>
(a) Certain amounts have been reclassified to conform with 2000 financial
statement presentation.
(b) Net interest income is net of interest expense of $20.1 million in 2000 and
$8.1 million in 1999.
Net income was $10.6 million for the quarter ended June 30, 2000, up 42%
over net income of $7.5 million in the second quarter of 1999. Earnings per
share (diluted) for the quarter were $0.45, a 25% increase from $0.36 per share
in the same period a year ago. Net revenues increased 32% in the second quarter
to $172.1 million compared with $130.5 million in the second quarter of 1999.
Commission revenues increased $12.0 million or 22% to $66.9 million in the
second quarter of 2000 from $54.9 million in the same period a year ago. The
higher commission revenues stem from increased productivity per investment
executive as well as an overall increase in new investment executives as a
result of acquisitions and the Company's recruiting efforts throughout 2000.
Revenues from principal transactions rose to $48.4 million in the second
quarter of 2000, up $17.6 million or 57% from $30.8 million a year ago,
primarily due to the acquisitions of Hill Thompson and Gibraltar in late 1999
which contributed $15.2 million of the increase in the current quarter.
Investment banking revenues were $18.1 million in the second quarter of 2000
compared with $16.8 million in the 1999 second quarter primarily due to
increased volume in merger and acquisitions and, to a lesser extent, from
private transactions.
Asset management revenues grew 24% to $20.4 million in the second quarter of
2000 compared with $16.4 million in the second quarter of 1999, mainly due to
growth in assets under management, which grew to $12.0 billion at June 30, 2000
from $10.0 billion at June 30, 1999.
10
<PAGE> 11
Net interest income was $12.2 million for the current quarter, up $3.0
million or 32% from $9.2 million in the 1999 second quarter, mostly due to
higher customer margin balances.
Non-interest expenses were $154.6 million in the second quarter of 2000, an
increase of 31% from the $118.2 million in the second quarter of 1999. Included
in the current quarter expenses are costs of $4.9 million from Hill Thompson and
$8.8 million from Gibraltar, which were both acquired in late 1999. Compensation
and benefits expense as a percentage of net revenues was down to 64.0% from
65.1% in the prior year quarter. Non-compensation operating expenses were $44.4
million in the second quarter of 2000 (including $4.1 million from Hill Thompson
and Gibraltar) versus $33.2 million a year ago and increased primarily due to
growth in the Company's net revenues. Despite an increase in costs of 34% from
last year, non-compensation operating expenses as a percentage of net revenues
was 25.8% for the current quarter, essentially flat compared with 25.4% a year
ago.
The Company's income tax provisions for the quarters ended June 30, 2000 and
1999 were $6.9 million and $4.8 million, respectively, and the effective tax
rate was 39% for both quarters.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
The following table compares first half results (dollars in millions) in 2000
and 1999.
<TABLE>
<CAPTION>
SIX MONTHS PERIOD TO PERIOD PERCENTAGE OF
ENDED JUNE 30, INCREASE NET REVENUES
---------------------- --------------------- -------------------
2000 1999 (A) AMOUNT PERCENT 2000 1999
------ -------- ------ ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions $157.1 $109.0 $ 48.1 44 38 43
Principal transactions 136.3 60.7 75.6 125 33 24
Investment banking 48.0 30.3 17.7 58 12 12
Asset management 39.4 30.6 8.8 29 9 12
Net interest income (b) 23.9 18.1 5.8 32 6 7
Other 10.1 4.5 5.6 126 2 2
------ ------ ------ --- ---
Net revenues 414.8 253.2 161.6 64 100 100
Non-interest expenses:
Compensation and benefits 267.0 164.9 102.1 62 64 65
Occupancy and equipment 16.2 13.7 2.5 18 4 5
Communications 13.2 10.6 2.6 25 3 4
Brokerage and clearance 15.6 9.9 5.7 59 4 4
Promotional 11.4 8.0 3.4 41 3 3
Other 38.9 22.4 16.5 74 9 9
------ ------ ------ --- ---
Total non-interest 362.3 229.5 132.8 58 87 90
expenses
Income before income taxes 52.5 23.7 28.8 121 13 10
Income taxes 21.5 9.4 12.1 127 5 4
------ ------ ------ --- ---
Net income $ 31.0 $ 14.3 $ 16.7 118 8 6
====== ====== ====== === ====
</TABLE>
(a) Certain amounts have been reclassified to conform with 2000 financial
statement presentation.
(b) Net interest income is net of interest expense of $36.6 million in 2000
and $15.1 million in 1999.
Net income increased 118% to $31.0 million in the first half of 2000, up
$16.7 million from net income of $14.3 million in the same period a year ago.
Earnings per share (diluted) for the first half of 2000 were $1.34, up 94% from
$0.69 for the first six months of 1999. Net revenues in the first half of 2000
were $414.8 million, a 64% increase over net revenues of $253.2 million a year
ago.
Commission revenues rose 44% to $157.1 million in the first six months of
2000 from $109.0 million in the same period a year ago. The higher commission
revenues stem from increased productivity per investment executive as well as an
overall increase in new investment executives as a result of acquisitions and
the Company's recruiting efforts throughout 1999 and 2000.
11
<PAGE> 12
Revenues from principal transactions were $136.3 million for the six months
ended June 30, 2000, up $75.6 million or 125% from $60.7 million a year ago,
primarily due to the acquisitions of Hill Thompson and Gibraltar in late 1999
which contributed $68.1 million of the increase in the first six months of 2000.
Of the $68.1 million increase attributable to Hill Thompson and Gibraltar, $53.8
million or 79% stems from Hill Thompson which benefited from high levels of
market activity in OTC traded securities during the first quarter of 2000.
Investment banking revenues increased $17.7 million or 58% to $48.0 million
in the first six months of 2000 from $30.3 million for the six months ended June
30, 1999 primarily due to increased volume in merger and acquisitions and, to a
lesser extent, from private transactions.
Asset management revenues grew 29% to $39.4 million in the first six months
of 2000 compared with $30.6 million in the first half of 1999, mainly due to
growth in assets under management, which grew to $12.0 billion at June 30, 2000
from $10.0 billion at June 30, 1999.
Net interest income was $23.9 million for the six months ended June 30,
2000, up $5.8 million or 32% from $18.1 million in the same period a year ago,
mostly due to higher customer margin balances.
Non-interest expenses were $362.3 million in the first half of 2000, an
increase of 58% from the $229.5 million in the first half of 1999. Included in
the year to date expenses are costs of $27.6 million from Hill Thompson and
$19.4 million from Gibraltar, which were both acquired in late 1999.
Compensation and benefits expense as a percentage of net revenues for the first
half of 2000 was down to 64.4% from 65.1% a year ago. Non-compensation operating
expenses were $95.3 million in the first six months of 2000 (including $10.3
million from Hill Thompson and Gibraltar) versus $64.6 million a year ago and
increased primarily due to growth in the Company's net revenues. Despite the
increase in costs, non-compensation operating expenses as a percentage of net
revenues declined to 23.0% for the first six months of 2000 from 25.5% a year
ago.
The Company's income tax provisions for the first half of 2000 and 1999 were
$21.5 million and $9.5 million, respectively. The effective tax rate was 41% for
the first half of 2000, up from 40% for the same period last year mainly due to
an increase in transactions that are not subject to preferential tax treatment.
LIQUIDITY AND CAPITAL RESOURCES
The Company receives dividends, interest on loans and other payments from
its subsidiaries, which are the Company's main source of funds to pay expenses,
service debt and pay dividends. Distributions and interest payments to the
Company from its registered broker-dealer subsidiaries, 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. 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.
The assets of the Company's primary operating subsidiaries are highly liquid
with the majority of their assets consisting of securities inventories and
collateralized receivables, both of which fluctuate depending on the levels of
customer business. Collateralized receivables consist mainly of securities
purchased under agreements to resell, which are secured by U.S. government and
agency securities.
The majority of the subsidiaries' assets are financed through Wexford, by
securities sold under repurchase agreements and by securities sold, not yet
purchased. The Company's principal source of short-term financing stems from 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
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customer and inventory needs; however, these fluctuations have not
materially affected liquidity or capital resources. The Company monitors the
collateral position and counterparty risk of 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 its current assets and liabilities.
In addition to normal operating requirements, capital is required to satisfy
financing and regulatory requirements. 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. The excess regulatory net
capital of the Company's broker-dealer subsidiaries may fluctuate throughout the
year reflecting changes in inventory levels and/or composition, investment
banking commitments and balance sheet components. For a description of the
Company's net capital requirements, see Note 2 of the Notes to the Financial
Statements. Management believes that existing capital, funds provided by
operations, the credit arrangement with Wexford and funds available from a
revolving credit agreement will be sufficient to finance the operating
subsidiaries' ongoing businesses. In 1999, the Company financed acquisitions
with cash, stock or a combination of both. Future acquisitions, if any, would
likely be financed in the same manner. Funds available from a revolving credit
agreement are expected to be sufficient to finance the cash component of
acquisitions in the near future.
The Company maintains a revolving credit agreement (the "Credit Agreement")
whereby participating banks have made commitments totaling $100 million. At June
30, 2000, the Company had borrowings of $50.0 million at interest rates ranging
from 1% to 1.45% above the federal funds rate. In addition, the Company must pay
a commitment fee of 0.20% on the unused available credit. The Credit Agreement
matures in November 2003 with all outstanding notes payable at that date. The
Company must comply with certain financial covenants under the Credit Agreement
and was in compliance with such covenants at June 30, 2000.
The Company maintains, through two subsidiaries, a fixed asset credit
facility (the "Fixed Asset Facility") secured by certain of the Company's fixed
assets. At June 30, 2000, the Company had borrowings outstanding under the Fixed
Asset Facility of $8.8 million, of which $6.9 million is payable in monthly
installments until December 2001 and $1.9 million is payable in monthly
installments through June 2003. The Company has historically financed capital
expenditures through internal cash generation and through the Fixed Asset
Facility. For the six months ended June 30, 2000 and 1999, the Company had
capital expenditures of $8.1 million and $4.3 million, respectively, which were
funded from operations.
The Company has a stock repurchase program that permits it to purchase
approximately two million shares of its common stock outstanding. To date, the
Company has funded its stock repurchases from internal sources and, as of June
30, 2000, the Company had 906,758 shares available for purchase under the
program.
CASH FLOWS
For the six months ended June 30, 2000, cash and cash equivalents increased
$12.0 million. Funds generated from operating activities were $22.8 million
including net income of $31.0 million and depreciation, amortization and other
non-cash charges to net income of $18.7 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three months ended June 30, 2000 does
not differ materially from that discussed under Item 7a of the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as defendant in a number of civil actions and
arbitrations primarily relating to its broker-dealer activities. The Company is
also involved, from time to time, in proceedings with, and investigations by,
governmental agencies and self regulatory organizations. While the ultimate
outcome of litigation involving the Company
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cannot be predicted with certainty, management believes, based on currently
available information, that it has meritorious defenses to all such actions and
intends to defend each of these vigorously.
While there can be no assurance that such actions, proceedings,
investigations and litigation will not have a material adverse effect on the
financial position or results of operations of the Company in any future period,
it is the opinion of management that the resolution of any such actions,
proceedings, investigations and litigation will not have a material adverse
effect on the consolidated financial position and results of operations of the
Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) UNREGISTERED SECURITIES:
During the second quarter of 2000, the Company issued 19,374 additional
shares of its common stock to the former owners of Charter Investment Group,
Inc. to finalize the acquisition of their firm in a private placement
transaction exempt under section 4(2) of the Securities Act.
Additionally, during the second quarter of 2000 the Company issued 3,030
shares of common stock in private placement transactions exempt under section
4(2) of the Securities Act to John Hancock Subsidiaries, Inc. pursuant to the
Additional Share Agreement entered into in connection with the acquisition of
the Company's subsidiaries from John Hancock in 1996.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 18, 2000
stockholders voted upon the following proposals:
PROPOSAL NO. 1 - ELECTION OF ELEVEN DIRECTORS:
NAMES SHARES FOR SHARES AGAINST
----- ---------- --------------
John H. Goldsmith 12,172,043 19,540
John F. Luikart 12,171,843 19,740
David P. Prokupek 12,040,238 151,345
Mark T. Whaley 12,172,043 19,540
Robert H. Yevich 12,172,043 19,540
C. Hunter Boll 12,172,043 19,540
Winston J. Churchill 12,172,043 19,540
Thomas M. Hagerty 12,172,043 19,540
David V. Harkins 12,172,043 19,540
Hugh R. Harris 12,172,043 19,540
Seth W. Lawry 12,172,043 19,540
There were no abstentions or broker non-votes with respect to the election of
directors.
PROPOSAL NO. 2 - RATIFICATION OF AUDITORS
Ratification of the firm of Ernst & Young, LLP. as independent accountants
for the Company for the fiscal year ending December 31, 2000.
SHARES FOR SHARES AGAINST ABSTENTIONS
---------- -------------- -----------
12,188,897 2,486 200
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PROPOSAL NO. 3 - APPROVAL OF AMENDMENTS TO 1998 EMPLOYEE STOCK PURCHASE PLAN
SHARES FOR SHARES AGAINST ABSTENTIONS NOT VOTED
---------- -------------- ----------- ---------
8,512,064 232,699 20,958 3,425,862
PROPOSAL NO. 4 - APPROVAL OF AMENDMENTS TO 1998 LONG-TERM INCENTIVE PLAN
SHARES FOR SHARES AGAINST ABSTENTIONS NOT VOTED
---------- -------------- ----------- ---------
8,027,040 717,983 20,698 3,425,862
A total of 12,191,583 shares were present in person or by proxy at the
Annual Meeting.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The following exhibits are included herein or are
incorporated by reference;
3.3 Certificate of Ownership and Merger Merging Tucker Anthony
Sutro, Inc. into Freedom Securities Corporation
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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.
TUCKER ANTHONY SUTRO
(REGISTRANT)
DATE: August 14, 2000 BY: /s/ JOHN H. GOLDSMITH
---------------------------------
JOHN H. GOLDSMITH
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
DATE: August 14, 2000 BY: /s/ KENNETH S. KLIPPER
---------------------------------
KENNETH S. KLIPPER
CHIEF FINANCIAL OFFICER
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EXHIBIT INDEX
-------------
ITEM NO. DESCRIPTION SEQUENTIAL PAGE NO.
-------- ----------- -------------------
3.3 Certificate of Ownership and Merger Merging 18
Tucker Anthony Sutro, Inc. into Freedom
Securities Corporation
27 Financial Data Schedule 20
17
