<PAGE> 1
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 THE SECURITIES
X EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 November 06, 2000 the Company had 23,932,957 shares of common stock
outstanding.
<PAGE> 2
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income - Three and nine months
ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - Nine months
ended September 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 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
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 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES
EXHIBIT INDEX
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TUCKER ANTHONY SUTRO
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 DECEMBER 31,
(unaudited) 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 21,502 $ 24,647
Receivables from brokers and dealers 79,651 103,568
Securities purchased under agreements to resell 43,941 41,250
Securities owned, at market 408,933 414,245
Fixed assets, net of accumulated depreciation and amortization 30,710 24,644
Deferred income taxes 9,394 10,936
Goodwill, net of accumulated amortization 82,231 87,083
Other receivables 77,714 63,755
Other assets 74,218 47,875
--------- ---------
Total assets $ 828,294 $ 818,003
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payables to brokers and dealers $ 93,166 $ 88,811
Securities sold under agreements to repurchase 13,334 10,983
Securities sold, not yet purchased, at market 187,397 234,026
Accrued compensation and benefits 96,034 94,341
Accounts payable and accrued expenses 58,162 56,323
Notes payable to banks 57,579 61,303
--------- ---------
Total liabilities 505,672 545,787
--------- ---------
Stockholders' equity:
Common stock, $.01 par value (60,000,000 shares authorized, 22,986,395
and 21,773,841 shares issued in 2000 and 1999, respectively) 230 218
Additional paid-in capital 221,203 207,134
Retained earnings 101,241 65,175
Treasury stock (3,341 and 21,967 shares in 2000 and 1999, respectively,
at cost) (52) (311)
--------- ---------
Total stockholders' equity 322,622 272,216
--------- ---------
Total liabilities and stockholders' equity $ 828,294 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Commissions $ 64,841 $ 52,870 $222,182 $161,832
Principal transactions 41,534 30,640 177,593 91,328
Investment banking 17,016 22,939 69,221 53,332
Asset management 20,989 16,740 60,446 47,351
Net interest income (1) 12,462 8,326 36,323 26,437
Other 2,846 2,192 8,721 6,597
-------- -------- -------- --------
Net revenues 159,688 133,707 574,486 386,877
Non-interest expenses
Compensation and benefits 103,605 88,521 370,609 253,385
Occupancy and equipment 8,250 7,331 24,400 21,032
Communications 6,470 5,570 19,691 16,173
Brokerage and clearance 5,662 4,596 20,880 14,076
Promotional 5,259 4,123 16,618 12,166
Other 14,664 12,732 54,027 35,501
-------- -------- -------- --------
Total non-interest expenses 143,910 122,873 506,225 352,333
-------- -------- -------- --------
Income before income taxes 15,778 10,834 68,261 34,544
Income taxes 6,652 3,830 28,127 13,290
-------- -------- -------- --------
Net income $ 9,126 $ 7,004 $ 40,134 $ 21,254
======== ======== ======== ========
Earnings per share:
Basic $ 0.40 $ 0.36 $ 1.80 $ 1.08
Diluted (2) $ 0.38 $ 0.34 $ 1.71 $ 1.03
Cash dividends declared per share $ 0.06 $ 0.05 $ 0.17 $ 0.14
Weighted-average common shares
outstanding:
Basic 22,604 19,565 22,342 19,688
Diluted 24,020 20,466 23,453 20,622
</TABLE>
(1) Net of interest expense of $19,643 and $10,206 for the quarters ended
September 30, 2000 and 1999, respectively and of $56,215 and $25,300 for the
nine months ended September 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>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 40,134 $ 21,254
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 28,550 15,686
Deferred income taxes 1,542 (280)
Non-cash compensation 123 123
Changes in assets and liabilities, net of effects
of acquisitions
(Increase) decrease in operating assets:
Receivables from brokers and dealers 23,917 21,383
Securities purchased under agreements to resell (2,691) 23,179
Securities owned, at market 5,312 (114,650)
Other receivables (13,959) (23,488)
Other assets (39,723) (20,007)
Increase (decrease) in operating liabilities:
Payables to brokers and dealers 4,355 18,542
Securities sold under agreements to repurchase 2,351 11,522
Securities sold, not yet purchased, at market (46,629) 96,047
Accrued compensation and benefits 6,292 (16,896)
Accounts payable and accrued expenses 3,699 68
-------- --------
Net cash provided by operating activities 13,273 32,483
Cash Flows from Investing Activities:
Purchases of fixed assets (13,077) (6,086)
Acquisitions, net of cash acquired -- (28,747)
-------- --------
Net cash used in investing activities (13,077) (34,833)
Cash Flows from Financing Activities:
Proceeds from sale of common stock, net 4,192 702
Purchases of treasury stock -- (21,613)
Payment of dividends (3,809) (2,738)
Proceeds from (repayments of) bank borrowings, net (3,724) 23,124
-------- --------
Net cash used in financing activities (3,341) (525)
-------- --------
(Decrease) in cash and cash equivalents (3,145) (2,875)
Cash and cash equivalents, beginning of period 24,647 11,292
-------- --------
Cash and cash equivalents, end of period $ 21,502 $ 8,417
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Income taxes $ 32,224 $ 14,799
Interest $ 53,378 $ 26,135
</TABLE>
See accompanying notes.
5
<PAGE> 6
TUCKER ANTHONY SUTRO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 banking 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 nine months ended September 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 September 30, 2000,
Tucker Anthony had net capital of approximately $16.1 million which was $15.1
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 September 30, 2000, Sutro had
net capital of approximately $15.2 million which was $14.2 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 September 30, 2000,
Hill Thompson had net capital of approximately $20.4 million which was $19.4
million in excess of the $1.0 million amount required to be maintained at that
date. In addition, at September 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 September 30, 2000,
Cleary Gull IMS had net capital of approximately $0.6 million which was $0.3
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 September 30, 2000,
FTC's regulatory capital, as defined, was $1.3 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 September 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 September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------
2000 1999 2000 1999
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
NUMERATOR
Net income $ 9,126 $ 7,004 $40,134 $21,254
DENOMINATOR
Weighted-average shares outstanding 22,604 19,565 22,342 19,688
Dilutive effect of:
Stock options and other exercisable shares (a) 1,416 901 1,111 934
------- ------- ------- -------
Adjusted weighted-average shares outstanding 24,020 20,466 23,453 20,622
EARNINGS PER SHARE
Basic $0.40 $0.36 $1.80 $1.08
Diluted $0.38 $0.34 $1.71 $1.03
</TABLE>
(a) Options to purchase 38,292 shares of the Company's common stock were
outstanding at September 30, 1999 but were not included in the computation
of diluted earnings per share. The inclusion of such options would have had
an antidilutive effect on the dilutive earnings per share calculation
because the options' exercise prices were greater than the average market
price of the Company's common shares for the 1999 third 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 SEPTEMBER 30, 2000
Net revenues $136,972 $21,041 $ 1,675 $159,688
Income (loss) before income taxes 11,271 4,555 (48) 15,778
---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
Net revenues $116,540 $16,793 $ 374 $133,707
Income (loss) before income taxes 8,010 3,684 (860) 10,834
---------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000
Net revenues $507,524 $60,590 $ 6,373 $574,486
Income (loss) before income taxes 62,308 13,561 (7,608) 68,261
Total assets 688,704 55,480 84,110 828,294
---------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net revenues $337,707 $47,564 $ 1,606 $386,877
Income (loss) before income taxes 25,364 10,718 (1,538) 34,544
Total assets 693,907 64,595 50,988 809,490
---------------------------------------------------------------------------------------------------------------------
(a) Other reflects the activities of the Company's holding companies.
</TABLE>
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.
COMPANY DEVELOPMENTS
On October 2, 2000, the Company closed its previously announced acquisition
of Branch, Cabell & Co. Inc. ("Branch Cabell") in an all-stock transaction
valued at approximately $19.6 million based on the average of the daily high and
low sale prices of the Company's common stock for the ten trading days
immediately preceding the closing date. In connection with the acquisition, the
Company entered into employment agreements with certain employees of Branch
Cabell and established a retention program totaling approximately $4.5 million.
Branch Cabell, founded in 1904, is a full-service regional brokerage and
investment firm headquartered in Richmond, Virginia. Branch Cabell will
ultimately operate as a division of Tucker Anthony Incorporated and within the
Company's broker-dealer segment. The transaction will be accounted for as a
pooling of interests.
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.
9
<PAGE> 10
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
The following table compares third quarter results (amounts in millions) in 2000
and 1999:
<TABLE>
<CAPTION>
THREE MONTHS PERIOD TO PERIOD PERCENTAGE OF
ENDED SEPTEMBER 30, INCREASE (DECREASE) NET REVENUES
------------------------ --------------------- -----------------
2000 1999(a) AMOUNT PERCENT 2000 1999
---- ------- ------ ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions $ 64.8 $ 52.9 $ 11.9 22 41 40
Principal transactions 41.5 30.6 10.9 36 26 23
Investment banking 17.1 22.9 (5.8) (25) 11 17
Asset management 21.0 16.8 4.2 25 13 13
Net interest income(b) 12.5 8.3 4.2 51 8 6
Other 2.8 2.2 0.6 29 2 2
-------- -------- ------- --- ---
Net revenues 159.7 133.7 26.0 19 100 100
Non-interest expenses:
Compensation and benefits 103.6 88.5 15.1 17 65 67
Occupancy and equipment 8.2 7.3 0.9 12 5 6
Communications 6.5 5.6 0.9 16 4 4
Brokerage and clearance 5.7 4.6 1.1 24 4 3
Promotional 5.2 4.2 1.0 25 3 3
Other 14.7 12.7 2.0 16 9 9
-------- -------- ------- --- ---
Total non-interest expenses 143.9 122.9 21.0 17 90 92
Income before income taxes 15.8 10.8 5.0 47 10 8
Income taxes 6.7 3.8 2.9 76 4 3
-------- -------- ------- --- ---
Net income $ 9.1 $ 7.0 $ 2.1 30 6 5
======== ======== ======= === ===
</TABLE>
(a) Certain amounts have been reclassified to conform with 2000 financial
statement presentation.
(b) Net interest income is net of interest expense of $19.6 million in 2000 and
$10.2 million in 1999.
Net income was $9.1 million for the quarter ended September 30, 2000, up
30% over net income of $7.0 million in the third quarter of 1999. Earnings per
share (diluted) for the quarter were $0.38, a 12% increase from $0.34 per share
in the same period a year ago. Net revenues increased 19% in the third quarter
to $159.7 million compared with $133.7 million in the third quarter of 1999.
Commission revenues increased $11.9 million or 22% to $64.8 million in the
third quarter of 2000 from $52.9 million in the same period a year ago. The
higher commission revenues stem from an increase in new investment executives as
a result of acquisitions and the Company's recruiting efforts as well as
increased productivity per investment executive.
10
<PAGE> 11
Revenues from principal transactions rose to $41.5 million in the third
quarter of 2000, up $10.9 million or 36% from $30.6 million a year ago. The
acquisitions of Hill Thompson and Gibraltar in late 1999 contributed $10.2
million of the increase in the current quarter which was partially offset by a
$2.8 million decrease in convertible arbitrage trading profits.
Investment banking revenues were $17.1 million in the third quarter of 2000
compared with $22.9 million in the 1999 third quarter reflecting an
industry-wide slowdown in this year's third quarter as well as the timing of
transactions.
Asset management revenues grew 25% to $21.0 million in the third quarter of
2000 compared with $16.8 million in the third quarter of 1999, mainly due to
growth in assets under management, which grew to $12.9 billion at September 30,
2000 from $10.2 billion at September 30, 1999.
Net interest income was $12.5 million for the current quarter, up $4.2
million or 51% from $8.3 million in the 1999 third quarter, primarily due to
higher customer margin balances.
Non-interest expenses were $143.9 million in the third quarter of 2000, an
increase of 17% from the $122.9 million in the third quarter of 1999 due in part
to $10.1 million of increased costs from the Hill Thompson and Gibraltar
acquisitions made in 1999. Compensation and benefits expense as a percentage of
net revenues was down to 65% from 67% in the prior year quarter in part due to
the reversal of certain discretionary compensation-related items in the current
quarter. Non-compensation operating expenses increased to $40.3 million in the
third quarter of 2000 from $34.4 million a year ago partly because of $2.6
million of expenses from Hill Thompson and Gibraltar as well as growth in the
Company's net revenues. Despite an increase in costs of 17% from last year,
non-compensation operating expenses as a percentage of net revenues was 25.2%
for the current quarter, essentially flat compared with 25.7% a year ago.
The Company's income tax provisions for the quarters ended September 30,
2000 and 1999 were $6.7 million and $3.8 million, respectively. The effective
tax rate was 42% in the third quarter of 2000 up from 35% in last year's third
quarter primarily due to an increase in transactions that are not subject to
preferential tax treatment.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
The following table compares first nine months results (dollars in millions) in
2000 and 1999:
<TABLE>
<CAPTION>
NINE MONTHS PERIOD TO PERIOD PERCENTAGE OF
ENDED SEPTEMBER 30, INCREASE NET REVENUES
------------------------ --------------------- -----------------
2000 1999(a) AMOUNT PERCENT 2000 1999
---- ------- ------ ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions $ 222.2 $ 161.8 $ 60.4 37 39 42
Principal transactions 177.6 91.3 86.3 94 31 24
Investment banking 69.2 53.3 15.9 30 12 14
Asset management 60.5 47.4 13.1 28 11 12
Net interest income (b) 36.3 26.5 9.8 37 6 7
Other 8.7 6.6 2.1 32 1 1
-------- -------- -------- --- ---
Net revenues 574.5 386.9 187.6 48 100 100
Non-interest expenses:
Compensation and benefits 370.6 253.4 117.2 46 65 66
Occupancy and equipment 24.4 21.0 3.4 16 4 5
Communications 19.7 16.2 3.5 22 3 4
Brokerage and clearance 20.9 14.1 6.8 48 4 4
Promotional 16.6 12.1 4.5 37 3 3
Other 54.0 35.5 18.5 52 9 9
-------- -------- -------- --- ---
Total non-interest expenses 506.2 352.3 153.9 44 88 91
Income before income taxes 68.3 34.6 33.7 97 12 9
Income taxes 28.2 13.3 14.9 112 5 3
-------- -------- -------- --- ---
Net income $ 40.1 $ 21.3 $ 18.8 88 7 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 $56.2 million in 2000 and
$25.3 million in 1999.
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Net income increased 88% to $40.1 million in the first nine months of 2000,
up $18.8 million from net income of $21.3 million in the same period a year ago.
Earnings per share (diluted) for the first nine months of 2000 were $1.71, up
66% from $1.03 for the first nine months of 1999. Net revenues in the first nine
months of 2000 were $574.5 million, a 48% increase over net revenues of $386.9
million a year ago.
Commission revenues rose 37% to $222.2 million in the first nine months of
2000 from $161.8 million in the same period a year ago. The higher commission
revenues stem from an increase in new investment executives as a result of
acquisitions and the Company's recruiting efforts throughout 1999 and 2000 as
well as increased productivity per investment executive.
Revenues from principal transactions were $177.6 million for the nine
months ended September 30, 2000, up $86.3 million or 94% from $91.3 million a
year ago, primarily due to the acquisitions of Hill Thompson and Gibraltar in
late 1999 which contributed $78.3 million of the increase in the first nine
months of 2000. Of the $78.3 million increase attributable to Hill Thompson and
Gibraltar, $59.7 million or 76% 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 $15.9 million or 30% to $69.2 million
in the first nine months of 2000 from $53.3 million for the nine months ended
September 30, 1999 primarily due to increased advisory and merger/acquisition
fees in the first half of 2000 and, to a lesser extent, from private
transactions.
Asset management revenues grew 28% to $60.5 million in the first nine
months of 2000 compared with $47.4 million in the first nine months of 1999,
mainly due to growth in assets under management, which grew to $12.9 billion at
September 30, 2000 from $10.2 billion at September 30, 1999.
Net interest income was $36.3 million for the nine months ended September
30, 2000, up $9.8 million or 37% from $26.5 million in the same period a year
ago, primarily due to higher customer margin balances.
Non-interest expenses were $506.2 million in the first nine months of 2000,
an increase of 44% from the $352.3 million in the first nine months of 1999. The
increase is partly attributable to costs of $31.2 million from Hill Thompson
which was acquired in the fourth quarter of 1999 and $25.9 million from
Gibraltar which was acquired in September 1999. Compensation and benefits
expense as a percentage of net revenues for the first nine months of 2000 was
65% down from 66% a year ago. Non-compensation operating expenses were $135.6
million in the first nine months of 2000 versus $98.9 million a year ago due in
part to $12.9 million of expenses from Hill Thompson and Gibraltar as well as
growth in the Company's net revenues. Despite the increase in costs,
non-compensation operating expenses as a percentage of net revenues declined to
23.6% for the first nine months of 2000 from 25.6% a year ago.
The Company's income tax provisions for the first nine months of 2000 and
1999 were $28.2 million and $13.3 million, respectively. The effective tax rate
was 41% for the first nine months of 2000, up from 38% 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
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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 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 example, Tucker Anthony's
net capital declined at September 30, 2000 primarily due to higher securities
inventory positions and increased receivables from affiliates. 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 and 2000, 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
September 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 September 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 September 30, 2000, the Company had borrowings outstanding under the
Fixed Asset Facility of $7.6 million, of which $5.8 million is payable in
monthly installments until December 2001 and $1.8 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 nine months ended September 30, 2000 and 1999, the Company had
capital expenditures of $6.4 million and $6.1 million, respectively, which were
funded from operations.
The Company has had 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
September 30, 2000, the Company had 906,758 shares available for purchase under
the program. On October 2, 2000 the Company announced that its Board of
Directors terminated the stock repurchase program in connection with its
acquisition of Branch Cabell because the Company plans to account for the
transaction as a pooling of interests.
CASH FLOWS
For the nine months ended September 30, 2000, cash and cash equivalents
decreased $3.1 million. Funds generated from operating activities were $13.3
million including net income of $40.1 million and depreciation, amortization and
other non-cash charges to net income of $30.2 million.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three months ended September 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 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 third quarter of 2000 the Company issued 6,276 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
None
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;
10.33a John F. Luikart - Renewal of Employment Agreement
10.34a Kevin J. McKay - Renewal of Employment Agreement
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: November 13, 2000 BY: /s/ JOHN H. GOLDSMITH
------------------------------------
JOHN H. GOLDSMITH
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
DATE: November 13, 2000 BY: /s/ KENNETH S. KLIPPER
--------------------------------------
KENNETH S. KLIPPER
CHIEF FINANCIAL OFFICER
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EXHIBIT INDEX
ITEM NO. DESCRIPTION SEQUENTIAL PAGE NO.
-------- ----------- -------------------
10.33a John F. Luikart - Renewal of Employment Agreement 17
10.34a Kevin J. McKay - Renewal of Employment Agreement 18
27 Financial Data Schedule 19
16
