EXHIBIT 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management's Financial Discussion
Stifel Financial Corp. and Subsidiaries
Business Environment
Stifel Financial Corp. and subsidiaries (the "Company"), through its
principal subsidiary, Stifel, Nicolaus & Company, Incorporated ("Stifel,
Nicolaus"), provides securities brokerage and investment management and
advisory services primarily to individuals, provides investment banking
services to municipal and corporate clients, and trades fixed income
securities and over-the-counter equity securities. Century Securities
Associates, Inc. ("CSA"), a wholly owned subsidiary of the Company,
provides administration services to independent registered investment
executives. Additionally, Pin Oak Capital Ltd. ("Pin Oak") and Todd
Investment Advisors, Inc. ("Todd"), both wholly owned subsidiaries of the
Company, provide fee-based investment advisory services to both individual
and institutional clients.
These business activities are sensitive to a variety of factors, including
the securities trading volume, the volatility and price level of securities
markets, the demand for investment banking services, the level and
volatility of interest rates, and investor sentiment. Many of the
Company's activities have fixed operating costs which do not decrease
proportionately with reduced levels of activity. Although the Company is
building its fee-based money management business and continually
controlling recurring operating expenses, sustained periods of reduced
transaction activity or loss of clients may adversely affect profitability.
The Company faces increasing competition from other financial institutions
such as commercial banks, thrifts, and investment firms. Certain financial
services, traditionally provided only by securities firms, are increasingly
being provided by these other financial institutions.
The business environment for the securities industry during 1995 was one of
the most prosperous in recent years. More investors, larger holdings, and
more active participants fueled record market activity and prices.
Individuals continued to evolve from savers to investors as lower interest
rates and slow growth in the U.S. economy boosted the equity markets.
Historically, a significant source of the Company's investment banking
revenues originated from Oklahoma municipal securities issuances. During
1994, the Company's municipal investment banking business was significantly
impaired by the negative publicity surrounding a formal investigation by
the Securities and Exchange Commission into certain municipal bond issues
managed by the Company's Oklahoma public finance department. During 1995,
this investigation was completed and resulted in the Company consenting to
a final judgement whereby, among other things, the Company paid
approximately $1.1 million in disgorgement and prejudgement interest and
$250,000 in fines. However, also during 1995, the municipal finance
industry continued to experience pressure on its profit margins due to a
decline in the number of underwritings and the narrowing of underwriting
spreads. Additionally, in December of 1994, the Company was approached by
a group of investors (primarily former employees of the Company) offering
to purchase the Company's operations in Oklahoma and several retail sales
offices in Texas. On May 25, 1995, the sale was consummated with Capital
West Financial Corporation ("Capital West"). (See Note Q to the Notes to
Consolidated Financial Statements filed herein.)
Additionally, in late 1994, after enduring adverse market conditions and
significant costs associated with litigation in Oklahoma, it became
necessary to downsize certain areas of the Company. As a result, during
the fourth quarter of 1994, management and the Board of Directors developed
and began implementation of a plan to restructure certain operations,
primarily related to retail sales operations and certain home office
management and product support functions. Prior to its completion in 1995,
the plan resulted in the closing or downsizing of 31 office locations and
termination of approximately 70 officers and employees.
During 1995, the Company focused on its retail investment and fee-based
money management services and intends to increase its reliance on these
services for its revenues. With the divestiture of the Company's Oklahoma
division, management is placing far less reliance on municipal finance as a
significant source of revenues. During 1995, municipal finance fee revenue
totaled $1.6 million compared to $4.0 million and $16.1 million for 1994
and 1993, respectively.
Results of Operations
In 1993, the Company changed its fiscal year-end from the last Friday in
July to a calendar year-end. Accordingly, results of operations for the
transition period cover a five-month period. The following table
summarizes amounts and percentages of changes in the major categories of
revenues and expenses for the periods indicated:
Year Ended Year Ended Five Months Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1995 vs. 1994 1994 vs. 1993 1993 vs. 1992
Increase (Decrease) (Unaudited) (Unaudited)
Amounts in thousands Amount Percentage Amount Percentage Amount Percentage
- -------------------- ------------ ------------ ------------ ------------ ------------ -----------
Revenues:
Commissions $ 2,885 11.4 % $ (2,989) (10.5)% $ 1,941 19.4 %
Principal transactions (3,587) (15.9) (665) (2.9) (1,969) (17.5)
Investment banking (295) (2.5) (18,316) (60.5) (266) (2.4)
Interest 2,084 19.1 1,602 17.2 (44) (1.1)
Sale of investment company shares (1,358) (14.0) (2,459) (20.3) 1,392 39.6
Sale of unit investment trusts (908) (33.2) (992) (26.6) 508 59.5
Sale of insurance products (98) (4.4) (175) (7.3) 767 155.0
Other 2,711 32.1 2,360 38.8 (749) (21.6)
--------- -------- --------- ------- --------- -------
$ 1,434 1.5 % $ (21,634) (18.7)% $ 1,580 3.5 %
========= ======== ========= ======= ========= =======
Expenses:
Employee compensation and benefits $ (3,465) (5.7)% $ (11,567) (16.0)% $ 3,543 13.7 %
Commissions and floor brokerage 199 9.4 (290) (12.0) (75) (8.1)
Communications and office supplies (394) (4.9) 864 12.0 345 12.6
Occupancy and equipment rental (1,513) (16.1) 1,599 20.5 150 4.7
Promotional (844) (29.4) (200) (6.5) 143 13.1
Interest 2,174 35.4 1,340 27.9 (549) (23.7)
Provision for litigation and
bad debts (857) (34.7) 1,560 172.0 (632) (57.4)
Restructure charge (2,672) (100.0) 2,672 * N.M. 0 0
Other operating expenses (1,722) (19.6) 1,498 20.5 36 1.1
--------- -------- --------- ------- --------- -------
$ (9,094) (8.8)% $ (2,524) (2.4)% $ 2,961 7.3 %
========= ======== ========= ======= ========= =======
*Not meaningful
1995 As Compared to 1994
For 1995, the Company had net income of $644,000, or $.14 per primary
share, on revenues of $95,360,000. During the twelve-month period ended
December 31, 1994, the Company had a net loss of $5,503,000, or $1.23 per
primary share, on revenues of $93,926,000.
Revenues for 1995 increased in commissions, interest income, and other
revenue. Revenues declined in principal transactions, sale of investment
company shares, unit investment trusts, and insurance products.
Commissionable revenues (commissions, principal transactions, sale of
investment company shares, unit investment trusts, and insurance products)
decreased in the aggregate $3,066,000 (4.9%) in 1995. This decrease was
primarily due to the reduction in the number of Investment Executives which
resulted from the sale of the Company's Oklahoma-based operations and to
the net loss of Investment Executives, primarily in the early part of 1995,
due to the restructuring plan of 1994.
The number of Investment Executives decreased by 79 (21.8%) to 283 at
December 31, 1995, from 362 at December 31, 1994. Despite this decline,
average production per Investment Executive increased $13,000 to $194,000
from $181,000. Management is continuing its effort to recruit Investment
Executives with above industry average performance records.
Principal transactions decreased $3,587,000 (15.9%) to $18,980,000 from
$22,567,000 largely as a result of decreased fixed income trading activity.
Investment banking decreased only slightly in 1995, $295,000 (2.5%) to
$11,674,000 from $11,969,000. Public finance-related income decreased
significantly, $2,342,000 (58.8%) to $1,638,000 from $3,980,000, due to the
negative publicity surrounding the SEC's investigation into certain
municipal finance underwritings by the Company's Oklahoma City public
finance department and the reduced number of transactions by municipalities
experienced industry-wide. These decreases were offset by an increase in
corporate finance-related investment banking revenue which increased
$3,803,000 (279.6%) to $5,163,000 from $1,360,000 largely as a result of
increased public offerings, particularly for financial institutions and
real estate investment trusts (REITs). In addition, underwriting and
syndicate participation fees and profits on trading new underwriting issues
decreased $1,757,000 primarily as a result of the aforementioned decreased
municipal finance activity.
Interest income increased $2,084,000 (19.1%) to $13,002,000 from
$10,918,000, and net interest (interest income less interest expense)
decreased $90,000. The revenue increase is primarily due to higher
customer borrowings which resulted from increased retail investor activity
experienced industry-wide. Because of the generally corresponding increase
in borrowings by the Company to finance the purchase of marketable
securities and underwrite new securities issues, the net interest retention
percentage decreased from 43.8% to 36.1%.
Other revenue increased $2,711,000 (32.1%) to $11,159,000 from $8,448,000
primarily as a result of increases in managed account fees, money market
distribution fees, clearing revenues, and realized gains on sale of
investments, which increased approximately $1.0 million, $800,000,
$500,000, and $400,000, respectively. Managed account fees increased
because of the introduction of the managed account program in late 1994.
Management expects the managed account fees to continue to grow, which are
generated by charging a fixed rate for managing investment portfolios of
customers. Realized gain on sale of investments increased primarily due to
sales of investments held by the Company's venture capital subsidiary.
Money market distribution fees increased because of higher levels of
customer funds invested in money market funds and the Company's switch to
omnibus processing of these funds. Clearing revenues increased as a direct
result of the clearing for Capital West Securities, Inc., the broker-dealer
subsidiary of Capital West, which began in June 1995.
Total expenses decreased $9,094,000 (8.8%) to $94,053,000 from
$103,147,000. With the exception of commissions and floor brokerage and
interest expense, all expense categories decreased for the year as a result
of the sale of the Oklahoma-based operations and the downsizing and
restructuring plan implemented in the fourth quarter of 1994. The Company
charged $2,672,000 to operations related to this plan in the fourth quarter
of 1994. There were no expenses related to that plan charged to operations
in 1995.
Employee compensation and benefits decreased $3,465,000 (5.7%) to
$57,187,000 from $60,652,000. Investment Executives' aggregate
compensation decreased $1,891,000 directly attributable to the decrease in
aggregate revenue production. Profitability and production-based incentive
compensation increased $2,132,000 due to increased profitability and
achievement of production goals. Salaries and benefits decreased
$4,581,000 (17.8%) to $21,210,000 from $25,791,000. Total full-time and
part-time salaried employees decreased by 93 to 417 from 510. Commissions
and floor brokerage increased $199,000 (9.4%) to $2,319,000 from $2,120,000
as a result of increased agency commissions. Communications and office
supplies, occupancy and equipment rental, and promotional expenses
decreased $394,000 (4.9%) to $7,651,000 from $8,045,000, $1,513,000 (16.1%)
to $7,884,000 from $9,397,000, and $844,000 (29.4%) to $2,024,000 from
$2,868,000, respectively.
Interest expense increased $2,174,000 (35.4%) to $8,312,000 from $6,138,000
due primarily to increased levels of short-term borrowings by the Company
and its customers and increased average borrowing rates. The average level
of short-term borrowings from banks for the year was $61,440,000 as
compared to $58,953,000 for 1994. The average interest rate charged for
these borrowings was 6.57% for 1995 as compared to 4.90% for 1994. The
Company's borrowings increased due to decreased available capital which
resulted primarily from the operating loss in 1994.
Other operating expenses decreased $1,722,000 (19.6%) to $7,066,000 from
$8,788,000. Included in the caption "Other operating expenses" are legal
fees which increased $600,000 due to continuing litigation surrounding
certain municipal bond issues and transactions completed by the Company's
former Oklahoma City-based public finance department. Management expects
legal fees to decrease in 1996.
Provision for litigation and bad debts decreased $857,000 (34.7%) to
$1,610,000 from $2,467,000 in 1994. The provision in 1995 includes an
amount for doubtful collection related to notes and advances receivable of
former employees and provision for settlements of Oklahoma suits. The
larger provision in 1994 included doubtful collection of employee note
receivables and advances of $1,976,000.
1994 As Compared to 1993
For 1994, the Company had a net loss of $5,503,000, or $1.23 per primary
share, on revenues of $93,926,000. During the twelve-month period ended
December 31, 1993, the Company had net income of $6,231,000, or $1.47 per
primary share, on $115,560,000 in revenues. This $21,634,000 (18.7%)
decrease in total revenues was the result of the aforementioned general
market conditions and the changes in the Company's operations.
Revenues declined from 1993 in every major revenue category except interest
income and investment advisory fees. Commissionable revenue (commissions,
principal transactions, sale of investment company shares, unit investment
trusts, and insurance products) in the aggregate decreased $7,280,000
(10.4%) from 1993. This decrease occurred despite significant efforts to
upgrade and add to the retail sales force. Every major commissionable
product area had decreased revenues from 1993 levels. The taxable fixed
income, syndicate, and mutual fund areas were off by 11%, 45%, and 20%,
respectively, primarily due to the generally decreased market activity
caused by increasing interest rates. Principal transactions, which
includes inventory gains and losses as well as commissionable sales
credits, was lower in 1994 primarily due to losses in the Company's equity
inventories and substantially lower profits in the fixed income
inventories. These decreased trading results occurred in traditional
products, as the Company does not carry complex derivative products or
significant amounts of low-priced equities (penny stocks).
In terms of both amount and percentage, the largest decrease in revenues
during 1994 occurred in the investment banking area. Investment banking
revenues, which includes managed fixed income and equity underwriting,
financial advisory, placement, and mergers and acquisition services,
decreased $18,316,000 (60.5%) from 1993 levels. Reflecting the historical
cyclicality and volatility of the securities markets, the investment
banking area of the Company had one of its worst years in 1994 following
its best year ever in 1993. This trend was generally consistent industry-
wide.
The most significant reason for the Company's decrease in this area was the
sharp fall-off in business in the municipal finance sector. 1993 saw a
record level of activity as municipal issuers took advantage of low and
declining interest rates to refinance and restructure outstanding issues
and issue new debt. 1994 saw a reversal of that interest rate trend which
eliminated the benefits of refundings that were unable to be accomplished
earlier and made new issuances more costly.
In addition to the significantly less favorable conditions in the industry
generally, the Company suffered additional decreases in business because of
the activities related to its Oklahoma City-based municipal finance
operation. Historically, the Company has been a major underwriter of
Oklahoma municipal issues. In 1994, in addition to the generally lower
issuances of municipal debt, the Company's revenue generation from Oklahoma
issues decreased substantially in part because of negative publicity
relating to the SEC's investigation of the Company's involvement in
transactions in certain Oklahoma municipal securities. During 1994, the
negative publicity related to the investigation significantly impaired the
ability of the Company to generate investment banking revenues from its
Oklahoma operations and was a significant factor in the Company's decision
to pursue the sale of both its retail and investment banking businesses in
Oklahoma.
Although affected somewhat by the negative publicity from Oklahoma, it is
encouraging to note that the St. Louis-based municipal investment banking
group performed better than the industry in general during 1994. Whereas
industry sources reported a 44% decline in municipal issuances in 1994, the
St. Louis-based group's revenues were off only 11%.
Interest income increased $1,602,000 (17.2%), and net interest (interest
income less interest expense) increased $261,000. The revenue increase is
due to two factors: higher average customer borrowings and higher interest
rates charged to customers resulting from the increases caused by the
Federal Reserve's interest rate hikes. Because of the generally
corresponding rise in both rates charged to customers and the Company's
borrowing rates, the net interest retention percentage decreased from 48.5%
in 1993 to 43.8% in 1994.
Other revenues, which consists primarily of investment advisory fees and
account service fees, increased $2,360,000 (38.8%). The most significant
component of this increase was from investment advisory fees. On December
28, 1993, the Company acquired Todd Investment Advisors, Inc. ("Todd"), an
asset management company located in Louisville, Kentucky. During 1994,
Todd's fees added $1,661,000 to the Company's investment advisory business.
Total expenses decreased $2,524,000 (2.4%) from $105,671,000 to
$103,147,000. While employee compensation and benefits, a major component
of total expenses, decreased significantly, almost all other expense
categories increased. In addition, the Company charged to expenses
$2,672,000 in the fourth quarter related to a restructuring and downsizing
plan approved by the Parent Company's Board of Directors (see Note P of
Notes to Consolidated Financial Statements filed herein).
Employee compensation and benefits decreased $11,567,000 (16%) from
$72,219,000 to $60,652,000 largely as a result of decreased variable
compensation which decreased $14,770,000 (29.2%) from $50,506,000 to
$35,736,000 as a direct result of decreased commissionable revenue and
profitability. The decrease was partially offset by an increase in
salaries and benefits which increased $3,997,000 (18.3%) from $21,813,000
to $25,810,000 as a result of the additional home office revenue support
staff and the opening of new branch locations. The additions were made to
facilitate revenue growth and to continue the firm's efforts to expand its
retail branch system and to increase administrative expertise in key areas.
Commission and floor brokerage decreased $290,000 (12%) from $2,410,000 to
$2,120,000 as a result of decreased commissionable revenue.
Communication and supplies and occupancy and equipment rental increased
$864,000 (12%) from $7,181,000 to $8,045,000 and $1,599,000 (21%) from
$7,798,000 to $9,397,000, respectively, as a direct result of 13 additional
branch offices opened in 1994.
Travel and promotion decreased $200,000 (6.5%) from $3,068,000 to
$2,868,000 as a result of the decreased general business environment.
Interest expense increased $1,340,000 (27.9%) from $4,798,000 to $6,138,000
as a result of the Company's increased borrowing rates. The Company's
short-term borrowings bore interest at a weighted average of 6.81% at
December 31, 1994, compared to a weighted average of 3.79% at December 31,
1993.
Other expenses increased $1,498,000 (20.5%) from $7,290,000 to $8,788,000
largely as a result of the increase in professional fees which increased
$1,407,000 primarily as a result of the ongoing SEC investigation into
certain municipal bond issues managed by the Oklahoma City-based public
finance department.
Provision for litigation and bad debt increased $1,560,000 largely as a
result of reserving for doubtful collection of employee notes receivable
and advances of $2,467,000.
In the fourth quarter, the Company charged to expenses $2,672,000 for
restructuring and downsizing unprofitable and potentially unprofitable
areas of the firm. Included in the costs are $1,400,000 net lease
commitments for 31 closed and reduced office locations; $875,000 for
approximately 70 terminated employees' severance and extended benefits, and
reserve for uncollectible notes receivable; $206,000 for leasehold
improvements related to closed offices; and $191,000 for contractual
commitments. The plan of restructuring and downsizing was completed during
1995.
Five Months Ended December 31, 1993 Compared With Five Months Ended
December 31, 1992
Results of operations for the five-month transition period ended December
31, 1993, compared to the same five-month period of the previous year
reflected favorable market conditions experienced by the industry as total
revenues increased slightly to $46,455,000 from $44,875,000, a modest 3.5%
increase over a strong five-month period of the previous year. Total
expenses, however, were up 7.3% or $2,961,000 to $43,395,000 from
$40,434,000 reflecting the costs associated with management's commitment to
growth and the pursuit of other sources of revenues to mitigate market
downturns. Accordingly, net income after tax decreased $807,000 (30%) to
$1,915,000 from $2,722,000 for the five-month transition period compared to
the previous year's five-month period.
Commissionable revenue (commissions, principal transactions, sales of
investment company shares, unit investment trusts, and insurance products)
for the five-month transition period ended December 31, 1993, increased
$2,639,000 (10%) to $28,793,000 from $26,154,000 as a result of favorable
markets for equity products, mutual funds, life insurance, and annuity
products. The increase also resulted from an increase in the number of
experienced full-time Investment Executives, which increased to 375 at
December 31, 1993, from 355 at December 31, 1992.
Sale of investment company shares (mutual funds) increased 40% to
$4,906,000 from $3,514,000 in 1992's five-month period as a result of the
continued demand for this product as retail investors sought alternatives
to low interest-bearing depository products offered by banking
institutions. The increase was also reflective of the continued demand for
these products industry-wide.
Principal transactions decreased 17% to $9,313,000 from $11,282,000
primarily as a result of a decrease in sales of taxable fixed income
products, principally mortgage-backed securities, which were made less
attractive because of low coupon rates.
Sales of insurance products increased 155% to $1,263,000 from $496,000 from
the previous five-month period largely as a result of the increased demand
for annuity and life insurance products precipitated by the 1993 tax law
changes.
Sales of unit investment trusts increased 59% to $1,362,000 from $854,000
in the same period of the previous year largely as a result of management's
continued emphasis to provide proprietary offerings and the retail
investor's continued demand for this product.
Other revenues decreased 22% to $2,720,000 from $3,469,000 in the previous
year largely as a result of the recognition of a one-time gain of $850,000
on the sale of a partnership investment in November 1992.
Investment banking revenue decreased $266,000 (2.4%) from the comparable
five-month period in 1992. Indications are that the public finance portion
of investment banking, which was the most significant portion of investment
banking and which experienced excellent business conditions over the past
two years, may not reach levels achieved historically in future periods.
Total expenses increased largely as a result of the increase in employee
compensation and benefits which increased $3,543,000 (13.7%) to $29,421,000
from $25,878,000. The variable portion of compensation and benefits
increased $2,100,000 to $16,300,000 from $14,200,000 as a result of an
increase in commissionable revenues and bonuses paid for production and
profitability of certain functions.
Salaries and the other fixed portions of compensation and benefits
increased $1,400,000 (17%) to $9,500,000 from $8,100,000 as a result of
annual salary adjustments (approximately 6% firm-wide), increases in the
number of branch offices, an increase in the number of Investment Executive
trainees whose salaries are fixed during their training period, and an
increase in the number of professional staff in key areas of revenue
production and direct support such as investment banking, trading, and
research. In addition, staff was added to bolster the firm's focus on
developing alternative sources of revenues.
Communication and supplies, rent and depreciation, and travel and promotion
increased $345,000 to $3,090,000 from $2,745,000, $150,000 to $3,333,000
from $3,183,000, and $143,000 to $1,231,000 from $1,088,000, respectively,
as a result of the increase in the number of branch offices opened during
the period. The Company added four offices over the previous year's total.
Interest expense decreased $549,000 to $1,763,000 from $2,312,000 as a
result of more favorable borrowing rates.
Provision for bad debt and litigation decreased $632,000 to $473,000 from
$1,105,000 due largely to a decrease in the amount of settlements paid for
claims by customers which decreased $600,000 from the $1,200,000 in 1994.
Liquidity and Capital Resources
The Company's assets are highly liquid, consisting mainly of cash or assets
readily convertible into cash. These assets are financed primarily by the
Company's equity capital, customer credit balances, short-term bank loans,
proceeds from securities lending, long-term notes payable, and other
payables. Changes in securities market volumes, related customer borrowing
demands, underwriting activity, and levels of securities inventory affect
the amount of the Company's financing requirements.
During the year ended December 31, 1995, cash and cash equivalents
decreased $581,000. Cash used for operating activities totaled $21,192,000
due primarily to increases in operating receivables as a result of
increased borrowing by customers and a decrease in operating payables
resulting mainly from a decline in stock loaned.
The decrease in cash used for operating activities was funded by short-term
borrowings which increased by $20,800,000.
During 1994, Stifel, Nicolaus obtained a revolving subordinated note
agreement in the amount of $5,500,000. The note will be used to finance
underwritings should the need arise. At December 31, 1995, Stifel,
Nicolaus had an advance of $50,000 against this revolving subordinated
note.
The Company has $3,002,000 in receivables from Investment Executives and
other employees who terminated employment with the Company. The Company
intends to vigorously pursue collection of these receivables and does not
anticipate that the outcome of these activities will adversely affect
liquidity or capital resources.
Management believes that funds from operations and available informal short-
term credit arrangements of $118,550,000 at December 31, 1995, and the
available revolving subordinated debt of $5,450,000 at December 31, 1995,
will provide sufficient resources to meet its present and anticipated
financing needs.
Stifel, Nicolaus & Company, Incorporated, the Company's principal
broker/dealer subsidiary, is subject to certain requirements of the
Securities and Exchange Commission with regard to liquidity and capital
requirements (see Note E of the Notes to Consolidated Financial
Statements). At December 31, 1995, Stifel, Nicolaus had net capital of
approximately $20,112,000, which exceeded the minimum net capital
requirements by approximately $16,550,000.
Inflation
The Company's assets are primarily monetary, consisting of cash, securities
inventory, and receivables. These monetary assets are generally liquid and
turn over rapidly and, consequently, are not significantly affected by
inflation. However, the rate of inflation affects various expenses of the
Company, such as employee compensation and benefits, communications, and
occupancy and equipment, which may not be readily recoverable in the price
of its services.
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in the five-month transition period ended
December 31, 1993. The standard requires, among other provisions, that
companies adjust their deferred tax asset or liability to reflect current
rates and recognize the effect of the change in operations. The adoption
of this new standard did not have a material impact on the Company's
consolidated financial statements.
The Company deals in listed options and other products such as
collateralized mortgage obligations which derive their values from the
price of some other security or index. The Company does not deal in
complex derivative financial instruments, such as futures, forwards, and
swaps, and therefore has no disclosure requirements in accordance with the
Financial Accounting Standard Board's Statement 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments."
The Financial Accounting Standards Board (FASB) has issued Statements of
Financial Accounting Standards (SFAS) 121, "Accounting for the Impairment
of Long-Lived Assets to Be Disposed of," and SFAS 123, "Accounting for
Stock-Based Compensation," both effective in fiscal years beginning after
December 15, 1995. Management does not believe adoption of these standards
will have a material impact on the Company's consolidated financial
statements.
Item 8. Financial Statements and Supplementary Data
(a) Financial Statements
Report Of Independent Accountants
Stifel Financial Corp. and Subsidiaries
Report of Independent Accountants
Stockholders and Board of Directors
Stifel Financial Corp.
St. Louis, Missouri
We have audited the accompanying consolidated statements of financial
condition of Stifel Financial Corp. and Subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1995
and December 31, 1994, the five-month transition period ended December 31,
1993, and the year ended July 30, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Stifel
Financial Corp. and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1995 and December 31, 1994, the five-month transition
period ended December 31, 1993, and the year ended July 30, 1993, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
St. Louis, Missouri
February 25, 1996
Consolidated Statements Of Operations
Stifel Financial Corp. and Subsidiaries
Five-Month Transition
Year Ended Year Ended Period Ended Fiscal Year Ended
(In thousands, except per share amounts) December 31, 1995 December 31, 1994 December 31, 1993 July 30, 1993
- ---------------------------------------- ----------------- ----------------- --------------------- -----------------
Revenues
Commissions $ 28,292 $ 25,407 $ 11,949 $ 26,456
Principal transactions 18,980 22,567 9,313 25,201
Investment banking 11,674 11,969 10,885 30,551
Interest 13,002 10,918 4,057 8,851
Sale of investment company shares 8,316 9,674 4,906 10,741
Sale of unit investment trusts 1,828 2,736 1,362 3,220
Sale of insurance products 2,109 2,207 1,263 1,614
Other 11,159 8,448 2,720 6,837
--------- --------- --------- ---------
95,360 93,926 46,455 113,471
Expenses
Employee compensation and benefits 57,187 60,652 29,421 68,657
Commissions and floor brokerage 2,319 2,120 845 2,485
Communications and office supplies 7,651 8,045 3,090 6,836
Occupancy and equipment rental 7,884 9,397 3,333 7,648
Promotional 2,024 2,868 1,231 2,925
Interest 8,312 6,138 1,763 4,838
Provision for litigation and bad debts 1,610 2,467 473 1,237
Restructuring charge - - 2,672 - - - -
Other operating expenses 7,066 8,788 3,239 7,575
--------- --------- --------- ---------
94,053 103,147 43,395 102,201
--------- --------- --------- ---------
Income (loss) before income taxes 1,307 (9,221) 3,060 11,270
--------- --------- --------- ---------
Provision (Benefit) for Income Taxes
Current (73) (1,983) 1,352 4,223
Deferred 736 (1,735) (207) 9
--------- --------- --------- ---------
663 (3,718) 1,145 4,232
--------- --------- --------- ---------
Net income (loss) $ 644 $ (5,503) $ 1,915 $ 7,038
========= ========= ========= =========
Earnings (Loss) Per Common Share and
Share Equivalents
Net income (loss) per share:
Primary earnings (loss) per share $ 0.14 $ (1.23) $ 0.42 $ 1.60
Fully diluted earnings (loss) per share $ 0.14 $ (1.23) $ 0.38 $ 1.33
See Notes to Consolidated Financial Statements.
Consolidated Statements Of Financial Condition
Stifel Financial Corp. and Subsidiaries
(In thousands) December 31, 1995 December 31, 1994
- -------------- ----------------- -----------------
Assets
Cash and cash equivalents $ 6,344 $ 6,925
Cash segregated for the exclusive benefit of customers 776 1,316
Receivable from brokers and dealers:
Securities failed to deliver 1,790 3,105
Deposits paid for securities borrowed 4,912 3,530
Settlement balances with clearing organizations 9,722 15,198
-------- --------
16,424 21,833
-------- --------
Receivable from customers, less allowance for doubtful
accounts of $805 and $1,071, respectively 156,904 139,899
Securities owned, at market value:
U.S. Government obligations 6,529 4,642
State and municipal obligations 7,111 13,231
Corporate obligations 2,394 3,240
Corporate stocks 3,487 2,206
-------- --------
19,521 23,319
-------- --------
Memberships in exchanges, at cost (approximate
market value: $1,904 and $1,655, respectively) 513 513
Office equipment and leasehold improvements, at cost,
less allowances for depreciation and amortization of
$12,517 and $13,518, respectively 3,015 4,779
Goodwill, net of accumulated amortization of $827
and $574, respectively 3,985 4,290
Notes and non-securities receivable from employees,
net of allowance for doubtful receivables of
$3,002 and $2,561, respectively 4,328 5,620
Current income tax receivable 254 1,515
Deferred tax asset 3,902 4,638
Miscellaneous other assets 10,809 7,561
-------- --------
TOTAL ASSETS $226,775 $222,208
======== ========
Consolidated Statements Of Financial Condition (continued)
Stifel Financial Corp. and Subsidiaries
(In thousands, except share amounts) December 31, 1995 December 31, 1994
- ------------------------------------ ----------------- -----------------
Liabilities and Stockholders' Equity
Short-term borrowings from banks $ 86,450 $ 65,650
Payable to brokers and dealers:
Securities failed to receive 2,572 2,991
Deposits received from securities loaned 20,555 43,405
-------- --------
23,127 46,396
-------- --------
Payable to customers, including free credit balances
of $21,079 and $15,601, respectively 31,806 24,369
Market value of securities sold, but not yet purchased 2,744 4,252
Drafts payable 17,867 14,576
Accrued employee compensation 9,526 9,110
Obligations under capital leases 774 1,029
Accounts payable and accrued expenses 8,876 11,030
Long-term debt 10,760 11,520
-------- --------
Total 191,930 187,932
-------- --------
Commitments and Contingencies (Notes D, H, and I)
-------- --------
Subordinated note 50 50
-------- --------
Stockholders' equity:
Preferred stock - $1 par value; authorized
3,000,000 shares; none issued
Common stock - $.15 par value; authorized 10,000,000
shares; issued 4,540,890 and 4,324,951 shares,
respectively; outstanding 4,357,665 and 4,085,615
shares, respectively 681 649
Additional paid-in capital 19,622 18,491
Retained earnings 15,754 17,016
-------- --------
36,057 36,156
-------- --------
Less:
Treasury stock, at cost
183,225 and 239,336 shares, respectively 1,162 1,732
Unamortized expense of restricted stock awards 100 198
-------- --------
Total Stockholders' Equity 34,795 34,226
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $226,775 $222,208
======== ========
See Notes to Consolidated Financial Statements.
Consolidated Statements Of Cash Flows
Stifel Financial Corp. and Subsidiaries
Five-Month Transition
Year Ended Year Ended Period Ended Fiscal Year Ended
(In thousands) December 31, 1995 December 31, 1994 December 31, 1993 July 30, 1993
- -------------- ----------------- ----------------- --------------------- -----------------
Cash Flows From Operating Activities
Net income (loss) $ 644 $( 5,503) $ 1,915 $ 7,038
Noncash items included in earnings:
Depreciation and amortization 1,990 2,572 880 2,020
Provision for litigation and bad debts 1,610 2,467 473 1,237
Unrealized (gain) loss on investments (57) (96) - - 440
Bonus notes amortization 1,033 1,134 321 600
Deferred compensation 468 538 202 429
Amortization of restricted stock awards
and stock benefits 84 107 65 177
Deferred tax provision (benefit) 736 (1,735) (207) 9
Restructuring charge - - 2,672 - - - -
--------- --------- --------- ---------
6,508 2,156 3,649 11,950
Gain on sale of memberships in exchanges - - - - (179) - -
(Increase) decrease in operating receivables:
Customers (17,005) 13,474 (36,058) (11,047)
Brokers and dealers 5,409 (4,548) (3,063) 4,997
Increase (decrease) in operating payables:
Customers 7,437 (11,955) 8,158 4,722
Brokers and dealers (23,268) 21,873 (9,607) 7,899
Decrease (increase) in assets:
Cash and U.S. Government securities
segregated for the exclusive benefit
of customers 540 (54) (2) 1,993
Securities owned 3,798 63,191 (48,489) 898
Notes receivable from officers and employees (1,190) (5,427) (788) (1,148)
Miscellaneous other assets (2,125) (1,779) (497) ( 768)
(Decrease) increase in liabilities:
Securities sold, not yet purchased (1,508) 345 (2,542) 3,105
Drafts payable, accounts payable and
accrued expenses, and accrued employee
compensation 212 (1,919) (5,568) 4,127
--------- --------- --------- ---------
Cash (Used For) Provided By
Operating Activities (21,192) 75,357 (94,986) 26,728
--------- --------- --------- ---------
Consolidated Statements Of Cash Flows (continued)
Stifel Financial Corp. and Subsidiaries
Five-Month Transition
Year Ended Year Ended Period Ended Fiscal Year Ended
(In thousands) December 31, 1995 December 31, 1994 December 31, 1993 July 30, 1993
- -------------- ----------------- ----------------- --------------------- -----------------
Cash (Used For) Provided By
Operating Activities --
From Previous Page $ (21,192) $ 75,357 $ (94,986) $ 26,728
--------- --------- --------- ---------
Cash Flows From Financing Activities
Net proceeds (payments) for short-term
borrowings from banks 20,800 (71,300) 97,275 (22,375)
Proceeds from:
Employee stock purchase plan 755 613 628 378
Exercised stock options 124 81 111 268
Subordinated borrowings - - 50 - - - -
Dividend reinvestment plan 10 1 - - - -
Payments for:
Settlement of long-term debt (760) - - - - - -
Purchases of stock for treasury (547) (1,417) (1,329) (302)
Restricted stock awards - - - - (34) (81)
Principal payments under
capital lease obligation (256) (710) (264) (591)
Cash dividends (500) (356) (218) (561)
--------- --------- --------- ---------
Cash Provided By (Used For)
Financing Activities 19,626 (73,038) 96,169 (23,264)
--------- --------- --------- ---------
Cash Flows From Investing Activities
Proceeds from:
Sale of office equipment, leasehold
improvements, and a building 910 24 23 16
Sale of investments 1,694 32 509 1,103
Sale of memberships in exchanges - - - - 840 - -
Payments for:
Acquisition of office equipment, leasehold
improvements, and a building (1,179) (1,734) (752) (1,634)
Acquisition of investments (440) (258) (250) (1,021)
Acquisition of subsidiary - - - - (1,981) - -
--------- --------- --------- ---------
Cash Provided By (Used For)
Investing Activities 985 (1,936) (1,611) (1,536)
--------- --------- --------- ---------
(Decrease) increase in cash and cash
equivalents (581) 383 (428) 1,928
Cash and cash equivalents -
beginning of year 6,925 6,542 6,970 5,042
--------- --------- --------- ---------
Cash and cash equivalents -
end of period $ 6,344 $ 6,925 $ 6,542 $ 6,970
========= ========= ========= =========
Consolidated Statements Of Cash Flows (continued)
Stifel Financial Corp. and Subsidiaries
Five-Month Transition
Year Ended Year Ended Period Ended Fiscal Year Ended
(In thousands) December 31, 1995 December 31, 1994 December 31, 1993 July 30, 1993
- -------------- ----------------- ----------------- --------------------- -----------------
Supplemental disclosures of cash flow
information:
Interest payments $ 8,237 $ 5,897 $ 984 $ 4,424
Income tax payments $ 372 $ 118 $ 2,080 $ 6,619
Schedule of Noncash Investing and
Financing Activities
Assumption of debt for acquisition of Todd - - - - $ 1,520 - -
Fixed assets acquired under capital lease - - $ 808 $ 257 - -
Stock dividends distributed $ 1,406 $ 1,287 - - $ 2,009
See Notes to Consolidated Financial Statements.
Stifel Financial Corp. and Subsidiaries
Consolidated Statements Of Stockholders' Equity
Unamortized
Additional Expense of
Common Stock Paid-In Retained Treasury Stock Restricted
(In thousands, except share amounts) Shares Amount Capital Earnings Shares Amount Stock Awards Total
- ------------------------------------- ------------- ------- ----------- -------- ---------- ---------------- ------- -------
Balance at July 31, 1992 3,923,315 $587 $14,968 $18,068 (342,012) $(1,874) $(152) $31,597
- ------------------------------------- ------------- ------- ----------- -------- ---------- ---------------- ------- -------
Cash dividends -- common stock
($.15 per share) (561) (561)
Purchase of treasury shares (41,468) (302) (302)
Employee benefit plans 53 132,201 725 778
Stock options exercised (2) 47,019 270 268
Restricted stock awards granted 17 21,000 115 (132) - -
Amortization of restricted
stock awards 177 177
Net income for the year 7,038 7,038
5% stock dividend 196,033 30 2,052 (2,082) (9,163) - -
- ------------------------------------- ------------- ------- ----------- -------- ---------- ---------------- ------- -------
Balance at July 30, 1993 4,119,348 617 17,088 22,463 (192,423) (1,066) (107) 38,995
- ------------------------------------- ------------- ------- ----------- -------- ---------- ---------------- ------- -------
5% stock dividend --
fractional shares (109) (1) (1) (2)
Cash dividends -- common
stock ($.055 per share) (215) (215)
Purchase of treasury shares (137,771) (1,329) (1,329)
Employee benefit plans 163 144,416 907 1,070
Stock options exercised (17) 19,050 128 111
Restricted stock awards granted 21 12,600 100 (122) (1)
Amortization of restricted
stock awards 30 30
Net income for the period 1,915 1,915
Stock bonuses issued 15 3,675 20 35
- ------------------------------------- ------------- ------- ----------- -------- ---------- ---------------- ------- -------
Balance at December 31, 1993 4,119,239 617 17,269 24,162 (150,453) (1,240) (199) 40,609
- ------------------------------------- ------------- ------- ----------- -------- ---------- ---------------- ------- -------
Cash dividends -- common
stock ($.09 per share) (356) (356)
Purchase of treasury shares (188,964) (1,417) (1,417)
Employee benefit plans 88 72,883 614 702
Stock options exercised (34) 13,884 115 81
Restricted stock awards granted (87) 24,500 194 (107) - -
Amortization of restricted
stock awards 108 108
Stock benefits 60 1 1
Dividend reinvestment 151 1 1
Net loss for the year (5,503) (5,503)
5% stock dividend 205,712 32 1,255 (1,287) (11,397) - -
- ------------------------------------- ------------- ------- ----------- -------- ---------- ---------------- ------- -------
Balance at December 31, 1994 4,324,951 649 18,491 17,016 (239,336) (1,732) (198) 34,226
- ------------------------------------- ------------- ------- ----------- -------- ---------- ---------------- ------- -------
Cash dividends -- common
stock ($.12 per share) (500) (500)
Purchase of treasury shares (88,656) (547) (547)
Employee benefit plans (195) 132,173 948 753
Stock options exercised (36) 22,425 159 123
Restricted stock awards granted (14) 13,000 96 (82) - -
Restricted stock awards forfeited 3 (16,125) (96) 79 (14)
Amortization of restricted
stock awards 101 101
Dividend reinvestment (1) 2,019 10 9
Net income for the year 644 644
5% stock dividend 215,939 32 1,374 (1,406) (8,725) - -
- ------------------------------------- ------------- ------- ----------- -------- ---------- ---------------- ------- -------
Balance at December 31, 1995 4,540,890 $681 $19,622 $15,754 (183,225) $(1,162) $(100) $34,795
- ------------------------------------- ------------- ------- ----------- -------- ---------- ---------------- ------- -------
See Notes to Consolidated Financial Statements.
Notes To Consolidated Financial Statements
Stifel Financial Corp. and Subsidiaries
Note A -- Accounting and Reporting Policies
Nature of Operations
Stifel Financial Corp. ("the Parent"), through its wholly owned
subsidiaries, principally Stifel, Nicolaus & Company,
Incorporated ("Stifel, Nicolaus"), collectively referred to as
("the Company"), is principally engaged in retail brokerage,
securities trading, investment banking, investment advisory, and
related financial services throughout the United States.
Although the Company has offices throughout the United States,
its major geographic area of concentration is in the Midwest.
The Company's principal customers are individual investors, with
the remaining client base composed of corporations,
municipalities, and institutions.
Basis of Presentation
The consolidated financial statements include the accounts of the
Parent and its wholly owned subsidiaries, principally Stifel,
Nicolaus. Stifel, Nicolaus is a broker-dealer registered under
the Securities Exchange Act of 1934. All material intercompany
balances and transactions are eliminated in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Where appropriate, prior years' financial information has been
reclassified to conform with the current year presentation.
In 1993, the Company changed its fiscal year-end to a calendar
year-end. Accordingly, results of operations for the transition
period cover a five-month period (22 weeks). Previously, the
Company's full fiscal year was the 52- or 53-week period ending
the last Friday in July. The year ended July 30, 1993 contained
52 weeks.
For purposes of presenting the consolidated statements of cash
flows, the Company has defined cash equivalents as short-term,
highly liquid investments with maturities of 90 days or less
other than those held for sale in the ordinary course of
business.
Security Transactions
Security transactions are recorded on a trade date basis.
Trading and investment securities owned and securities sold but
not yet purchased are carried at market value, and unrealized
gains and losses are reflected in operations. Securities held
for investment, which are included in other assets, are carried
at the lower of historical cost or market for the Parent.
Investment securities of the subsidiaries are carried at market
value or fair value as determined by management.
Securities failed to deliver and receive represent the contract
value of securities that have not been delivered or received by
settlement date.
Receivable from customers includes amounts due on cash and margin
transactions. The value of securities owned by customers and
held as collateral for these receivables is not reflected in the
consolidated statements of financial condition.
Customers' security transactions, including sales of investment
company shares and unit investment trusts, are recorded on a
settlement date basis with related commission income and expense
recorded on a trade date basis.
Securities accounts of officers and directors are included in
amounts receivable from and payable to customers, since they are
subject to the normal terms and regulations as to payment and, in
the aggregate, are not significant.
Fair Value
The Company's financial instruments are carried at fair value or
amounts that approximate fair value. Securities inventory and
securities sold but not yet purchased are valued using quoted
market or dealer prices. Customer receivables, primarily
consisting of floating-rate loans collateralized by margin
securities, are charged interest at rates similar to other such
loans made throughout the industry. The Company's remaining
financial instruments are generally short-term in nature, and
their carrying values approximate market value. The Company has
estimated the fair value of its long-term debt using the
discounted cash flow analysis of payments. At December 31, 1995,
the estimated fair value of the notes was $11,814,000.
Income Taxes
During the transition period ended December 31, 1993, the Company
adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." This standard required a change
from the "deferred method of accounting for income taxes" to the
"asset and liability" method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and
liabilities are recognized based on the differences between the
financial statement carrying amounts and their respective tax
bases using enacted tax rates in effect in the years in which the
differences are expected to reverse. The cumulative effect of
this change in accounting for income taxes was not material to
the consolidated financial statements.
Other
Investment banking revenue is recorded as follows: management
fees on offering date, selling concessions on trade date,
underwriting fees upon completion of the underwriting, and other
investment banking revenue upon the completion of the service.
Amortization of capital leases is computed on a straight-line
basis over the estimated useful life of the asset. Leasehold
improvements are amortized over the lesser of the economic useful
life of the improvement or the term of the lease. Depreciation
of office equipment is computed on a straight-line basis for
equipment purchased prior to January 1, 1994, and an accelerated
method for equipment purchased thereafter.
Goodwill recognized in business combinations accounted for as
purchases is being amortized over 15 to 40 years on a straight-
line basis.
Earnings (loss) per share of common stock is based upon the
weighted average number of common shares and share equivalents
outstanding during the periods. Common share equivalents include
dilutive stock options under the treasury stock method (see Note
G) and dilutive shares from Senior Convertible Notes under the if
converted method (see Note J).
Note B -- Short-Term Borrowings From Banks
In the normal course of business, Stifel, Nicolaus borrows from
various banks on a demand basis with securities pledged as
collateral. Available credit arrangements with banks totaled
$205,000,000 at December 31, 1995, of which $118,550,000 was
unused. There were no compensating balance requirements under
these arrangements. The Company's short-term borrowings bore
interest at a weighted average rate of 6.63% and 6.81% at
December 31, 1995 and 1994, respectively. Certain short-term
borrowings were collateralized by Company-owned securities valued
at approximately $20,844,000 on a settlement date basis. Short-
term borrowings used to finance receivables from customers were
collateralized by customer-owned securities valued at
approximately $125,275,000 at December 31, 1995. The value of
these customer-owned securities is not reflected in the
consolidated statement of financial condition (see Note A).
Note C -- Subordinated Note
Stifel, Nicolaus has a revolving subordinated note agreement in
the amount of $5,500,000 which terminates January 31, 1997. The
agreement, approved by the New York Stock Exchange, Inc. (the
"NYSE"), allows Stifel, Nicolaus to borrow up to this amount and
would be available for the computation of adjusted net capital
under the Uniform Net Capital Rule of the Securities and Exchange
Commission (the "SEC"). To the extent that borrowings under this
agreement are required for Stifel, Nicolaus' continued compliance
with minimum net capital requirements, such borrowings may not be
repaid. The rights of the note holders to receive any payment
from Stifel, Nicolaus under the terms of the note are
subordinated to the claims of all present and future creditors of
Stifel, Nicolaus which arise prior to maturity. Under the terms
of the note agreement, Stifel, Nicolaus must meet various
financial requirements specified in the agreement.
Stifel, Nicolaus is charged an annual commitment fee in an amount
equal to 1/2 of 1% of the average daily balance of the unused
portion of the amount available under the agreement. Such fee is
payable quarterly. During the year, Stifel, Nicolaus charged to
operations $23,000 for this fee.
At December 31, 1995, Stifel, Nicolaus had an advance outstanding
against the revolving subordinated note agreement of $50,000.
Interest on this advance is paid quarterly based upon the prime
rate (8.5% at December 31, 1995). Future advances, if any, would
be charged interest based on the published "LIBOR" rate in effect
during the term the advance is outstanding.
Note D -- Commitments and Contingencies
In the normal course of business, Stifel, Nicolaus enters into
underwriting commitments. Settlement of transactions relating to
such underwriting commitments which were open December 31, 1995,
had no material effect on the consolidated financial statements.
In connection with margin deposit requirements of The Options
Clearing Corporation (the "OCC"), Stifel, Nicolaus has on deposit
with OCC a standby letter of credit amounting to $1,000,000 and
has pledged cash and customer-owned securities valued at
$18,995,762. At December 31, 1995, the amounts on deposit
satisfied the minimum margin deposit requirement of $17,568,161.
Pursuant to the provisions of Rule 15c3-3 of the Securities and
Exchange Commission, Stifel, Nicolaus is required to maintain a
Special Reserve Bank Account for the exclusive benefit of
customers ("15c3-3 Accounts"). Deposits to the 15c3-3 Accounts are
required in the amount of the excess of total customer-related credits
over total customer-related debits, as defined. Withdrawals from
these 15c3-3 Accounts may be made to the extent of the excess of the
account balance over deposit requirements. At December 31, 1995, no
deposit was required; however, Stifel, Nicolaus had cash and
qualified securities in the amount of $776,286 on deposit in its
15c3-3 Accounts.
The future minimum rental commitments at December 31, 1995, with
initial or remaining non-cancellable lease terms in excess of one
year for office space and equipment are as follows (see Note M):
Operating Leases
-----------------------------------------------
Minimum Future
Lease Payments Under Minimum Rental
Year Ending December 31 Capital Leases Commitments Related Sublease Commitment
- ----------------------- -------------- ----------- ---------------- ----------
1996 $325,000 $ 4,383,000 $(431,000) $ 3,952,000
1997 303,000 2,653,000 (325,000) 2,328,000
1998 238,000 1,690,000 (127,000) 1,563,000
1999 0 1,458,000 (66,000) 1,392,000
2000 0 1,328,000 (3,000) 1,325,000
Thereafter 0 2,798,000 0 2,798,000
-------- ----------- --------- -----------
Minimum Commitments $866,000 $14,310,000 $(952,000) $13,358,000
Less Interest 92,000 =========== ========= ===========
--------
Net Present Value of Capital
Lease Obligations $774,000
========
Rental expense for the calendar years ended 1995 and 1994, the
five-month transition period ended December 31, 1993, and the
fiscal year ended July 30, 1993, amounted to approximately
$3,986,000, $4,596,000, $1,685,000, and $4,021,000, respectively.
Office equipment, under capital leases, with a recorded cost of
approximately $766,000, collateralizes the above capital lease
obligations and is included in the consolidated statements of
financial condition in the caption of "Office equipment and
leasehold improvements."
The Company purchased equipment for approximately $440,000 in the
first quarter of 1995. During the fourth quarter of 1995,
management determined that certain of that equipment with a
carrying value of approximately $248,000, which was originally
intended for use in operations, was not immediately required and
therefore recorded a $195,000 charge to fourth quarter operations
to write the equipment down to net recoverable value based on
outside dealer quotes.
Depreciation expense for capitalized leases and owned furniture
and equipment for the calendar years 1995 and 1994, the five-
month transition period ended December 31, 1993, and the fiscal
year ended July 30, 1993, amounted to approximately $1,732,000,
$2,192,000, $795,000, and $1,808,000, respectively.
Note E -- Net Capital Requirements and Dividend Restrictions
Stifel, Nicolaus is subject to the Uniform Net Capital Rule of
the Securities and Exchange Commission (the "rule") which
requires the maintenance of minimum net capital, as defined.
Stifel, Nicolaus has elected to use the alternative method
permitted by the rule which requires maintenance of minimum net
capital equal to the greater of $250,000 or 2 percent of
aggregate debit balances arising from customer transactions, as
defined. The rule also provides that equity capital may not be
withdrawn or cash dividends paid if resulting net capital would
be less than 5 percent of aggregate debits.
At December 31, 1995, Stifel, Nicolaus had net capital of
$20,111,930, which was 11.3 percent of aggregate debit balances
and $16,549,640 in excess of minimum required net capital. At
December 31, 1995, the net assets of Stifel, Nicolaus were
$35,727,712, of which $24,571,507 was restricted as to the
payment of dividends. In addition, there are restrictions in the
Parent's long-term note agreement on payment of dividends by the
Parent to its stockholders based on the amount of the Company's
cumulative consolidated net income, as defined. At December 31,
1995, $1,864,000 was available for payment of future dividends
under such provisions.
Note F -- Employee Benefit Plans
The Company has a profit sharing plan and an employee stock
purchase plan (the "ESPP") covering qualified employees as
defined in the plans. Contributions to the profit sharing plan
were based upon a company match of 50% of the employees' first
$500 in annual contributions for the calendar years 1995 and 1994
and the five-month transition period ended December 31, 1993.
Contributions prior to the transition period were discretionary.
Under the ESPP, the Company contributes 15% of the purchase price
of employee stock purchases of the Parent's stock.
The Company also has an employee stock ownership plan (the
"ESOP") covering qualified employees as defined in the plan.
Employer contributions are made to the ESOP as determined by the
Compensation Committee of the Board of Directors of the Parent on
behalf of all eligible employees based upon the relationship of
individual compensation (up to a maximum of $150,000) to total
compensation. At December 31, 1995, the plan held and has
allocated 247,172 shares of Stifel Financial Corp. common stock
valued at $1,637,515.
The following approximate amounts were charged to operations for
the periods indicated:
Five Months
Calendar Years Ended Ended Fiscal Year Ended
1995 1994 December 31, 1993 July 30, 1993
Employee Stock
Purchase Plan $ 92,600 $112,500 $92,000 $ 94,000
Profit Sharing Plan 165,900 185,000 91,000 442,000
Employee Stock
Ownership Plan - - - - 91,000 442,000
Restricted stock awards were made to certain key employees during
fiscal years 1989, 1993, the five-month transition period, and
calendar years 1995 and 1994. The shares are restricted as to
resale over a five-year service period for awards made in 1989
commencing in 1989, a three- to five-year service period for
awards made in 1993 commencing in 1993, a three- to five-year
service period for awards made in the transition period
commencing in the transition period, a three- to five-year
service period for awards made in 1994 commencing in 1994, and a
three-year service period for awards made in 1995 commencing in
1995. The restrictions lapse with respect to 20 percent of such
shares in fiscal 1991 and 1992 and 30 percent of such shares in
fiscal 1993 and the five-month transition period for awards made
in 1989. For all other awards, restrictions lapse ratably over
the three- and five-year service periods.
The deferred cost of the restricted stock awards is amortized on
a straight-line basis. The Company charged to operations for the
calendar years 1995 and 1994, the five-month transition period,
and fiscal year 1993, approximately $86,000, $108,000, $30,000,
and $177,000, respectively.
Stifel, Nicolaus also has a deferred compensation plan available
to Investment Executives. The amounts charged to operations
related to this plan were approximately $468,000, $539,000,
$202,000, and $429,000 for the calendar years 1995 and 1994, for
the five-month transition period, and for fiscal year 1993,
respectively.
Note G -- Stock Option Plans
Under the Company's 1983 and 1985 Incentive Stock Option Plans,
the Company may grant options up to an aggregate of 450,000
shares to key employees. Under the Company's 1987 non-qualified
stock option plan, the Company may grant options up to an
aggregate of 100,000 shares. All options under these plans are
granted at market value and expire 10 years from the date of
grant. The Company has also granted stock options to external
board members under a non-qualified plan. These options were
granted at market value and are exercisable one year from date of
grant and expire 10 years from date of grant. Activity, adjusted
for stock dividends distributed, under all plans for the calendar
years ended 1995 and 1994, the five-month transition period ended
December 31, 1993, and for the year ended July 30, 1993,
respectively, is set forth on the following table. All amounts
and prices have been adjusted to reflect the 5 percent stock
dividends declared September 9, 1992, September 14, 1993, January
24, 1995, and January 23, 1996.
- -------------------------------------------------------------------------------
Shares Under Option Price
Option Range
- -------------------------------------------------------------------------------
Outstanding at July 31, 1992 (263,188 exercisable) 401,127 $4.32 - 11.10
- -------------------------------------------------------------------------------
Granted 7,230 4.94 - 6.15
Exercised (54,437) 4.32 - 7.25
Cancelled (4,055) 4.94 - 11.10
- -------------------------------------------------------------------------------
Outstanding at July 30, 1993 (316,613 exercisable) 349,865 $4.32 - 9.36
- -------------------------------------------------------------------------------
Granted 69,183 6.15 - 8.96
Exercised (21,003) 4.83 - 5.96
Cancelled (2,178) 4.32 - 4.94
- -------------------------------------------------------------------------------
Outstanding at December 31, 1993 (315,977 exercisable) 395,867 $4.32 - 9.36
- -------------------------------------------------------------------------------
Granted 50,336 5.44 - 6.92
Exercised (15,308) 4.83 - 7.25
Cancelled (36,831) 4.32 - 6.46
- -------------------------------------------------------------------------------
Outstanding at December 31, 1994 (285,119 exercisable) 394,064 $4.32 - 9.36
- -------------------------------------------------------------------------------
Granted 31,763 5.33 - 6.31
Exercised (23,545) 4.83 - 5.66
Cancelled (69,960) 4.32 - 8.95
- -------------------------------------------------------------------------------
Outstanding at December 31, 1995 (250,200 exercisable) 332,322 $4.32 - 9.36
- -------------------------------------------------------------------------------
All option plans are administered by the Compensation Committee
of the Board of Directors of the Parent which has the authority
to interpret the Plans, determine to whom options may be granted
under the Plans, determine the terms of each option, and cancel,
with the consent of an optionee, any option previously granted to
such optionee and to grant a new option in place thereof.
Note H -- Legal Proceedings
The Company is a defendant in several lawsuits and arbitrations
which arose from its usual business activities. Some of these
lawsuits and arbitrations claim substantial amounts, including
punitive damage claims. While results of litigation and
arbitration cannot be predicted with certainty, management, based
on opinions of outside counsel, has provided for actions most
likely of adverse disposition and believes that the effects of
resolution of such litigation and arbitration beyond the amounts
provided will not have a material adverse effect on the Company's
consolidated financial position. However, depending upon the
period of resolution, such effects could be material to the
financial results of an individual operating period. It is
reasonably possible that certain of these lawsuits and
arbitrations could be resolved in the next year, and management
does not believe such resolutions will result in losses
materially in excess of the amounts previously provided.
During 1995, the SEC completed a formal investigation into
possible violations of the federal securities laws in connection
with certain municipal bond issues managed by the Company's
former Oklahoma City public finance department where the Company
was the managing or co-managing underwriter. This investigation
resulted in the Company consenting to a final judgement of
permanent injunction whereby, among other things, the Company
paid approximately $1.1 million in disgorgement and prejudgement
interest, and $250,000 in fines.
Additionally, the Company is named in lawsuits filed by The
Oklahoma Turnpike Authority ("OTA") and The State of Oklahoma.
The OTA suit seeks $6.5 million in compensatory damages and an
unspecified amount of punitive damages. The State of Oklahoma
seeks $7.6 million in compensatory damages and that these damages
be trebled. The OTA suit alleges that an undisclosed fee paid to
the Company by a third party for the placement of a forward
purchase contract in an advance refunding escrow for the proceeds
of the 1992 OTA $660 million refinancing should have been paid to
the OTA. The State of Oklahoma suit alleges that the Company and
two former executives of the Company committed violations of the
Racketeer Influenced and Corrupt Organizations ("RICO") Act.
This suit alleges essentially the same facts as are alleged in
the OTA suit and were alleged by the SEC in its action against
the Company which was settled in August 1995 by the Company
without admitting or denying the allegations. Management does not
believe the ultimate resolution of these matters will have a materially
adverse effect on the Company's financial position.
Note I -- Financial Instruments With Off-Balance-Sheet Credit Risk
In the normal course of business, the Company's activities
involve the execution, settlement, and financing of various
securities transactions. These activities may expose the Company
to off-balance-sheet risk in the event the customer or other
party is unable to fulfill its contracted obligations.
A portion of the Company's customer activity involves the sale of
securities not yet purchased ("short sales") and the writing of
option contracts through margin accounts. Such transactions may
expose the Company to significant off-balance-sheet risk in the
event collateral is not sufficient to cover losses which
customers may incur upon significant market changes.
The Company receives cash representing at least the market value
of securities loaned. In the event the other party to these
transactions is unable to return the securities loaned, the
Company may be exposed to the risk of replacing the securities at
prevailing market prices.
The Company pledges customer securities as collateral for bank
loans and to satisfy margin deposits of clearing organizations
(see Note B and Note D). In the event such party is unable to
return customer securities pledged as collateral, the Company may
be exposed to the risk of acquiring the securities at prevailing
market prices.
The Company, as a part of its normal brokerage activities,
assumes short positions in its inventory. The establishment of
short positions exposes the Company to off-balance-sheet risk in
the event prices increase, as the Company may be obligated to
cover such positions. The Company does not engage in proprietary
trading of volatile securities such as short options and futures.
At December 31, 1995, 74 percent of the value of the Company's
short positions consisted of equity securities, and the remainder
consisted of debt securities.
The Company controls off-balance-sheet risk by monitoring the
market value and marking to market securities on a daily basis
and by requiring adjustments of collateral levels in accordance
with industry regulations and internal policies. The Company
establishes credit limits for margin trading and monitors
compliance with the applicable limits on a daily basis.
Securities collateralizing customer accounts are held by the
Company or held by other depository institutions, principally the
Depository Trust Company.
Concentrations of Credit Risk
The Company maintains margin and cash security accounts for its
customers located throughout the United States. The majority of
the Company's customer receivables are serviced by branch
locations in Missouri and Illinois.
As a securities broker and dealer, a substantial portion of the
Company's transactions are collateralized. The Company's
exposure to credit risk associated with the nonperformance in
fulfilling contractual obligations pursuant to securities
transactions can be directly impacted by volatile trading markets
which may impair the customers' or counterparties' ability to
satisfy their obligations to the Company. The Company controls
its exposure to credit risk by continually monitoring its
counterparties' position, and where deemed necessary, the Company
may require a deposit of additional collateral and/or a reduction
or diversification of positions.
The Company maintains its cash deposits in various financial
institutions, several of which include amounts in excess of that
insured by the Federal Deposit Insurance Corporation.
Note J -- Long-Term Debt
The Parent has outstanding $10,000,000 aggregate principal amount
of its 11.25 percent Senior Convertible Notes due September 1, 1997,
through September 1, 2000 in equal installments. The notes are
convertible into shares of the Company's $.15 par value common stock
at any time prior to maturity, unless previously redeemed, at a conversion
price of $7.41 per share. Under certain conditions, the notes
are redeemable in whole or in part at the option of the Parent by
payment of the principal and the accrued interest on the notes to
be redeemed plus a premium of 4.1 percent. The premium decreases
approximately one percentage point each September 1 from 1996
through 1999. The Company is required to maintain consolidated
tangible net worth (as defined by the note agreement) at an
amount not less than $22,000,000 as long as any amount remains
unpaid. (Also see Note E.)
The Parent has outstanding $760,000 in promissory notes issued
for the purchase of Todd Investment Advisors, Inc. The principal
of the notes is due on January 2, 1996, with interest at 3.83%
per annum of the unpaid balance. Interest charged to operations
for these notes was $29,108 and $58,216 for calendar years 1995
and 1994, respectively.
Note K -- Preferred Stock Purchase Rights
On June 30, 1987, the Company's Board of Directors declared a
distribution of one preferred stock purchase right for each share
of the Company's common stock. Each right will entitle the
holder to buy 1/100 of a share of a Series A Junior Participating
Preferred Stock at an exercise price of $40 per right. The
rights become exercisable on the tenth day after public
announcement that a person or group has acquired 20 percent or
more of the Company's common stock or upon commencement or
announcement of intent to make a tender offer for 30 percent or
more of the outstanding shares of common stock without prior
written consent of the Company. The rights may be redeemed by
the Company prior to becoming exercisable by action of the Board
of Directors at a redemption price of $.05 per right. If the
Company is acquired by any person after the rights become
exercisable, each right will entitle its holder to purchase stock
of the acquiring company having a market value of twice the
exercise price of each right. The rights were issued to
shareholders of record at the close of business on July 14, 1987,
and expire in July 1997.
Note L -- Income Taxes
The Company's provision (benefit) for income taxes consists of:
Year Year Five Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, July 30,
1995 1994 1993 1993
------------ ------------ ------------ --------
Current:
Federal $(59,000) $(1,601,000) $1,092,000 $3,448,000
State (14,000) ( 382,000) 260,000 775,000
--------- ------------ ---------- ----------
$(73,000) $(1,983,000) $1,352,000 $4,223,000
Deferred:
Federal $594,000 $(1,401,000) $ (167,000) $ (22,000)
State 142,000 (334,000) (40,000) 31,000
-------- ------------ ----------- -----------
$736,000 $(1,735,000) $ (207,000) $ 9,000
-------- ------------ ----------- -----------
$663,000 $(3,718,000) $1,145,000 $4,232,000
======== ============ =========== ===========
The provision (benefit) for income taxes differs from the amount
computed by applying the statutory federal income tax rate to
(loss) income before income taxes for the following reasons:
Year Year Five Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, July 30,
1995 1994 1993 1993
------------ ------------ ------------ --------
Federal tax computed at statutory rates $444,000 $(3,135,000) $1,040,000 $3,832,000
State income taxes, net of federal
income tax benefit 84,000 (450,000) 145,000 532,000
Tax-exempt interest, net of related
interest expense (62,000) (143,000) (7,000) (237,000)
Goodwill amortization 80,000 80,000 3,000 11,000
Meals and entertainment 96,000 107,000 12,000 38,000
SEC fine 85,000 - - - - - -
Increase in cash surrender value of
life insurance (27,000) 9,000 (20,000) 7,000
Other, net (37,000) (186,000) (28,000) 49,000
-------- ----------- ---------- ----------
Provision (benefit) for income taxes $663,000 $(3,718,000) $1,145,000 $4,232,000
======== =========== ========== ==========
The net deferred tax asset consists of the following temporary differences:
December 31, December 31,
1995 1994
------------ ------------
Deferred Tax Asset
Receivables from customers, principally due to
allowance for doubtful accounts $ 314,000 $ 417,000
Office equipment and leasehold improvements,
principally book over tax depreciation 777,000 784,000
Deferred compensation 693,000 669,000
Deferred revenue 171,000 217,000
Investments, principally due to valuation
allowance 155,000 242,000
Provision for litigation and settlements 644,000 1,017,000
Receivables from officers and employees,
principally due to allowance for
doubtful accounts 1,169,000 997,000
Accrued expenses 485,000 681,000
Other 8,000 9,000
---------- ----------
Deferred Tax Asset 4,416,000 5,033,000
---------- ----------
Deferred Tax Liability
Intangible assets, principally tax over book
amortization (220,000) (215,000)
Investment fee revenue installment receivable (294,000) (180,000)
---------- ----------
Total Gross Deferred Tax Liability (514,000) (395,000)
---------- ----------
Net Deferred Tax Asset $3,902,000 $4,638,000
========== ==========
The Company believes that a valuation allowance with respect to
the realization of the total gross deferred tax asset is not
necessary. Based on the Company's historical earnings, future
expectations of taxable income, and the future reversals of gross
deferred tax liability, management believes it is more likely
than not that the Company will realize the gross deferred tax
asset.
For years prior to the adoption of SFAS No. 109, "Accounting for
Income Taxes," the components of deferred income taxes are as follows:
Year Ended
July 30, 1993
-------------
Accruals currently not deductible $ 259,000
Depreciation and amortization (55,000)
Deferred compensation (143,000)
Bad debts 58,000
Unrealized gains and losses 35,000
Other, net (145,000)
---------
Deferred income taxes $ 9,000
=========
Note M -- Related Party Transactions
Three directors and one former director of the Parent are
associated with firms which provide legal and consulting services
to the Company. Additionally, several employees of Stifel,
Nicolaus, through their individual ownership or interest in a
corporation or partnership, provide leasing services primarily
for branch office space. The Company charged to operations in
the aggregate approximately $1,283,000, $1,369,000, $315,000, and
$386,000 for calendar years 1995 and 1994, the five-month
transition period ended December 31, 1993, and the fiscal year 1993,
respectively, for these services.
A director of the Parent has a general partnership interest in an
enterprise in which the Company also holds general and limited
partnership interests carried at approximately $623,000 at
December 31, 1995, and $530,000 at December 31, 1994.
The Company has receivables aggregating $1,976,000 at December
31, 1995 and 1994, from two former employees who were also
directors and officers of the Company. These receivables arose
from employment contracts which were to be earned or forgiven if
performance criteria defined in the contracts were met. In 1994,
the employees terminated with the Company. The Company filed
suits to recover the balance of the receivables.
Note N -- Transition Period and Comparable Prior Year
The Company changed its fiscal year from the last Friday in July to a
calendar year-end. Comparative results of operations are shown below:
Five-Month
Calendar Year Ended Transition Five Months Ended
December 31, 1994 December 31, 1993 Period Ended December 31, 1992
(unaudited) December 31, 1993 (unaudited)
---------------------------------------------------------------------------
Revenues
Commissions $ 25,407,000 $ 28,396,000 $ 11,949,000 $ 10,008,000
Principal transactions 22,567,000 23,232,000 9,313,000 11,282,000
Investment banking 11,969,000 30,285,000 10,885,000 11,151,000
Interest 10,918,000 9,316,000 4,057,000 4,101,000
Sale of investment company shares 9,674,000 12,133,000 4,906,000 3,514,000
Sale of unit investment trusts 2,736,000 3,728,000 1,362,000 854,000
Sale of insurance products 2,207,000 2,382,000 1,263,000 496,000
Other revenues 8,448,000 6,088,000 2,720,000 3,469,000
------------ ------------ ------------ ------------
Total Revenues 93,926,000 115,560,000 46,455,000 44,875,000
------------ ------------ ------------ ------------
Expenses
Employee compensation and benefits 60,652,000 72,219,000 29,421,000 25,878,000
Commissions and floor brokerage 2,120,000 2,410,000 845,000 920,000
Communications and office supplies 8,045,000 7,181,000 3,090,000 2,745,000
Occupancy and equipment rental 9,397,000 7,798,000 3,333,000 3,183,000
Promotional 2,868,000 3,068,000 1,231,000 1,088,000
Interest 6,138,000 4,798,000 1,763,000 2,312,000
Provision for litigation and bad debts 2,467,000 907,000 473,000 1,105,000
Restructuring charge 2,672,000 0 0 0
Other expenses 8,788,000 7,290,000 3,239,000 3,203,000
------------ ------------ ------------ ------------
Total Expenses 103,147,000 105,671,000 43,395,000 40,434,000
------------ ------------ ------------ ------------
Pre-tax income (loss) (9,221,000) 9,889,000 3,060,000 4,441,000
Income tax provision (benefit) (3,718,000) 3,658,000 1,145,000 1,719,000
------------ ------------ ------------ ------------
Net income (loss) $ (5,503,000) $ 6,231,000 $ 1,915,000 $ 2,722,000
============ ============ ============ ============
Note O -- Acquisition
On December 28, 1993, the Company purchased all of the
outstanding stock of Todd Investment Advisors, Inc. (Todd), an
investment advisory firm registered with the SEC under the
Investment Advisory Act of 1940, for $1,780,000 in cash and
$1,520,000 in promissory notes, payable in two installments. The
transaction was accounted for as a purchase and resulted in the
recognition of goodwill of approximately $3,201,000, which is
being amortized on a straight-line basis over a fifteen-year
period.
Unaudited pro forma financial data for the combined operations,
assuming the transaction had taken place at the beginning of the
periods presented, follows:
Five-Month
Transition
Period Ended Fiscal Year Ended
December 31, 1993 July 30, 1993
----------------- -----------------
Revenue $47,251,000 $115,379,000
Net income 1,945,000 7,102,000
Primary earnings per share 0.43 1.61
Note P -- Plan of Restructuring
During the fourth quarter of 1994, the Board of Directors of the
Parent approved a restructuring and downsizing plan for the
Company to be implemented beginning in December 1994, which
involved the closing or downsizing of 31 office locations and
termination of approximately 70 officers and employees. The plan
was completed during 1995. Following is a summary of activity in the
accounts related to the restructuring accrual recorded at December 31, 1994:
<CAPTIONS>
Adjustments
Balance Recorded Balance
December 31, Payments/ Through December 31,
1994 Charges Operations 1995
---------------------------------------------------------
Net lease commitments for closed offices $1,400,000 $ 440,153 $ 64,387 $895,460
Severance pay, extended benefits, and receivables
written off for terminated employees 695,000 627,270 1,215 66,515
Contractual commitments 191,000 61,000 130,000 - -
Abandonment of leasehold improvements 206,000 197,271 - - 8,729
---------- ---------- -------- --------
Total $2,492,000 $1,325,694 $195,602 $970,704
========== ========== ======== ========
The severance pay accrual as of December 31, 1994, disclosed in
the above table has been amended from amounts previously reported
to reflect the reclassification of a $180,000 reserve for bonus
notes, which has been reclassified to conform to the 1995
presentation. The balances at December 31, 1995 and December 31,
1994 are included in the statement of financial condition under
the caption Accounts payable and accrued expenses.
During the year, the Parent Company's Board of Directors reversed
its decision regarding the payment of certain philanthropic
commitments which had been accrued in 1994 as part of the
restructuring charge and included in "Contractual commitments"
above. As a result of this decision, $130,000 related to accrued
contractual commitments was reversed and credited to operations
in 1995.
Note Q -- Sale of Oklahoma-Based Assets
On May 25, 1995, the Company sold the majority of the assets of
its Oklahoma-based operations to Capital West Financial
Corporation ("Capital West"). Capital West is primarily owned by
former employees of the Company. Included in the sale were the
majority of the assets related to the Company's retail offices in
Oklahoma, several retail offices in Texas, and the Oklahoma-based
public finance, institutional trading, and sales departments.
The Company received cash, secured and senior notes, and warrants
to purchase a minority interest in Capital West. In addition,
Capital West assumed or subleased certain office and equipment
lease obligations of the Company. The sale resulted in the
reduction of approximately 70 investment executives and
approximately 50 support staff located in 26 branch offices.
The Company received secured and senior notes with a face amount
of $1,850,000 bearing interest at a 10% annual rate with the
final payments due May 24, 2000, in connection with the sale of
its Oklahoma-based assets. The notes were recorded at a
discounted rate of 17%. The Company has deferred recognition of
the gain on the sale in the amount of $570,120 and has deferred
recognition of any interest income related to the notes until
such time that Capital West has demonstrated the ability to
generate earnings and cash flow to fund interest and principal
payments when scheduled. The notes receivable net of the
discount of $335,617 and deferred gain of $570,120 are included
in the statement of financial condition under the caption
"Miscellaneous other assets" at December 31, 1995.
Pro forma financial information assuming the transaction had
taken place at the beginning of the year is presented below:
Unaudited Pro Forma Combined Results of Operations
Year Ended
December 31, 1995
-----------------
Revenue $85,845,916
Net income $ 770,252
Net income per primary share $ 0.17
The above pro forma results do not purport to be indicative of
results which actually would have occurred had the sale been made
on January 1, 1995.
Note R -- Subsequent Event
On January 23, 1996, the Company's Board of Directors approved a
5 percent stock dividend to be distributed and $.03 per share
cash dividend to be paid on February 20, 1996, to shareholders of
record on February 6, 1996. All shares issued and earnings per
share amounts included in the consolidated financial statements
and notes thereto have been retroactively adjusted to give effect
to the 5 percent stock dividend.
Note S -- Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued
Statements of Financial Accounting Standards (SFAS) 121,
"Accounting for the Impairment of Long-Lived Assets to Be
Disposed of," and SFAS 123, "Accounting for Stock-Based
Compensation," both effective in fiscal years beginning after
December 15, 1995. Management does not believe adoption of these
standards will have a material impact on the Company's
consolidated financial statements.
(b) Supplementary Financial Information
Quarterly Results
Stifel Financial Corp. and Subsidiaries
Quarterly Operating Results (Unaudited)
(Loss) Primary Fully Diluted
Earnings Net (Loss) (Loss)
Before (Loss) Earnings Earnings
Revenue Income Taxes Income Per Share Per Share
- --------------------------- ------------------ --------------- ---------------- ---------------- -------
Year 1995 By Quarter
First $21,895,000 $ (318,000) $ (183,000) $ (.04) $(.04)
Second 25,748,000 593,000 348,000 .08 .08
Third 23,055,000 482,000 162,000 .04 .04
Fourth 24,662,000 550,000 317,000 .07 .07
- --------------------------- ------------------ --------------- ---------------- ---------------- -------
Year 1994 By Quarter
First $25,827,000 $289,000 $179,000 $ .04 $ .04
Second 22,746,000 (1,224,000) (731,000) (.16) (.16)
Third 23,573,000 (681,000) (420,000) (.10) (.10)
Fourth 21,780,000 (7,605,000) (4,531,000) (1.05) (1.05)
- --------------------------- ------------------ --------------- ---------------- ---------------- -------
Transition Period 1993
First Quarter $28,916,000 $2,540,000 $1,603,000 $ .35 $ .30
November and December 17,539,000 520,000 312,000 .07 .07
- --------------------------- ------------------ --------------- ---------------- ---------------- -------
During 1995, the Company filed quarterly reports on Form 10-Q with the
Securities and Exchange Commission and reported quarterly results to
shareholders. The 1995 annual audit resulted in the Company recording several
adjustments which affected the previously reported results of operations for
each quarter. The quarterly results as adjusted are reflected in the
preceding table. Following is a summary of the adjustments by quarter and
their effect on previously reported net income and earnings per share data.
- -------------------------------------------------------------------------------------------------------------------------
Year Ended 1995 -- Increase/(Decrease) First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------------------------------
Net income as previously reported $ 68,000 $292,000 $241,000 $264,000
Adjustments:
Accrued revenues - - - - - - 88,000
Employee compensation and benefits (58,000) 10,000 10,000 108,000
Valuation of investments (100,000) - - - - 25,000
Allowance for doubtful receivables (280,000) 100,000 - - - -
Write-down of fixed assets - - - - - - (195,000)
Other - - - - - - 87,000
Deferred tax provision - - - - (97,000) - -
Tax effect of above 187,000 (54,000) 8,000 (60,000)
---------- -------- --------- ---------
Net (loss) income as reported above $(183,000) $348,000 $162,000 $317,000
========== ======== ========= =========
- --------------------------------------------------------- ---------------- ----------------- --------------- ----------
Primary earnings per share as previously reported $ .02 $ .07 $ .06 $ .06
Effect of adjustments (.06) .01 (.02) .01
-------- ------- ------- -------
Primary (loss) earnings per share as reported above $ (.04) $ .08 $ .04 $ .07
- --------------------------------------------------------- ---------------- ----------------- --------------- ----------
Fully diluted earnings per share as previously reported $ .02 $ .07 $ .06 $ .06
Effect of adjustments (.06) .01 (.02) .01
-------- ------- ------- -------
Fully diluted (loss) earnings per share as reported above $ (.04) $ .08 $ .04 $ .07
- --------------------------------------------------------- ---------------- ----------------- --------------- ----------