1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1996
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 1-9305
STIFEL FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1273600
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 N. Broadway, St. Louis, Missouri 63102-2188
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 314-342-2000
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark 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 for 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 / /
Shares of common stock outstanding at March 29, 1996: 4,475,897
par value $.15.
Exhibit Index is on page 16.
2
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q INDEX
March 29, 1996
PAGE
PART I. FINANCIAL CONDITION ----
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition --
March 29, 1996 and December 31, 1995 3-4
Consolidated Statements of Operations --
Three Months Ended March 29, 1996 and March 31, 1995 5
Consolidated Statements of Cash Flows--
Three Months Ended March 29, 1996 and March 31, 1995 6-7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
3
PART I. FINANCIAL CONDITION
Item 1. Financial Statements (Unaudited)
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 29, December 31,
1996 1995
(Unaudited) (Note)
------------ ------------
ASSETS
Cash and cash equivalents $ 5,390,884 $ 6,344,042
Cash segregated for the exclusive
benefit of customers 578,737 776,286
Receivable from brokers and dealers 14,803,406 16,423,620
Receivable from customers, less
allowance for doubtful accounts of
$812,545 and $804,916, respectively 140,058,117 156,903,772
Securities owned, at market value 23,117,353 19,520,771
Membership in exchanges, at cost
(approximate market value: $2,154,000
and $1,904,000, respectively) 513,015 513,015
Office equipment and leasehold improvements,
at cost, less allowances for depreciation
and amortization of $10,003,076 and
$12,517,487, respectively 2,770,328 3,014,464
Goodwill, net of accumulated amortization
of $890,286 and $826,608, respectively 3,921,574 3,985,252
Notes and non-securities receivable from
employees, net of allowance for
doubtful receivables of $2,804,549 and
$3,002,220, respectively 4,267,548 4,328,431
Deferred tax asset 3,601,519 3,901,939
Miscellaneous other assets 7,650,767 11,063,079
------------ ------------
$206,673,248 $226,774,671
============ ============
NOTE: The Consolidated Statement of Financial Condition at
December 31, 1995 has been derived from the audited
financial statements at that date.
See Notes to Consolidated Financial Statements.
4
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
March 29, December 31,
1996 1995
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings from banks $ 74,750,000 $ 86,450,000
Payable to brokers and dealers 40,823,813 23,127,421
Payable to customers, including free
credit balances of $13,738,768 and
$21,078,544, respectively 19,941,270 31,806,213
Market value of securities sold, but
not yet purchased 1,273,252 2,744,276
Drafts payable 11,185,582 17,866,638
Accrued employee compensation 6,657,401 9,525,863
Accounts payable and accrued expenses 6,564,627 9,648,898
Long-term debt 10,000,000 10,760,000
------------ ------------
Total Liabilities 171,195,945 191,929,309
Subordinated note 50,000 50,000
Stockholders' equity
Common stock 681,134 681,134
Additional paid-in capital 19,490,165 19,622,646
Retained earnings 15,754,082 15,753,713
------------ ------------
35,925,381 36,057,493
Less cost of stock in treasury 410,146 1,162,376
Less unamortized expense of restricted
stock awards 87,932 99,755
------------ ------------
Total Stockholders' Equity 35,427,303 34,795,362
------------ ------------
$206,673,248 $226,774,671
============ ============
NOTE: The Consolidated Statement of Financial Condition at
December 31, 1995 has been derived from the audited
financial statements at that date.
See Notes to Consolidated Financial Statements.
5
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 29, 1996 March 31, 1995
-------------- --------------
REVENUES
Commissions $ 7,976,051 $ 6,852,654
Principal transactions 4,300,800 5,331,299
Investment banking 1,144,875 744,840
Interest 3,189,858 3,197,690
Sale of investment company shares 2,463,977 2,062,669
Sale of insurance products 582,000 545,717
Sale of unit investment trusts 575,590 426,399
Other 3,204,287 2,733,268
----------- -----------
23,437,438 21,894,536
EXPENSES
Employee compensation & benefits 14,525,739 13,573,152
Commissions & floor brokerage 602,062 574,037
Communication & office supplies 1,759,034 2,155,239
Occupancy & equipment rental 1,820,938 1,970,568
Promotional 483,671 523,537
Interest 1,942,306 2,087,295
Other operating expenses 2,045,827 1,329,582
----------- -----------
23,179,577 22,213,410
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 257,861 (318,874)
Provision (benefit) for income taxes 108,000 (134,913)
----------- -----------
NET INCOME (LOSS) $ 149,861 $ (183,961)
=========== ===========
Net income (loss) per share:
Primary $ 0.03 $ (0.04)
Fully diluted $ 0.03 $ (0.04)
Dividends declared per share $ 0.03 $ 0.03
Average common equivalent shares
outstanding:
Primary 4,497,781 4,387,862
Fully Diluted 5,851,204 5,738,137
See Notes to Consolidated Financial Statements.
6
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 29, 1996 March 31, 1995
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 149,861 $ (183,961)
Non-cash items included in earnings:
Depreciation and amortization 423,144 485,879
Bonus notes amortization 236,256 223,048
Deferred compensation 110,648 245,803
Deferred tax asset 300,420 - -
Provision for litigation and bad debt 132,628 - -
Unrealized gains on investments (18,000) (522,408)
Amortization of restricted stock awards 15,321 22,632
------------ ------------
1,350,278 270,993
Decrease in operating receivables:
Customers 16,838,026 5,274,512
Brokers and dealers 1,620,214 7,968,955
(Decrease) increase in operating
payables:
Customers (11,864,943) 2,967,338
Brokers and dealers 17,696,392 567,887
Decrease (increase) in assets:
Cash segregated for the exclusive
benefit of customers 197,549 (2,411)
Securities owned (3,596,582) 2,785
Notes receivable from officers
and employees (579,352) (440,108)
Miscellaneous other assets 3,650,536 2,214,948
(Decrease) increase in liabilities:
Securities sold, not yet purchased (1,471,024) 1,723,563
Drafts payable, accounts payable and
accrued expenses, and accrued
employee compensation (12,818,200) (8,792,421)
------------ ------------
Cash Provided By
Operating Activities $ 11,022,894 $ 11,756,041
------------ ------------
See Notes to Consolidated Financial Statements.
7
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Three Months Ended
March 29, 1996 March 31, 1995
-------------- --------------
Cash Provided By Operating Activities
- from previous page $ 11,022,894 $ 11,756,041
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments for short-term borrowings
from banks (11,700,000) (11,343,000)
Proceeds from:
Employee stock purchase plan 616,669 755,274
Exercised stock options - - 102,723
Dividend reinvestment plan 5,115 3,122
Payments for:
Settlement of long-term debt (760,000) (760,000)
Purchases of stock for treasury (5,533) (159,917)
Principal payments under capital
leases (66,482) (63,199)
Cash dividends (134,247) (125,611)
------------ ------------
Cash Used For Financing Activities (12,044,478) (11,590,608)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of office equipment and
leasehold improvements 4,950 6,100
Sale of investments 190,000 - -
Payments for:
Acquisition of office equipment and
leasehold improvements (89,645) (757,528)
Acquisition of investments (36,879) (135,057)
------------ ------------
Cash Provided By (Used For)
Investing Activities 68,426 (886,485)
------------ ------------
Decrease in cash and cash equivalents (953,158) (721,052)
Cash and cash equivalents -
beginning of period 6,344,042 6,925,192
------------ ------------
Cash and Cash Equivalents - end of period $ 5,390,884 $ 6,204,140
============ ============
Supplemental disclosure of cash
flow information:
Income tax payments $ 20,279 $ 11,257
Interest payments $ 2,316,904 $ 2,335,526
See Notes to Consolidated Financial Statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Stifel Financial Corp. and its subsidiaries (collectively
referred to as the Company). 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 Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results
for the three months ended March 29, 1996 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the
financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1995.
Included in "Other Assets" are securities held for investment.
Securities are carried at the lower of historical cost or market
for the Parent Company and carried at market value or fair value
as determined by management for the Company's subsidiaries. The
Company holds warrants with a historical cost of $900 at March
29, 1996. These warrants are restricted from exercise until July,
1996. The market value less the exercise value of the underlying
securities of said warrants was $1.6 million at March 29, 1996.
During the period ended March 31, 1996, the Company wrote off
$2,838,292 which represented fully amortized capital leases.
NOTE B - NET CAPITAL REQUIREMENT
As a registered broker-dealer and member of the New York Stock
Exchange, the Company's principal subsidiary, Stifel, Nicolaus &
Company, Incorporated (SN & Co.), is subject to the Securities
and Exchange Commission's (SEC) uniform net capital rules. SN &
Co. has elected to operate under the alternative method of the
rule, which prohibits a broker-dealer from engaging in any
securities transactions when its net capital is less than 2% of
its aggregate debit balances, as defined, arising from customer
transactions. The SEC may also require a member firm to reduce
its business and restrict withdrawal of subordinated capital if
its net capital is less than 4% of aggregate debit balances, and
may prohibit a member firm from expanding its business and
declaring cash dividends if its net capital is less than 5% of
aggregate debit balances. At March 29, 1996, SN & Co. had net
capital of $20,803,166 which was 13% of its aggregate debit
balances and $17,719,746 in excess of the 2% net capital
requirement.
9
NOTE C - PLAN OF RESTRUCTURING
During the fourth quarter of 1994, the Board of Directors of
the Company approved a restructuring and downsizing plan for the
Company which was implemented beginning in December 1994, and
involved the closing or downsizing of 31 office locations and
termination of approximately 70 officers and employees. Detail
of the activity during the first quarter related to the accruals
follows:
Balance at Balance at
December Payments March
31, 1995 /Charges 29, 1996
---------- -------- ----------
Net lease commitments for
closed offices $895,460 $ 44,910 $850,550
Severance pay, extended benefits
and receivables written off
for terminated employees 66,515 - - 66,515
Abandonment of leasehold
improvements 8,729 - - 8,729
-------- -------- --------
Total $970,704 $ 44,910 $925,794
======== ======== ========
Such amounts are included in the consolidated statement of
financial condition under the caption of Accounts payable and
accrued expenses at March 29, 1996 and December 31, 1995.
NOTE D - 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.
10
NOTE D - SALE OF OKLAHOMA-BASED ASSETS (continued)
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 March 29, 1996.
Pro forma financial information assuming the transaction had
taken place on January 1, 1995 the previous year is presented
below:
Quarter Ended
March 31, 1995
Pro Forma Combined Results of Operations --------------
Revenue $19,658,000
Net Loss $ 103,000
Net Loss per primary share $ 0.02
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 E - SUBSEQUENT EVENT
On April 23, 1996, the board of directors declared a regular
quarterly dividend of $0.03 per share, payable on May 21, 1996 to
shareholders of record May 7, 1996.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three months ended March 1996 and March 1995
The Company recorded a net profit of $150,000 for the quarter
ended March 29, 1996 compared to a net loss of $183,000 for the
same period one year earlier for an increase of $333,000. The
primary earnings per share was $0.03 compared to the previous
year's primary loss of $0.04. The increase is primarily
attributable to increased commissions resulting from a robust
retail market and a reduction in administrative costs.
Total revenues increased $1,542,000 (7.0%) to $23,437,000 from
$21,895,000 as all categories of revenue increased with the
exception of principal transactions and interest income.
Principal transactions decreased $1,030,000 (19.3%) to $4,301,000
from $5,331,000 due primarily to decreased sales of fixed income
products and inventory trading losses incurred from those same
fixed income products.
Commissions, sale of investment company shares, sale of
insurance products, and sale of unit investment trusts increased
$1,123,000 (16.4%) to $7,976,000 from $6,853,000, $401,000
(19.5%) to $2,464,000 from $2,063,000, $36,000 (6.6%) to $582,000
from $546,000, and $149,000 (35.0%) to $575,000 from $426,000,
respectively, due to a very strong retail market as
aforementioned.
Investment banking revenues increased $400,000 (53.7%) to
$1,145,000 from $745,000 due primarily to increased municipal
finance activity and corporate finance underwriting income.
Other revenues increased $471,000 (17.2%) to $3,204,000 from
$2,733,000 as a result of increased investment advisory fees,
management account fees, clearing income, money market
distribution fees and seat lease income which increased $102,000,
$374,000, $191,000 $148,000, and $203,000, respectively. These
increases were offset by a reduction of gains on investments
which was recognized in the first quarter of 1995 related to an
investment held by the Company's venture capital subsidiary.
Investment advisory fees increased due to increases in portfolio
values. Managed account fees increased because of the
introduction of the managed account program in November, 1994.
Clearing income increased as a direct result of clearing for
Capital West Securities, Inc. which began in June, 1995. Money
market distribution fees increased due to the increase in money
market fund balances.
12
Total expenses increased $966,000 (4.3%) to $23,179,000 from
$22,213,000 primarily as a result of increased employee
compensation and benefits. Employee compensation and benefits
increased $953,000 (7.0%) to $14,526,000 from $13,573,000
primarily as a result of increased variable compensation,
investment executive compensation and performance and
profitability based compensation, which increased $1,518,000
coincidentally with increased production and profitability. The
increase in variable compensation was offset by a decrease in
fixed salaries and benefits which decreased $566,000 as a result
of the downsizing and restructuring plan implemented in the
fourth quarter of 1994 and the sale of the Oklahoma division to
Capital West Financial Corp. (see Notes C and D to the unaudited
Consolidated Financial Statements).
Commission and floor brokerage increased $28,000 (4.9%) to
$602,000 from $574,000 as a result of increased commission
revenue generated. Interest expense decreased $145,000 (6.9%) to
$1,942,000 from $2,087,000 as a result of improved borrowing
rates and decreased stock loan interest.
The aforementioned downsizing and restructuring plan and the
sale of the Oklahoma division to Capital West Financial Corp.,
reduced the number of retail office locations. The reduction of
office locations contributed to the reduction in occupancy and
equipment, communication and office supplies and promotional
expenses which decreased $150,000 (7.6%), $396,000 (18.4%) and
$40,000 (7.6%), respectively.
Other expense increased $716,000 (53.9%) to $2,046,000 from
$1,330,000 as a result of increased professional fees,
settlements and bad debt expense, and charitable contributions,
which increased $277,000, $326,000, and $137,000, respectively.
Professional fees increased due to additional audit fees related
to the 1995 annual audit and legal fees. Settlements and bad
debt expense increased due to increased activity combined with a
first quarter 1995 recovery of an account previously written off.
Charitable contributions increased primarily due to a credit to
expense for a write-off of certain philanthropic commitments in
the first quarter of 1995 which had previously been accrued.
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 senior convertible notes, 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. Because of the nature of the Company's business,
the changes in operating assets and liability account balances
relative to net income for any particular accounting period can
be quite large and somewhat arbitrary and therefore are not very
useful indicators of long-term trends in the Company's cash flow
from operations.
13
In the three months ended March 29, 1996, cash and cash
equivalents decreased $953,000 (15.0%) to $5,391,000 from
$6,344,000 at December 31, 1995. Cash provided by operating
activities was primarily used for payment of short-term
borrowings from banks. The cash provided by operating activities
were principally attributed to decreases in operating receivables
and other assets of $18,458,000 and $3,651,000, respectively, in
conjunction with an increase in operating payables of $5,831,000.
The cash provided was partially offset by cash used for an
increase in securities owned of $3,597,000 and decreases of
drafts payable, accounts payable and accrued expenses, and
accrued employee compensation and market value of securities
sold, not yet purchased of $12,818,000 and $1,471,000,
respectively.
SN & Co. is subject to requirements of the Securities and
Exchange Commission with regard to liquidity and capital
requirements (see Note B of the Notes to unaudited Consolidated
Financial Statements). At March 29, 1996, SN & Co. had net
capital of approximately $20,803,000 which exceeded the minimum
net capital requirements by approximately $17,720,000.
During 1994, SN & Co. obtained a revolving subordinated note
in the amount of $5,500,000. The subordinated note was intended
to be used to finance underwritings and was available for
additional advances until January 31, 1996. At March 29, 1996,
SN & Co. had an advance of $50,000 against this revolving
subordinated note which is due January 31, 1997.
Management believes that funds from operations and available
unused informal and formal short-term credit arrangements of
$130,250,000 at March 29, 1996, will provide sufficient resources
to meet the present and anticipated financial needs.
The Company has $2,805,000 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.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material changes, during the three months
ended March 29, 1996, in the legal proceedings previously
reported in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995. Such information is hereby
incorporated by reference.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual meeting of Stockholders was held on April 23,
1996, for the election of two directors and for the
ratification of Coopers & Lybrand as the Company's
independent accountants for the year ending December 31,
1996.
(b) Proxies for the meeting were solicited pursuant to
Regulation 14 under the Act. There was no solicitation in
opposition to the Board of Directors' proposals as listed in
the Proxy Statement and all of the proposals were passed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Sequential
(Reference to Item 601(b) Page
of Regulation S-K) Description Number
------------------------- ----------- ----------
11 Computation of 17
Earnings (Loss) Per Share
27 Financial Data Schedule 18
(furnished to the Securities
and Exchange Commission for
Electronic Data Gathering, Analysis,
and Retrieval [EDGAR] purposes only)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended March 29, 1996.
15
SIGNATURES
Pursuant to the requirement of Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
STIFEL FINANCIAL CORP.
(Registrant)
Date: May 10, 1996 By /s/ Gregory F. Taylor
Gregory F. Taylor
(Chief Executive Officer)
Date: May 10, 1996 By /s/ Stephen J. Bushmann
Stephen J. Bushmann
(Acting Principal Financial
and Accounting Officer)
16
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
March 29, 1996
Exhibit Sequential
Number Description Page Number
------- ----------- -----------
11 Computation of Earnings (Loss) Per Share 17
27 Financial Data Schedule 18
(furnished to the Securities and Exchange
Commission for Electronic Data
Gathering, Analysis, and Retrieval
[EDGAR] purposes only)