Management's Discussion and Analysis
of Financial Condition and Results of Operations*
Business Environment
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.
Many factors affect the Company's results of operations,
including changes in economic conditions, inflation, volatility
of securities prices and interest rates, trading volume of
securities, demand for investment banking services, political
events, and competition from other financial institutions. As
these factors are outside the control of the Company, and a
significant portion of the Company's expenses are relatively
fixed, results of operations can vary significantly from period
to period.
The Company faces increasing competition from other financial
institutions such as commercial banks,on-line service providers,
and other companies offering financial services. As a result of
recent and pending regulatory initiatives to relieve certain
restrictions on commercial banks, competition to provide
financial services once dominated by securities firms has
increased and may continue to increase. In addition, recent
consolidation in the financial services industry may lead to
increased competition from larger diversified organizations. At
present, the Company is unable to predict the extent of these
changes and the impact on the Company's results of operations.
The following summarizes the changes in the major categories of
revenues and expenses for the respective periods.
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31, December 31, December 31,
Increase (Decrease) 1998 vs. 1997 1997 vs. 1996
- --------------------------------------------------------------------------------
Dollars in thousands Amount Percentage Amount Percentage
- --------------------------------------------------------------------------------
Revenues:
Commissions $ 6,966 14% $ 5,863 13%
Principal transactions 6,002 29 965 5
Investment banking (12,713) (45) 12,223 75
Interest (2,508) (12) 7,623 55
Other revenues 3,445 22 (391) (2)
- --------------------------------------------------------------------------------
$ 1,192 1% $26,283 24%
- --------------------------------------------------------------------------------
Expenses:
Compensation and benefits $ 4,873 6% $15,329 23%
Commissions and floor brokerage 24 1 139 5
Communication and office supplies 1,475 21 117 2
Occupancy and equipment rental 1,440 18 151 2
Interest (3,193) (25) 4,794 58
Litigation settlements and
bad debts (2,896) (78) 434 13
Other operating expenses 301 3 1,500 18
- --------------------------------------------------------------------------------
$ 2,024 2% $22,464 22%
- --------------------------------------------------------------------------------
*This Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements, as
well as a discussion of some of the risks and uncertainties
involved in the Company's businesses that could affect the matters
referred to in such statements.
1998 As Compared to 1997
The strong market conditions experienced in 1997 continued to
surge upward in 1998 as record volumes set in 1997 over 1996 fell
by the wayside. Continued low interest rates and low inflation
preserved investor confidence in the equity markets as evidenced
by record trading volumes on the three major U.S. markets (NYSE,
NASDAQ, and AMEX) which increased 25% over 1997's record volumes.
Additionally, industry-wide net new sales of mutual funds
experienced a record increase of 28% in 1998 over 1997's record
net new sales.
The Company's focus for 1998 was expansion of its Private Client
Group. In that vein, the Company invested in several key areas
to broaden its capabilities and capacity to support the Private
Client Group. Professional support associates were added to
improve financial and retirement planning, provide trust and
corporate executive services, and provide technical support for
improved technology. Additionally, the Company introduced new
client statements with cost-basis information and made
substantial investments in state-of-the-art desktop workstations
and market data platforms. As a result, the Company added 65 new
investment executives and opened 10 new offices. Short term,
margins have been negatively impacted.
Calendar 1998 was the Company's second successive year of record
revenues. Total revenues of $137.3 million represented a nominal
increase over the prior year's revenues of $136.1 million, but
was more notable considering the drop in new issue underwritings
experienced industry-wide. Net income declined to $5.2 million
in 1998 from $5.7 million in 1997, while net income per diluted
share declined to $0.73 from $0.88 one year earlier.
Revenues from commissions increased $7.0 million, principally as
a result of the strong equity markets and an increase in the
number of investment executives and independent contractors.
Main components of the increase were commissions on mutual funds,
listed equity securities, and insurance products, which increased
24%, 16%, and 29%, respectively.
Principal transaction revenues are primarily derived from over-
the-counter equity and fixed income inventory activities.
Inventories of these securities are maintained to meet client
needs. Realized and unrealized gains and losses that result from
holding and trading these securities are included in principal
transaction revenues. Revenues from principal transactions
increased $6.0 million, resulting primarily from revenue
generated by the sales of unit investment trusts.
Investment banking revenues are derived from underwriting of
corporate and municipal securities and providing advisory
services to clients. These revenues decreased $12.7 million from
the record year of 1997, as new issue equity underwritings,
especially small and mid-cap offerings, slowed dramatically. The
Company's investment banking revenues declined principally from
fewer equity and preferred underwritings. The number of managed
and co-managed corporate underwritings and the dollar volume of
these transactions decreased from 24 new issues for $1.4 billion
in 1997 to 8 new issues for $442 million in 1998.
Interest revenue decreased $2.5 million, resulting from a drop in
interest earned from customer borrowings on margin accounts.
This earnings decline was the result of both a reduction in
customer borrowings and a moderate decrease in rates charged to
customers.
Other revenues increased $3.4 million, principally from a 28%
growth in money market account fees and a 28% growth in managed
account service fees.
1998 As Compared to 1997 (continued)
Total expenses increased $2.0 million to $128.7 million,
principally as a result of increased compensation and benefits
along with rising operating costs associated with the growth of
the Company's Private Client Group, offset by a significant
decline in litigation expenses.
Compensation and benefits, the largest component of the Company's
total expenses, rose $4.9 million. A significant element of
compensation, sales commissions, increased $3.6 million. The
increased level of sales commissions was the result of increases
in hiring incentives paid to newly recruited investment
executives, increases in compensation as a result of higher
individual production, and increases in payments to independent
contractors. The Company's emphasis on expanding the Private
Client Group, broadening the depth of services provided to the
Private Client Group, enhancing information technology, and
opening 10 branch offices led to an increase in the number of
support associates, resulting in a $3.1 million increase in
salary expense over 1997 salary expense. The increase in sales
commission and salary expense was offset by the decline in
incentive compensation related to departmental and firm-wide
profitability.
Communications and office supplies rose $1.5 million. The
increases in communication costs resulted principally from the
expansion and improvement of the Company's communication
technology to enhance services provided for the Company's private
clients. Office supplies increased as a direct result of the
increase in branch office openings.
The opening of 10 new Private Client Group branch offices and the
upgrading of communications technology equipment led to a $1.4
million increase in occupancy and equipment rental expenses.
Decreased borrowings to finance customer margin accounts, and the
1997 conversion of $10.0 million of debt into shares of the
Company's common stock (see Note J) led to a $3.2 million decline
in interest expense.
Litigation, settlements, and bad debt expense decreased $2.9
million. The principal cause of the decrease is due to the
significant decline in litigation related to the Company's former
Oklahoma operations for which estimated losses were provided for
in prior years.
1997 As Compared to 1996
The Company benefited from strong market conditions driven by
continued low interest rates, low inflation, and strong equity
markets experienced industry-wide. Trading volume on the three
major U.S. markets (NYSE, NASDAQ, and AMEX) and net sales of
mutual funds reached new highs. Trading volume on the major U.S.
markets increased 22%, along with industry-wide net sales of
mutual funds increasing 10% compared to 1996. The Company
recorded revenues of $136.1 million, a $26.3 million increase
over 1996. Net income for 1997 reached $5.7 million, an increase
of $2.3 million over 1996. Net income per diluted share rose to
$0.88 from $0.59 in 1996.
Strong market conditions fueled an increase in revenue from
commissions of $5.9 million. The increase was mainly comprised
of commissions on mutual funds, over-the-counter equity
securities, listed equity securities, and insurance and annuity
products, which increased 21%, 8%, 13%, and 40%, respectively.
Revenues from principal transactions increased $965,000,
resulting from a rise in sales of over-the-counter equities which
was partially offset by a decrease in fixed income transactions.
Low interest rates, low inflation, and a rising stock market
fueled greater investor demand for equities and lower levels of
demand for municipal and corporate debt.
1997 As Compared to 1996 (continued)
Investment banking revenues increased $12.2 million, as favorable
market conditions continued to support these activities.
Underwriting and advisory services for the Company's corporate
clients comprised the majority of the increase. During the year,
the Company completed 24 managed or co-managed offerings,an
increase of 35% over 1996.
The majority of the increase in interest revenue of $7.6 million
resulted from interest earned from customer borrowings on margin
accounts. Average margin account balances increased 60%
principally as a result of significant customer borrowings during
the first nine months of the year.
Other revenues decreased $390,000. However, several components
within other revenues fluctuated significantly. Increased fees
from investment management services and other advisory and asset
management programs were offset by the absence of a significant
investment gain recorded in 1996. This $3.3 million investment
gain was the result of an exercise of warrants relating to an
underwriting and the subsequent sale of the equity securities.
Total expenses increased $22.5 million to $126.7 million,
principally as a result of increased compensation and benefits
and interest expense.
Compensation and benefits, a significant portion of the Company's
total expenses, rose $15.3 million. A majority of the increase
resulted from compensation that is variable in nature and was
commensurate with commissionable revenues and departmental,
subsidiary, and firm-wide profitability.
Interest expense increased $4.8 million as a result of increased
levels of short-term borrowings by the Company. These borrowings
were necessary to finance the increased activity in customer
margin accounts.
Several of the remaining expense categories were relatively
unchanged during 1997. The following discussion will focus on
expense items with significant changes.
Litigation, settlements, and bad debt expense increased $434,000
in 1997. The 1997 expenses include a $2.5 million provision for
estimated costs to address various litigation matters related
primarily to the Company's former Oklahoma operations.
Other operating expenses increased $1.5 million, primarily due to
increased travel and promotion cost from efforts to expand the
Company's private client and institutional businesses and fees
paid for legal services, consulting, and employment search firms.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Impact of Year 2000
The Year 2000 issue is the result of computer programs currently
written in two-digit format, rather than four-digit, to define
the applicable year, which affects the ability of computer
systems to accurately process dates ending after December 31,
1999.
During 1998, the Company assessed its Year 2000 compliance for
all of its operating systems including outside vendors. The
Company's securities processing system, which provides all of the
record-keeping and transaction processing services for the
Company's customer accounts, has been identified as mission
critical. The Company utilizes a third-party service bureau for
this system. The service bureau designs and maintains the system
at its own location. The Company utilizes the system via direct
on-line computer access. This service bureau provides the same
customer record-keeping services to approximately 20 other
securities firms throughout the United States.
In January 1999, the service bureau reported they had completed
100% of the changes to program code required for the customer
record-keeping system and had placed these changes into live
production. In December 1998 and January 1999, the Company and
other user firms of this service bureau performed detail testing
on the system. This involved processing a wide variety of
transactions on the system in a Year 2000 environment. This
testing identified no significant problems.
The Company and the service bureau will participate in the
securities industry-wide test in March and April 1999. This test
will demonstrate the service bureau's ability to interface with
all of its critical third parties in the trading and settlement
process.
The Company's Year 2000 plan also addresses other systems,
including a variety of vendor-supplied software products and a
small number of internally created AS400 mainframe programs. The
Company has substantially completed implementation of all
remedies planned for mission critical systems as of January 1999.
The Company will test its internally created AS400 mainframe
programs by June 30, 1999. There are currently no plans for
specific testing of most vendor-supplied software for which
vendors have provided assurance of Year 2000 compliance.
The Company believes that the incremental costs associated with
modifications for internal software and systems will not be
material to the Company's financial statements. However, the
interdependent natureof securities transactions and the success
of the Company's external counterparties and vendors, including
the third-party service bureau mentioned above, in dealing with
this issue could significantly influence the Company's estimate
of the impact the Year 2000 will have on its business.
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.
Management believes that funds from operations, available
informal short-term credit arrangements, and long-term borrowings
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. At December 31, 1998, Stifel Nicolaus
had net capital of approximately $28.5 million,which exceeded the
minimum net capital requirements by approximately $23.1 million.
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.
Market Risk
Market risk refers to the risk that a change in the level of one
or more market prices, interest rates, indices, volatilities,
correlations, or other market factors, such as liquidity, will
result in losses for a certain financial instrument or group of
financial instruments. The Company actively monitors its market
risk through a variety of control procedures involving senior
management and selected risk management committees.The Company's
existing and proposed underwritings, credit extended to customers
and counterparties, and inventory trading activities are reviewed
by business unit managers and senior management. Underwritings
are subject to due diligence reviews by senior management. Credit
risk is managed through the use of credit exposure information,
the monitoring of collateral values, and the establishment of
credit limits. Inventory positions are continually monitored by
management and subject to trading and position limits.
During 1998, the Company's securities trading inventory consisted
of fixed income debt and over-the-counter equity positions. The
fair value of these securities at December 31, 1998, was $34.3
million and $4.4 million, respectively, in long positions and
$461,000 and $537,000, respectively, in short positions.
Analysis was performed on these instruments that assessed the
related risk and materiality as required by the Securities and
Exchange Commission. Based on this analysis, in the opinion of
management, the market risk associated with the Company's
financial instruments at December 31, 1998, will not have a
material adverse effect on the Company's consolidated financial
position or results of operations.
Recent Accounting Pronouncements
In 1998, the Company early adopted Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidelines for
capitalization of developmental costs of proprietary software and
purchased software for internal use. The adoption of this SOP
had no material effect on the statement of financial position or
results of operations.
In 1998, the Financial Accounting Standards Board "FASB" issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
This standard requires that derivatives be recognized in the
balance sheet at fair value. Designation as hedges of specific
assets or liabilities is permitted only if certain conditions are
met. Effective in calendar year 2000, the Company will be
required to record and mark to market any derivative financial
instruments and related underlying assets, liabilities, and firm
commitments. Management has not determined what effect SFAS No.
133 will have on its financial statements.
Consolidated Statements Of Financial Condition
- ----------------------------------------------------------------------------------------------------------------
(In thousands) December 31, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------------------------
Assets Cash and cash equivalents $ 12,835 $ 15,366
--------------------------------------------------------------------------------------------------
Cash segregated for the exclusive benefit of customers 177 177
--------------------------------------------------------------------------------------------------
Receivable from brokers and dealers:
Securities failed to deliver 1,481 481
Deposits paid for securities borrowed 12,653 18,223
Settlement balances with clearing organizations 9,812 16,519
--------------------------------------------------------------------------------------------------
23,946 35,223
--------------------------------------------------------------------------------------------------
Receivable from customers, net of allowance for doubtful
accounts of $556 and $556, respectively 213,709 218,301
--------------------------------------------------------------------------------------------------
Securities owned, at fair value:
U.S. Government obligations 4,282 4,763
State and municipal obligations 27,946 6,471
Corporate obligations 2,025 2,153
Corporate stocks 4,379 5,825
--------------------------------------------------------------------------------------------------
38,632 19,212
--------------------------------------------------------------------------------------------------
Memberships in exchanges, at cost 513 513
Office equipment and leasehold improvements, at cost,
net of allowances for depreciation and amortization of
$12,361 and $10,890, respectively 5,315 2,227
Goodwill, net of accumulated amortization of $1,721
and $1,414, respectively 3,874 4,181
Notes receivable from and advances to officers and
employees, net of allowance for doubtful receivables
from former employees of $482 and $2,376, respectively 6,460 4,249
Deferred tax asset 3,213 4,577
Other assets 26,331 11,458
--------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 335,005 $ 315,484
--------------------------------------------------------------------------------------------------
Consolidated Statement of Financial Condition
- ---------------------------------------------------------------------------------------------------------------
(In thousands,except share amounts) December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------
Liabilities and Short-term borrowings from banks $ 62,890 $ 89,150
Stockholders' Payable to brokers and dealers:
Equity Securities failed to receive 1,545 1,242
Deposits received from securities loaned 103,224 72,466
---------------------------------------------------------------------------------------------
104,769 73,708
---------------------------------------------------------------------------------------------
Payable to customers 37,306 39,239
Securities sold,but not yet purchased,at fair value 998 4,264
Drafts payable 18,210 13,966
Accrued employee compensation 18,320 19,247
Obligations under capital leases 848 522
Accounts payable and accrued expenses 16,117 15,707
Long-term debt 20,570 9,600
---------------------------------------------------------------------------------------------
Total Liabilities 280,028 265,403
---------------------------------------------------------------------------------------------
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 7,219,335 and 6,678,223 shares,
respectively 1,084 1,002
Additional paid-in capital 41,867 37,006
Retained earnings 18,291 17,425
---------------------------------------------------------------------------------------------
61,242 55,433
---------------------------------------------------------------------------------------------
Less:
Treasury stock, at cost
222,743 and 168,648 shares, respectively 2,162 1,989
Unamortized expense of restricted stock awards 1,081 185
Unearned employee stock ownership plan shares,
at cost, 235,866 and 236,250 shares, respectively 3,022 3,178
---------------------------------------------------------------------------------------------
Total Stockholders' Equity 54,977 50,081
---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $335,005 $315,484
---------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
Consolidated Statements Of Operations
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------------------------------------
(In thousands, except per share amounts) 1998 1997 1996
-----------------------------------------------------------------------------------------
Revenues Commissions $ 56,729 $ 49,763 $ 43,900
Principal transactions 26,465 20,463 19,498
Investment banking 15,763 28,476 16,253
Interest 18,889 21,397 13,774
Other 19,442 15,997 16,388
-----------------------------------------------------------------------------------------
137,288 136,096 109,813
- ------------------------------------------------------------------------------------------------------------
Expenses Employee compensation and benefits 86,967 82,094 66,765
Commissions and floor brokerage 2,804 2,780 2,641
Communications and office supplies 8,389 6,914 6,797
Occupancy and equipment rental 9,549 8,109 7,958
Interest 9,798 12,991 8,197
Litigation, settlements, and bad debts 830 3,726 3,292
Other operating expenses 10,362 10,061 8,561
-----------------------------------------------------------------------------------------
128,699 126,675 104,211
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 8,589 9,421 5,602
Provision for income taxes 3,344 3,750 2,209
-----------------------------------------------------------------------------------------
Net income $ 5,245 $ 5,671 $ 3,393
=========================================================================================
- ------------------------------------------------------------------------------------------------------------
Earnings Per Net income per share:
Common Share and Basic earnings per share $ 0.77 $ 1.01 $ 0.66
Share Equivalents Diluted earnings per share $ 0.73 $ 0.88 $ 0.59
-----------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Consolidated Statements Of Stockholders' Equity
- -----------------------------------------------------------------------------------------------------------------------
Treasury Stock and Unamortized
Additional Unearned Employee Expense of
(In thousands, Common Stock Paid-In Retained Stock Ownership Plan Restricted
except share amounts) Shares Amount Capital Earnings Shares Amount Stock Awards Total
- -----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1996 4,540,890 $ 681 $ 19,622 $15,754 (183,225) $(1,162) $( 100) $34,795
- -----------------------------------------------------------------------------------------------------------------------
Cash dividends -common
stock ($.09 per share) ( 405) ( 405)
Stock rights redemption -
common stock ($.05 per share) ( 223) ( 223)
Purchase of treasury shares ( 69,713) ( 520) ( 520)
Employee benefit plans ( 132) 118,953 753 621
Stock options exercised ( 1) 615 4 3
Restricted stock awards 162 3,000 20 ( 182) - -
Amortization of restricted stock
awards 75 75
Dividend reinvestment 1,365 13 13
Net income for the year 3,393 3,393
5% stock dividend 226,825 34 1,752 (1,786) ( 6,450) - -
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 4,767,715 715 21,403 16,733 (135,455) ( 892) ( 207) 37,752
- ------------------------------------------------------------------------------------------------------------------------
Cash dividends -common
stock ($.12 per share) ( 609) ( 609)
Purchase of treasury shares (276,331) (2,926) (2,926)
Employee benefit plans ( 82) 158,740 1,098 1,016
Stock options exercised ( 274) 49,467 375 101
Restricted stock awards ( 196) 42,168 349 ( 153) - -
Amortization of restricted stock
awards 175 175
Shares issued 1,592,707 239 11,832 12,071
Dividend reinvestment 1 794 7 8
Net income for the year 5,671 5,671
5% stock dividend 317,801 48 4,322 (4,370) ( 8,031) - -
Employee stock ownership plan (236,250) (3,178) (3,178)
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,678,223 1,002 37,006 17,425 (404,898) (5,167) ( 185) 50,081
- ------------------------------------------------------------------------------------------------------------------------
Cash dividends -common
stock ($.12 per share) ( 828) ( 828)
Purchase of treasury shares (211,717) (2,160) (2,160)
Employee benefit plans 20,903 3 ( 267) 173,351 2,082 1,818
Stock options exercised 94,676 14 367 7,099 63 444
Restricted stock awards 82,000 12 1,262 ( 1,576) ( 11) (1,263) - -
Amortization of restricted stock
awards 367 367
Dividend reinvestment 1 972 9 10
Net income for the year 5,245 5,245
5% stock dividend 343,533 53 3,498 (3,551) ( 21,840) - -
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 7,219,335 $1,084 $41,867 $18,291 (458,609) $(5,184) $(1,081) $54,977
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.Consolidated
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Cash Flows Net income $ 5,245 $ 5,671 $ 3,393
From Operating --------------------------------------------------------------------------------------
Activities Noncash items included in earnings:
Depreciation and amortization 2,133 1,519 1,664
Bonus notes amortization 1,717 1,178 1,213
Deferred compensation 575 920 571
Amortization of restricted stock awards
and stock benefits 595 172 75
Deferred tax provision (benefit) 1,363 ( 907) 231
- ------------------------------------------------------------------------------------------------------------
11,628 8,553 7,147
Decrease (increase) in operating receivables:
Customers 4,592 16,915 (78,291)
Brokers and dealers 11,277 (20,387) 1,588
(Decrease) increase in operating payables:
Customers ( 1,933) 7,144 289
Brokers and dealers 31,061 26,560 24,020
Decrease (increase) in assets:
Cash and U.S. Government securities
segregated for the exclusive benefit
of customers - - 305 293
Securities owned (19,420) ( 300) 608
Notes receivable from officers and employees ( 3,927) ( 2,409) ( 1,030)
Other assets ( 3,225) 1,633 ( 532)
(Decrease) increase in liabilities:
Securities sold, not yet purchased ( 3,266) 1,035 485
Drafts payable, accounts payable and
accrued expenses, and accrued employee
compensation 3,153 10,148 1,302
--------------------------------------------------------------------------------------
Cash From Operating Activities $ 29,940 $ 49,197 $(44,121)
- ------------------------------------------------------------------------------------------------------------
Consolidated Statement of Cash Flows (Continued)
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Cash From Operating Activities -
From Previous Page $ 29,940 $ 49,197 $(44,121)
- ------------------------------------------------------------------------------------------------------------
Cash Flows Net (payments) proceeds for short-term
From Financing borrowings from banks (26,260) (43,250) 45,950
Activities Proceeds from:
Issuance of stock 2,043 2,907 633
Long-term debt 10,970 9,600 - -
Subordinated borrowings - - 8,000 - -
Payments for:
Settlement of long-term debt - - - - ( 760)
Purchases of stock for treasury ( 2,160) ( 2,926) ( 520)
Principal payments under
capital lease obligation ( 597) ( 392) ( 431)
Subordinated borrowings - - ( 8,000) ( 50)
Cash dividends and rights redemption ( 828) ( 609) ( 628)
Purchase of stock for employee stock
ownership plan - - ( 3,178) - -
------------------------------------------------------------------------------------------
Cash From Financing Activities (16,832) (37,848) 44,194
- ------------------------------------------------------------------------------------------------------------
Cash Flows Proceeds from:
From Investing Sale of office equipment and leasehold
improvements 46 145 28
Sale of investments 118 84 3,753
Payments for:
Acquisition of office equipment and
leasehold improvements ( 4,025) ( 999) ( 443)
Acquisition of investments (11,778) (3,173) ( 1,795)
------------------------------------------------------------------------------------------
Cash From Investing Activities (15,639) (3,943) 1,543
------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash
equivalents ( 2,531) 7,406 1,616
Cash and cash equivalents -
beginning of year 15,366 7,960 6,344
------------------------------------------------------------------------------------------
Cash and cash equivalents -
end of year $ 12,835 $ 15,366 $ 7,960
==========================================================================================
Supplemental disclosures of cash flow information:
Interest payments $ 10,082 $ 13,093 $ 8,264
Income tax payments $ 4,474 $ 3,418 $ 2,247
Schedule of Noncash Investing and Financing Activities
Fixed assets acquired under capital lease $ 923 $ 405 $ 240
Restricted stock awards, net of forfeitures $ 1,263 $ 153 $ 182
Employee stock ownership shares $ 165 $ 300 $ 280
Debt converted into stock - - $ 10,000 - -
Stock dividends distributed $ 3,551 $ 4,370 $ 1,786
------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Notes To Consolidated Financial Statements
(in thousands, except share and per share amounts)
Note A -Summary of Significant 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.
The Company defines cash equivalents as short-term, highly liquid
investments with original maturities of 90 days or less, other
than those held for sale in the ordinary course of business.
Security Transactions
Trading and investment securities owned and securities sold, but
not yet purchased are carried at fair value, and unrealized gains
and losses are reflected in the results of operations.
Securities held for investment by the Parent and certain
subsidiaries are included in other assets and are carried at the
lower of historical cost or fair value. Investment securities of
registered broker-dealer subsidiaries are carried at fair value
or amounts that approximate 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.
Note A -Summary of Significant Accounting and Reporting Policies
(continued)
Customer security transactions are recorded on a settlement date
basis with related commission revenue and expense recorded on a
trade date basis. Principal securities transactions are recorded
on a trade date basis.
Fair Value
The Company's financial instruments are carried at fair value or
amounts that approximate fair value. Securities owned and
securities sold, but not yet purchased are valued using quoted
market or dealer prices, pricing models, or management's
estimates. Customer receivables, primarily consisting of
floating-rate loans collateralized by customer-owned 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 fair value. The Company has
estimated the fair value of its long-term debt using the
discounted cash flow analysis of payments. At December 31, 1998,
the estimated fair value of the notes was $13,858.
Income Taxes
Deferred income taxes are recognized for the future tax
consequences attributable to differences between the financial
reporting and income tax bases of assets and liabilities.
Segment Reporting
During 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures About
Segments of Enterprise and Related Information." SFAS 131
supersedes SFAS 14, "Financial Reporting for Segments of a
Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach
designates the internal organization that is used by management
for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic
areas, and major customers. The adoption of SFAS 131 did not
affect the Company's financial position or results of operations
but did affect the disclosure of segment information (see Note
N).
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires entities to report changes in equity that
result from transactions and economic events other than those
with shareholders. The Company had no other comprehensive income
items; accordingly net income and other comprehensive income are
the same.
Other
Securities borrowed and securities loaned are recorded at the
amount of cash collateral advanced or received. Securities
borrowed transactions require Stifel Nicolaus to deposit cash or
other collateral with the lender. With respect to securities
loaned, Stifel Nicolaus receives collateral in the form of cash
or other collateral in an amount generally in excess of the
market value of securities loaned. Stifel Nicolaus monitors the
market value of securities borrowed and loaned on a daily basis,
with additional collateral obtained or refunded as necessary.
Amortization of assets under capital lease is computed on a
straight-line basis over the estimated useful life of the asset.
Leasehold improvements are amortized over the remaining 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.
Basic earnings per share of common stock is computed by dividing
income available to shareholders by the weighted average number
of common shares outstanding during the periods. Diluted
earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity. Diluted earnings include dilutive stock options under
the treasury stock method and dilutive shares from Senior
Convertible Notes under the if converted method.
Note B -Special Reserve Bank Account
At December 31, 1998, cash of $177 has been segregated in a
special reserve bank account for the exclusive benefit of
customers pursuant to Rule 15c3-3 under the Securities Exchange
Act of 1934.
Note C -Short-Term Borrowings From Banks
In the normal course of business, Stifel Nicolaus borrows from
various banks on a demand basis with company-owned and customer
securities pledged as collateral. Available credit arrangements
with banks totaled $245,000 at December 31, 1998, of which
$182,110 was unused. There were no compensating balance
requirements under these arrangements. The Company's floating
interest rate short-term borrowings bore interest at a weighted
average rate of 5.65% and 6.87% at December 31, 1998 and 1997,
respectively. Short-term borrowings of $29,475 and $21,725 were
collateralized by company-owned securities valued at
approximately $38,301 and $28,452 on a settlement date basis at
December 31, 1998 and 1997, respectively. Short-term borrowings
of $33,415 and $67,425 used to finance receivables from
customers were collateralized by customer-owned securities valued
at approximately $60,846 and $108,821 at December 31, 1998 and
1997, respectively.
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, 1998,
had no material effect on the consolidated financial statements.
In connection with margin deposit requirements of The Options
Clearing Corporation, Stifel Nicolaus has pledged cash and
customer-owned securities valued at $62,768. At December 31,
1998, the amounts on deposit satisfied the minimum margin deposit
requirement of $58,031.
The future minimum rental commitments at December 31, 1998, with
initial or remaining non-cancellable lease terms in excess of one
year are as follows:
- ---------------------------------------------------------------------------------------
Operating Leases
---------------------------------------------
Minimum Future
Lease Payments Under Minimum Rental
Year Ending December 31, Capital Leases Commitments Related Sublease Commitment
- ---------------------------------------------------------------------------------------
1999 $483 $ 4,063 $(115) $ 3,948
2000 362 4,129 (56) 4,073
2001 62 3,859 - - 3,859
2002 - - 3,304 - - 3,304
2003 - - 2,856 - - 2,856
Thereafter - - 14,084 - - 14,084
- ---------------------------------------------------------------------------------------
Minimum Commitments $907 $32,295 $(171) $32,124
======= ====== =======
Less Interest 59
----
Net Present Value of
Capital Lease Obligations $848
====
Rental expense for the years ended 1998, 1997, and 1996
approximated $4,032, $2,899, and $3,541, respectively.
Office equipment, under capital leases, with a recorded cost of
approximately $828, net of amortization of $1,387, and $497, net
of amortization of $1,036, at December 31, 1998 and 1997,
respectively, 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."
Amortization and depreciation expense of assets under capital
lease and owned furniture and equipment for 1998, 1997, and 1996
was $1,794, $1,224, and $1,384, respectively.
Note E -Net Capital Requirements
Stifel Nicolaus is subject to the Uniform Net Capital Rule, Rule
15c3-1 under the Securities Exchange Act of 1934 (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
minimumnet capital equal to the greater of $250 or 2 percent of
aggregate debit items 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 debit items.
At December 31, 1998, Stifel Nicolaus had net capital of $28,509,
which was 10.6 percent of aggregate debit items and $23,106 in
excess of minimum required net capital.
Note F -Employee Benefit Plans
The Company has a profit sharing 401(k) plan (the "PSP") covering
qualified employees as defined in the plans. Contributions to
the PSP were based upon a company match of 50% of the employees'
first five hundred dollars in annual contributions for 1998,
1997, and 1996. Additional contributions by the Company are
discretionary. The amounts charged to operations for the PSP
were $158, $142, and $146, for 1998, 1997, and 1996,
respectively.
Stifel Nicolaus also has a deferred compensation plan available
to investment executives whereby a certain percentage of their
earnings is deferred as defined in the plan and vests over a five-
year period. The investment executives have the right to elect
to invest their individual deferred amounts into several
investment options, including Company stock. The amounts charged
to operations related to this plan were $507, $920, and $571, for
1998, 1997, and 1996, respectively.
Note G -Stock-Based Compensation Plans
The Company has several stock-based compensation plans, which are
described below. The Company applies APB Opinion 25, "Accounting
for Stock Issued to Employees," and related Interpretations in
accounting for its plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on
the fair value at the grant dates for awards under the Fixed
Stock Option and the Employee Stock Purchase Plans consistent
with the method of FASB Statement 123, "Accounting for Stock-
Based Compensation," the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated
below:
- -----------------------------------------------------------------
Years Ended December 31,
--------------------------------------
1998 1997 1996
- -----------------------------------------------------------------
Net income
As reported $5,245 $5,671 $3,393
Pro forma $4,629 $5,283 $3,345
- -----------------------------------------------------------------
Basic earnings per share
As reported $ 0.77 $ 1.01 $ 0.66
Pro forma $ 0.68 $ 0.94 $ 0.65
- -----------------------------------------------------------------
Diluted earnings per share
As reported $ 0.73 $ 0.88 $ 0.59
Pro forma $ 0.64 $ 0.82 $ 0.58
- -----------------------------------------------------------------
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, and determine the terms of each option.
Fixed Stock Option Plans
The Company has four fixed stock option plans and an incentive
stock award plan. Under the Company's 1983 and 1985 Incentive
Stock Option Plans, the Company granted options up to an
aggregate of 450,000 shares to key employees. Under the
Company's 1987 non-qualified stock option plan, the Company
granted options up to an aggregate of 100,000 shares. Under the
Company's 1997 "Incentive Stock Plan," the Company may grant
incentive stock options, stock appreciation rights, restricted
stock, performance awards, and stock units up to an aggregate of
600,000 shares. Options under these plans are generally granted
at 100% of market value at the date of the grant and expire 10
years from the date of grant. The options vest ratably over a
three- to five-year period or on a five-year cliff vesting
period. The Company has also granted stock options to external
board members under a non-qualified plan. These options are
generally granted at 100% of market value at the date of the
grant and are exercisable six months to one year from date of
grant and expire 10 years from date of grant.
Effective with options granted in 1995 and subsequently, the fair
value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997, and
1996, respectively: dividend yield of 1.15%, 1.50%, and 1.88%;
expected volatility of 41.9%, 42.7%, and 26.7%; risk-free
interest rates of 5.15%, 6.22%, and 6.17%; and expected lives of
5.25 years for all grants.
The summary of the status of the Company's fixed stock option
plans as of December 31, 1998, 1997, and 1996, and changes during
the years ending on those dates is presented below:
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- -------------------------- --------------------------
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 764,617 $ 7.49 477,857 $ 5.10 384,704 $ 5.04
- ------------------------------------------------------------------------------------------------------------------------
Granted 169,050 11.70 396,995 9.75 122,463 5.43
Exercised (123,069) 4.60 (44,427) 5.10 ( 712) 4.35
Forfeited ( 39,607) 9.42 (54,399) 4.83 ( 28,598) 5.23
Expired ( 1,907) 4.26 (11,409) 6.26 - - - -
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 769,084 $ 8.78 764,617 $ 7.49 477,857 $ 5.10
========================================================================================================================
Options exercisable at year-end 384,475 360,180 280,909
Weighted-average fair value of
options granted during the year $4.78 $4.07 $1.80
Notes To Consolidated Financial Statements
(in thousands, except share and per share amounts)
The following table summarizes information about fixed stock
options outstanding at December 31, 1998:
- -------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------------
Number Weighted-Average Number
Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted Average
Exercise Prices 12/31/98 Contractual Life Exercise Price 12/31/98 Exercise Price
- -------------------------------------------------------------------------------------------------------------------
$ 3.73-$ 5.51 185,272 4.61 years $ 4.9167 156,614 $ 4.8173
5.58- 7.56 170,143 7.56 years 6.2306 117,444 6.0386
7.64- 10.48 83,248 8.81 years 9.4749 19,198 7.6560
10.83- 10.83 176,372 8.75 years 10.8276 80,824 10.8276
11.07- 15.31 154,049 9.23 years 13.5413 10,395 15.1215
- -------------------------------------------------------------------------------------------------------------------
$ 3.73-$ 15.31 769,084 7.59 years $ 8.7838 384,475 $ 6.8742
===================================================================================================================
Employee Stock Purchase Plan
Under the 1998 Employee Stock Purchase Plan (the "ESPP"), the
Company was authorized to issue up to 157,500 shares of common
stock to its full-time employees, nearly all of whom are eligible
to participate. Under the terms of the ESPP, employees can
choose each year to have a specified percentage of their
compensation withheld in 1% increments not to exceed 10%. The
participant may also specify a maximum dollar amount to be
withheld. At the beginning of every year, each participant will
be granted an option to purchase 1,000 shares of common stock at
a price equal to the lower of 85% of the beginning-of-year or end-
of-year fair market value of the common stock. Approximately 29%
to 37% of eligible employees have participated in the ESPP in the
last three years. Under the ESPP, the Company sold 156,841
shares, 131,016 shares, and 120,978 shares, to employees in 1998,
1997, and 1996, respectively.
Effective with options granted in 1995, the fair value of each
employee's purchase rights is estimated using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997, and 1996,
respectively: dividend yield of 1.15%, 1.50%, and 1.88%;
expected volatility of 41.9%, 42.7%, and 26.7%; risk-free
interest rates of 5.05%, 5.61%, and 5.09%; and expected lives of
one year. The weighted-average fair value of those purchase
rights granted in 1998, 1997, and 1996 was $2.67, $2.06, and
$1.30, respectively.
Restricted Stock Awards
Restricted stock awards are made, and shares issued, to certain
key employees without cash payment by the employee. Certain key
employees were granted 98,275, 50,164, and 3,473 shares of
restricted stock, with a fair value of $1,276, $337, and $18,
during 1998, 1997, and 1996, respectively. At December 31, 1998,
restricted stock awards covering 117,854 shares were outstanding,
with the restrictions expiring at various dates through 2003.
The shares are restricted as to resale. Restrictions generally
lapse ratably over three-to five-year service periods. The
deferred cost of the restricted stock awards is amortized on a
straight-line basis. The Company charged to employee
compensation and benefits $367, $249, and $73 for the
amortization during 1998, 1997, and 1996, respectively.
Stock Units
During the year, the Board of Directors amended the 1997
Incentive Stock Plan to include stock units. A stock unit
represents the right to receive a share of Common Stock from the
Company at a designated time in the future without cash payment
by the employee and is issued in lieu of cash incentive. The
units vest over a three-to five-year period and are generally
distributable upon vesting or at future specified dates. The
Company granted 158,485 units and charged $210 to employee
compensation and benefits for
these units.
Employee Stock Ownership Plan
The Company 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 $160) to total
compensation. In 1997, the Company purchased 248,063 shares for
$3,178 and contributed these shares to the ESOP. The unallocated
shares will be released for allocation to the participants based
upon employer contributions to fund an internal loan between the
Parent and the ESOP. At December 31, 1998, the plan held 543,222
shares and has allocated 307,356 shares of common stock valued at
$5,400 and $3,055, respectively. The Company charged to employee
compensation and benefits $165, $300, and $280 for the ESOP
contributions for 1998, 1997, and 1996, respectively.
Note H -Legal Proceedings
The Company is a defendant in several lawsuits and arbitrations
relating principally to its securities business. Some of these
lawsuits and arbitrations claim substantial amounts, including
punitive damages. One such claim involves a lawsuit filed by The
Oklahoma Turnpike Authority ("OTA"). The OTA suit seeks $6.5
million in compensatory damages and an unspecified amount of
punitive damages. 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 $608 million municipal bond refinancing
should have been paid to the OTA. Although the ultimate outcome
of this and other actions cannot be ascertained at this time,
management, based on its understanding of the facts and after
consultation with outside counsel, does not believe the ultimate
resolution of these matters will have a materially adverse effect
on the Company's consolidated financial condition and results of
operations. 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.
Note I -Financial Instruments With Off-Balance Sheet Credit Risk
In the normal course of business, the Company executes, settles,
and finances customer and proprietary securities transactions.
These activities expose the Company to off-balance sheet risk in
the event that customers or other parties fail to satisfy their
obligations.
In accordance with industry practice, securities transactions are
recorded on settlement date, generally three business days after
trade date. Should a customer or broker fail to deliver cash or
securities as agreed, the Company may be required to purchase or
sell securities at unfavorable market prices.
The Company borrows and lends securities to finance transactions
and facilitate the settlement process, utilizing both firm
proprietary positions and customer margin securities held as
collateral. The Company monitors the adequacy of collateral
levels on a daily basis. The Company periodically borrows from
banks on a collateralized basis utilizing firm and customer
margin securities in compliance with SEC rules. Should the
counterparty fail to return customer securities pledged, the
Company is subject to the risk of acquiring the securities at
prevailing market prices in order to satisfy its customer
obligations. 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 sells securities it does not currently own (short
sales), and is obligated to subsequently purchase such securities
at prevailing market prices. The Company is exposed to risk of
loss if securities prices increase prior to closing the
transactions. The Company controls its exposure to price risk
for short sales through daily review and setting position and
trading limits.
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.
Derivatives
The Company deals, on an agency basis, 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.
Note J -Long-Term Debt
At December 31, 1996, the Parent had outstanding $10,000
aggregate principal amount of its 11.25 percent senior
convertible notes due September 1, 1997, through September 1,
2000. During 1997, the notes were converted into 1,563,021
shares of the Company's $.15 par value common stock at a
conversion price of $6.40 per share. Interest charged to
operations for these notes was $886 and $1,125 for 1997 and 1996,
respectively.
The Company has outstanding $5,000 principal amount of notes due
on June 30, 2004. Interest is payable monthly at the monthly
libor rate plus 1% (6.06% at December 31, 1998) through July 1,
1999, at which time the note will bear interest at the rate of 8%
per annum.
In 1997, the Company formed a Limited Liability Corporation
("LLC") to be a certified capital company under the statutes of
the state of Missouri. The LLC issued $4,600 non-interest
bearing notes due May 15, 2008, and $10,600 non-interest bearing
notes due February 15, 2009, which are included in the Company's
consolidated statement of financial condition under the caption
"long-term debt." Proceeds from the notes are invested in zero
coupon U.S. Government securities in an amount sufficient to
accrete to the repayment of the notes and are placed in an
irrevocable trust. The securities, valued at approximately
$8,440 and $2,507 at December 31, 1998 and 1997, respectively,
are held to maturity and are included under the caption "other
assets."
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. On July 23, 1996, the Company's
Board of Directors approved the redemption of these shareholder
rights and the adoption of a new Shareholder Rights Plan.
Shareholders of record on August 12, 1996, received a payment of
$.05 per share, representing the redemption price for the
existing rights. This payment was in lieu of the regular
quarterly dividend of $.03 per share.
In addition, on July 23, 1996, the Company's Board of Directors
authorized and declared a dividend distribution of one preferred
stock purchase right for each outstanding share of the Company's
common stock, par value $0.15 per share. The dividend was
distributed to stockholders of record on August 12, 1996. Each
right will entitle the registered holder to purchase one one-
hundredth of a share of a Series A Junior Participating Preferred
Stock, par value $1.00 per share, at an exercise price of $35 per
right. The rights become exercisable on the tenth day after
public announcement that a person or group has acquired 15
percent or more of the Company's common stock or upon
commencement of announcement of intent to make a tender offer for
15 percent or more of the outstanding shares of common stock
without prior written consent of the Company. If the Company is
acquired by any person after the rights become exercisable, each
right will entitle its holder to purchase shares of common stock
at one-half the then current market price, and in the event of a
subsequent merger or other acquisition of the Company, to buy
shares of common stock of the acquiring entity at one-half of the
market price of those shares. The rights may be redeemed by the
Company prior to becoming exercisable by action of the Board of
Directors at a redemption price of $.01 per right. These rights
will expire, if not previously exercised, on August 12, 2006.
Note L -Income Taxes
The Company's provision (benefit) for income taxes consists of:
--------------------------------
Years Ended December 31,
--------------------------------
1998 1997 1996
- ------------------------------------------------------------------------
Current:
Federal $ 1,600 $ 3,760 $ 1,597
State 381 897 381
- ------------------------------------------------------------------------
1,981 4,657 1,978
- ------------------------------------------------------------------------
Deferred:
Federal 1,100 ( 732) 187
State 263 ( 175) 44
- ------------------------------------------------------------------------
1,363 ( 907) 231
- ------------------------------------------------------------------------
$ 3,344 $ 3,750 $ 2,209
========================================================================
The provision for income taxes differs from the amount computed
by applying the statutory federal income tax rate to income
before income taxes for the following reasons:
- ------------------------------------------------------------------------
Years Ended December 31,
--------------------------------
1998 199 1996
- ------------------------------------------------------------------------
Federal tax computed at statutory rates $ 2,921 $ 3,203 $ 1,904
State income taxes, net of federal
income tax benefit 441 476 281
Other, net ( 18) 71 24
- -------------------------------------------------------------------------
Provision for income taxes $ 3,344 $ 3,750 $ 2,209
=========================================================================
The net deferred tax asset consists of the following temporary
differences:
- -----------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------
Deferred Tax Receivables from customers, principally due to
Asset allowance for doubtful accounts $ - - $ 217
Office equipment and leasehold improvements,
principally book over tax depreciation 859 1,037
Deferred compensation 1,400 1,135
Deferred revenue 974 229
Investments, principally due to valuation allowance 92 26
Receivables from officers and employees, principally
due to allowance for doubtful accounts 189 950
Accruals not currently deductible 1,212 1,277
Other 101 78
-------------------------------------------------------------------------------------------
Deferred Tax Asset 4,827 4,949
-------------------------------------------------------------------------------------------
Deferred Tax Customer and employee receivable (1,304) - -
Liability Intangible assets, principally tax over book amortization ( 195) (203)
Investment fee revenue installment receivable ( 115) (169)
-------------------------------------------------------------------------------------------
Total Gross Deferred Tax Liability (1,614) (372)
-------------------------------------------------------------------------------------------
Net Deferred Tax Asset $ 3,213 $ 4,577
===========================================================================================
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 and taxes
previously paid, 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.
Note M -Related Party Transactions
Four directors of the Parent are associated with firms which
provide legal and consulting services to the Company. The
Company charged approximately $761, $1,586, and $801 (primarily
for legal fees) to operations for these services for 1998, 1997,
and 1996, respectively. 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 approximately $46, $46, and $17 for 1998, 1997, and
1996, 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 $628 at December
31, 1998, and $507 at December 31, 1997.
Note N -Segment Reporting
The Company's reportable segments include private client, capital
markets, and other. The private client segment includes 146
branch offices of the Company's broker-dealer subsidiaries
located throughout the U.S., primarily in the Midwest. These
branches provide securities brokerage services, including the
sale of equities, mutual funds, fixed income products, and
insurance, to their private clients. The capital markets segment
includes management and participation in underwritings (exclusive
of sales credits, which are included in the private client
segment), mergers and acquisitions, public finance, trading,
research, and market making. Investment advisory fees and
clearing income is included in other.
Intersegment revenues and charges are eliminated between
segments. The Company evaluates the performance of its segments
and allocates resources to them based on various factors,
including prospects for growth, return on investment, and return
on revenues.
The Company has not disclosed asset information by segment, as
the information is not produced internally and its preparation is
impracticable.
Information concerning operations in these segments of business
is as follows:
- ----------------------------------------------------------------
Years Ended December 31,
-------------------------------
1998 1997 1996
- -----------------------------------------------------------------
Revenues
Private Client $112,050 $107,537 $ 85,726
Capital Markets 19,517 23,517 19,583
Other 5,721 5,042 4,504
- -----------------------------------------------------------------
Total Revenues $137,288 $136,096 $109,813
=================================================================
Operating Contribution
Private Client $ 17,619 $ 14,108 $ 10,439
Capital Markets 1,286 6,293 4,690
Other 1,326 821 ( 421)
- -----------------------------------------------------------------
Total Operating Contribution 20,231 21,222 14,708
Unallocated Overhead (11,642) (11,801) ( 9,106)
- -----------------------------------------------------------------
Pre-Tax Income $ 8,589 $ 9,421 $ 5,602
=================================================================
Note O -Earnings Per Share
The following table reflects a reconciliation between Basic EPS
and Diluted EPS.
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- --------------------------------- --------------------------------
Income Shares PerShare Income Shares Per Share Income Shares Per Share
Net Income (Numerator)(Denominator) Amount (Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to shareholders $5,245 6,849,998 $0.77 $5,671 5,590,919 $1.01 $3,393 5,150,498 $0.66
Effect of Dilutive Securities
Employee benefits plans - - 347,988 - - - - 292,328 - - - - 102,532 - -
Convertible debt - - - - - - 541 1,215,692 - - 601 1,563,032 - -
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $5,245 7,197,986 $0.73 $6,212 7,098,939 $0.88 $3,994 6,816,062 $0.59
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Note P -Subsequent Event
On January 27, 1999, the Company's Board of Directors approved a
5 percent stock dividend to be distributed and a $.03 per share
cash dividend to be paid on February 25, 1999, to shareholders of
record on February 11, 1999.
On January 27, 1999, the Company's Board of Directors announced
the agreement to sell Todd Investment Advisors' common stock to a
subsidiary of Western & Southern Life Insurance Company, a
significant shareholder of the Company. The sale is scheduled to
close during the second quarter of 1999 and is expected to result
in an after-tax gain of approximately $1.3 million.
Note Q -Recent Accounting Pronouncements
In 1998, the Company early adopted Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidelines for
capitalization of developmental costs of proprietary software and
purchased software for internal use. The adoption of this SOP
had no material effect on the statement of financial position or
results of operations.
Also in 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This standard
requires that derivatives be recognized in the balance sheet at
fair value. Designation as hedges of specific assets or
liabilities is permitted only if certain conditions are met.
Effective in calendar year 2000, the Company will be required to
record and mark to market any derivative financial instruments
and related underlying assets, liabilities, and firm commitments.
Management has not determined what effect SFAS No. 133 will have
on its financial statements.
******
Independent Auditor's ReportIndependent Auditor's Report
To the Board of Directors and Stockholders of
Stifel Financial Corp.
St. Louis, Missouri
We have audited the accompanying consolidated statements of
financial condition of Stifel Financial Corp. and Subsidiaries
(the "Company") as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended
December 31, 1998. 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, such consolidated financial statements present
fairly, in all material respects, the financial position of
Stifel Financial Corp. and Subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows
for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting
principles.
St. Louis, Missouri
March 5, 1999
Quarterly Results
(in thousands, except share and per share amounts)
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Quarterly Operating Results (Unaudited)
- ------------------------------------------------------------------------------------------------
Earnings Basic Diluted
Before Net Earnings Earnings
Revenue Income Taxes Income Per Share Per Share
- ------------------------------------------------------------------------------------------------
Year 1998 By Quarter
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First $35,839 $3,418 $2,053 $.30 $ .29
Second 34,072 2,100 1,224 .18 .17
Third 34,259 1,561 967 .14 .13
Fourth 33,118 1,510 1,001 .15 .14
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Year 1997 By Quarter
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First $31,845 $2,752 $1,647 $.31 $ .26
Second 30,660 1,564 921 .18 .15
Third 36,645 3,364 2,012 .38 .30
Fourth 36,946 1,741 1,091 .17 .15
- ------------------------------------------------------------------------------------------------
All earnings per share amounts have been adjusted to reflect the
5 percent stock dividend declared January 27, 1999.