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 September 26, 1997 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 incorporation(I.R.S. Employer Identification No.) 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 September 26, 1997: 5,238,685 par value $.15. Exhibit Index is on page 1.
2 Stifel Financial Corp. And Subsidiaries Form 10-Q Index September 26, 1997 PAGE PART I. FINANCIAL CONDITION Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition -- September 26, 1997 and December 31, 1996 3-4 Consolidated Statements of Operations -- Three Months Ended September 26, 1997 and September 27, 1996 5 Consolidated Statements of Operations -- Nine Months Ended September 26, 1997 and September 27, 1996 6 Consolidated Statements of Cash Flows-- Nine Months Ended September 26, 1997 and September 27, 1996 7-8 Notes to Consolidated Financial Statements 9-10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11-14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16
3 PART I. FINANCIAL CONDITION Item 1. Financial Statements (Unaudited) STIFEL FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (In thousands) September 26, December 31, 1997 1996 ASSETS -------------- ------------ Cash and cash equivalents $ 6,151 $7,960 Cash segregated for the exclusive benefit of customers 241 483 Receivable from brokers and dealers 15,243 14,836 Receivable from customers, net of allowance for doubtful accounts of $578 and $582, respectively 218,967 235,216 Securities owned, at fair value 17,234 18,913 Membership in exchanges, at cost 513 513 Office equipment and leasehold improvements, at cost, net of allowances for depreciation and amortization of $10,599 and $10,125, respectively 2,380 2,233 Goodwill, net of accumulated amortization of $1,338 and $1,107, respectively 4,257 4,488 Notes receivable from and advances to officers and employees, net of allowance for doubtful receivables of $2,325 and $2,552, respectively 2,939 3,373 Refundable income taxes 355 358 Deferred tax asset 2,955 3,671 Other assets 10,261 9,300 -------- -------- $281,496 $301,344 ======== ========
4 STIFEL FINANCIAL CORP. AND SECURITIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED) (UNAUDITED) (In thousands) September 26, December 31, 1997 1996 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Short-term borrowings from banks $ 61,675 $ 132,400 Payable to brokers and dealers 102,240 47,148 Payable to customers 23,467 32,095 Securities sold, but not yet purchased, at fair value 3,337 3,229 Drafts payable 11,046 15,287 Accrued employee compensation 16,366 14,756 Obligations under capital leases 564 581 Accounts payable and accrued expenses 10,545 8,096 Convertible debt 7,500 10,000 -------- -------- Total Liabilities 236,740 263,592 Stockholders' Equity Preferred stock -- $1 par value; authorized 3,000,000 shares; none issued Common stock -- $0.15 par value; authorized 10,000,000 shares; issued 5,297,139 and 4,767,715 shares, respectively; outstanding 5,238,685 and 4,632,260 shares, respectively 795 715 Additional paid-in capital 25,436 21,403 Retained earnings 20,889 16,733 -------- -------- 47,120 38,851 Less treasury stock, at cost 58,454 and 135,455 shares, respectively 646 892 Less unamortized expense of note and restricted stock awards 1,718 207 -------- -------- Total Stockholders' Equity 44,756 37,752 -------- -------- $281,496 $301,344 ======== ======== See Notes to Consolidated Financial Statements.
5 STIFEL FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share amounts) Three Months Ended September 26, September 27, 1997 1996 ------------- -------------- REVENUES Commissions $ 13,505 $ 9,916 Principal transactions 4,565 4,651 Investment banking 8,406 2,983 Interest 5,957 3,510 Other 4,212 3,143 --------- --------- 36,645 24,203 EXPENSES Employee compensation and benefits 22,031 14,437 Commissions and floor brokerage 774 689 Communications and office supplies 1,669 1,684 Occupancy and equipment rental 2,048 1,979 Interest 3,931 2,093 Other operating expenses 2,828 2,546 ---------- --------- 33,281 23,428 ---------- --------- INCOME BEFORE INCOME TAXES 3,364 775 Provision for income taxes 1,352 317 ---------- --------- NET INCOME $ 2,012 $ 458 ========== ========= Net income per share: Primary $ 0.40 $ 0.10 Fully diluted $ 0.34 $ 0.09 Dividends declared per share $ 0.03 $ -- Average common equivalent shares outstanding: Primary 5,079 4,788 Fully Diluted 6,193 6,238 See Notes to Consolidated Financial Statements.
6 STIFEL FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share amounts) Nine Months Ended September 26, September 27, 1997 1996 ------------ ------------ REVENUES Commissions $ 36,804 $ 32,454 Principal transactions 14,681 14,668 Investment banking 20,130 8,034 Interest 16,004 10,069 Other 11,530 13,123 ---------- --------- 99,149 78,348 EXPENSES Employee compensation and benefits 59,625 47,155 Commissions and floor brokerage 2,208 2,021 Communications and office supplies 5,121 5,040 Occupancy and equipment rental 5,969 5,917 Interest 10,414 6,100 Other operating expenses 8,132 8,841 ---------- --------- 91,469 75,074 ---------- --------- INCOME BEFORE INCOME TAXES 7,680 3,274 Provision for income taxes 3,100 1,305 ---------- --------- NET INCOME $ 4,580 $ 1,969 ========== ========= Net income per share: Primary $ 0.93 $ 0.41 Fully diluted $ 0.80 $ 0.39 Dividends declared per share $ 0.09 $ 0.06 Average common equivalent shares outstanding: Primary 4,936 4,770 Fully Diluted 6,110 6,234 See Notes to Consolidated Financial Statements.
7 STIFEL FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(In thousands) Nine Months Ended September 26, September 27, 1997 1996 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,580 $ 1,969 Noncash items included in earnings: Depreciation and amortization 1,150 1,202 Provision for litigation and bad debts 620 2,188 Net (gains) losses on investments (217) 36 Bonus notes amortization 906 787 Deferred compensation 642 380 Deferred tax provision 716 499 Amortization of restricted stock awards 96 42 ---------- ---------- 8,493 7,103 Decrease (increase) in operating receivables: Customers 16,253 (350) Brokers and dealers (407) (5,725) (Decrease) increase in operating payables: Customers (8,628) (10,352) Brokers and dealers 55,092 58,578 Decrease (increase) in assets: Cash segregated for the exclusive benefit of customers 242 294 Securities owned 1,679 397 Notes receivable from officers and employees (575) (1,030) Other assets 981 (1,216) Increase (decrease) in liabilities: Securities sold, but not yet purchased 108 750 Drafts payable, accounts payable and accrued expenses, and accrued employee compensation (1,340) (11,806) ---------- ---------- Cash Provided By Operating Activities $ 71,898 $ 36,643 See Notes to Consolidated Financial Statements.
8 STIFEL FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)(In thousands) Nine Months Ended September 26, September 27, 1997 1996 Cash Provided By Operating Activities ------------- ------------- - - from previous page $ 71,898 $ 36,643 CASH FLOWS FROM FINANCING ACTIVITIES Short-term borrowings, net (70,725) (36,225) Proceeds from: Subordinated borrowings 8,000 - - Employee stock purchase plan 727 617 Exercised stock options 59 - - Dividend reinvestment plan 5 10 Payments for: Subordinated borrowings (8,000) (50) Settlement of debt - - (760) Purchases of stock for treasury (1,315) (190) Principal payments under capital lease obligation (308) (253) Cash dividends (425) (492) --------- --------- Cash Used For Financing Activities (71,982) (37,343) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from: Sale of office equipment 70 23 Sale of investments 57 3,520 Payments for: Acquisition of office equipment and leasehold improvements (882) (362) Acquisition of investments (970) (1,584) --------- --------- Cash (Used For) Provided By Investing Activities (1,725) 1,597 --------- --------- (Decrease) increase in cash and cash equivalents (1,809) 897 Cash and cash equivalents - beginning of period 7,960 6,344 --------- --------- Cash and Cash Equivalents - end of period $ 6,151 $ 7,241 ========= ========= Supplemental disclosure of cash flow information: Income tax payments $ 1,964 $ 904 Interest payments $ 10,315 $ 6,379 Schedule of noncash investing and financing activities: Fixed assets acquired under capital lease $ 357 $ 240 Employee stock ownership plan shares issued $ 287 - - Note and restricted stock awards, net of forfeitures $ 1,607 $ 13 Debt converted into stock $ 2,500 - - Assumption of debt for investment - - $ 150 See Notes to Consolidated Financial Statements.
9 STIFEL FINANCIAL CORP. AND SUBSIDIARIES 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 nine months ended September 26, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. 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, 1996. Where appropriate, prior years' financial information has been reclassified to conform with the current year presentation. NOTE B - NET CAPITAL REQUIREMENT The Company's principal subsidiary, Stifel, Nicolaus & Company, Incorporated ("SN & Co."), is subject to the Uniform Net Capital Rule 15c3-1 under the Securities Exchange Act of 1934 (the "rule"), which requires the maintenance of minimum net capital, as defined. SN & Co. has elected to use the alternative method permitted by the rule which requires maintenance of minimum net capital equal to the greater of $250,000 or 2 percent of aggregate debit 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 September 26, 1997, SN & Co. had net capital of $26,900,000 which was 11.18% of its aggregate debit items and $22,090,000 in excess of the minimum required net capital.
10 NOTE C - CONVERTIBLE DEBT At December 31, 1996, the Company had outstanding $10,000,000 aggregate principal amount of 11.25% Senior Convertible Notes (the "Notes") due September 1, 1997, through September 1, 2000, in equal installments. The convertible feature allows the Notes to be converted into shares of the Company's $0.15 par value common stock at any time prior to maturity, unless previously redeemed, at a conversion price of $7.0536 per share. The first installment was due September 1, 1997, in the amount of $2,500,000. On August 27, 1997, the option to convert the $2,500,000 installment into 354,424 shares of common stock was exercised. Subsequently, on October 24, 1997, the Company was notified that the conversion privileges on the remaining $7,500,000 in Notes will be exercised and converted into 1,063,283 shares of common stock. NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued SFAS 128, "Earnings per Share," and SFAS 129, "Disclosure of Information about Capital Structure," which are to be implemented by companies whose fiscal year ends after December 15, 1997. The adoption of these accounting standards will not have a material impact on the Company's reported earnings per share or consolidated financial statements. Additionally, the Financial Accounting Standards Board has issued SFAS 130, "Reporting Comprehensive Income," and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," which are to be implemented by companies whose fiscal year begins after December 15, 1997. Management has not determined the impact, if any, that the adoption of these accounting standards will have on the Company's consolidated financial statements. NOTE E - SUBSEQUENT EVENT On October 28, 1997, the Company's Board of Directors declared a regular quarterly dividend of $0.03 per share, payable on November 25, 1997 to stockholders of record November 11, 1997. ******
11 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Three months ended September 1997 and September 1996 The Company recorded net income of $2,012,000 or $0.40 per primary share on record revenues of $36,645,000 for the third quarter ended September 26, 1997, compared to $458,000 or $.10 per primary share on revenues of $24,203,000 for the same period one year earlier. The increase in the firm's profitability is attributed principally to the increase in total revenues which increased $12,442,000 (51.4%) as investor activity remained strong combined with improved investment executive production and increased investment banking activity. Commissions increased $3,589,000 (36.2%) to $13,505,000 from $9,916,000 resulting from the strong markets and improvement in average investment executive production. Investment banking revenue increased $5,423,000 (181.8%) to $8,406,000 from $2,983,000 from the previous quarter as a result of increased number of underwritings principally for regional financial institutions and Real Estate Investment Trusts ("REITs") as favorable market conditions fueled new issue underwritings. Revenue from financial advisory fees increased $1,036,000 to $1,051,000 from $15,000 as merger activity among banks and thrift institutions increased. Other revenues increased $1,069,000 (34.0%) to $4,212,000 from $3,143,000 resulting from increased revenue from managed account fees, investment advisory fees, and money market distribution fees. Interest revenues increased $2,447,000 (69.7%) to $5,957,000 from $3,510,000 as result of rising average customer receivables which increased $127,067,000 (79.0%) to 287,899,000 for the quarter ended September 26, 1997, from $160,832,000 for the quarter ended September 27, 1996, as individual investors increased their borrowings. Total expenses increased $9,853,000 (42.1%) to $33,281,000 from $23,428,000. Employee compensation and benefits increased $7,594,000 (52.6%) to $22,031,000 from $14,437,000. The variable portion of compensation and benefits increased $6,983,000 (70.7%) to $16,858,000 from $9,875,000 in conjunction with increased revenue production and increased profitability. The fixed portion of compensation and benefits increased $611,000 (13.4%) to $5,173,000 from $4,562,000 as a result of increased staffing, primarily in revenue production support personnel, and normal year-to-year pay adjustments.
12 Interest expense increased $1,838,000 (87.8%) to $3,931,000 from $2,093,000 mainly as a result of increased borrowings for customer trading activity. Other expense increased $282,000 (11.1%) to $2,828,000 from $2,546,000 primarily as a result of increases in consulting fees and attorney's fees. Nine months ended September 1997 and September 1996 The reasons noted for variances in revenue and expense categories in the three months ended September 26, 1997 Management's Discussion and Analysis of Results of Operations are applicable to the nine months ended discussion unless otherwise noted. The Company recorded net earnings of $4,580,000 or $0.93 per primary share on total revenues of $99,149,000 for the nine months ended September 26, 1997, compared to net earnings of $1,969,000 or $0.41 per primary share on total revenues of $78,348,000 for the same period one year earlier. The increase in net income for the first nine months of 1997 over the first nine months of 1996 can be attributed primarily to the increase in revenues. Total revenues increased $20,801,000 (26.5%) to $99,149,000 from $78,348,000. Commission revenue increased $4,350,000 (13.4%) to $36,804,000 from $32,454,000 resulting from the continued strong markets coupled with improved investment executive production. Investment banking revenue increased $12,096,000 (150.6%) to $20,130,000 from $8,034,000. Interest revenues increased $5,935,000 (58.9%) to $16,004,000 from $10,069,000 primarily as a result of rising average customer receivables which increased $110,628,000 (72.1%) to $264,005,000 for the nine months ended September 26, 1997, from $153,377,000 for the nine months ended September 27, 1996. Other revenues decreased $1,593,000 (12.1%) to $11,530,000 from $13,123,000 principally due to the gain on an investment of $3,297,000 recorded in the second quarter of 1996 with no like revenue in 1997. Excluding the gain on investment recorded in 1996 other revenues increased $1,704,000, principally from managed account fees, investment advisory fees, and money market distribution fees. Total expenses increased $16,395,000 (21.8%) to $91,469,000 from $75,074,000.
13 Employee compensation and benefits increased $12,470,000 (26.4%) to $59,625,000 from $47,155,000. The variable portion of compensation and benefits increased $11,011,000 (32.6%) to $44,815,000 from $33,804,000 as a result of increased revenue production and increased profitability. The fixed portion of compensation increased $1,459,000 (10.9%) to $14,810,000 from $13,351,000 resulting from increased staffing levels primarily for revenue production support personnel and normal year to year salary increases. Interest expense increased $4,314,000 (70.7%) to $10,414,000 from $6,100,000 mainly as a result of increased borrowings for customer trading activity. 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, 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. In the nine months ended September 26, 1997, cash and cash equivalents decreased $1,809,000 (22.7%) to $6,151,000 from $7,960,000 at December 31, 1996. The decrease in cash was a result of cash used by financing and investing activities of $71,982,000 and $1,725,000, respectively, and offset by cash provided by operating activities of $71,898,000. The cash provided by operating activities was principally attributed to an increase in operating payables of $46,464,000, decreases in operating receivables and securities inventory owned of $15,846,000 and $1,679,000, respectively, and net income, adjusted for noncash charges, of $8,493,000. The cash provided by operating activities was partly offset by cash used for a decrease of drafts payable, accounts payable and accrued expenses, and accrued employee compensation of $1,340,000. The cash used for financing activity primarily consisted of net payments for short-term borrowings of $70,725,000. The Company used $1,852,000 for the acquisition of investments and fixed assets. 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 Consolidated Financial Statements). At September 26, 1997, SN & Co. had net capital of $26,900,000 which was 11.18% of its aggregate debit items and $22,090,000 in excess of the minimum required net capital.
14 During the first quarter ended March 27, 1997, SN & Co. obtained and repaid a temporary subordinated note in the amount of $8,000,000. The subordinated note was used to finance underwritings. The first installment of the Company's 11.25% Senior Convertible Note (the "Note") was due September 1, 1997, in the amount of $2,500,000. The convertible feature allows the notes to be converted into shares of the Company's $0.15 par value common stock at any time prior to maturity, unless previously redeemed, at a conversion price of $7.0536 per share. On August 27, 1997, the holder of the notes exercised the option to convert the $2,500,000 installment into 354,424 shares of common stock. Subsequently, on October 24, 1997, the Company received notice that the holder will exercise the conversion privilege of the Note and convert the remaining $7,500,000 notes into 1,063,283 shares of common stock. The Company's outstanding shares after the conversion will approximate 6,243,000 shares. The former Note holder will hold approximately 22.7% of total outstanding shares after the conversion. Directors of the Company have approved the purchase of up to 250,000 shares of the Company's common stock. The Company plans to buy shares from time to time in the open market or otherwise, depending on market conditions. The stock will be used for outstanding options exercises and other employee benefit plans. Management believes the funds from operations and available informal short-term credit arrangements of $198,325,000, at September 26, 1997, will provide sufficient resources to meet the present and anticipated financing needs.
15 PART II. OTHER INFORMATION Item 1. Legal Proceedings During the nine months ended September 26, 1997, the lawsuit filed by the State of Oklahoma seeking $7.6 million in compensatory damages and that these damages be trebled, was dismissed and is currently on appeal in the United States Court of Appeals for the Tenth Circuit. There were no other material changes in the other legal proceedings previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Such information is hereby incorporated by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit No. (Reference to Item 601(b) of Regulation S-K) Description ------------------------- ----------- 11 Computation of Earnings Per Share 27 Financial Data Schedule (furnished to the Securities and Exchange Commission for Electronic Data Gathering, Analysis, and Retrieval [EDGAR] purposes only) (b) Reports on Form 8-K The Company filed a report on Form 8-K dated July 2, 1997. This report Form 8-K contained information under Item 5. Other Events. On July 2, 1997, the Company announced that Gregory F. Taylor, Director, President and Chief Executive Officer of both Stifel Financial Corp. and Stifel, Nicolaus & Company, Incorporated (the Registrant's wholly-owned broker-dealer subsidiary) resigned as of July 31, 1997. The Company filed a report on Form 8-K dated August 27, 1997. This report Form 8-K contained information under Item 5. Other Events. The first installment of the Company's 11.25% Senior Convertible Note was due September 1, 1997, in the amount of $2,500,000. The convertible feature allows the notes to be converted into shares of the Company's $0.15 par value common stock at any time prior to maturity, unless previously redeemed, at a conversion price of $7.0536 per share. On August 27, 1997, the holder of the notes exercised the option to convert the $2,500,000 installment into 354,424 shares of common stock. The Company filed a report on Form 8-K dated September 26, 1997. This report Form 8-K contained information under Item 5. Other Events. The Company announced the appointment of Ronald J. Kruszewski as President and Chief Executive Officer.
16 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: November 7, 1997 By /s/ Ronald J. Kruszewski Ronald J. Kruszewski (President and Chief Executive Officer) Date: November 7, 1997 By /s/ Stephen J. Bushmann Stephen J. Bushmann (Principal Financial and Accounting Officer)
17 STIFEL FINANCIAL CORP. AND SUBSIDIARIES EXHIBIT INDEX September 26, 1997 Exhibit Number Description 11 Computation of Earnings Per Share 27 Financial Data Schedule (furnished to the Securities and Exchange Commission for Electronic Data Gathering, Analysis, and Retrieval [EDGAR] purposes only)