-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OnFZj9kMLTdf0BMEb6hMp+eIiVIDeV6ODJsCnoJcyp2E9vEOTjheiLKH+gnEzf4s xuRrVLb6rcvgDc1OrUoyAg== 0000720672-98-000006.txt : 19980330 0000720672-98-000006.hdr.sgml : 19980330 ACCESSION NUMBER: 0000720672-98-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STIFEL FINANCIAL CORP CENTRAL INDEX KEY: 0000720672 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 431273600 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09305 FILM NUMBER: 98576653 BUSINESS ADDRESS: STREET 1: 500 N. BROADWAY STREET 2: 14TH FLOOR CITY: ST LOUIS STATE: MO ZIP: 63102-2188 BUSINESS PHONE: 3143422000 MAIL ADDRESS: STREET 1: 500 N BROADWAY CITY: ST LOUIS STATE: MO ZIP: 63102-2188 10-K405 1 FORM 10-K; DECEMBER 31, 1997 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 ----------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----------------- ---------------- Commission file number 1-9305 ------ STIFEL FINANCIAL CORP. - ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 43-1273600 - ------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 500 N. Broadway St. Louis, Missouri 63102-2188 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 314-342-2000 ------------ Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class On Which Registered - -------------------------------------- ----------------------- Common Stock, Par Value $.15 per share New York Stock Exchange Chicago Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Chicago Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 report) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] 2 Aggregate market value of voting stock held by non-affiliates of the registrant at March 10, 1998 was $84,016,545. Shares of Common Stock outstanding at March 10, 1998: 6,677,432 shares, par value $.15 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended December 31, 1997 are incorporated by reference to Part II hereof. Portions of the Company's Proxy Statement filed with the SEC in connection with the Company's Annual Meeting of Stockholders to be held April 28, 1998 are incorporated by reference to Part III hereof. Exhibit Index located on page 29. 3 PART I ITEM 1. BUSINESS - ---------------- Stifel Financial Corp. ("Financial"), a Delaware corporation and holding company, was organized in fiscal year 1983 pursuant to a plan of reorganization whereby Stifel, Nicolaus & Company, Incorporated ("Stifel, Nicolaus") became a wholly-owned subsidiary of Financial. Stifel, Nicolaus is the successor to a partnership founded in 1890. The term "Company" as used herein means Financial and its subsidiaries. The Company offers securities-related financial services through its wholly-owned operating subsidiaries, Stifel, Nicolaus, Century Securities Associates, Inc., Todd Investment Advisors, Inc., and Pin Oak Capital, Ltd. These subsidiaries provide brokerage, trading, investment banking, investment advisory, and related financial services primarily to customers throughout the United States from 42 locations. The Company's customers include individuals, corporations, municipalities and institutions. Although the Company has customers throughout the United States, its major geographic area of concentration is in the Midwest. On May 25, 1995, the Company sold the majority of the assets related to its operations in Oklahoma, which consisted of 26 securities sales offices and the municipal underwriting, trading, and institutional sales operations located in Oklahoma, and three securities sales offices in Texas. These operations comprised 14% of the Company's total revenue for 1994. (See proforma financial information in Note O of the Consolidated Financial Statements incorporated by reference herein.) Principal Sources of Revenue The amounts of each of the principal sources of revenue of the Company for the calendar years 1997, 1996 and 1995 is contained in Item 6. Selected Financial Data, filed herein. Commissions During recent years, most of the Company's securities commissions resulted from transactions with individual investor accounts. Commissions are charged on both stock exchange and over-the- counter transactions in accordance with the Company's commission schedule. In certain cases, discounts from that schedule are granted. The percentage of total commission revenue from institutional customers was 6% and 5% in 1997 and 1996, respectively. Prior to 1996 revenue generated from institutional customers was not accounted for separately. Institutional accounts are serviced mainly by the Company's offices in St. Louis. Investment executives also receive orders from institutional customers from time to time which are not included in the percentages mentioned above. 4 Principal Transactions The Company trades as principal in the over-the-counter market. It acts as both principal and agent to facilitate the execution of customers' orders. The Company makes a market in various securities of interest to its customers through buying, selling and maintaining an inventory of these securities. The Company does not engage in a significant amount of trading for its own account. The Company also buys corporate and municipal bonds for its own account in the secondary market, maintains an inventory, and resells from that inventory to other dealers and to institutional and individual customers. Investment Banking The Company manages the underwriting of both corporate and municipal securities and participates as an underwriter in syndicates of issues managed by other firms. The corporate and public finance departments are responsible for originating underwritings, mergers and acquisitions, placements, valuations, financial advisory work and other investment banking matters. The Company acts as an underwriter and dealer in bonds issued by states, cities and other political subdivisions and may act as manager or participant in offerings managed by other firms. The majority of the Company's municipal bond underwritings and corporate underwritings are originated through its office in St. Louis. In calendar years 1995-1997, the majority of the Company's investment banking revenues have been generated by the corporate finance department. The department continues to focus on providing research, financial advisory services, merger and acquisition advisory services and serving as a manager or co- manager for underwriting issuances of corporate debt or equity securities primarily for financial institutions located primarily in the Midwest and Real Estate Investment Trusts (REITs) located throughout the country. The management of and participation in public offerings involves significant risks. An underwriter may incur losses if it is unable to resell, at a profit, the securities it has purchased. Under the Securities Act of 1933 and other statutes and court decisions, an underwriter may be subject to substantial liability for misstatements or omissions of fact that are judged to be material in prospectuses and other communications related to underwritings. Underwriting commitments may reduce the Company's regulatory net capital position (as defined by Rule 15c3-1 administered by the Securities and Exchange Commission -- see "Regulation"); and, consequently, the aggregate amount of underwriting commitments at any one time may be limited by the amount of available net capital of the Company. Other Business The Company has dealer-sales agreements with numerous distributors of investment company shares. These agreements generally provide for dealer discounts ranging up to 4.25 percent of the purchase price, depending upon the size of the transaction. 5 The Company acts as an agent for its customers' transactions in put and call options traded on the Chicago Board Options Exchange, Inc., American Stock Exchange, Inc., Philadelphia Stock Exchange, Inc., and, to a much lesser extent, in the over-the- counter market. The Company has a wholly-owned subsidiary, Century Securities Associates, Inc. ("CSA"), an introducing broker-dealer which clears its transactions through Stifel, Nicolaus. CSA contracts with independent licensed brokers to sell securities and other investment products to individual investor accounts. CSA is licensed in 50 states. In 1993, the Company formed a wholly-owned subsidiary, Stifel Asset Management Corp. ("SAM"), to act as a holding company for two investment advisory firms, Pin Oak Capital, Ltd. ("Pin Oak"), and Todd Investment Advisors, Inc. ("Todd"). Pin Oak, which operated formerly as the investment advisory division of Stifel, Nicolaus, was formed as an investment advisory firm and began operations during the five-month transition period ended December 31, 1993. SAM purchased all of the outstanding stock of Todd, an investment advisory firm located in Louisville, Kentucky, in December 1993. Both Pin Oak and Todd provide investment advice and services to individual, fiduciary and corporate clients. Combined assets under management for the two firms at December 31, 1997 was approximately $2,860,111,000. Pin Oak holds registrations as an investment advisor in six states. Todd is registered as an investment advisor in sixteen states. In late 1994, Stifel, Nicolaus established a program for managing customers' investment portfolios. Fees are charged based upon a percentage of total assets of the portfolio. At December 31, 1997, Stifel, Nicolaus had assets under management of approximately $497,000,000 related to this program. The Company intends to commit resources to grow this business. Coincidental with the sale of the Oklahoma based operations, the Company entered into a clearing agreement to clear the trades of the purchasing firm's broker-dealer subsidiary and carry its customer accounts on a fully-disclosed basis. The Company charges for these services based upon the clearing agreement. Various subsidiaries of the Company act as General Partners in certain limited partnerships for which Stifel, Nicolaus has sold limited partnership interests to the public. The subsidiaries may receive distributions upon the dissolution of such partnerships, but the amount and timing of receipts of such distributions, if any, cannot be determined at this time and are subject to the usual risks and liabilities associated with acting as a general partner. 6 Customer Financing Securities are purchased for customers on either a cash or margin basis. The customer deposits less than the full cost of the security when securities are purchased on a margin basis. The Company makes a loan for the balance of the purchase price. Such loans are collateralized by the securities purchased. The amounts of the loans are subject to the margin requirements of Regulation T of the Board of Governors of the Federal Reserve System, New York Stock Exchange, Inc. ("NYSE") margin requirements, and the Company's internal policies, which usually are more restrictive than Regulation T or NYSE requirements. In permitting customers to purchase securities on margin, the Company is subject to the risk of a market decline which could reduce the value of its collateral below the amount of the customers' indebtedness. Research The Company's research department provides individual and institutional customers information and recommendations on the securities of specific companies. These services are rendered without charge. The Company also purchases research services from other firms. Competition The Company competes with other securities firms, some of which offer their customers a broader range of brokerage services, have substantially greater resources, and may have greater operating efficiencies. In addition, an increasing number of specialized firms, as well as banks, savings and loans, and other financial institutions, now offer discount brokerage services to individual customers. These firms generally charge lower commission rates to their customers without offering services such as portfolio valuation, investment recommendations and research. Competition from such discount brokerage services may adversely affect revenues of the Company and other full service brokerage firms. Banks also compete with brokerage firms by offering certain investment banking and corporate finance services. Management relies on the expertise acquired in its market area over its 107-year history, its personnel, and its equity capital to operate in the competitive environment. 7 Regulation The securities industry in the United States is subject to extensive regulation under federal and state laws. The Securities and Exchange Commission ("SEC") is the federal agency charged with the administration of the federal securities laws. Much of the regulation of broker-dealers, however, has been delegated to self-regulatory organizations, principally the National Association of Securities Dealers, Inc., the Municipal Securities Rulemaking Board, and the national securities exchanges, such as the NYSE. These self-regulatory organizations adopt rules (which are subject to approval by the SEC) which govern the industry and conduct periodic examinations of member broker-dealers. Securities firms are also subject to regulation by state securities commissions in the states in which they are registered. The regulations to which broker-dealers are subject cover all aspects of the securities business, including sales practices, trade practices among broker-dealers, capital structure of securities firms, record keeping, and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory organizations, and changes in the interpretation or enforcement of existing laws and rules often directly affect the method of operation and profitability of broker-dealers. The SEC and the self-regulatory organizations may conduct administrative proceedings which can result in censures, fines, suspension or expulsion of a broker- dealer, its officers or employees. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets rather than the protection of creditors and stockholders of broker-dealers. As a broker-dealer and member of the NYSE, Stifel, Nicolaus is subject to the Uniform Net Capital Rule (Rule 15c3-1) promulgated by the SEC which provides that a broker-dealer doing business with the public shall not permit its aggregate indebtedness (as defined) to exceed 15 times its net capital (as defined) or, alternatively, that its net capital shall not be less than 2 percent of aggregate debit balances (primarily receivables from customers and broker-dealers) computed in accordance with the SEC's Customer Protection Rule (Rule 15c3-3). The Uniform Net Capital Rule is designed to measure the general financial integrity and liquidity of a broker-dealer and the minimum net capital deemed necessary to meet the broker-dealer's continuing commitments to its customers and other broker/dealers. Both methods allow broker-dealers to increase their commitments to customers only to the extent their net capital is deemed adequate to support an increase. Management believes that the alternative method, which is utilized by most full-service securities firms, is more directly related to the level of customer business. Therefore, Stifel, Nicolaus computes its net capital under the alternative method. 8 Under SEC rules, a broker-dealer may be required to reduce its business and restrict withdrawal of subordinated capital if its net capital is less than 4 percent of aggregate debit balances and may be prohibited from expanding its business and declaring cash dividends if its net capital is less than 5 percent of aggregate debit balances. A broker-dealer that fails to comply with the Uniform Net Capital Rule may be subject to disciplinary actions by the SEC and self-regulatory agencies, such as the NYSE, including censures, fines, suspension, or expulsion. In computing net capital, various adjustments are made to net worth to exclude assets which are not readily convertible into cash and to state conservatively the other assets such as a firm's position in securities. Compliance with the Uniform Net Capital Rule may limit those operations of a firm such as Stifel, Nicolaus which require the use of its capital for purposes of maintaining the inventory required for a firm trading in securities, underwriting securities, and financing customer margin account balances. Stifel, Nicolaus had net capital of approximately $28,227,000 at December 31, 1997, which was approximately 11.7 percent of aggregate debit balances and approximately $23,396,000 in excess of required net capital. Employees There were 756 individuals employed by the Company as of February 28, 1998 and 109 independent licensed brokers contracted through CSA. ITEM 2. PROPERTIES - ------------------- The headquarters and administrative offices of the Company, Stifel, Nicolaus and CSA are located in downtown Saint Louis, Missouri. Todd is located in Louisville, Kentucky. Pin Oak is located in New York, New York. Stifel Nicolaus has a branch office system located in 13 states, primarily in the Midwest. The Company has a total of 42 locations in 13 states. All offices of the Company are located in leased premises. The Company's management believes that at the present time the facilities are suitable and adequate to meet its needs and that such facilities have sufficient productive capacity and are appropriately utilized. The Company also leases communication and other equipment. Aggregate annual rental expense for the twelve month period ended December 31, 1997, for office space and equipment, was approximately $2,899,000. Further information about the lease obligations of the Company is provided in Note D of the Consolidated Financial Statements incorporated by reference herein. 9 ITEM 3. LEGAL PROCEEDINGS - ------------------------- The Company is a defendant in several lawsuits and arbitrations which arose from its usual business activities. Some of these lawsuits and arbitrations claim substantial amounts, including punitive claims. While results of litigation and arbitration cannot be predicted with certainty, management, based on opinions of outside counsel, has provided for actions most likely of adverse disposition and believes that the effects of resolution of such litigation and arbitration beyond the amounts provided will not have a material adverse effect on the Company's consolidated financial 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. During 1995, the Securities and Exchange Commission (the "SEC") completed a formal investigation into possible violations of the federal securities laws in connection with certain municipal bond issues managed by the Company's former Oklahoma City-based public finance department where the Company was the managing or co- managing underwriter. This investigation resulted in the Company consenting to a final judgement of permanent injunction whereby, among other things, the Company paid approximately $1.1 million in disgorgement and prejudgement interest, and $250,000 in fines. On October 5, 1995 the Company was named in a lawsuit filed by The Oklahoma Turnpike Authority ("OTA") in the District Court of Oklahoma County, State of Oklahoma, along with DeWayne VonFeldt and Robert Cochran, two former employees of the Company; Sakura Global Capital and Steven Strauss; Pacific Matrix and Jeff Feld. Additionally, the Company was named in a lawsuit filed by the State of Oklahoma in the United States District Court for the Western District of Oklahoma on February 24, 1995 along with Robert Cochran. The OTA suit seeks $6.5 million in compensatory damages and an unspecified amount of punitive damages. The State of Oklahoma seeks $7.6 million in compensatory damages and that these damages be trebled. The OTA suit alleges that an undisclosed fee paid to the Company by a third party for the placement of a forward purchase contract in an advance refunding escrow for the proceeds of the 1992 OTA $608 million refinancing should have been paid to the OTA. The State of Oklahoma suit alleges that the Company and two former executives of the Company committed violations of the Racketeer Influenced and Corrupt Organizations Act. This suit alleges essentially the same facts as are alleged in the OTA suit and were alleged by the SEC in its action against the Company which was settled in August 1995 by the Company without admitting or denying the allegations. The State of Oklahoma suit was dismissed by the United States District Court for the Western District of Oklahoma and is currently on appeal in the United States Tenth Circuit Court of Appeals. Although the ultimate outcome of these actions cannot be ascertained at this time, and the results of legal proceedings cannot be predicted with certainty, management, based on its 10 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. EXECUTIVE OFFICERS OF THE REGISTRANT The following information is furnished pursuant to General Instruction G(3) of Form 10-K with respect to the executive officers of Financial: Year First Appointed as Positions or Offices Executive Officer Name Age with the Company of the Company ---- --- -------------------- ------------------------ George H. Walker III 67 Chairman of the 1978 Board of Financial and Stifel, Nicolaus Ronald J. Kruszewski 39 President and Chief 1997 Executive Officer of Financial and Stifel, Nicolaus Stephen J. Bushmann 40 Vice President, Treasurer and 1996 Chief Financial Officer of Financial and Chief Financial Officer and Senior Vice President of Stifel, Nicolaus Charles R. Hartman 54 Vice President and Secretary of 1996 Financial and General Counsel, Senior Vice President and Secretary of Stifel, Nicolaus Michael A. Murphy 46 Vice President of Financial and 1996 Senior Vice President - Director of Private Client Group of Stifel, Nicolaus Lawrence E. Somraty 49 Vice President of Financial and 1996 President of Century Securities Associates, Inc. The following are brief summaries of the business experience during the past five years of each of the executive officers. George H. Walker III joined Stifel, Nicolaus in 1976, became Chief Executive Officer of Stifel, Nicolaus in December, 1978, and became Chairman of Stifel, Nicolaus in July, 1982. From the time of the organization of Financial, Mr. Walker has served as its Chairman of the Board and, until October 26, 1992, Mr. Walker served as its President and Chief Executive Officer. Mr. Walker is a director of Laclede Steel Company, Laidlaw Corp., Macroeconomics Advisers, LLC, and EAC Corporation. He is active in various community activities and currently is Chairman of the Missouri Historical Society. He is Chairman of the Advisory Committee of Webster University Business School and on the National Counsel of Washington University Business School. 11 Ronald J. Kruszewski was appointed President and Chief Executive Officer of the Company and Stifel, Nicolaus on September 25, 1997. Prior to joining the Company, Mr. Kruszewski served as Managing Director and Chief Financial Officer of Baird Financial Corporation and Managing Director of Robert W. Baird & Co., Incorporated. Stephen J. Bushmann joined Stifel, Nicolaus in October of 1981. He is Vice President, Treasurer and Chief Financial Officer of Financial and Chief Financial Officer and Senior Vice President of Stifel, Nicolaus. From 1994 - 1996, Mr. Bushmann served as Financial Analyst and prior to that he was Assistant Controller. Charles R. Hartman joined Stifel, Nicolaus in June of 1994. He is Vice President and Secretary of Financial and General Counsel, Senior Vice President and Secretary of Stifel, Nicolaus. Prior to joining Stifel, Nicolaus, Mr. Hartman was the Regional Counsel for the Securities and Exchange Commission in Los Angeles, California and since April of 1982 a Los Angeles partner in the law firm of Rogers & Wells. Michael A. Murphy joined Stifel, Nicolaus in 1989. He was Vice President of Financial and Senior Vice President and Director of Private Client Group of Stifel, Nicolaus. From 1989 - 1994, Mr. Murphy served as First Vice President and Director of Branch Administration of Stifel, Nicolaus. Lawrence E. Somraty has been with Stifel, Nicolaus since 1977. He is Vice President of Financial and became the President of Century Securities Associates, Inc. in January 1991. Prior thereto, he served as Option Department Manager, Senior Registered Options Principal, Investment Advisor and Branch Manager. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None 12 PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED - -------------------------------------------------------------- STOCKHOLDER MATTERS ------------------- a.) Market Information The common stock of Financial is traded on the New York Stock Exchange and Chicago Stock Exchange under the symbol "SF." The high/low sales prices for Financial's Common Stock for each full quarterly period for the two most recent calendar years are as follows: High and Low Stock Price By Quarter ------------------------------------------ 1997 1996 Quarter High - Low High - Low ------------------------------------------ First 8 5/8 - 7 $ 6 - 5 1/2 Second 11 1/2 - 7 1/8 7 3/8 - 5 3/4 Third 11 1/2 - 8 3/4 7 3/8 - 5 7/8 Fourth 16 1/8 - 11 3/8 7 7/8 - 6 3/8 ------------------------------------------ The Company from time-to-time uses funds generated from operations to purchase the Company's common stock throughout the calendar year. On October 29, 1997, the Company's Board of Directors authorized the purchase of an additional 262,500 shares to be used to satisfy share obligations for employee benefit plans. b.) Holders The approximate number of stockholders of record on March 10, 1998 was 3,000. c.) Dividends Dividends paid were as follows: Record Payment Cash Stock Date Date Dividend Dividend 02/06/96 02/20/96 $0.03 5% 05/07/96 05/21/96 $0.03 - - 11/05/96 11/19/96 $0.03 - - 02/4/97 02/18/97 $0.03 5% 05/6/97 05/20/97 $0.03 - - 08/5/97 08/19/97 $0.03 - - 11/11/97 11/25/97 $0.03 - - A regular quarterly cash dividend of $0.03 per share was established on November 30, 1993. On July 23, 1996, the Board of Directors of Financial approved the redemption of certain stock rights under a former Shareholder Rights Plan and the adoption of a new Shareholder Rights Plan. Shareholders on record, as of August 12, 1996, received a payment of $0.05 per share, representing the redemption price for the former Rights. This payment was in lieu of the regular quarterly cash dividend of $0.03 per share. 13 ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- Stifel Financial Corp. and Subsidiaries Financial Summary
Five Year Months ended Years Ended December 31, Ended July 30, -------------------------------------------- (In thousands, except per 1997 1996 1995 1994 Dec. 31, 1993 1993 share and percentages) Revenues Commissions $ 49,763 $ 43,900 $ 38,716 $ 37,287 $ 18,119 $ 38,812 Principal transactions 20,202 19,498 20,362 24,639 10,287 27,503 Investment banking 28,476 16,253 12,121 12,634 11,272 31,468 Interest 21,397 13,774 13,002 10,918 4,057 8,851 Other 16,258 16,388 11,159 8,448 2,720 6,837 -------- -------- -------- -------- -------- -------- 136,096 109,813 95,360 93,926 46,455 113,471 -------- -------- -------- -------- -------- -------- Expenses Employee compensation and benefits 82,094 66,765 57,187 61,527 29,433 68,678 Commissions and floor brokerage 2,780 2,641 2,319 2,120 845 2,485 Communications and office supplies 6,914 6,797 7,651 8,045 3,090 6,836 Occupancy and equipment rental 8,109 7,958 8,512 11,601 3,618 8,405 Interest 12,991 8,197 8,312 6,138 1,763 4,838 Litigation, settlements, and bad debts 3,726 3,292 1,610 2,467 473 1,237 Restructuring charge - - - - - - 2,672 - - - - Other operating expenses 10,061 8,561 8,462 8,577 4,173 9,722 -------- -------- -------- -------- -------- -------- 126,675 104,211 94,053 103,147 43,395 102,201 -------- -------- -------- -------- -------- -------- Income (loss) before income taxes 9,421 5,602 1,307 (9,221) 3,060 11,270 Provision (benefit) for income taxes 3,750 2,209 663 (3,718) 1,145 4,232 -------- -------- -------- -------- -------- -------- Net income (loss) $ 5,671 $ 3,393 $ 644 $ (5,503) $ 1,915 $ 7,038 ======== ======== ======== ======== ======== ======== Per Share Data Basic earnings (loss) $ 1.06 $ .69 $ .13 $ (1.15) $ .40 $ 1.49 Diluted earnings (loss) $ .92 $ .62 $ .13 $ (1.15) $ .34 $ 1.22 Cash dividends $ .12 $ .09 $ .12 $ .09 $ .055 $ .15 Other Data Total assets $315,484 $301,344 $226,775 $222,208 $288,203 $196,539 Long-term obligations $ 9,600 $ 10,000 $ 10,760 $ 11,520 $ 11,520 $ 10,000 Stockholders' equity $ 50,081 $ 37,752 $ 34,795 $ 34,226 $ 40,609 $ 38,995 Net income as % average equity 13.29% 9.35% 1.87% * N.M. 4.81% 19.94% Net income as % revenues 4.17% 3.09% 0.68% * N.M. 4.12% 6.20% Average common shares and share equivalents outstanding : Basic 5,325 4,905 4,837 4,802 4,835 4,729 Diluted 6,755 6,491 4,907 4,802 6,477 6,351 - -----------------------------------------------------------------------------------------------------------
Retroactively restated to reflect the 5 percent stock dividend declared January 20, 1998. * Not Meaningful 14 The information called for in items 7 and 8 of Part II is set forth on the pages listed below of the Company's 1997 Annual Report to Stockholders and is incorporated herein by reference: Pages In Annual Report To Stockholders (filed herewith in Exhibit 13) ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 16 through 21 ITEM 8. Financial Statements and Supplementary Data. 22 through 43 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Company filed a report on Form 8-K dated October 29, 1996. This report Form 8-K contained information under Item 4. "Changes in registrant's certifying accountants". The Board of Directors of Financial, upon the recommendation of its Audit Committee, determined to replace Coopers & Lybrand L.L.P. as the Company's independent auditors for the year ended December 31, 1996. In addition, the Company filed a report on Form 8-K dated December 9, 1996. This report Form 8-K contained information under Item 4. "Changes in registrant's certifying accountants". The Board of Directors of Financial, upon the recommendation of its Audit Committee, determined to appoint Deloitte & Touche LLP as the Company's newly engaged certifying accountants and Deloitte & Touche LLP has accepted this appointment. During the two years ended December 31, 1995 and through the date of their appointment, Deloitte & Touche LLP had not provided any consultations to the Company. PART III ITEMS 10 THROUGH 13 Financial intends to file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A involving the election of directors not later than 120 days after the end of its fiscal year ended December 31, 1997. Accordingly, except to the extent included in Part I under the caption "Executive Officers of the Registrant", the information required by Part III (Items 10, 11, 12 and 13) is incorporated herein by reference to such definitive proxy statement in accordance with General Instruction G(3) to Form 10-K. 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: Reference (page) ---------------- Annual Report to Stockholders ------------ 1. The following consolidated financial statements of Stifel Financial Corp. and subsidiaries, included on pages 22 through 43 in the 1997 Annual Report to Stockholders, are incorporated by reference in Item 8 Consolidated Statements of Financial Condition -- December 31, 1997 and December 31, 1996............... 22 - 23 Consolidated Statements of Operations -- Years ended December 31, 1997, December 31, 1996 and December 31, 1995................................. 24 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1997, December 31, 1996 and December 31, 1995................................. 25 Consolidated Statements of Cash Flows -- Years ended December 31, 1997, December 31, 1996 and December 31, 1995................................. 26 - 27 Notes to Consolidated Financial Statements............. 28 - 42 Independent Auditors' Report........................... 43 2. The following consolidated financial statement schedules of Stifel Financial Corp. and subsidiaries are filed herewith pursuant to ITEM 14(d): Independent Auditors' Report Report of Independent Accountants Report of Independent Accountants Schedule I - Condensed Financial Information of Registrant Schedule II- Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. 16 3. Exhibits -------- Exhibit No. (Referenced to Item 601(b) of Regulation S-K) (a)(1) Restated Certificate of Incorporation of Financial filed with the Secretary of State of Delaware on June 1, 1983, incorporated herein by reference to Exhibit 3.1 to Financial's Registration Statement on Form S-1, as amended (Registration File No. 2-84232) filed July 19, 1983. (a)(2) Amendment to Restated Certificate of Incorporation of Financial filed with the Secretary of State of Delaware on May 11, 1987, incorporated herein by reference to Exhibit (3)(a)(2) to Financial's Report on Form 10-K for the year ended July 31, 1987. (a)(3) Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of Financial filed with the Secretary of State of Delaware on July 10, 1987, incorporated herein by reference to Exhibit (3)(a)(3) to Financial's Report on Form 10-K for the year ended July 31, 1987. (a)(4) Amendment to Restated Certificate of Incorporation of Financial filed with the Secretary of State of Delaware on November 28, 1989, incorporated herein by reference to Exhibit (3)(a)(4) to Financial's Report on Form 10-K for the year ended July 27, 1990. (b) Amended and Restated By-Laws of Financial, incorporated herein by reference to Exhibit 3(b)(1) to Financial's Report on Form 10-K for fiscal year ended July 30, 1993. 4. Note Agreement dated as of October 15, 1988, between Financial and Bankers United Life Assurance Company and Pacific Fidelity Life Insurance Company, incorporated herein by reference to Exhibit 4 to Financial's Report on Form 10-Q for the quarterly period ended April 28, 1989. The Company hereby agrees to furnish the Securities and Exchange Commission copies of such instruments upon request. 10. (a)(1) Employment Agreement with George H. Walker III dated August 21, 1987, incorporated herein by reference to Exhibit 10(c) to Financial's Report on Form 10-K for the fiscal year ended July 31, 1987. (a)(2) First Amendment to Employment Agreement with George H. Walker III, incorporated herein by reference to Exhibit 10(a)(2) to Financial's Report on Form 10-K for the fiscal year ended July 31, 1992. 17 (b) Form of Indemnification Agreement with directors dated as of June 30, 1987, incorporated herein by reference to Exhibit 10.2 to Financial's Report on Form 8-K (date of earliest event reported - June 22, 1987) filed July 14, 1987. (c) 1983 Incentive Stock Option Plan of Financial, incorporated herein by reference to Exhibit 4(a) to Financial's Registration Statement on Form S-8 (Registration File No. 2-94326) filed November 14, 1984. (d) 1985 Incentive Stock Option Plan of Financial, incorporated herein by reference to Exhibit 28C to Financial's Registration Statement on Form S-8, as amended (Registration File No. 33-10030) filed November 7, 1986. (e) 1987 Non-qualified Stock Option Plan of Financial , incorporated herein by reference to Exhibit 10(h) to Financial's Report on Form 10-K for the fiscal year ended July 31, 1987. (f) Amendment to 1983 Incentive Stock Option Plan, 1985 Incentive Stock Option Plan and 1987 Non- Qualified Stock Option Plan, incorporated herein by reference to Exhibit 10(f) to Financial's Report on Form 10-K for the fiscal year ended July 28, 1989. (g)(1) 1993 Employee Stock Purchase Plan of Financial, incorporated herein by reference to ANNEX A of Financial's Definitive Proxy Statement (Registration File No. 33-16150) filed October 28, 1992. (g)(2) First Amendment to the 1993 Employee Stock Plan of Financial, incorporated herein by reference to Exhibit 4.5 to Financial's Registration Statement on Form S-8 (Registration File No. 33-53097) filed April 11, 1994. (h) Employment and Non-Competition Agreement with Gregory F. Taylor dated July 26, 1993, incorporated herein by reference to Exhibit 10(m) to Financial's Report on Form 10-K for fiscal year ended July 30, 1993. (i) Dividend Reinvestment and Stock Purchase Plan of Financial, incorporated herein by reference to Financial's Registration Statement on Form S-3 (Registration File No. 33-53699) filed May 18, 1994. (j) 1997 Incentive Stock Plan of Financial, incorporated herein by reference to Financial's Registration Statement on Form S-8 (Registration File No. 333-37805) filed October 14, 1997. 18 (k) 1998 Employee Stock Plan of Financial, incorporated herein by reference to Financial's Registration Statement on Form S-8 (Registration File No. 333-37807) filed October 14, 1997. (l) Employment Letter with Ronald J. Kruszewski, filed herewith. 13. Annual Report to Stockholders for the year ended December 31, 1997. Except for those portions of pages expressly incorporated by reference, the 1997 Annual Report to Stockholders is not deemed filed as part of this Annual Report on Form 10-K. 21. List of Subsidiaries of Financial, filed herewith. 23. (a) Consent of Independent Auditors, filed herewith. 23. (b) Consent of Independent Accountants, filed herewith. 27. (a) 1997 Financial Data Schedule BD, filed herewith. 27. (b) 1995 and 1996 Restated Financial Data Schedule BD, filed herewith. 27. (c) 1997 Restated Financial Data Schedule BD, filed herewith. (b) Reports on Form 8-K: The Company filed a report on Form 8-K dated December 31, 1997. This report Form 8-K contained information under Item 5. "Other Events". The Company announced that AEGON USA, Inc. Insurance Group had sold 1,207,500 shares of the Registrant's common stock. The Western and Southern Life Insurance Company and Stifel, Nicolaus Stock Ownership Plan and Trust had purchased 971,250 and 236,250 shares, respectively. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Louis, State of Missouri, on the 26th day of March, 1998. STIFEL FINANCIAL CORP. (Registrant) By /s/ Ronald J. Kruszewski ----------------------------- Ronald J. Kruszewski (Principal Executive Officer) /s/ Stephen J. Bushmann ----------------------------- Stephen J. Bushmann (Principal Financial and Accounting Officer) 20 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on March 20, 1998, in the capacities indicated. /s/George H. Walker III Chairman of the Board George H. Walker III /s/Ronald J. Kruszewski President, Chief Executive Ronald J. Kruszewski Officer, and Director /s/Bruce A. Beda Director Bruce A. Beda /s/Belle A. Cori Director Belle A. Cori /s/Charles A. Dill Director Charles A. Dill /s/Richard F. Ford Director Richard F. Ford /s/John J. Goebel Director John J. Goebel /s/Stuart I. Greenbaum Director Stuart I. Greenbaum /s/Robert E. Lefton Director Robert E. Lefton /s/James M. Oates Director James M. Oates 21 [Deloitte & Touche LLP letterhead] Independent Auditors' Report To the Board of Directors and Stockholders of Stifel Financial Corp. St. Louis, Missouri: We have audited the consolidated financial statements of Stifel Financial Corp. and Subsidiaries as of December 31, 1997 and December 31, 1996, and for the years then ended, and have issued our report thereon dated February 20, 1998; such consolidated financial statements and report are included in your 1997 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the 1997 and 1996 consolidated financial statement schedules of Stifel Financial Corp. and Subsidiaries, listed in Item 14. These consolidated financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, such 1997 and 1996 consolidated financial statement schedules, when considered in relation to the basic 1997 and 1996 consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP February 20, 1998 St. Louis, Missouri 22 [Coopers & Lybrand L.L.P. letterhead] Report of Independent Accountants Stockholders and Board of Directors Stifel Financial Corp. St. Louis, Missouri We have audited the consolidated statements of operations, stockholders' equity, and cash flows of Stifel Financial Corp. and Subsidiaries for the year ended December 31, 1995. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements of Stifel Financial Corp. and Subsidiaries referred to above present fairly, in all material respects, the consolidated results of their operations and their cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. St. Louis, Missouri February 25, 1996 23 [Coopers & Lybrand L.L.P. letterhead] Report of Independent Accountants Board of Directors Stifel Financial Corp. St. Louis, Missouri: Our report on the consolidated statements of operations, stockholders' equity and cash flows of Stifel Financial Corp. and Subsidiaries is included on page 18 of this Form 10-K. In connection with our audit of such financial statements, we have also audited the related financial statement schedules for the year ended December 31, 1995 listed in the index on page 12 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. St. Louis, Missouri February 25, 1996 24 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS STIFEL FINANCIAL CORP. Dec. 31, 1997 Dec. 31, 1996 ------------- ------------- ASSETS Cash $ 9,155 $ 9,155 Due from subsidiaries (a) 3,615,656 3,711,973 Investment in subsidiaries (a) 47,214,574 41,262,901 Office equipment and leasehold improvements, less allowances for depreciation and amortization of $10,449,850 and $9,705,941, respectively 2,136,544 2,182,025 Investments, at cost 1,373,424 815,764 Goodwill, net of amortization of $554,095 and $462,235, respectively 1,815,047 1,906,907 Other assets 2,427,287 1,389,304 ----------- ----------- TOTAL ASSETS $58,591,687 $51,278,029 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Due to subsidiaries (a) $ 2,238,164 $ 1,739,432 Obligation under capital lease 522,498 580,945 Long-term debt 5,000,000 10,000,000 Other liabilities 749,881 1,206,523 ----------- ----------- TOTAL LIABILITIES 8,510,543 13,526,900 Stockholders' Equity: Capital stock 1,001,733 715,158 Additional paid-in capital 37,006,108 21,402,971 Retained earnings 17,425,321 16,733,073 ----------- ----------- 55,433,162 38,851,202 Less treasury stock, at cost 1,988,915 892,892 Less unearned employee stock ownership plan shares 3,179,125 -- Less unamortized expense of restricted stock awards, at cost 184,978 207,181 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 50,081,144 37,751,129 ----------- ----------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $58,591,687 $51,278,029 =========== =========== (a) Eliminated in consolidation. See Notes to Consolidated Financial Statements (Item 8) 25 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CONDENSED STATEMENTS OF OPERATIONS STIFEL FINANCIAL CORP. Years Ended December 31, --------------------------------------- 1997 1996 1995 ---- ---- ---- Revenues: Lease $1,202,248 $1,406,556 $1,708,160 Other 95,015 (59,024) (162,347) ---------- ---------- ---------- 1,297,263 1,347,532 1,545,813 Expenses: Depreciation and amortization 1,294,108 1,431,798 1,751,250 Professional fees 290,554 246,178 170,664 Provision for doubtful collection -- 300,000 -- Miscellaneous 194,419 159,460 135,363 ---------- ---------- ---------- 1,779,081 2,137,436 2,057,277 ---------- ---------- ---------- Loss before income taxes (481,818) (789,904) (511,464) (Benefit) provision for income taxes (201,150) (343,024) 52,100 Loss before equity in net income of subsidiaries (280,668) (446,880) (563,564) Equity in net income of subsidiaries 5,951,674 3,839,382 1,207,085 ---------- ---------- ---------- NET INCOME $5,671,006 $3,392,502 $ 643,521 ========== ========== ========== See Notes to Consolidated Financial Statements (Item 8) 26 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CONDENSED STATEMENTS OF CASH FLOWS STIFEL FINANCIAL CORP.
Years Ended December 31, ----------------------------------------------- 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,671,006 $ 3,392,502 $ 643,521 Non-cash items included in net income: Depreciation and amortization 1,294,108 1,431,798 1,751,250 Unrealized (gain) loss on investment (127,590) 115,000 -- Deferred tax (benefit) provision (123,902) (234,353) 105,547 Undistributed (income) of subsidiaries (5,951,674) (3,839,382) (1,207,085) Amortization and forfeitures of restricted stock awards and stock benefits 172,357 75,055 84,346 ----------- ----------- ----------- 934,305 940,620 1,377,579 Net change in due to/due from subsidiaries 595,049 1,512,913 730,442 (Increase) decrease in other assets (796,569) 1,487,309 (1,162,037) (Decrease) increase in other liabilities (169,235) (379,298) 393,193 ----------- ----------- ----------- CASH PROVIDED BY OPERATING ACTIVITIES 563,550 3,561,544 1,339,177 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from: Shares issued 2,071,564 -- -- Long-term debt 5,000,000 -- -- Employee stock purchase plan 727,208 616,670 755,274 Exercised options 101,082 3,098 123,503 Dividend reinvestment plan 7,936 12,570 9,533 Payments for: Retirement of long-term debt - - (760,000) (760,000) Purchase of stock for treasury (2,926,452) (520,321) (546,615) Purchase unearned ESOP shares (3,178,125) -- -- Principal payments under capital lease (392,248) (433,284) (255,053) Cash dividend and rights redemption (608,968) (625,128) (500,611) ----------- ----------- ----------- CASH USED FOR FINANCING ACTIVITIES 801,997 (1,706,395) (1,173,969) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from: Distributions/sales received on investments 62,020 36,360 94,893 Sales of office equipment and leasehold Improvements 144,512 23,405 909,762 Payments for: Acquisition of investments (633,739) (1,513,232) -- Office equipment and leasehold improvements (938,340) (401,682) (1,169,863) ----------- ----------- ----------- CASH USED FOR INVESTING ACTIVITIES (1,365,547) (1,855,149) (165,208) ----------- ----------- ----------- Increase in cash 0 0 0 Cash (beginning of period) 9,155 9,155 9,155 ----------- ----------- ----------- Cash (end of period) $ 9,155 $ 9,155 $ 9,155 =========== =========== =========== 27 Supplemental Disclosures of Cash Flow Information Schedule of Non-cash Investing and Financing Activities Fixed assets acquired under capital lease $ 405,000 $ 240,000 -- Restricted stock awards, net of forfeitures $ 153,000 $ 182,000 $ 3,000 Employee stock ownership shares issued $ 300,000 $ 280,000 -- Debt converted to stock $10,000,000 -- -- Stock dividends distributed $ 4,370,000 $ 1,786,000 $ 1,406,000
See Notes to Consolidated Financial Statements (Item 8) 28 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS STIFEL FINANCIAL CORP. AND SUBSIDIARIES
COL. A COL. B COL. C COL. D COL. E ------ ------ ------ ------ ------- Balance at Additions Balance Beginning Charged to Costs at End Description of Period and Expenses Deductions of Period ----------- ---------- ---------------- ---------- ---------- Year Ended December 31, 1997: Deducted from asset account: Allowances for doubtful accounts $581,946 $2,038 $28,093 $555,891 Deducted from asset account: Allowances for doubtful notes receivables 2,551,627 235,229 410,505 2,376,351 Deducted from asset account: Allowances for doubtful collection of other assets 300,000 62,000 300,000 62,000 Deducted from asset account: Reserves for investments 735,362 175,154 230,670 679,846 Deducted from asset account: Reserves for securities owned 200,000 0 0 200,000 Year Ended December 31, 1996: Deducted from asset account: Allowances for doubtful accounts $804,916 $28,400 $251,370 $581,946 Deducted from asset account: Allowances for doubtful notes receivables 3,002,220 173,467 624,060 2,551,627 Deducted from asset account: Allowances for doubtful collection of other assets 0 300,000 0 300,000 Deducted from asset account: Reserves for investments 628,362 115,000 8,000 735,362 Deducted from asset account: Reserves for securities owned 200,000 0 0 200,000 Year Ended December 31, 1995: Deducted from asset account: Allowances for doubtful accounts $1,070,985 $ 0 $266,069 $804,916 Deducted from asset account: Allowances for doubtful notes receivables 2,560,617 802,004 360,401 3,002,220 Deducted from asset account: Reserves for investments 962,795 88,500 422,933 628,362 Deducted from asset account: Reserves for securities owned 0 0 (200,000) 200,000 - --------------------------- Uncollected accounts written off and recoveries. Uncollected notes written off and recoveries. Investments disposed of. Uncollected asset written off. Reserve balance reclassified from Reserve for investments to conform to 1995 presentation.
29 EXHIBIT INDEX Stifel Financial Corp. and Subsidiaries Annual Report on Form 10-K Year Ended December 31, 1997 Exhibit Number Description - ------- ----------- 10. (l) Employment Letter with Ronald J. Kruszewski, filed herewith. 13. 1997 Annual Report to Stockholders.* 21. Subsidiaries of Stifel Financial Corp. 23. (a) Consent of Independent Auditors. 23. (b) Consent of Independent Accountants. 27. (a) 1997 Financial Data Schedule BD. 27. (b) 1995 and 1996 Restated Financial Data Schedule BD. 27. (c) 1997 Restated Financial Data Schedule BD. * Certain portions of the Annual Report to Stockholders are incorporated herein by reference; the Annual Report to Stockholders is not to be deemed filed as a part of this Annual Report on Form 10-K. EX-10 2 EXHIBIT 10. (l) STIFEL FINANCIAL CORP. AND SUBSIDIARIES Employment Letter with Ronald J. Kruszewski Stifel Financial Corp. 500 North Broadway St. Louis, Missouri 63102 September 25, 1997 Mr. Ronald J. Kruszewski 10800 Haddonstone Place Mequon, Wisconsin 53092 Dear Ron: I am pleased to confirm that you have been elected President and Chief Executive Officer of Stifel Financial Corp. ("Company") and President and Chief Executive Officer of the Company's principal subsidiary. Your employment hereunder will be in accordance with the following provisions. 1. Term. The term of your employment will commence effective as of September 25, 1997, and will continue until terminated by either party upon thirty (30) days' advance notice to the other, or such shorter period as may be mutually agreed upon. 2. Duties. You will perform the duties normally associated with the office of President and Chief Executive Officer and such other appropriate duties as may be assigned by the Board of Directors of the Company. 3. Salary. You will be paid an annual salary of not less than two hundred thousand dollars ($200,000) during the term of your employment, such salary to be reviewed annually in connection with the salaries of other senior executives of the Company. 4. Bonus. You will be eligible to participate in the Company's senior executive bonus plan with performance goals being determined by the Compensation Committee on the basis of performance criteria disclosed to, and submitted for the approval of shareholders. 5. Restricted Stock. Pursuant to the Stifel Financial Corp. 1997 Incentive Stock Plan (the "Incentive Stock Plan"), you have been awarded one hundred seventy-five thousand (175,000) shares of Restricted Stock in accordance with the terms of the Restricted Stock Agreement attached hereto. 6. Stock Options. a. Under the Incentive Stock Plan. Pursuant to the Incentive Stock Plan, you have been granted incentive stock options to purchase fifty Mr. Ronald J. Kruszewski September 25, 1997 Page 2 thousand (50,000) shares of stock in accordance with the terms of the Incentive Stock Option Agreement attached hereto. b. Outside of the Incentive Stock Plan. You have been granted nonqualified stock options to purchase seventy five thousand (75,000) shares of stock in accordance with the Nonqualified Stock Option Agreement attached hereto. 7. Loan. The Company will loan you one million four hundred seventy-nine thousand six hundred eighty-seven dollars and fifty cents ($1,479,687.50) in accordance with the Promissory Note attached hereto. 8. Life Insurance. During the term of your employment the Company will reimburse you for the premiums you pay on the two million dollar ($2,000,000) term life insurance policy you have with the Northwestern Mutual Life Company and on the additional one million dollar ($1,000,000) life insurance policy you plan to purchase from Northwestern Mutual Life. 9. Reimbursement of Moving Expenses. The Company will supplement its regular relocation guidelines by reimbursing you for (a) reasonable expenses incurred by you in moving your family and household effects to the St. Louis area, (b) the full brokerage commission you will incur in the sale of your current home, and (c) travel and temporary housing costs you incur during a reasonable transition period until your relocation is completed. 10. Country Club. The Company will pay the initiation fees for your membership in a country club mutually agreeable to the Company and you. 11. Continued Employment Not Guaranteed. None of the benefits provided herein will be construed as a guarantee of your continued employment nor shall they limit the ability of the Board of Directors of the Company to terminate the employment relationship at any time, with or without cause. None of the benefits provided herein shall be construed as a guarantee on your part that you will continue to perform services for the Company nor shall they limit you ability to resign at the time. 12. Governing Law. The terms of your employment will be governed in accordance with the laws of the State of Missouri. Mr. Ronald J. Kruszewski September 25, 1997 Page 2 If the foregoing provisions are acceptable to you please sign and return to me one copy of this letter. We look forward to a long and mutually beneficial relationship. Sincerely, /s/ George H. Walker III George H. Walker III Chairman Agreed to and accepted. /s/ Ronald J. Kruszewski Ronald J. Kruszewski EX-13 3 EXIBIT 13 STIFEL FINANCIAL CORP. AND SUBSIDIARIES 1997 ANNUAL REPORT TO STOCKHOLDERS 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, thrifts, and other investment firms. 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) 1997 vs. 1996 1996 vs. 1995 - ---------------------------------------------------------------------------------------------------------- Dollars in thousands Amount Percentage Amount Percentage - ---------------------------------------------------------------------------------------------------------- Revenues: Commissions $ 5,863 13 % $ 5,184 13 % Principal transactions 704 4 ( 864) ( 4) Investment banking 12,223 75 4,132 34 Interest 7,623 55 772 6 Other revenues ( 130) ( 1) 5,229 47 $ 26,283 24 % $ 14,453 15 % Expenses: Compensation and benefits $ 15,329 23 % $ 9,578 17 % Commissions and floor brokerage 139 5 322 14 Communication and office supplies 117 2 ( 854) ( 11) Occupancy and equipment rental 151 2 ( 554) ( 7) Interest 4,794 58 ( 115) ( 1) Litigation, settlements, and bad debts 434 13 1,682 105 Other operating expenses 1,500 18 99 1 $ 22,464 22 % $ 10,158 11 %
*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. 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 (24%) increase over 1996. Net income for 1997 reached $5.7 million, an increase of $2.3 million (67%) over 1996. Net income per diluted share rose 48% to $0.92 from $0.62 in 1996. Revenue from commissions increased $5.9 million (13%) to $49.8 million in 1997. The increase was mainly comprised from sales of mutual funds - up $2.0 million (21%); over-the-counter equity securities - up $1.5 million (8%); listed equity securities - up $1.3 million (13%); and insurance and annuity products - up $1.1 million (40%). Principal transaction revenues are primarily derived from over-the-counter 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 revenue. Revenues from principal transactions increased $700,000 (4%) from 1996 to 1997. The increase resulted 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 demands for equities and lower levels of demand for municipal and corporate debt. Investment banking revenue is derived from underwriting of corporate and municipal securities and providing advisory services to clients. These revenues increased $12.2 million (75%), to $28.5 million in 1997 from $16.3 million in 1996, 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 25 managed or co-managed offerings, an increase of 35% over 1996, principally for underwriting Trust Preferred securities and mortgage REIT transactions. Interest revenue increased $7.6 million, or 55%, in 1997 compared with the prior year. The majority of the increase ($7.4 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 $130,000 (1%) from 1996 to 1997. Certain components within other revenues, however, 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 (22%) to $126.7 million from $104.2 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 (23%) in 1997. 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 (58%) 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 focuses on expense items with significant changes. Litigation, settlements, and bad debt expense increased $400,000 in 1997. The 1997 expense includes 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, or 18%, during 1997 primarily due to increased travel and promotion cost from efforts to expand the Company's private client and institutional businesses and fees paid for professional services and employment search firms. 1996 As Compared to 1995 The Company recorded $0.62 earnings per dilutive share in 1996 compared to $0.13 earnings per dilutive share in 1995. The increase in earnings per share was attributed principally to the growth in revenues to $109.8 million in 1996 from $95.4 in 1995. The Company experienced a $14.5 million (15%) growth in total revenues in 1996 over 1995 revenues, increasing to $109.8 million from $95.4 million. Average revenues per Investment Executive increased $43,000 (22%) to $237,000 from $194,000 due to the addition of higher producing Investment Executives in conjunction with industry-wide record performance and growth which was attributed in part to increased corporate profits and continued low interest rates. Revenue from commissions, which includes sale of investment company shares and sale of insurance products, increased $5.2 million (13%) to $43.9 million from $38.7 million as a result of strong markets and increased production per Investment Executive referred to above. Principal transactions, which accounts for over-the-counter sales and trading profits and losses on securities the Company held as principal to meet investors' needs, decreased $900,000 (4%) to $19.5 million from $20.4 million primarily as a result of decreased trading in fixed income products - municipal and corporate debt which decreased $3.0 million (23%) to $10.5 million from $13.5 million due to continued low interest rates which fueled investors' demands for the higher returns generated by the equity products. This decrease was offset by an increase in over-the-counter principal sales credits and trading profits of $1.9 million (37%) to $7.4 million from $5.5 million. The increase was due to improved trading profits and continued strong demand for the over-the-counter equity products. Investment banking, which consists of revenue derived from underwriting corporate and municipal securities and advisory fees, increased $4.2 million (34%) to $16.3 million from $12.1 million largely as a result of an increase in corporate finance revenues. Favorable market conditions fueled corporate new issue underwritings. Revenue for new issue corporate underwritings and financial advisory fees, primarily for regional financial institutions and Real Estate Investment Trusts ("REITs"), increased $2.8 million (39%) to $10.1 million from $7.3 million. Municipal investment banking revenues, which includes fee income, increased $900,000 to $3.8 million from $2.9 million as the number of awards as senior manager for underwritings increased to 34 in 1996 from 24 in 1995. Interest income is derived principally from financing customers' margin accounts. Interest income increased $772,000 (6%) to $13.7 million from $13.0 million as a result of increased borrowing by customers to finance their investments. Other income increased $5.2 million (47%) to $16.4 million from $11.2 million principally due to a gain of $3.3 million on an investment resulting from the exercise of warrants generated by the corporate finance department related to an underwriting and the ultimate sale of the shares received for the exercise of those warrants. Additionally, managed account fees, which are derived from management of customers' investment portfolios, increased $1.4 million (137%) to $2.5 million from $1.1 million due principally to the growth of the managed account program which was introduced in November 1994. Total expenses increased $10.2 million (11%) to $104.2 million from $94.0 million largely as a result of increased compensation and benefits, which increased $9.6 million (17%) to $66.8 million from $57.2 million, and litigation, settlements, and bad debts, which increased $1.7 million (105%) to $3.3 million from $1.6 million. The fixed portion of compensation and benefits, principally salaries, remained virtually unchanged from 1995. The variable portion of total compensation and benefits, principally Investment Executive compensation and incentive compensation payments, increased coincidentally with increased production and profitability. Commission and floor brokerage increased $300,000 (14%) to $2.6 million from $2.3 million coincidentally with increased commission revenue discussed in the aforementioned increase in commission revenue. Communications and office supplies and occupancy and equipment rental decreased $900,000 (11%) to $6.8 million from $7.7 million and $600,000 (7%) to $7.9 million from $8.5 million, respectively, principally due to the sale of the Oklahoma offices (see Note O of the Notes to Consolidated Financial Statements filed herein). Litigation, settlements, and bad debt increased $1.7 million (105%) to $3.3 million from $1.6 million due principally to settlements of claims against Stifel, Nicolaus resulting from activities initiated in an office which was closed in 1995. Impact of Year 2000 Software Issues Many of the world's computer systems currently record years in a two-digit format. Such computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to business disruptions. The potential costs and uncertainties associated with this issue will depend on a number of factors including software, hardware, and the nature of the industry in which a company operates. Additionally, companies must coordinate with other entities with which they electronically interact, such as customers, vendors, and borrowers. This is a significant undertaking for securities firms, as virtually every aspect of the sale of securities and related processing of transactions will be affected and the consequences for noncompliance will be significant. A significant portion of the Company's operations and information systems are provided by third-party service providers. The Company has developed a plan to analyze how the Year 2000 will impact its operations, including monitoring the status of its service providers and evaluating alternatives. Given the Company's exposure to third-party service providers, management does not believe the internal costs to address the Year 2000 issue will have a material impact on future operations other than the impact such event will have on the cost of services provided by its vendors which is unknown at this time. The interdependent nature of securities transactions and the success of the Company's external counterparties and vendors 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. In 1997, the Company issued $5 million principal amount of notes due on June 30, 1999, with interest payable monthly at the monthly LIBOR rate plus 1% (6.53% at December 31, 1997) beginning February 1, 1998. 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, 1997, Stifel, Nicolaus had net capital of approximately $28.2 million, which exceeded the minimum net capital requirements by approximately $23.4 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. Recent Accounting Pronouncements As of January 1, 1997, the Company adopted SFAS No. 125, which was effective for transfers of financial assets made after December 31, 1996, except for transfers of certain financial assets for which the effective date has been delayed for one year. SFAS No. 125 provides financial reporting standards for the derecognition and recognition of financial assets, including the distinction between transfers of financial assets which should be recorded as sales and those which should be recorded as secured borrowings. The adoption of the enacted provisions of SFAS No. 125 had no material effect on the Company's financial condition or results of operations. With respect to the provisions of SFAS No. 125 which become effective in 1998, the Company does not expect the impact of the adoption of the deferred provisions to be material to the Company's financial condition or results of operations. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." These statements, which are effective for fiscal years beginning after December 15, 1997, establish standards for the reporting and display of comprehensive income and the disclosure requirements related to segments. Consolidated Statements Of Financial Condition
- -------------------------------------------------------------------------------------------------------------------- (In thousands) December 31, 1997 December 31, 1996 - -------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 15,366 $ 7,960 -------------------------------------------------------------------------------------------------- Cash segregated for the exclusive benefit of customers 177 483 -------------------------------------------------------------------------------------------------- Receivable from brokers and dealers: Securities failed to deliver 481 617 Deposits paid for securities borrowed 18,223 10,284 Settlement balances with clearing organizations 16,519 3,935 -------------------------------------------------------------------------------------------------- 35,223 14,836 -------------------------------------------------------------------------------------------------- Receivable from customers, net of allowance for doubtful accounts of $556 and $582, respectively 218,301 235,216 -------------------------------------------------------------------------------------------------- Securities owned, at fair value: U.S. Government obligations 4,763 3,619 State and municipal obligations 6,471 9,506 Corporate obligations 2,153 3,502 Corporate stocks 5,825 2,286 -------------------------------------------------------------------------------------------------- 19,212 18,913 -------------------------------------------------------------------------------------------------- Memberships in exchanges, at cost 513 513 Office equipment and leasehold improvements, at cost, net of allowances for depreciation and amortization of $10,890 and $10,125, respectively 2,227 2,233 Goodwill, net of accumulated amortization of $1,414 and $1,107, respectively 4,181 4,488 Notes receivable from and advances to officers and employees, net of allowance for doubtful receivables of $2,376 and $2,552, respectively 4,249 3,373 Refundable income taxes 65 358 Deferred tax asset 4,577 3,671 Other assets 11,393 9,300 -------------------------------------------------------------------------------------------------- TOTAL ASSETS $315,484 $301,344 ==================================================================================================
Consolidated Statements Of Financial Condition
- -------------------------------------------------------------------------------------------------------------------- (In thousands, except share amounts) December 31, 1997 December 31, 1996 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Short-term borrowings from banks $ 89,150 $132,400 Stockholders' -------------------------------------------------------------------------------------------------- Equity Payable to brokers and dealers: Securities failed to receive 1,242 421 Deposits received from securities loaned 72,466 46,727 -------------------------------------------------------------------------------------------------- 73,708 47,148 -------------------------------------------------------------------------------------------------- Payable to customers 39,239 32,095 Securities sold, but not yet purchased, at fair value 4,264 3,229 Drafts payable 13,966 15,287 Accrued employee compensation 19,247 14,756 Obligations under capital leases 522 581 Accounts payable and accrued expenses 15,707 8,096 Long-term debt 9,600 10,000 -------------------------------------------------------------------------------------------------- Total 265,403 263,592 -------------------------------------------------------------------------------------------------- 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 6,678,223 and 4,767,715 shares, respectively 1,002 715 Additional paid-in capital 37,006 21,403 Retained earnings 17,425 16,733 -------------------------------------------------------------------------------------------------- 55,433 38,851 -------------------------------------------------------------------------------------------------- Less: Treasury stock, at cost 168,648 and 135,455 shares, respectively 1,989 892 Unamortized expense of restricted stock awards 185 207 Unearned employee stock ownership plan shares, at cost, 236,250 and 0 shares, respectively 3,178 - - -------------------------------------------------------------------------------------------------- Total Stockholders' Equity 50,081 37,752 -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $315,484 $301,344 ==================================================================================================
See Notes to Consolidated Financial Statements. Consolidated Statements Of Operations
- ---------------------------------------------------------------------------------------------------------------------- Year Ended Year Ended Year Ended (In thousands, except per share amounts) December 31, 1997 December 31, 1996 December 31, 1995 - ---------------------------------------------------------------------------------------------------------------------- Revenues Commissions $ 49,763 $ 43,900 $ 38,716 Principal transactions 20,202 19,498 20,362 Investment banking 28,476 16,253 12,121 Interest 21,397 13,774 13,002 Other 16,258 16,388 11,159 ------------------------------------------------------------------------------------------------ 136,096 109,813 95,360 - ---------------------------------------------------------------------------------------------------------------------- Expenses Employee compensation and benefits 82,094 66,765 57,187 Commissions and floor brokerage 2,780 2,641 2,319 Communications and office supplies 6,914 6,797 7,651 Occupancy and equipment rental 8,109 7,958 8,512 Interest 12,991 8,197 8,312 Litigation, settlements, and bad debts 3,726 3,292 1,610 Other operating expenses 10,061 8,561 8,462 ------------------------------------------------------------------------------------------------ 126,675 104,211 94,053 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 9,421 5,602 1,307 Provision for income taxes 3,750 2,209 663 ------------------------------------------------------------------------------------------------ Net income $ 5,671 $ 3,393 $ 644 ================================================================================================ - ---------------------------------------------------------------------------------------------------------------------- Earnings Per Common Net income per share: Share and Share Basic earnings per share $ 1.06 $ 0.69 $ 0.13 Equivalents Diluted earnings per share $ 0.92 $ 0.62 $ 0.13 ------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. Consolidated Statements Of Stockholders' Equity
Treasury Stock and Unamortized Additional Unearned Employee Expense of Common Stock Paid-In Retained Stock Ownership Plan Restricted (In thousands, except share amounts) Shares Amount Capital Earnings Shares Amount Stock Awards Total - ----------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 4,324,951 $ 649 $ 18,491 $ 17,016 (239,336) $(1,732) $(198) $ 34,226 - ----------------------------------------------------------------------------------------------------------------------- Cash dividends - common stock ($.12 per share) ( 500) ( 500) Purchase of treasury shares ( 88,656) ( 547) ( 547) Employee benefit plans ( 195) 132,173 948 753 Stock options exercised ( 36) 22,425 159 123 Restricted stock awards granted ( 14) 13,000 96 ( 82) - - Restricted stock awards forfeited 3 ( 16,125) ( 96) 79 ( 14) Amortization of restricted stock awards 101 101 Dividend reinvestment ( 1) 2,019 10 9 Net income for the year 644 644 5% stock dividend 215,939 32 1,374 ( 1,406) ( 8,725) - - - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 4,540,890 681 19,622 15,754 (183,225) (1,162) (100) 34,795 - ------------------------------------------------------------------------------------------------------------------------ Cash dividends - common stock ($.09 per share) ( 405) ( 405) Stock rights redemption - common stock ($.05 per share) ( 223) ( 223) Purchase of treasury shares ( 69,713) ( 520) ( 520) Employee benefit plans ( 132) 118,953 753 621 Stock options exercised ( 1) 615 4 3 Restricted stock awards granted 162 3,000 20 (182) - - Amortization of restricted stock awards 75 75 Dividend reinvestment 1,365 13 13 Net income for the year 3,393 3,393 5% stock dividend 226,825 34 1,752 ( 1,786) ( 6,450) - - - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 4,767,715 715 21,403 16,733 (135,455) ( 892) (207) 37,752 - ------------------------------------------------------------------------------------------------------------------------ Cash dividends - common stock ($.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 - ------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. Consolidated Statements Of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------- Year Ended Year Ended Year Ended (In thousands) December 31, 1997 December 31, 1996 December 31, 1995 - ------------------------------------------------------------------------------------------------------------------------- Cash Flows Net income $ 5,671 $ 3,393 $ 644 From Operating ------------------------------------------------------------------------------------------------------- Activities Noncash items included in earnings: Depreciation and amortization 1,519 1,664 1,990 Unrealized (gain) loss on investments ( 197) 28 ( 57) Bonus notes amortization 1,178 1,213 1,033 Deferred compensation 920 571 468 Amortization of restricted stock awards and stock benefits 172 75 84 Deferred taxes ( 907) 231 736 ------------------------------------------------------------------------------------------------------- 8,356 7,175 4,898 Decrease (increase) in operating receivables: Customers 16,915 (78,291) (17,005) Brokers and dealers (20,387) 1,588 5,409 Increase (decrease) in operating payables: Customers 7,144 289 7,437 Brokers and dealers 26,560 24,020 (23,268) Decrease (increase) in assets: Cash and U.S. Government securities segregated for the exclusive benefit of customers 305 293 540 Securities owned ( 300) 608 3,798 Notes receivable from officers and employees ( 2,409) ( 1,030) ( 1,190) Other assets 1,830 ( 560) ( 2,125) Increase (decrease) in liabilities: Securities sold, not yet purchased 1,035 485 ( 1,508) Drafts payable, accounts payable and accrued expenses, and accrued employee compensation 10,148 1,302 1,822 ------------------------------------------------------------------------------------------------------- Cash Provided By (Used For) Operating Activities 49,197 (44,121) ( 21,192) -------------------------------------------------------------------------------------------------------
Consolidated Statement Of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------- Year Ended Year Ended Year Ended (In thousands) December 31, 1997 December 31, 1996 December 31, 1995 - ------------------------------------------------------------------------------------------------------------------------- Cash Provided By (Used For) Operating-- Activities From Previous Page $ 49,197 $ (44,121) $( 21,192) - ------------------------------------------------------------------------------------------------------------------------- Cash Flows Net (payments) proceeds for short-term From Financing borrowings from banks (43,250) 45,950 20,800 Activities Proceeds from: Issuance of stock 2,071 - - - - Long-term debt 9,600 - - - - Employee stock purchase plan 727 617 755 Exercised stock options 101 3 124 Subordinated borrowings 8,000 - - - - Dividend reinvestment plan 8 13 10 Payments for: Settlement of long-term debt - - ( 760) ( 760) Purchases of stock for treasury ( 2,926) ( 520) ( 547) Principal payments under capital lease obligation ( 392) ( 431) ( 256) Subordinated borrowings ( 8,000) ( 50) - - Cash dividends and rights redemption ( 609) ( 628) ( 500) Purchase of stock for employee stock ownership plan ( 3,178) - - - - ------------------------------------------------------------------------------------------------------- Cash (Used For) Provided By Financing Activities (37,848) 44,194 19,626 - ------------------------------------------------------------------------------------------------------------------------- Cash Flows Proceeds from: From Investing Sale of office equipment and leasehold Activities improvements 145 28 910 Sale of investments 84 3,753 1,694 Payments for: Acquisition of office equipment and leasehold improvements ( 999) ( 443) ( 1,179) Acquisition of investments ( 3,173) ( 1,795) ( 440) ------------------------------------------------------------------------------------------------------- Cash (Used For) Provided By Investing Activities ( 3,943) 1,543 985 ------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 7,406 1,616 ( 581) Cash and cash equivalents - beginning of year 7,960 6,344 6,925 ------------------------------------------------------------------------------------------------------- Cash and cash equivalents - end of year $ 15,366 $ 7,960 $ 6,344 ======================================================================================================= Supplemental disclosures of cash flow information: Interest payments $ 13,093 $ 8,264 $ 8,237 Income tax payments $ 3,418 $ 2,247 $ 372 Schedule of Noncash Investing and Financing Activities Fixed assets acquired under capital lease $ 405 $ 240 - - Restricted stock awards, net of forfeitures $ 153 $ 182 $ 3 Employee stock ownership shares issued $ 300 $ 280 - - Debt converted into stock $ 10,000 - - - - Stock dividends distributed $ 4,370 $ 1,786 $ 1,406
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 other 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. 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, 1997, the estimated fair value of the notes was $7,517. 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. 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. During the year, the Company implemented The Financial Accounting Standard Board's (FASB) SFAS 128 "Earnings Per Share." This statement simplifies the computation of earnings per share (EPS) by replacing the primary EPS requirements with a "basic" EPS computation. 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. All prior year EPS computations have been recalculated in accordance with the provisions of SFAS 128. Note B - Special Reserve Bank Account At December 31, 1997, 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 $260,000 at December 31, 1997, of which $170,850 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 6.87% and 6.07% at December 31, 1997 and 1996, respectively. Certain short-term borrowings were collateralized by company-owned securities valued at approximately $28,452 on a settlement date basis. Short-term borrowings used to finance receivables from customers were collateralized by customer- owned securities valued at approximately $108,821 at December 31, 1997. The value of these customer-owned securities is not reflected in the consolidated statement of financial condition. 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, 1997, 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 $37,705, representing the minimum margin deposit requirement at December 31, 1997. The future minimum rental commitments at December 31, 1997, with initial or remaining non-cancellable lease terms in excess of one year for office space and equipment are as follows:
- ---------------------------------------------------------------------------------------------------------- Operating Leases ---------------------------------------------------- Minimum Future Lease Payments Under Minimum Rental Year Ending December 31, Capital Leases Commitments Related Sublease Commitments - ---------------------------------------------------------------------------------------------------------- 1998 $ 382 $ 3,538 $(169) $ 3,369 1999 144 3,225 ( 96) 3,129 2000 23 3,086 ( 28) 3,058 2001 0 1,971 0 1,971 2002 0 1,035 0 1,035 Thereafter 0 1,104 0 1,104 - ---------------------------------------------------------------------------------------------------------- Minimum Commitments $ 549 $ 13,959 $(293) $13,666 Less Interest 27 ========= ====== ======= ------ Net Present Value of Capital Lease Obligations $ 522 ======
Rental expense for the years ended 1997, 1996, and 1995 approximated $2,899, $3,541, and $3,986, respectively. Office equipment under capital leases, with a recorded cost of approximately $497 net of amortization of $1,036, and $566 net of amortization of $953 at December 31, 1997 and 1996, 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." The Company purchased equipment, that was subject to a capital lease, for approximately $440 in the first quarter of 1995. During the fourth quarter of 1995, management determined that certain of that equipment with a carrying value of approximately $248, which was originally intended for use in operations, was not immediately required and therefore recorded a $195 charge to fourth quarter operations to write the equipment down to net recoverable value based on outside dealer quotes. Amortization and depreciation expense of assets under capital lease and owned furniture and equipment for 1997, 1996, and 1995 was $1,224, $1,384, and $1,732, 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 minimum net 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, 1997, Stifel, Nicolaus had net capital of $28,227, which was 11.7 percent of aggregate debit items and $23,396 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 1997, 1996, and 1995. Additional contributions by the Company are discretionary. The amounts charged to operations for the PSP were $142, $146, and $166, for 1997, 1996, and 1995, 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 three to 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 $920, $571, and $468, for 1997, 1996, and 1995, respectively. Note G - Stock-Based Compensation Plans At December 31, 1997, the Company had 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: - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Net income As reported $5,671 $3,393 $644 Pro forma $5,283 $3,345 $621 - ---------------------------------------------------------------------------- Basic earnings per share As reported $ 1.06 $ .69 $ .13 Pro forma $ .99 $ .68 $ .13 - ---------------------------------------------------------------------------- Diluted earnings per share As reported $ .92 $ .62 $ .13 Pro forma $ .86 $ .61 $ .13 - ---------------------------------------------------------------------------- All option plans are administered by the Compensation Committee of the Board of Directors of the Parent which has the authority to interpret the Plans, determine to whom options may be granted under the Plans, determine the terms of each option, and cancel, with the consent of an optionee, any option previously granted to such optionee and to grant a new option in place thereof. All shares issued for the various plans were satisfied with treasury stock. Fixed Stock Option Plans The Company has four fixed 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, and performance awards 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 at a rate of 25% each anniversary date 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 1997, 1996, and 1995, respectively: dividend yield of 1.50%, 1.88%, and 1.88%, expected volatility of 42.7%, 26.7%, and 22.2%; risk-free interest rates of 6.22%, 6.17%, and 6.06%, and expected lives of 5.25 years for all years. The summary of the status of the Company's fixed stock option plans as of December 31, 1997, 1996, and 1995, and changes during the years ending on those dates as adjusted for the 5% stock divided declared on January 20, 1998, is presented below:
- ------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 ------------------------- ------------------------- ------------------------- Weighted-Average Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------------------------------------------------------------------------------------------------------------------ Outstanding at beginning of year 455,102 $ 5.36 366,385 $ 5.29 434,455 $5.42 - ------------------------------------------------------------------------------------------------------------------------ Granted 378,090 10.24 116,631 35,020 5.48 Exercised ( 42,311) 5.36 ( 678) 4.57 ( 25,959) 4.76 Forfeited ( 6,059) 4.99 ( 27,236) 5.49 ( 72,443) 6.52 Expired ( 56,615) 5.82 - - - - ( 4,688) 4.38 - ------------------------------------------------------------------------------------------------------------------------ Outstanding at end of year 728,207 $ 7.86 455,102 $ 5.36 366,385 $5.29 ======================================================================================================================== Options exercisable at year-end 343,029 267,532 275,846 Weighted-average fair value of options granted during the year $4.27 $1.89 $1.53 - ------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options outstanding at December 31, 1997:
- ------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ----------------------------------------------------- --------------------------------- Number Weighted-Average Number Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average Exercise Prices 12/31/97 Contractual Life Exercise Price 12/31/97 Exercise Price - ------------------------------------------------------------------------------------------------------------------- $ 3.92 - $ 4.57 149,026 1.94 years $ 4.3396 149,026 $ 4.3396 4.83 - 5.86 151,205 6.37 years 5.6023 93,768 5.5305 5.89 - 8.12 189,101 8.48 years 6.7765 73,985 6.6549 11.37 - 11.37 189,000 6.43 years 11.3690 26,250 11.3690 16.07 - 16.07 49,875 10.00 years 16.0714 0 0.0000 - ------------------------------------------------------------------------------------------------------------------- $ 3.92 - $16.07 728,207 6.27 years $ 7.8625 343,029 $ 5.7024 ===================================================================================================================
Employee Stock Purchase Plan Under the 1993 Employee Stock Purchase Plan (the "ESPP"), the Company is authorized to issue up to 125,000 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 124,777 shares, 115,217 shares, and 112,613 shares, to employees in 1997, 1996, and 1995, 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 1997, 1996, and 1995, respectively: dividend yield of 1.50%, 1.88%, and 1.88%; expected volatility of 42.7%, 26.7%, and 22.2%; risk-free interest rates of 5.61%, 5.09%, and 7.05%; and expected lives of one year for the three years. The weighted-average fair value of those purchase rights granted in 1997, 1996, and 1995 was $2.06, $1.30, and $1.07, 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 45,501, 3,000, and 13,000 shares of restricted stock, with a fair value of $153, $182, and $82, during 1997, 1996, and 1995, respectively. As of December 31, 1997, restricted stock awards covering 38,283 shares were outstanding, with the restrictions expiring at various dates through 2000. The shares are restricted as to resale. Restrictions lapse ratably over three- and five-year service periods. The deferred cost of the restricted stock awards is amortized on a straight-line basis. 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 236,250 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, 1997, the plan held 523,382 shares and has allocated 287,132 shares of the Parents' common stock valued at $8,411 and $4,615, respectively. The Company charged to operations $300 and $280 for the ESOP contribution for 1997 and 1996, respectively. There were no contributions for the ESOP for 1995. Note H - Legal Proceedings The Company is a defendant in several lawsuits and arbitrations which arose from its usual business activities. Some of these lawsuits and arbitrations claim substantial amounts, including punitive damage claims. While results of litigation and arbitration cannot be predicted with certainty, management, based on opinions of outside counsel, has provided for actions most likely of adverse disposition and believes that the effects of resolution of such litigation and arbitration beyond the amounts provided will not have a material adverse effect on the Company's consolidated financial 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. During 1995, the Securities and Exchange Commission (the "SEC") completed a formal investigation into possible violations of the federal securities laws in connection with certain municipal bond issues managed by the Company's former Oklahoma City-based public finance department where the Company was the managing or co-managing underwriter. This investigation resulted in the Company consenting to a final judgement of permanent injunction whereby, among other things, the Company paid approximately $1,100 in disgorgement and prejudgement interest, and $250 in fines. Additionally, the Company is named in lawsuits filed by The Oklahoma Turnpike Authority ("OTA") and The State of Oklahoma. The OTA suit seeks $6.5 million in compensatory damages and an unspecified amount of punitive damages. The State of Oklahoma seeks $7.6 million in compensatory damages and that these damages by trebled. The OTA suit alleges that an undisclosed fee paid to the Company by a third party for the placement of a forward purchase contract in an advance refunding escrow for the proceeds of the 1992 OTA $608 million refinancing should have been paid to the OTA. The State of Oklahoma suit alleges that the Company and two former executives of the Company committed violations of the Racketeer Influenced and Corrupt Organizations Act. This suit alleges essentially the same facts as are alleged in the OTA suit and were alleged by the SEC in its action against the Company which was settled in August 1995 by the Company without admitting or denying the allegations. The State of Oklahoma suit was dismissed by the United States District Court for the Western District of Oklahoma and is currently on appeal in the United States Tenth Circuit Court of Appeals. Although the ultimate outcome of these actions cannot be ascertained at this time and the results of legal proceedings cannot be predicted with certainty, 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. 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 sells securities it does not currently own, 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 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. 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 the year, the notes were converted into 1,488,592 shares of the Company's $0.15 par value common stock at a conversion price of $6.72 per share. Interest charged to operations for these notes was $886, $1,125, and $1,125 for years 1997, 1996, and 1995, respectively. At December 31, 1997, the Company had outstanding with a stockholder $5,000 principal amount of notes due on June 30, 1999. Interest payments are due monthly commencing February 1, 1998, at the monthly LIBOR rate plus 1% (6.53% at December 31, 1997). 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 is included in the Company's consolidated statement of financial condition under the caption "long-term debt." Under the provisions of the statutes for certified capital companies, U.S. Treasury Notes of $2,507 have been placed in escrow to provide for repayment of the notes. 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 for income taxes consists of:
- ------------------------------------------------------------------------------------------- Year Ended Year Ended Year Ended December 31, 1997 December 31, 1996 December 31, 1995 - ------------------------------------------------------------------------------------------- Current: Federal $ 3,760 $1,597 $( 59) State 897 381 ( 14) - ------------------------------------------------------------------------------------------- $ 4,657 $1,978 $( 73) Deferred: Federal $( 732) $ 187 $ 594 State $( 175) 44 142 - ------------------------------------------------------------------------------------------- $( 907) $ 231 $ 736 - ------------------------------------------------------------------------------------------- $ 3,750 $2,209 $ 663 ===========================================================================================
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:
- ----------------------------------------------------------------------------------------------------------- Year Ended Year Ended Year Ended December 31, 1997 December 31, 1996 December 31, 1995 - ----------------------------------------------------------------------------------------------------------- Federal tax computed at statutory rates $ 3,203 $ 1,904 $ 444 State income taxes, net of federal income tax benefit 476 281 84 Tax-exempt interest, net of related interest expense ( 70) ( 59) (62) Goodwill amortization 80 80 80 Meals and entertainment 104 103 96 SEC fine - - - - 85 Increase in cash surrender value of life insurance ( 63) ( 36) ( 27) Other, net 20 ( 64) ( 37) - ----------------------------------------------------------------------------------------------------------- Provision for income taxes $ 3,750 $ 2,209 $ 663 ===========================================================================================================
The net deferred tax asset consists of the following temporary differences:
- ------------------------------------------------------------------------------------------------------------------------ December 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------------ Deferred Tax Receivables from customers, principally due to Asset allowance for doubtful accounts $ 217 $ 227 Office equipment and leasehold improvements, principally book over tax depreciation 1,037 856 Deferred compensation 1,135 810 Deferred revenue 229 195 Investments, principally due to valuation allowance 26 25 Receivables from officers and employees, principally due to allowance for doubtful accounts 950 1,111 Accruals not currently deductible 1,277 783 Other 78 15 -------------------------------------------------------------------------------------------------------- Deferred Tax Asset 4,949 4,022 -------------------------------------------------------------------------------------------------------- Deferred Tax Intangible assets, principally tax over book amortization ( 203) ( 211) Liability Investment fee revenue installment receivable ( 169) ( 140) -------------------------------------------------------------------------------------------------------- Total Gross Deferred Tax Liability ( 372) ( 351) -------------------------------------------------------------------------------------------------------- Net Deferred Tax Asset $ 4,577 $ 3,671 ========================================================================================================
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 $1,540, $801, and $1,263 (primarily for legal fees) to operations for these services for 1997, 1996, and 1995, 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, $17, and $20, for 1997, 1996, and 1995, respectively, for these services. Certain directors of the Parent have a general partnership interest in an enterprise in which the Company also holds general and limited partnership interests carried at approximately $507 at December 31, 1997, and $663 at December 31, 1996. Note N - Plan of Restructuring During the fourth quarter of 1994, the Board of Directors of the Parent approved a restructuring and downsizing plan for the Company to be implemented beginning in December 1994, which involved the closing or downsizing of 31 office locations and termination of approximately 70 officers and employees. The plan was completed during 1995. Following is a summary of activity in the accounts related to the restructuring accrual:
- ---------------------------------------------------------------------------------------------------------------- Severance Pay, Extended Benefits, Net Lease and Receivables Commitments Written Off for Abandonment for Closed Terminated Contractual of Leasehold Offices Employees Commitments Improvements Total - ---------------------------------------------------------------------------------------------------------------- January 1, 1995 Balance $1,400 $695 $191 $206 $2,492 - ---------------------------------------------------------------------------------------------------------------- Payments/charges 441 627 61 197 1,326 Adjustments through operations 64 1 130 - - 195 - ---------------------------------------------------------------------------------------------------------------- December 31, 1995 Balance 895 67 - - 9 971 - ---------------------------------------------------------------------------------------------------------------- Payments/charges 238 67 - - - - 305 Adjustments through operations - - - - - - 9 9 - ---------------------------------------------------------------------------------------------------------------- December 31, 1996 Balance 657 - - - - - - 657 - ---------------------------------------------------------------------------------------------------------------- Payments/charges 177 - - - - - - 177 Adjustments through operations 318 - - - - - - 318 - ---------------------------------------------------------------------------------------------------------------- December 31, 1997 Balance $ 162 - - - - - - $ 162 - ----------------------------------------------------------------------------------------------------------------
The balances at December 31, 1997, and December 31, 1996, are included in the statement of financial condition under the caption "Accounts payable and accrued expenses." During 1995, the Parent Company's Board of Directors reversed its decision regarding the payment of certain philanthropic commitments which had been accrued in 1994 as part of the restructuring charge and included in "Contractual commitments" above. As a result of this decision, $130 related to accrued contractual commitments was reversed and credited to operations in 1995. Note O - Sale of Oklahoma-Based Assets On May 25, 1995, the Company sold the majority of the assets of its Oklahoma- based operations to Capital West Financial Corporation ("Capital West"). The Company received cash, secured and senior notes, and warrants to purchase a minority interest in Capital West. In addition, Capital West assumed or subleased certain office and equipment lease obligations of the Company. The sale resulted in the reduction of approximately 70 Investment Executives and approximately 50 support staff located in 26 branch offices. The Company received secured and senior notes with a face amount of $1,850 bearing interest at a 10% annual rate with the final payments due May 24, 2000, in connection with the sale of its Oklahoma-based assets. The notes were recorded at a discounted cash flows rate of 17%. Pro forma financial information assuming the transaction had taken place at the beginning of the year is presented below: - -------------------------------------------------------------------------- Year Ended Unaudited Pro Forma Combined Results of Operations December 31, 1995 - -------------------------------------------------------------------------- Revenue $ 85,846 Net income $ 770 Basic income per share $ .16 - -------------------------------------------------------------------------- The above pro forma results do not purport to be indicative of results which actually would have occurred had the sale been made on January 1, 1995. On January 2, 1997, Capital West was reorganized and a new company, Affinity Holdings Corporation ("Affinity"), was formed. Affinity assumed the outstanding debt of Capital West. As part of the reorganization, Affinity exchanged the remaining balance of the $1,850 secured and senior notes issued by Capital West for a secured note due December 31, 2001, with a face amount of $305 bearing interest at a 10% annual rate; two hundred thousand shares of 10% cumulative non-voting preferred stock, par value $1.00; warrants to purchase a minority interest in Affinity; and substantially all of the fixed assets of Affinity with a fair value of approximately $300, which is being leased back to Affinity. Principal and interest payments on the note and dividend payments are made monthly based upon the level of activity of Affinity's broker-dealer subsidiary. Note P - Earnings Per Share During the year, the Company adopted SFAS 128. The following table reflects a reconciliation between Basic EPS and Diluted EPS.
- --------------------------------------------------------------------------------------------------------------------------------- December 31, 1997 December 31, 1996 December 31, 1995 ---------------------------------- ---------------------------------- -------------------------------- Income Shares Per Share 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 $5,671 5,324,895 $1.06 $3,393 4,905,236 $0.69 $644 4,836,894 $ 0.13 Effect of Dilutive Securities Options, ESPP, and deferred compensation - - 271,960 - - - - 97,650 - - - - 70,464 -- Convertible debt 541 1,157,802 - - 601 1,488,602 - - N/A* N/A* -- Diluted Earnings Per Share Income available to common stockholders and assumed conversions $6,212 6,754,657 $0.92 $3,994 6,491,488 $0.62 $644 4,907,358 $ 0.13 - ---------------------------------------------------------------------------------------------------------------------------------
*Anti-dilutive Note Q - Subsequent Event On January 20, 1998, 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 26, 1998, to shareholders of record on February 12, 1998. All share and per share data have been adjusted to reflect the stock dividend. Note R - Recent Accounting Pronouncements As of January 1, 1997, the Company adopted SFAS No. 125, which was effective for transfers of financial assets made after December 31, 1996, except for transfers of certain financial assets for which the effective date has been delayed for one year. SFAS No. 125 provides financial reporting standards for the derecognition and recognition of financial assets, including the distinction between transfers of financial assets which should be recorded as sales and those which should be recorded as secured borrowings. The adoption of the enacted provisions of SFAS No. 125 had no material effect on the Company's financial condition of results of operations. With respect to the provisions of SFAS No. 125 which become effective in 1998, the Company does not expect the impact of the adoption of the deferred provisions to be material to the Company's financial condition or results of operations. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." These statements, which are effective for fiscal years beginning after December 15, 1997, establish standards for the reporting and display of comprehensive income and the disclosure requirements related to segments. Independent Auditor's Report Independent 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. 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. The financial statements of the Company for the year ended December 31, 1995, were audited by other auditors whose report, dated February 25, 1996, expressed an unqualified opinion on those statements. 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 1997 and 1996 consolidated financial statements present fairly, in all material respects, the consolidated financial position of Stifel Financial Corp. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP February 20, 1998 St. Louis, Missouri EX-21 4 EXHIBIT 21 STIFEL FINANCIAL CORP. AND SUBSIDIARIES SUBSIDIARIES OF STIFEL FINANCIAL CORP. (1) STATE OF NAMES UNDER WHICH NAME INCORPORATION SUBSIDIARY DOES BUSINESS Stifel, Nicolaus & Missouri Stifel, Nicolaus & Company, Company, Incorporated Incorporated Alliance Realty Corp. Missouri Alliance Realty Corp. Century Securities Missouri Century Securities Associates, Associates, Inc. Inc. Stifel, Nicolaus Insurance Arkansas Stifel, Nicolaus Insurance Agency, Inc. (2) Agency, Inc. S-N Capital Corp. (2) Missouri S-N Capital Corp. Stifel Insurance Agency - Ohio Stifel Insurance Agency - Ohio, Ohio, Inc. (4) Inc. Stifel Venture Corp. Missouri Stifel Venture Corp. Pin Oak Capital, Ltd. (3) Missouri Pin Oak Capital, Ltd. Stifel Asset Management Corp. Missouri Stifel Asset Management Corp. Todd Investment Advisors, Kentucky Todd Investment Inc. (3) Advisors, Inc. Stifel CAPCO, L.L.C. Missouri Stifel CAPCO, L.L.C. (1) Does not include corporations in which registrant owns 50 percent or less of the stock. (2) Wholly owned subsidiary of Stifel, Nicolaus & Company, Incorporated. (3) Wholly owned subsidiary of Stifel Asset Management Corp. (4) Majority owned subsidiary of Stifel, Nicolaus & Company, Incorporated. EX-23.1 5 [Deloitte & Touche LLP letterhead] EXHIBIT 23 (a) STIFEL FINANCIAL CORP. CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the registration statements of Stifel Financial Corp. and Subsidiaries on Form S-8 (file numbers 2-94326, 33-10030, 33-16150, 33-20568, 33-53097, 333-37805, and 333-37807), on Form S-3 (file number 33-53699), and on Form S-2 (file number 333-28871) of our report dated February 20, 1998, incorporated by reference in the Annual Report on Form 10-K of Stifel Financial Corp. for the year ended December 31, 1997. /s/ Deloitte & Touche LLP February 20, 1998 St. Louis, Missouri EX-23.2 6 [Coopers & Lybrand L.L.P. letterhead] EXHIBIT 23 (b) STIFEL FINANCIAL CORP. CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Stifel Financial Corp. and Subsidiaries on Form S-8 (file numbers 2-94326, 33-10030, 33-16150, 33-20568, 33-53097, 333-37805, and 333-37807), on Form S-3 (file number 33-53699), and on Form S-2 (file number 333-28871) of our report dated February 25, 1996 on our audit of the consolidated statements of operations, stockholders' equity and cash flows and financial statement schedules of Stifel Financial Corp. and Subsidiaries for the year ended December 31, 1995, which report is incorporated by reference in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. St. Louis, Missouri March 25, 1998 EX-27.1 7 1997 FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the consolidated statement of financial condition dated December 31, 1997 and the statement of operations for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 15,544 239,550 0 18,223 19,212 2,227 315,484 89,150 89,923 0 72,466 4,264 9,600 1,002 0 0 49,079 315,484 20,202 21,397 49,763 28,476 2,950 12,991 82,094 9,421 9,421 0 0 5,671 1.06 0.92
EX-27.2 8 1995 AND 1996 RESTATED FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the consolidated statements of financial condition and the statements of operations and is qualified in its entirety by reference to such financial statements. 1,000 YEAR YEAR 9-MOS 6-MOS 3-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1995 DEC-31-1996 SEP-27-1996 JUN-28-1996 MAR-29-1996 7,120 8,443 7,723 9,175 5,967 172,998 243,141 166,304 168,741 148,085 0 0 0 0 0 4,912 10,284 16,943 5,558 11,044 19,521 18,913 19,124 24,721 23,117 3,014 2,233 2,559 2,717 2,770 227,288 301,344 231,589 229,313 206,673 86,450 132,400 50,225 65,225 74,750 71,934 71,237 49,511 54,255 44,897 0 0 0 0 0 20,555 46,727 81,458 60,768 40,276 2,744 3,229 3,494 2,271 1,273 10,760 10,000 10,000 10,000 10,000 681 715 681 681 681 0 0 0 0 0 0 0 0 0 0 34,114 37,036 36,070 35,913 34,746 227,288 301,344 231,589 229,313 206,673 20,362 19,498 14,668 10,017 4,788 13,002 13,774 10,069 6,559 3,190 38,716 43,900 32,454 22,538 11,042 12,121 16,253 8,034 5,050 1,214 2,617 2,650 2,003 1,375 706 8,312 8,197 6,100 4,008 1,942 57,187 66,765 47,155 32,718 14,526 1,307 5,602 3,274 2,499 258 1,307 5,602 3,274 2,499 258 0 0 0 0 0 0 0 0 0 0 644 3,393 1,969 1,511 150 0.13 0.69 0.40 0.31 0.03 0.13 0.62 0.38 0.29 0.03
EX-27.3 9 1997 RESTATED FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the consolidated statements of financial condition and the statements of operations and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 SEP-26-1997 JUN-27-1997 MAR-27-1997 6,392 7,113 6,435 226,409 319,037 270,639 0 0 0 10,740 12,549 19,569 17,234 20,055 27,464 2,380 2,407 2,312 281,496 378,216 343,577 61,675 180,575 166,375 65,566 54,968 63,258 0 0 0 98,662 89,113 60,893 3,337 3,507 3,536 7,500 10,000 10,000 795 715 715 0 0 0 0 0 0 43,961 39,338 38,801 281,496 378,216 343,577 14,681 10,117 5,266 16,004 10,047 4,045 36,804 23,299 11,420 20,130 11,723 7,696 2,146 1,346 633 10,414 6,483 2,351 59,625 37,595 20,215 7,680 4,316 2,752 7,680 4,316 2,752 0 0 0 0 0 0 4,580 2,568 1,647 0.92 0.52 0.33 0.73 0.43 0.27
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