-----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, VsCynZmKeHozBTaeYzDqPsBFMaPGp2XioIQ/su6Gk3YiR//Uzo35NZYf8CQIV6iY S5S8N9kPOKldcQEzoLBASg== 0000720672-99-000003.txt : 19990331 0000720672-99-000003.hdr.sgml : 19990331 ACCESSION NUMBER: 0000720672-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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-K SEC ACT: SEC FILE NUMBER: 001-09305 FILM NUMBER: 99576927 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-K 1 FORM 10-K; DECEMBER 31, 1998 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, 1998 [ ] 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) 501 N. Broadway St. Louis, Missouri 63102-2102 - --------------------------------------- ---------- (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 [ ] 2 Aggregate market value of voting stock held by non-affiliates of the registrant at March 10, 1999 was $58,431,864. Shares of Common Stock outstanding at March 10, 1999: 7,045,330 shares, par value $.15 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended December 31, 1998 are incorporated by reference in 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, 1999 are incorporated by reference in Part III hereof. Exhibit Index located on page 25. 3 PART I ITEM 1. BUSINESS Stifel Financial Corp. ("Financial"), a Delaware corporation and holding company, was organized in 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. Unless the context requires otherwise, 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 54 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. Principal Sources of Revenue The amounts of each of the principal sources of revenue of the Company for the years ended December 31, 1998, 1997 and 1996 are contained in Item 6. Selected Financial Data, herein. Narrative Description of Business As of February 28, 1999, the Company employed 851 individuals. Stifel Nicolaus employed 821 of which 307 were employed as investment executives. In addition, 144 investment executives were affiliated with Century Securities Associates, Inc. ("CSA") as independent contractors. Through its broker-dealer subsidiaries, the Company provides securities services to approximately 104,000 client accounts. No single client accounts for a material percentage of the Company's total business. The Company currently divides its business into three segments based on the products and services offered. These segments are private client, capital markets, and other. See Note N of the Consolidated Financial Statements incorporated by reference herein for a further discussion. Private Client The Company provides securities transaction and financial planning services to its private clients through Stifel Nicolaus' branch system and its independent contractor firm, CSA. In 1998 management made significant investments in personnel, technology, and market data platforms to grow the private client segment. 4 Stifel Nicolaus Private Client Stifel Nicolaus has 51 private client branches located in 12 states, primarily in the Midwest. Its 307 Investment Executives provide a broad range of services and financial products to their clients. In most cases Stifel Nicolaus charges commissions on both stock exchange and over-the-counter transactions, in accordance with Stifel Nicolaus' commission schedule. In certain cases, varying discounts from the schedule are granted. In addition, Stifel Nicolaus distributes both taxable and tax exempt fixed-income products to its private clients, including municipal, corporate, government agency and mortgage backed bonds, preferred stock, and unit investment trusts. An increasing number of clients are electing asset based fee alternatives to the traditional commission schedule. In addition, Stifel Nicolaus distributes insurance and annuity products, and investment company shares. Stifel Nicolaus has dealer-sales agreements with numerous distributors of investment company shares. These agreements generally provide for dealer discounts ranging up to 5.75 percent of the purchase price, depending upon the size of the transaction. Century Securities Associates Inc. Private Client CSA has affiliations with 144 independent contractors in 29 branch offices and 67 satellite offices in 29 states. Under their contractual arrangements, these independent contractors may provide accounting services, real estate brokerage, insurance, or other business activities for their own account. However, all securities transactions must be transacted through CSA. CSA's independent contractors provide the same types of financial products and services to its private clients, as does Stifel Nicolaus. Independent contractors are responsible for all of their direct costs and are paid a larger percentage of commissions to compensate them for their added expenses. CSA is an introducing broker-dealer and as such clears its transactions through Stifel Nicolaus. Client transactions in securities for Stifel Nicolaus and CSA are affected on either a cash basis 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. 5 Capital Markets Capital markets include investment banking, corporate finance and public finance departments, research department, syndicate department, over-the-counter equity trading, and institutional sales and trading. Investment Banking - Corporate Finance The investment banking corporate finance group consists of ten professionals, located in St. Louis, and is involved in public and private equity and preferred underwritings for corporate clients, merger and acquisition advisory services, fairness opinions, and evaluations. Stifel Nicolaus focuses on small and mid-cap financial institutions, located primarily in the Midwest, and to a lesser extent mortgage and property real estate investment trusts. Research Department The research department consists of seven analysts who publish research on over 144 companies. Proprietary research reports are provided to private and institutional clients at no charge and are supplemented by research purchased from outside vendors. Syndicate Department The syndicate department coordinates the marketing, distribution, pricing, and stabilization of the Company's lead- and co-managed underwritings. In addition, the syndicate department coordinates the firm's syndicate and selling group activities managed by other investment banking firms. Over-the-Counter Equity Trading 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. At December 31, 1998, Stifel Nicolaus made a market in 149 equity issues in the over-the-counter market. The Company does not engage in a significant amount of trading for its own account. Institutional Sales Institutional sales is comprised of institutional equity sales, fixed income sales, and taxable and tax-exempt trading departments located in St. Louis. The institutional equity sales group provides equity products to its institutional accounts in both the primary and secondary markets. Primary equity issues are generally underwritten by Stifel Nicolaus' investment banking corporate finance group. At December 31, 1998, the institutional equity sales department maintained relationships with over 370 institutional accounts. Stifel Nicolaus buys fixed income products, both tax-exempt and taxable products, primarily municipal bonds, corporate, government agency, and mortgage back bonds for its own account, maintains an inventory of these products and resells from that inventory to its institutional accounts. The institutional fixed income sales group maintained relationships with over 530 accounts at December 31, 1998. 6 Investment Banking-Public Finance Investment banking public finance consists of eight professionals with its principal offices in St. Louis and Wichita. Stifel Nicolaus 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 are originated through its office in St. Louis. Other Segments In addition to its private client segment and capital markets segment, the company has two investment advisory firms which provide investment advisory services to individuals, fiduciary, and corporate clients. Revenues are derived based upon assets under management. Pin Oak Capital, Ltd. is registered as an investment advisor in six states and had assets under management of approximately $147,298,000 at December 31,1998.Todd Investment Advisors,Inc.("Todd") holds registrations in sixteen states with approximately $3,088,475,000 of assets under management at December 31, 1998. On January 28, 1999, the Board of Directors of the Company announced the sale of all of the oustanding capital stock of Todd to a subsidiary of Western and Southern Life Insurance Company, a significant shareholder of the Company. Stifel Nicolaus clears transactions for the Company's independent contractor, CSA, and two other introducing broker-dealers. Revenues and costs associated with clearing these transactions are also included in "other segments." 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, on-line service providers, 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 108-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 two 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 four percent of aggregate debit balances and may be prohibited from expanding its business and declaring cash dividends if its net capital is less than five 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 requires 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 $28.5 million at December 31, 1998, which was approximately 10.6 percent of aggregate debit balances and approximately $23.1 million in excess of required net capital. 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 12 states, primarily in the Midwest. The Company has a total of 54 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 office space and equipment, for the year ended December 31, 1998 was approximately $4,031,000. 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 relating principally to its securities business. Some of these lawsuits and arbitrations claim substantial amounts, including punitive damages. One such claim involves a lawsuit filed on October 5, 1995 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. The OTA suit seeks $6.5 million in compensatory damages and an unspecified amount of punitive damages. The OTA suit alleges that an undisclosed fee paid to the Company by a third party for the placement of a forward purchase contract in an advance refunding escrow for the proceeds of the 1992 OTA $608 million municipal bond refinancing should have been paid to the OTA. Although the ultimate outcome of this and other actions cannot be ascertained at this time, management, based on its understanding of the facts and after consultation with outside counsel, does not believe the ultimate resolution of these matters will have a materially adverse effect on the Company's consolidated financial condition and results of operations. However, depending upon the period of resolution, such effects could be material to the financial results of an individual operating period. It is reasonably possible that certain of these lawsuits and arbitrations could be resolved in the next year, and management does not believe such resolutions will result in losses materially in excess of the amounts previously provided. 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 4a. 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 68 Chairman of the Board of 1978 Financial and Stifel Nicolaus Ronald J. Kruszewski 40 President and Chief Executive 1997 Officer of Financial and Stifel Nicolaus James M. Zemlyak 39 Vice President, Treasurer and 1999 Chief Financial Officer of Financial and Senior Vice President and Chief Financial Officer of Stifel Nicolaus Charles R. Hartman 55 Vice President and Secretary 1996 of Financial and General Counsel, Senior Vice President and Secretary of Stifel Nicolaus Scott B. McCuaig 49 Vice President of Financial and 1998 Director of Retail Sales & Marketing of Stifel Nicolaus Lawrence E. Somraty 50 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 of the Company. 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 Western and Southern Life Insurance Company, Laclede Steel Company, Laidlaw Corp., Macroeconomics Advisers, LLC, and EAC Corporation. He is active in various community activities. 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. Mr. Kruszewski is a director of digital broadcast network Corporation. James M. Zemlyak joined Stifel Nicolaus in February of 1999. He is Vice President, Treasurer, and Chief Financial Officer of Financial and Senior Vice President and Chief Financial Officer of Stifel Nicolaus and a member of the Board of Directors of Stifel Nicolaus. Prior to joining the Company, Mr. Zymlyak served as Chief Financial Officer of Baird Financial Corporation and Managing Director, Chief Financial Officer and a member of the Board of Directors of Robert W. Baird & Co. Incorporated. 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 from April 1982 to June of 1994, a Los Angeles partner in the law firm of Rogers & Wells. Scott B. McCuaig joined Stifel Nicolaus in January of 1998. He is Vice President of Financial and the Director of Retail Sales & Marketing, and a member of the Board of Directors of Stifel Nicolaus. Prior to joining Stifel Nicolaus, Mr. McCuaig was a Managing Director, head of marketing, regional sales manager, and a member of the Board of Directors of Robert W. Baird & Co. Incorporated. 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 of Stifel Nicolaus. 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 -------------------------------------------------- 1998 1997 Quarter High - Low High - Low -------------------------------------------------- First $16 3/16 - 12 1/16 $ 8 3/16 - 6 11/16 Second 17 5/8 - 13 11/16 10 15/16- 6 13/16 Third 15 11/16- 9 1/8 11 7/8 - 8 5/16 Fourth 11 1/2 - 8 3/4 15 3/8 - 11 13/16 ================================================== The Company from time-to-time uses funds generated from operations to purchase the Company's common stock throughout the calendar year. On January 27, 1999, the Company's Board of Directors authorized the purchase of an additional 500,000 shares to be used to satisfy share obligations for employee benefit plans and for general corporate purposes. b.) Holders The approximate number of stockholders of record on March 10, 1999 was 3,000. c.) Dividends Dividends paid were as follows: Record Payment Cash Stock Date Date Dividend Dividend 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 - - 02/12/98 02/26/98 $0.03 5% 05/12/98 05/28/98 $0.03 - - 08/06/98 08/20/98 $0.03 - - 11/05/98 11/19/98 $0.03 - - A regular quarterly cash dividend of $0.03 per share was established on November 30, 1993. 13 ITEM 6. SELECTED FINANCIAL DATA Stifel Financial Corp. and Subsidiaries Financial Summary
Years Ended December 31, ----------------------------------------------------------------- (In thousands, except 1998 1997 1996 1995 1994 per share and percentages) ---- ---- ---- ---- ---- Revenues Commissions $ 56,729 $ 49,763 $ 43,900 $ 38,716 $ 37,287 Principal transactions 26,465 20,463 19,498 20,362 24,639 Investment banking 15,763 28,476 16,253 12,121 12,634 Interest 18,889 21,397 13,774 13,002 10,918 Other 19,442 15,997 16,388 11,159 8,448 --------- --------- --------- --------- --------- 137,288 136,096 109,813 95,360 93,926 --------- --------- --------- --------- --------- Expenses Employee compensation and benefits 86,967 82,094 66,765 57,187 61,527 Commissions and floor brokerage 2,804 2,780 2,641 2,319 2,120 Communications and office supplies 8,389 6,914 6,797 7,651 8,045 Occupancy and equipment 9,549 8,109 7,958 8,512 11,601 Interest 9,798 12,991 8,197 8,312 6,138 Litigation, settlements,and bad debts 830 3,726 3,292 1,610 2,467 Restructuring charge - - - - - - - - 2,672 Other operating expenses 10,362 10,061 8,561 8,462 8,577 --------- --------- --------- --------- --------- 128,699 126,675 104,211 94,053 103,147 --------- --------- --------- --------- --------- Income (loss) before income taxes 8,589 9,421 5,602 1,307 (9,221) Provision (benefit) for income taxes 3,344 3,750 2,209 663 (3,718) --------- --------- --------- --------- --------- Net income (loss) $ 5,245 $ 5,671 $ 3,393 $ 644 $ (5,503) ========= ========= ========= ========= ========= Per Share Data Basic earnings (loss)(a) $ .77 $ 1.01 $ .66 $ .13 $ (1.09) Diluted earnings (loss)(a) $ .73 $ .88 $ .59 $ .13 $ (1.09) Cash dividends $ .12 $ .12 $ .09 $ .12 $ .09 Other Data Total assets $ 335,005 $ 315,484 $ 301,344 $ 226,775 $ 222,208 Long-term obligations $ 20,570 9,600 10,000 10,760 11,520 Stockholders' equity $ 54,977 50,081 37,752 34,795 34,226 Net income as % averageity 9.69 % 13.29 % 9.35 % 1.87 % * N.M. Net income as % revenues 3.82 % 4.17 % 3.09 % 0.68 % * N.M. Average common shares and share equivalents outstanding (a): Basic 6,850 5,591 5,150 5,079 5,042 Diluted 7,198 7,099 6,816 5,152 5,042 - --------------------------------------------------------------------------------------------------
(a) Retroactively restated to reflect the 5 percent stock dividend declared January 27, 1999. * Not Meaningful 14 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Management's Financial Discussion, including the discussion under "Year 2000," together with other sections of this Annual Report, contains forward-looking statements within the meaning of federal securities laws. Actual results are subject to risks and uncertainties, including both those specific to the Company and those specific to the industry which could cause results to differ materially from those contemplated. The risks and uncertainties include, but are not limited to, third-party or Company failures to achieve timely, effective remediation of the Year 2000 issues, general economic conditions, actions of competitors, regulatory actions, changes in legislation and technology changes. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date of this Annual Report. The Company does not undertake any obligation to publicly update any forward-looking statements. Management's Discussion and Analysis of Financial Condition and Results of Operations, included on pages 22 through 27 of the Annual Report of the Registrant to its Stockholders, for the year ended December 31, 1998, is incorporated herein by reference. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. Quantitative and Qualitative Disclosure About Market Risk, included on page 27 of the Annual Report of the Registrant to its Stockholders, for the year ended December 31, 1998, is incorporated herein by reference. 15 ITEM 8. Financial Statements and Supplementary Data. The following consolidated financial statements included in the Annual Report of the Registrant to its Stockholders, for the year ended December 31, 1998, is incorporated herein by reference. Statement Annual Report Reference --------- ----------------------- Consolidated Statements of Financial Condition -- December 31, 1998 and December 31, 1997 ................ 28 - 29 Consolidated Statements of Operations -- Years ended December 31, 1998, December 31, 1997 and December 31, 1996.................................. 30 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1998, December 31, 1997 and December 31, 1996.................................. 31 Consolidated Statements of Cash Flows -- Years ended December 31, 1998, December 31, 1997 and December 31, 1996.................................. 32 - 33 Notes to Consolidated Financial Statements............... 34 - 48 Independent Auditors' Report............................. 49 Selected Quarterly Financial Data, included on page 50 of the Annual Report of the Registrant to its Stockholders, for the year ended December 31, 1998, is incorporated herein by reference. 16 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III ITEM 10. Directors and Executive Officers of the Registrant. Information regarding directors is contained in "Voting Securities and Principal Holders Thereof" and "Election of Directors," included in the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders, which information is incorporated herein by reference. Information regarding the executive officers, as of March 26,1999 is contained in "Item 4a Executive Officers of the Registrant," hereof. There is no family relationship between any of the named executive officers. Information regarding compliance with Section 16 of the Securities Exchange Act of 1934, as amended, is contained in "Section 16(a) Beneficial Ownership Reporting Compliance," included in the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders, which information is incorporated herein by reference. 17 ITEM 11. Executive Compensation. Information regarding executive compensation is contained in "Executive Compensation," included in the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownership of certain beneficial owners and management is contained in "Voting Securities and Principal Holders Thereof," included in the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions. Information regarding certain relationships and related transactions is contained in "Certain Relationships and Related Transactions," included in the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial Statements: Incorporated herein by reference, are listed in item 8 hereof. (2) Consolidated Financial Statement Schedules: Independent Auditors' Report...................................20 Schedule I - Condensed Financial Information of Registrant....21-23 Schedule II- Valuation and Qualifying Accounts.................24 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. (3) Exhibits: See Exhibit Index on pages 25 and 27 hereof. (b) Reports on Form 8-K: There were no reports on Form 8-K during the fourth quarter ended December 31, 1998. 18 SIGNATURES Pursuant to the requirements of Section 13 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 1999. STIFEL FINANCIAL CORP. (Registrant) By /s/ Ronald J. Kruszewski ----------------------------- Ronald J. Kruszewski (Principal Executive Officer) /s/ Bernard N. Burkemper ----------------------------- Bernard N. Burkemper (Principal Accounting Officer) 19 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 26, 1999, 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/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 20 [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, 1998 and December 31, 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated March 5, 1999; such consolidated financial statements and report are included in your 1998 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the 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 consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP March 5, 1999 St. Louis, Missouri 21 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS STIFEL FINANCIAL CORP. Dec. 31, Dec. 31, 1998 1997 ---------- ---------- ASSETS Cash $ 9,155 $ 9,155 Due from subsidiaries (a) 3,795,026 3,615,656 Investment in subsidiaries (a) 52,684,827 47,214,774 Office equipment and leasehold improvements,less allowances for depreciation and amortization of $11,869,688 and $10,449,850, respectively 5,195,917 2,136,544 Investments, at cost 1,462,239 1,373,424 Goodwill, net of amortization of $645,955 and $554,095, respectively 1,723,187 1,815,047 Other assets 2,075,975 2,427,287 ----------- ----------- TOTAL ASSETS $66,946,326 $58,591,887 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Due to subsidiaries (a) $ 4,773,926 $ 2,238,164 Obligation under capital lease 847,769 522,498 Long-term debt 5,370,000 5,000,000 Other liabilities 978,417 749,881 ----------- ----------- TOTAL LIABILITIES 11,970,112 8,510,543 Stockholders' Equity: Capital stock 1,082,521 1,001,933 Additional paid-in capital 41,867,576 37,006,360 Retained earnings 18,291,104 17,425,321 ----------- ----------- 61,241,201 55,433,614 Less treasury stock, at cost 2,161,886 1,989,167 Less unearned employee stock ownership plan shares 3,021,862 3,178,125 Less unamortized expense of restricted stock awards, at cost 1,081,239 184,978 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 54,976,214 50,081,344 ----------- ----------- TOTAL LIABILITIES & STOCKHOLDERS'EQUITY $66,946,326 $58,591,887 =========== =========== (a) Eliminated in consolidation. See Notes to Consolidated Financial Statements (Item 8) 22 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CONDENSED STATEMENTS OF OPERATIONS STIFEL FINANCIAL CORP. Years Ended December 31, --------------------------------------- 1998 1997 1996 Revenues: Lease $1,762,434 $1,202,248 $1,406,556 Other 523,138 95,015 (59,024) ---------- ---------- ---------- 2,285,572 1,297,263 1,347,532 Expenses: Depreciation and amortization 1,853,837 1,294,108 1,431,798 Professional fees 410,039 290,554 246,178 Provision for doubtful collection - - - - 300,000 Miscellaneous 492,273 194,419 159,460 ---------- ---------- ---------- 2,756,149 1,779,081 2,137,436 ---------- ---------- ---------- Loss before income taxes (470,577) (481,818) (789,904) Benefit for income taxes (226,522) (201,150) (343,024) (Loss) before equity in net Income of subsidiaries (244,055) (280,668) (446,880) Equity in net income of subsidiaries 5,489,482 5,951,674 3,839,382 ---------- ---------- ---------- NET INCOME $5,245,427 $5,671,006 $3,392,502 ========== ========== ========== See Notes to Consolidated Financial Statements (Item 8) 23 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CONDENSED STATEMENTS OF CASH FLOWS STIFEL FINANCIAL CORP.
Years Ended December 31, -------------------------------------------- 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: - ------------------------------------- Net income $ 5,245,427 $ 5,671,006 $ 3,392,502 Non-cash items included in net income: Depreciation and amortization 1,853,837 1,294,108 1,431,798 Deferred items 79,812 (251,492) (119,353) Undistributed income of subsidiaries (5,489,482) (5,951,674) (3,839,382) Amortization and forfeitures of restricted Stock awards and stock benefits 594,800 172,357 75,055 ----------- ----------- ----------- 2,284,394 934,305 940,620 Net change in due to/due from subsidiaries (179,370) 595,049 1,512,913 (Increase) decrease in other assets 197,542 (796,569) 1,487,309 Increase (decrease) in other liabilities 2,765,035 (169,235) (379,298) ----------- ----------- ----------- CASH FROM OPERATING ACTIVITIES 5,067,601 563,550 3,561,544 =========== =========== =========== CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from: Shares issued 2,043,402 2,907,790 632,338 Long-term debt 370,000 5,000,000 - - Payments for: Settlement of long-term debt - - - - (760,000) Purchase of stock for treasury (2,160,450) (2,926,452) (520,321) Purchase unearned ESOP shares - - (3,178,125) - - Principal payments under capital lease (597,930) (392,248) (433,284) Cash dividend and rights redemption (829,046) (608,968) (625,128) ----------- ----------- ----------- CASH FROM FINANCING ACTIVITIES (1,174,024) 801,997 (1,706,395) =========== =========== =========== CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from: Distributions/sales received on investments 118,300 62,020 36,360 Sales of office equipment and leasehold improvements 46,205 144,512 23,405 Payments for: Acquisition of investments (119,999) (633,739) (1,513,232) Acquisition of Office equipment and leasehold improvements (3,938,083) (938,340) ( 401,682) ----------- ----------- ----------- CASH FROM INVESTING ACTIVITIES (3,893,577) (1,365,547) (1,855,149) =========== =========== =========== 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 =========== =========== =========== Supplemental Disclosures of Cash Flow Information Schedule of Non-cash Investing and Financing Activities Fixed assets acquired under capital lease $ 923,000 $ 405,000 $ 240,000 Restricted stock awards, net of forfeitures $ 1,263,000 $ 153,000 $ 182,000 Employee stock ownership shares issued $ 165,000 $ 300,000 $ 280,000 Debt converted to stock - - $10,000,000 - - Stock dividends distributed $ 3,551,000 $ 4,370,000 $ 1,786,000 See Notes to Consolidated Financial Statements (Item 8)
24 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 Deduction of Period ----------- --------- ---------------- --------- --------- Year Ended December 31, 1998: Deducted from asset account: Allowances for doubtful accounts $ 555,891 $ 0 $ 0 $ 555,891 Deducted from asset account: Allowances for doubtful notes receivables 2,376,351 254,108 2,148,090 482,369 Deducted from asset account: Allowances for doubtful collection of other assets 62,000 0 58,414 3,586 Deducted from asset Account: Reserves for Investments 679,846 330,270 0 1,010,116 Deducted from asset Account: Reserves for Securities owned 200,000 0 0 200,000 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 Uncollected accounts written off and recoveries. Uncollected notes written off and recoveries. Investments disposed of. Uncollected asset written off. Recovery of account.
25 EXHIBIT INDEX Stifel Financial Corp. and Subsidiaries Annual Report on Form 10-K Year Ended December 31, 1998 Exhibit Number Description 3. (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 Annual Report on Form 10-K (File No.1-9305) 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 Annual Report on Form 10-K (File No.1-9305) 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 Annual Report on Form 10-K (File No.1-9305) 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 Annual Report on Form 10-K (File No. 1-9305) for fiscal year ended July 30, 1993. 4. (a) Prefered Stock Purchase Rights of Financial, incorporated herein by reference to Financial's Registration Statement on Form 8-A (File No. 1- 9305) filed July 30, 1996. 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 Annual Report on Form 10-K (File No. 1-9305) 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 Annual Report on Form 10-K(File No.1-9305) for the fiscal year ended July 31, 1992. * 26 (b) Form of Indemnification Agreement with directors dated as of June 30, 1987, incorporated herein by reference to Exhibit 10.2 to Financial's Current 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 Annual Report on Form 10-K (File No. 1 -9305) 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 Annual Report on Form 10-K (File No. 1-9305) for the fiscal year ended July 28, 1989. * (g) 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. (h) 1997 Stock Incentive Plan of Financial, incorporated herein by reference to Financial's Registration Statement on Form S-8 (Registration File No. 333-37805) filed October 14, 1998. * (i) 1998 Employee Stock Purchase Plan of Financial, incorporated herein by reference to Financial's Registration Statement on Form S-8(Registration File No. 333-37807) filed October 14,1998. * (j)(1) Employment Letter with Ronald J.Kruszewski, incorporated herein by reference to Exhibit 10(l) to Financial's Annual Report on Form 10-K (File No. 1-9305) for the year ended December 31,1997. * (j)(2) Stock Unit Agreement with Ronald J. Kruszewski, filed herewith. * 13. Annual Report to Stockholders for the year ended December 31, 1998, filed herewith. Except for those portions of pages expressly incorporated by reference, the 1998 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. Consent of Independent Auditors, filed herewith. 27. 1998 Financial Data Schedule BD, filed herewith. * Management contract or compensatory plan or arrangement. EX-10 2 EXHIBIT 10. (j)(2) STIFEL FINANCIAL CORP. AND SUBSIDIARIES Stock Unit Agreement with Ronald J. Kruszewski STIFEL FINANCIAL CORP. STOCK UNIT AGREEMENT Stifel Financial Corp., a Delaware Corporation ("Company") and Ronald J. Kruszewski ("Executive") hereby agree as follows: WHEREAS, the Company established the Stifel Financial Corp. 1997 Incentive Stock Plan (the "Plan") pursuant to which options, stock appreciation rights and restricted stock covering an aggregate of 600,000 shares of the Stock of the Company may be granted to key employees of the Company and its subsidiaries; and WHEREAS, the Board of Directors of the Company has amended the Plan to permit the grant of Stock Units; and WHEREAS, Executive previously purchased 124,688 restricted shares of Stock for a note to the Company, which the Board of Directors of the Company agreed to forgive over a period of approximately six years subject to the continued employment of Executive; and WHEREAS, Executive has agreed to surrender such 124,688 restricted shares of Stock in satisfaction of the remaining balance due on such note, up to the fair market value of such shares, contingent on the award of 124,688 Stock Units in replacement of such restricted stock/note arrangement; and WHEREAS, the Compensation Committee of the Board of Directors of the Company, as Administrator of the Plan, wishes to grant Executive 124,688 Stock Units to replace the shares of Stock surrendered by Executive in partial satisfaction of such note; NOW, THEREFORE, in consideration of services rendered and the mutual covenants herein contained, the parties agree as follows: Section 1. Definitions As used in this Agreement, the following terms shall have the following meanings: A. "Award" means the award provided for in Section 2. B. "Board of Directors" means the Board of Directors of the Company. C. "Change in Control" means: (i) The acquisition by any individual, entity or group, or a Person (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of ownership of 15% or more of either (a) the then outstanding shares of Stock of the Company (the "Outstanding Company Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, such an acquisition of ownership of 15% or more but less than 25% of Outstanding Corporation Common Stock or Outstanding Corporation Voting Securities with the prior approval of the Board of Directors of the Company shall not result in a Change in Control within the meaning of this subparagraph; or (ii) Individuals who, as the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, as a member of the Incumbent Board, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule l4a-11 of Regulation l4A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (a) more than 50% of, respectively, the then outstanding shares of Stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person beneficially owns, directly or indirectly, 15% or more of, respectively, the then outstanding shares of Stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors (provided, however, such 15% threshold may be increased up to 25% by the Board of Directors of the Company prior to such approval by the stockholders) and (c) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the stockholders of the Company of (a) a complete liquidation or dissolution of the Company or (b) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (1) more than 50% of, respectively, the then outstanding shares of Stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person beneficially owns, directly or indirectly, 15% or more of, respectively, the then outstanding shares of Stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors (provided, however, such 15% threshold may be increased up to 25% by the Board of Directors of the Company prior to such approval by the stockholders) and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. D. "Date of Award" means December 21, 1998. E. "Permanent Disability" means total inability of Executive, because of bodily injury or disease, to carry out his duties as an employee of the Company's Subsidiary, Stifel, Nicolaus & Company, Incorporated, for a period of at least six consecutive months. F. "Retirement" means termination of employment with the Company and its Subsidiaries after attaining the age of 65. G. "Stock" means the common stock of the Company, par value fifteen cents ($0.15) per share. H. "Subsidiary" means any corporation, other than the Company, in an unbroken chain of corporations beginning with the Company if, at the relevant date, each of the corporations, other than the last corporation in the unbroken chain, owns stock possessing fifty percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Section 2. Award Subject to the terms of this Agreement, the Company hereby awards to Executive 124,688 Stock Units, effective as of the Date of Award. Each Stock Unit represents the obligation of the Company to transfer one share of Stock to Executive at the time provided in Section 5 of this Agreement, provided such Stock Unit is vested at such time. Section 3. Bookkeeping Account The Company shall record the number of Stock Units granted hereunder to a bookkeeping account for Executive (the "Stock Unit Account"). Executive's Stock Unit Account shall be debited by the number of Stock Units, if any, forfeited in accordance with Section 4 and by the number of shares of Stock transferred to Executive in accordance with Section 5 with respect to such Stock Units. Executive's Stock Unit Account also shall be adjusted from time to time for stock dividends, stock splits and other such transactions in accordance with Section 10. Section 4. Vesting Subject to the accelerated vesting provisions provided below, if Executive remains employed by the Company through the applicable date, the Stock Units shall vest at the times provided in the following schedule: Stock Units Becoming Aggregated Stock Vesting Date Vested on such Date Units Vested January 1, 1999 26,250 26,250 January 1, 2000 26,250 52,500 January 1, 2001 26,250 78,750 January 1, 2002 26,250 105,000 January 1, 2003 19,688 124,688 In the event Executive dies while employed, or terminates employment on account of his Permanent Disability, before January 1, 2003, an additional number of Stock Units shall vest. The additional number shall be the number of Stock Units that would have vested had Executive remained employed by the Company as of the January 1 next following the year in which such death or disability occurred, multiplied by a fraction the numerator of which is the number of days that have elapsed during the calendar year in which such death or disability occurred and the denominator of which is 365. All of the Stock Units granted pursuant to Section 2 shall be fully vested immediately upon a Change in Control. In addition, all of the Stock Units granted pursuant to Section 2 shall be fully vested (a) in the event of termination of Executive's employment by the Company for a reason other than a Good Cause Event (as defined below), or (b) Executive's resignation for Good Reason (as defined below). The term "Good Cause Event" shall mean (a) a good faith determination by the Board of Directors, after notice to Executive and opportunity by Executive to be heard, that Executive committed a fraud, misappropriation, embezzlement or theft against or from the Company or any of its subsidiaries, (b) conviction of Executive of a felony or (c) a good faith determination by the Board of Directors, after a ninety day warning and the opportunity to cure and to be heard by the Board of Directors, on substantial evidence that Executive was grossly negligent in carrying out, or unreasonably refused to serve or carry out, the duties and responsibilities of Executive's employment with the Company. The term "Good Reason" shall mean the occurrence of any of the following without the Executive's consent: (a) the assignment to the Executive of any duties inconsistent in any material respect with his positions as President and Chief Executive Officer of the Company (including status, offices, titles and reporting requirements), authority, duties or responsibilities as of the commencement of Executive's employment with the Company, or any action by the Company that results in material diminution in such positions, authority, duties or responsibilities, excluding, for this purpose, any isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Company promptly after receipt of written notice thereof given by the Executive; or (b) any failure by the Company to provide the compensation and benefits to which the Executive is entitled under any agreement with the Company or any compensation or benefit plan or practice generally applicable to senior executives of the Company, other than any isolated, insubstantial and inadvertent failure not occurring in bad faith and that is remedied by the Company promptly after receipt of written notice given by the Executive; or (c) the Company requiring Executive to be based at a location that is more than fifty miles for St. Louis, MO. In the event of the termination of employment of the Executive with the Company for any other reason, all Stock Units that are not vested at the time of such termination of employment shall be forfeited. Section 5. Distribution of Shares Subject to the provisions below, so long as Executive shall remain employed by the Company, the Company shall transfer shares of Stock to Executive in annual installments over a period of seven years beginning January 1, 2007. The number of shares of Stock in each installment shall be determined under the declining balance accounting method, based on the number of Stock Units credited to Executive's Stock Unit Account as of the beginning of each year in the installment payment period. For example, shares of Stock equal to 1/7 of the Stock Units credited to Executive's Stock Unit Account as of January 1, 2007 shall be transferred to Executive as soon as administratively practical in 2007; 1/6 of the Stock Units credited to Executive's Stock Unit Account as of January 1, 2008 shall be transferred to Executive as soon as administratively practical in 2008; and so on, with the balance distributed in the seventh year of the payout period. Executive may elect to defer the date of transfer of Stock to a specified later date while Executive is still employed. Such an election shall be delivered in writing to the Company at least six months before the date of transfer specified above, and shall be irrevocable after such election deadline. In the event of the termination of the employment of Executive with the Company before the payment dates as scheduled above, the Company shall transfer, as soon as practical after such a termination of employment, shares of Stock to Executive equal in number to the Stock Units credited to Executive's Stock Unit Account at the time of such termination of employment (regardless of any election to defer the transfer). Notwithstanding any other provision of this Agreement to the contrary, no shares of Stock shall be transferred to Executive prior to the earliest date on which the Company's federal income tax deduction for such payment is not precluded by Section 162(m) of the Internal Revenue Code. In the event any payment is delayed solely as a result of the preceding restriction, such payment shall be made as soon as administratively feasible following the first date as of which Section 162(m) of the Internal Revenue Code no longer precludes the deduction by the Company of such payment. Section 6. Shareholder Rights Executive shall not have any of the rights of a shareholder of the Company with respect to Stock Units, such as the right to vote. Section 7. Dividend Equivalents The Company shall pay Executive as soon as practical after the Company pays a cash dividend to shareholders of Stock an amount in cash equal to the amount per share of such cash dividend multiplied by the number of Stock Units credited to the Stock Unit Account of Executive as of the record date of such dividend. The Company may withhold from such payment any applicable federal, state or local income or payroll tax. Section 8. Death Benefits In the event of the death of Executive, as soon as practical after the death of Executive, the Company shall transfer shares equal in number to the vested Stock Units, if any, credited to Executive's Stock Unit Account to Executive's Beneficiary or Beneficiaries. Executive may designate a Beneficiary or Beneficiaries (contingently, consecutively, or successively) of such death benefit and, from time to time, may change his or her designated Beneficiary. A Beneficiary may be a trust. A beneficiary designation shall be made in writing in a form prescribed by the Company and delivered to the Company while the Participant is alive. If there is no designated Beneficiary surviving at the death of a Participant, payment of any death benefit of the Participant shall be made to the persons and in the proportions which any death benefit under the Stifle Financial Corp. Employee Stock Ownership Plan is or would be payable. Section 9. Units Non-Transferable Stock Units awarded hereunder shall not be transferable by Executive. Except as may be required by the federal income tax withholding provisions of the Code or by the tax laws of any State, the interests of Executive and his Beneficiaries under this Agreement are not subject to the claims of their creditors and may not be voluntarily or involuntarily sold, transferred, alienated, assigned, pledged, anticipated, or encumbered. Any attempt by Executive or a Beneficiary to sell, transfer, alienate, assign, pledge, anticipate, encumber, charge or otherwise dispose of any right to benefits payable hereunder shall be void. Section 10. Adjustment in Certain Events If there is any change in the Stock by reason of stock dividends, split-ups, mergers, consolidations, reorganizations, combinations or exchanges of shares or the like, the number of Stock Units credited to Executive's Stock Unit Account shall be adjusted appropriately so that the number of Stock Units credited to Executive's Stock Unit Account after such an event shall equal the number of shares of Stock a shareholder would own after such an event if the shareholder, at the time such an event occurred, had owned shares of Stock equal to the number of Stock Units credited to Executive's Stock Unit Account immediately before such an event. Section 11. Tax Withholding The Company shall not be obligated to transfer any shares of Stock until Executive pays to the Company or a Subsidiary in cash, or any other form of property, including Stock, acceptable to the Company, the amount required to be withheld from the wages of Executive with respect to such shares. Executive may elect to have such withholding satisfied by a reduction of the number of shares otherwise transferable under this Agreement at such time, such reduction to be calculated based on the closing market price of the Stock on the day Executive gives written notice of such election to the Company. Section 12. Source of Payment Shares of Stock transferable to Executive, or his Beneficiary, under this Agreement may be either Treasury shares, authorized but unissued shares, or any combination of such stock. The Company shall have no duties to segregate or set aside any assets to secure Executive's right to receive shares of Stock under this Agreement. Executive shall not have any rights with respect to transfer of shares of Stock under this Agreement other than the unsecured right to receive shares of Stock from the Company. Section 13. Amendment This Agreement may be amended by mutual consent of the parties hereto by written agreement. Section 14. Governing Law This Agreement shall be construed and administered in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the Company and Executive have caused this Agreement to be executed on this 21st day of December 1998. STIFEL FINANCIAL CORP. By: /s/ Charles R. Hartman ---------------------- Title: Secretary ---------------------- By: /s/ Ronald J. Kruszewski ------------------------ Ronald J. Kruszewski Executive EX-13 3 Management's Discussion and Analysis of Financial Condition and Results of Operations* Business Environment Stifel Financial Corp. ("the Parent"), through its wholly owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus"), collectively referred to as ("the Company"), is principally engaged in retail brokerage, securities trading, investment banking, investment advisory, and related financial services throughout the United States. Although the Company has offices throughout the United States, its major geographic area of concentration is in the Midwest. The Company's principal customers are individual investors, with the remaining client base composed of corporations, municipalities, and institutions. Many factors affect the Company's results of operations, including changes in economic conditions, inflation, volatility of securities prices and interest rates, trading volume of securities, demand for investment banking services, political events, and competition from other financial institutions. As these factors are outside the control of the Company, and a significant portion of the Company's expenses are relatively fixed, results of operations can vary significantly from period to period. The Company faces increasing competition from other financial institutions such as commercial banks,on-line service providers, and other companies offering financial services. As a result of recent and pending regulatory initiatives to relieve certain restrictions on commercial banks, competition to provide financial services once dominated by securities firms has increased and may continue to increase. In addition, recent consolidation in the financial services industry may lead to increased competition from larger diversified organizations. At present, the Company is unable to predict the extent of these changes and the impact on the Company's results of operations. The following summarizes the changes in the major categories of revenues and expenses for the respective periods.
- -------------------------------------------------------------------------------- Year Ended Year Ended December 31, December 31, December 31, December 31, Increase (Decrease) 1998 vs. 1997 1997 vs. 1996 - -------------------------------------------------------------------------------- Dollars in thousands Amount Percentage Amount Percentage - -------------------------------------------------------------------------------- Revenues: Commissions $ 6,966 14% $ 5,863 13% Principal transactions 6,002 29 965 5 Investment banking (12,713) (45) 12,223 75 Interest (2,508) (12) 7,623 55 Other revenues 3,445 22 (391) (2) - -------------------------------------------------------------------------------- $ 1,192 1% $26,283 24% - -------------------------------------------------------------------------------- Expenses: Compensation and benefits $ 4,873 6% $15,329 23% Commissions and floor brokerage 24 1 139 5 Communication and office supplies 1,475 21 117 2 Occupancy and equipment rental 1,440 18 151 2 Interest (3,193) (25) 4,794 58 Litigation settlements and bad debts (2,896) (78) 434 13 Other operating expenses 301 3 1,500 18 - -------------------------------------------------------------------------------- $ 2,024 2% $22,464 22% - --------------------------------------------------------------------------------
*This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, as well as a discussion of some of the risks and uncertainties involved in the Company's businesses that could affect the matters referred to in such statements. 1998 As Compared to 1997 The strong market conditions experienced in 1997 continued to surge upward in 1998 as record volumes set in 1997 over 1996 fell by the wayside. Continued low interest rates and low inflation preserved investor confidence in the equity markets as evidenced by record trading volumes on the three major U.S. markets (NYSE, NASDAQ, and AMEX) which increased 25% over 1997's record volumes. Additionally, industry-wide net new sales of mutual funds experienced a record increase of 28% in 1998 over 1997's record net new sales. The Company's focus for 1998 was expansion of its Private Client Group. In that vein, the Company invested in several key areas to broaden its capabilities and capacity to support the Private Client Group. Professional support associates were added to improve financial and retirement planning, provide trust and corporate executive services, and provide technical support for improved technology. Additionally, the Company introduced new client statements with cost-basis information and made substantial investments in state-of-the-art desktop workstations and market data platforms. As a result, the Company added 65 new investment executives and opened 10 new offices. Short term, margins have been negatively impacted. Calendar 1998 was the Company's second successive year of record revenues. Total revenues of $137.3 million represented a nominal increase over the prior year's revenues of $136.1 million, but was more notable considering the drop in new issue underwritings experienced industry-wide. Net income declined to $5.2 million in 1998 from $5.7 million in 1997, while net income per diluted share declined to $0.73 from $0.88 one year earlier. Revenues from commissions increased $7.0 million, principally as a result of the strong equity markets and an increase in the number of investment executives and independent contractors. Main components of the increase were commissions on mutual funds, listed equity securities, and insurance products, which increased 24%, 16%, and 29%, respectively. Principal transaction revenues are primarily derived from over- the-counter equity and fixed income inventory activities. Inventories of these securities are maintained to meet client needs. Realized and unrealized gains and losses that result from holding and trading these securities are included in principal transaction revenues. Revenues from principal transactions increased $6.0 million, resulting primarily from revenue generated by the sales of unit investment trusts. Investment banking revenues are derived from underwriting of corporate and municipal securities and providing advisory services to clients. These revenues decreased $12.7 million from the record year of 1997, as new issue equity underwritings, especially small and mid-cap offerings, slowed dramatically. The Company's investment banking revenues declined principally from fewer equity and preferred underwritings. The number of managed and co-managed corporate underwritings and the dollar volume of these transactions decreased from 24 new issues for $1.4 billion in 1997 to 8 new issues for $442 million in 1998. Interest revenue decreased $2.5 million, resulting from a drop in interest earned from customer borrowings on margin accounts. This earnings decline was the result of both a reduction in customer borrowings and a moderate decrease in rates charged to customers. Other revenues increased $3.4 million, principally from a 28% growth in money market account fees and a 28% growth in managed account service fees. 1998 As Compared to 1997 (continued) Total expenses increased $2.0 million to $128.7 million, principally as a result of increased compensation and benefits along with rising operating costs associated with the growth of the Company's Private Client Group, offset by a significant decline in litigation expenses. Compensation and benefits, the largest component of the Company's total expenses, rose $4.9 million. A significant element of compensation, sales commissions, increased $3.6 million. The increased level of sales commissions was the result of increases in hiring incentives paid to newly recruited investment executives, increases in compensation as a result of higher individual production, and increases in payments to independent contractors. The Company's emphasis on expanding the Private Client Group, broadening the depth of services provided to the Private Client Group, enhancing information technology, and opening 10 branch offices led to an increase in the number of support associates, resulting in a $3.1 million increase in salary expense over 1997 salary expense. The increase in sales commission and salary expense was offset by the decline in incentive compensation related to departmental and firm-wide profitability. Communications and office supplies rose $1.5 million. The increases in communication costs resulted principally from the expansion and improvement of the Company's communication technology to enhance services provided for the Company's private clients. Office supplies increased as a direct result of the increase in branch office openings. The opening of 10 new Private Client Group branch offices and the upgrading of communications technology equipment led to a $1.4 million increase in occupancy and equipment rental expenses. Decreased borrowings to finance customer margin accounts, and the 1997 conversion of $10.0 million of debt into shares of the Company's common stock (see Note J) led to a $3.2 million decline in interest expense. Litigation, settlements, and bad debt expense decreased $2.9 million. The principal cause of the decrease is due to the significant decline in litigation related to the Company's former Oklahoma operations for which estimated losses were provided for in prior years. 1997 As Compared to 1996 The Company benefited from strong market conditions driven by continued low interest rates, low inflation, and strong equity markets experienced industry-wide. Trading volume on the three major U.S. markets (NYSE, NASDAQ, and AMEX) and net sales of mutual funds reached new highs. Trading volume on the major U.S. markets increased 22%, along with industry-wide net sales of mutual funds increasing 10% compared to 1996. The Company recorded revenues of $136.1 million, a $26.3 million increase over 1996. Net income for 1997 reached $5.7 million, an increase of $2.3 million over 1996. Net income per diluted share rose to $0.88 from $0.59 in 1996. Strong market conditions fueled an increase in revenue from commissions of $5.9 million. The increase was mainly comprised of commissions on mutual funds, over-the-counter equity securities, listed equity securities, and insurance and annuity products, which increased 21%, 8%, 13%, and 40%, respectively. Revenues from principal transactions increased $965,000, resulting from a rise in sales of over-the-counter equities which was partially offset by a decrease in fixed income transactions. Low interest rates, low inflation, and a rising stock market fueled greater investor demand for equities and lower levels of demand for municipal and corporate debt. 1997 As Compared to 1996 (continued) Investment banking revenues increased $12.2 million, as favorable market conditions continued to support these activities. Underwriting and advisory services for the Company's corporate clients comprised the majority of the increase. During the year, the Company completed 24 managed or co-managed offerings,an increase of 35% over 1996. The majority of the increase in interest revenue of $7.6 million resulted from interest earned from customer borrowings on margin accounts. Average margin account balances increased 60% principally as a result of significant customer borrowings during the first nine months of the year. Other revenues decreased $390,000. However, several components within other revenues fluctuated significantly. Increased fees from investment management services and other advisory and asset management programs were offset by the absence of a significant investment gain recorded in 1996. This $3.3 million investment gain was the result of an exercise of warrants relating to an underwriting and the subsequent sale of the equity securities. Total expenses increased $22.5 million to $126.7 million, principally as a result of increased compensation and benefits and interest expense. Compensation and benefits, a significant portion of the Company's total expenses, rose $15.3 million. A majority of the increase resulted from compensation that is variable in nature and was commensurate with commissionable revenues and departmental, subsidiary, and firm-wide profitability. Interest expense increased $4.8 million as a result of increased levels of short-term borrowings by the Company. These borrowings were necessary to finance the increased activity in customer margin accounts. Several of the remaining expense categories were relatively unchanged during 1997. The following discussion will focus on expense items with significant changes. Litigation, settlements, and bad debt expense increased $434,000 in 1997. The 1997 expenses include a $2.5 million provision for estimated costs to address various litigation matters related primarily to the Company's former Oklahoma operations. Other operating expenses increased $1.5 million, primarily due to increased travel and promotion cost from efforts to expand the Company's private client and institutional businesses and fees paid for legal services, consulting, and employment search firms. Management's Discussion and Analysis of Financial Condition and Results of Operations Impact of Year 2000 The Year 2000 issue is the result of computer programs currently written in two-digit format, rather than four-digit, to define the applicable year, which affects the ability of computer systems to accurately process dates ending after December 31, 1999. During 1998, the Company assessed its Year 2000 compliance for all of its operating systems including outside vendors. The Company's securities processing system, which provides all of the record-keeping and transaction processing services for the Company's customer accounts, has been identified as mission critical. The Company utilizes a third-party service bureau for this system. The service bureau designs and maintains the system at its own location. The Company utilizes the system via direct on-line computer access. This service bureau provides the same customer record-keeping services to approximately 20 other securities firms throughout the United States. In January 1999, the service bureau reported they had completed 100% of the changes to program code required for the customer record-keeping system and had placed these changes into live production. In December 1998 and January 1999, the Company and other user firms of this service bureau performed detail testing on the system. This involved processing a wide variety of transactions on the system in a Year 2000 environment. This testing identified no significant problems. The Company and the service bureau will participate in the securities industry-wide test in March and April 1999. This test will demonstrate the service bureau's ability to interface with all of its critical third parties in the trading and settlement process. The Company's Year 2000 plan also addresses other systems, including a variety of vendor-supplied software products and a small number of internally created AS400 mainframe programs. The Company has substantially completed implementation of all remedies planned for mission critical systems as of January 1999. The Company will test its internally created AS400 mainframe programs by June 30, 1999. There are currently no plans for specific testing of most vendor-supplied software for which vendors have provided assurance of Year 2000 compliance. The Company believes that the incremental costs associated with modifications for internal software and systems will not be material to the Company's financial statements. However, the interdependent natureof securities transactions and the success of the Company's external counterparties and vendors, including the third-party service bureau mentioned above, in dealing with this issue could significantly influence the Company's estimate of the impact the Year 2000 will have on its business. Liquidity and Capital Resources The Company's assets are highly liquid, consisting mainly of cash or assets readily convertible into cash. These assets are financed primarily by the Company's equity capital, customer credit balances, short-term bank loans, proceeds from securities lending, long-term notes payable, and other payables. Changes in securities market volumes, related customer borrowing demands, underwriting activity, and levels of securities inventory affect the amount of the Company's financing requirements. Management believes that funds from operations, available informal short-term credit arrangements, and long-term borrowings will provide sufficient resources to meet its present and anticipated financing needs. Stifel, Nicolaus & Company, Incorporated, the Company's principal broker-dealer subsidiary, is subject to certain requirements of the Securities and Exchange Commission with regard to liquidity and capital requirements. At December 31, 1998, Stifel Nicolaus had net capital of approximately $28.5 million,which exceeded the minimum net capital requirements by approximately $23.1 million. Inflation The Company's assets are primarily monetary, consisting of cash, securities inventory, and receivables. These monetary assets are generally liquid and turn over rapidly and, consequently, are not significantly affected by inflation. However, the rate of inflation affects various expenses of the Company, such as employee compensation and benefits, communications, and occupancy and equipment, which may not be readily recoverable in the price of its services. Market Risk Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations, or other market factors, such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. The Company actively monitors its market risk through a variety of control procedures involving senior management and selected risk management committees.The Company's existing and proposed underwritings, credit extended to customers and counterparties, and inventory trading activities are reviewed by business unit managers and senior management. Underwritings are subject to due diligence reviews by senior management. Credit risk is managed through the use of credit exposure information, the monitoring of collateral values, and the establishment of credit limits. Inventory positions are continually monitored by management and subject to trading and position limits. During 1998, the Company's securities trading inventory consisted of fixed income debt and over-the-counter equity positions. The fair value of these securities at December 31, 1998, was $34.3 million and $4.4 million, respectively, in long positions and $461,000 and $537,000, respectively, in short positions. Analysis was performed on these instruments that assessed the related risk and materiality as required by the Securities and Exchange Commission. Based on this analysis, in the opinion of management, the market risk associated with the Company's financial instruments at December 31, 1998, will not have a material adverse effect on the Company's consolidated financial position or results of operations. Recent Accounting Pronouncements In 1998, the Company early adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidelines for capitalization of developmental costs of proprietary software and purchased software for internal use. The adoption of this SOP had no material effect on the statement of financial position or results of operations. In 1998, the Financial Accounting Standards Board "FASB" issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires that derivatives be recognized in the balance sheet at fair value. Designation as hedges of specific assets or liabilities is permitted only if certain conditions are met. Effective in calendar year 2000, the Company will be required to record and mark to market any derivative financial instruments and related underlying assets, liabilities, and firm commitments. Management has not determined what effect SFAS No. 133 will have on its financial statements. Consolidated Statements Of Financial Condition
- ---------------------------------------------------------------------------------------------------------------- (In thousands) December 31, 1998 December 31, 1997 - ---------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 12,835 $ 15,366 -------------------------------------------------------------------------------------------------- Cash segregated for the exclusive benefit of customers 177 177 -------------------------------------------------------------------------------------------------- Receivable from brokers and dealers: Securities failed to deliver 1,481 481 Deposits paid for securities borrowed 12,653 18,223 Settlement balances with clearing organizations 9,812 16,519 -------------------------------------------------------------------------------------------------- 23,946 35,223 -------------------------------------------------------------------------------------------------- Receivable from customers, net of allowance for doubtful accounts of $556 and $556, respectively 213,709 218,301 -------------------------------------------------------------------------------------------------- Securities owned, at fair value: U.S. Government obligations 4,282 4,763 State and municipal obligations 27,946 6,471 Corporate obligations 2,025 2,153 Corporate stocks 4,379 5,825 -------------------------------------------------------------------------------------------------- 38,632 19,212 -------------------------------------------------------------------------------------------------- Memberships in exchanges, at cost 513 513 Office equipment and leasehold improvements, at cost, net of allowances for depreciation and amortization of $12,361 and $10,890, respectively 5,315 2,227 Goodwill, net of accumulated amortization of $1,721 and $1,414, respectively 3,874 4,181 Notes receivable from and advances to officers and employees, net of allowance for doubtful receivables from former employees of $482 and $2,376, respectively 6,460 4,249 Deferred tax asset 3,213 4,577 Other assets 26,331 11,458 -------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 335,005 $ 315,484 --------------------------------------------------------------------------------------------------
Consolidated Statement of Financial Condition
- --------------------------------------------------------------------------------------------------------------- (In thousands,except share amounts) December 31, 1998 December 31, 1997 - --------------------------------------------------------------------------------------------------------------- Liabilities and Short-term borrowings from banks $ 62,890 $ 89,150 Stockholders' Payable to brokers and dealers: Equity Securities failed to receive 1,545 1,242 Deposits received from securities loaned 103,224 72,466 --------------------------------------------------------------------------------------------- 104,769 73,708 --------------------------------------------------------------------------------------------- Payable to customers 37,306 39,239 Securities sold,but not yet purchased,at fair value 998 4,264 Drafts payable 18,210 13,966 Accrued employee compensation 18,320 19,247 Obligations under capital leases 848 522 Accounts payable and accrued expenses 16,117 15,707 Long-term debt 20,570 9,600 --------------------------------------------------------------------------------------------- Total Liabilities 280,028 265,403 --------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock -$1 par value; authorized 3,000,000 shares; none issued Common stock -$.15 par value; authorized 10,000,000 shares; issued 7,219,335 and 6,678,223 shares, respectively 1,084 1,002 Additional paid-in capital 41,867 37,006 Retained earnings 18,291 17,425 --------------------------------------------------------------------------------------------- 61,242 55,433 --------------------------------------------------------------------------------------------- Less: Treasury stock, at cost 222,743 and 168,648 shares, respectively 2,162 1,989 Unamortized expense of restricted stock awards 1,081 185 Unearned employee stock ownership plan shares, at cost, 235,866 and 236,250 shares, respectively 3,022 3,178 --------------------------------------------------------------------------------------------- Total Stockholders' Equity 54,977 50,081 --------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $335,005 $315,484 ---------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements Consolidated Statements Of Operations
- ------------------------------------------------------------------------------------------------------------ Years Ended December 31, ----------------------------------------------------------------------------------------- (In thousands, except per share amounts) 1998 1997 1996 ----------------------------------------------------------------------------------------- Revenues Commissions $ 56,729 $ 49,763 $ 43,900 Principal transactions 26,465 20,463 19,498 Investment banking 15,763 28,476 16,253 Interest 18,889 21,397 13,774 Other 19,442 15,997 16,388 ----------------------------------------------------------------------------------------- 137,288 136,096 109,813 - ------------------------------------------------------------------------------------------------------------ Expenses Employee compensation and benefits 86,967 82,094 66,765 Commissions and floor brokerage 2,804 2,780 2,641 Communications and office supplies 8,389 6,914 6,797 Occupancy and equipment rental 9,549 8,109 7,958 Interest 9,798 12,991 8,197 Litigation, settlements, and bad debts 830 3,726 3,292 Other operating expenses 10,362 10,061 8,561 ----------------------------------------------------------------------------------------- 128,699 126,675 104,211 - ------------------------------------------------------------------------------------------------------------ Income before income taxes 8,589 9,421 5,602 Provision for income taxes 3,344 3,750 2,209 ----------------------------------------------------------------------------------------- Net income $ 5,245 $ 5,671 $ 3,393 ========================================================================================= - ------------------------------------------------------------------------------------------------------------ Earnings Per Net income per share: Common Share and Basic earnings per share $ 0.77 $ 1.01 $ 0.66 Share Equivalents Diluted earnings per share $ 0.73 $ 0.88 $ 0.59 -----------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. Consolidated Statements Of Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------------- Treasury Stock and Unamortized Additional Unearned Employee Expense of (In thousands, Common Stock Paid-In Retained Stock Ownership Plan Restricted except share amounts) Shares Amount Capital Earnings Shares Amount Stock Awards Total - ----------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1996 4,540,890 $ 681 $ 19,622 $15,754 (183,225) $(1,162) $( 100) $34,795 - ----------------------------------------------------------------------------------------------------------------------- Cash dividends -common stock ($.09 per share) ( 405) ( 405) Stock rights redemption - common stock ($.05 per share) ( 223) ( 223) Purchase of treasury shares ( 69,713) ( 520) ( 520) Employee benefit plans ( 132) 118,953 753 621 Stock options exercised ( 1) 615 4 3 Restricted stock awards 162 3,000 20 ( 182) - - Amortization of restricted stock awards 75 75 Dividend reinvestment 1,365 13 13 Net income for the year 3,393 3,393 5% stock dividend 226,825 34 1,752 (1,786) ( 6,450) - - - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 4,767,715 715 21,403 16,733 (135,455) ( 892) ( 207) 37,752 - ------------------------------------------------------------------------------------------------------------------------ Cash dividends -common stock ($.12 per share) ( 609) ( 609) Purchase of treasury shares (276,331) (2,926) (2,926) Employee benefit plans ( 82) 158,740 1,098 1,016 Stock options exercised ( 274) 49,467 375 101 Restricted stock awards ( 196) 42,168 349 ( 153) - - Amortization of restricted stock awards 175 175 Shares issued 1,592,707 239 11,832 12,071 Dividend reinvestment 1 794 7 8 Net income for the year 5,671 5,671 5% stock dividend 317,801 48 4,322 (4,370) ( 8,031) - - Employee stock ownership plan (236,250) (3,178) (3,178) - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 6,678,223 1,002 37,006 17,425 (404,898) (5,167) ( 185) 50,081 - ------------------------------------------------------------------------------------------------------------------------ Cash dividends -common stock ($.12 per share) ( 828) ( 828) Purchase of treasury shares (211,717) (2,160) (2,160) Employee benefit plans 20,903 3 ( 267) 173,351 2,082 1,818 Stock options exercised 94,676 14 367 7,099 63 444 Restricted stock awards 82,000 12 1,262 ( 1,576) ( 11) (1,263) - - Amortization of restricted stock awards 367 367 Dividend reinvestment 1 972 9 10 Net income for the year 5,245 5,245 5% stock dividend 343,533 53 3,498 (3,551) ( 21,840) - - - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1998 7,219,335 $1,084 $41,867 $18,291 (458,609) $(5,184) $(1,081) $54,977 - ------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.Consolidated Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------ Years Ended December 31, ------------------------------------- (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Cash Flows Net income $ 5,245 $ 5,671 $ 3,393 From Operating -------------------------------------------------------------------------------------- Activities Noncash items included in earnings: Depreciation and amortization 2,133 1,519 1,664 Bonus notes amortization 1,717 1,178 1,213 Deferred compensation 575 920 571 Amortization of restricted stock awards and stock benefits 595 172 75 Deferred tax provision (benefit) 1,363 ( 907) 231 - ------------------------------------------------------------------------------------------------------------ 11,628 8,553 7,147 Decrease (increase) in operating receivables: Customers 4,592 16,915 (78,291) Brokers and dealers 11,277 (20,387) 1,588 (Decrease) increase in operating payables: Customers ( 1,933) 7,144 289 Brokers and dealers 31,061 26,560 24,020 Decrease (increase) in assets: Cash and U.S. Government securities segregated for the exclusive benefit of customers - - 305 293 Securities owned (19,420) ( 300) 608 Notes receivable from officers and employees ( 3,927) ( 2,409) ( 1,030) Other assets ( 3,225) 1,633 ( 532) (Decrease) increase in liabilities: Securities sold, not yet purchased ( 3,266) 1,035 485 Drafts payable, accounts payable and accrued expenses, and accrued employee compensation 3,153 10,148 1,302 -------------------------------------------------------------------------------------- Cash From Operating Activities $ 29,940 $ 49,197 $(44,121) - ------------------------------------------------------------------------------------------------------------
Consolidated Statement of Cash Flows (Continued)
- ------------------------------------------------------------------------------------------------------------ Years Ended December 31, ------------------------------------- (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Cash From Operating Activities - From Previous Page $ 29,940 $ 49,197 $(44,121) - ------------------------------------------------------------------------------------------------------------ Cash Flows Net (payments) proceeds for short-term From Financing borrowings from banks (26,260) (43,250) 45,950 Activities Proceeds from: Issuance of stock 2,043 2,907 633 Long-term debt 10,970 9,600 - - Subordinated borrowings - - 8,000 - - Payments for: Settlement of long-term debt - - - - ( 760) Purchases of stock for treasury ( 2,160) ( 2,926) ( 520) Principal payments under capital lease obligation ( 597) ( 392) ( 431) Subordinated borrowings - - ( 8,000) ( 50) Cash dividends and rights redemption ( 828) ( 609) ( 628) Purchase of stock for employee stock ownership plan - - ( 3,178) - - ------------------------------------------------------------------------------------------ Cash From Financing Activities (16,832) (37,848) 44,194 - ------------------------------------------------------------------------------------------------------------ Cash Flows Proceeds from: From Investing Sale of office equipment and leasehold improvements 46 145 28 Sale of investments 118 84 3,753 Payments for: Acquisition of office equipment and leasehold improvements ( 4,025) ( 999) ( 443) Acquisition of investments (11,778) (3,173) ( 1,795) ------------------------------------------------------------------------------------------ Cash From Investing Activities (15,639) (3,943) 1,543 ------------------------------------------------------------------------------------------ (Decrease) increase in cash and cash equivalents ( 2,531) 7,406 1,616 Cash and cash equivalents - beginning of year 15,366 7,960 6,344 ------------------------------------------------------------------------------------------ Cash and cash equivalents - end of year $ 12,835 $ 15,366 $ 7,960 ========================================================================================== Supplemental disclosures of cash flow information: Interest payments $ 10,082 $ 13,093 $ 8,264 Income tax payments $ 4,474 $ 3,418 $ 2,247 Schedule of Noncash Investing and Financing Activities Fixed assets acquired under capital lease $ 923 $ 405 $ 240 Restricted stock awards, net of forfeitures $ 1,263 $ 153 $ 182 Employee stock ownership shares $ 165 $ 300 $ 280 Debt converted into stock - - $ 10,000 - - Stock dividends distributed $ 3,551 $ 4,370 $ 1,786 ------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. Notes To Consolidated Financial Statements (in thousands, except share and per share amounts) Note A -Summary of Significant Accounting and Reporting Policies Nature of Operations Stifel Financial Corp. ("the Parent"), through its wholly owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus"), collectively referred to as ("the Company"), is principally engaged in retail brokerage, securities trading, investment banking, investment advisory, and related financial services throughout the United States. Although the Company has offices throughout the United States, its major geographic area of concentration is in the Midwest. The Company's principal customers are individual investors, with the remaining client base composed of corporations, municipalities, and institutions. Basis of Presentation The consolidated financial statements include the accounts of the Parent and its wholly owned subsidiaries, principally Stifel Nicolaus. Stifel Nicolaus is a broker-dealer registered under the Securities Exchange Act of 1934. All material intercompany balances and transactions are eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Where appropriate, prior years' financial information has been reclassified to conform with the current year presentation. The Company defines cash equivalents as short-term, highly liquid investments with original maturities of 90 days or less, other than those held for sale in the ordinary course of business. Security Transactions Trading and investment securities owned and securities sold, but not yet purchased are carried at fair value, and unrealized gains and losses are reflected in the results of operations. Securities held for investment by the Parent and certain subsidiaries are included in other assets and are carried at the lower of historical cost or fair value. Investment securities of registered broker-dealer subsidiaries are carried at fair value or amounts that approximate fair value as determined by management. Securities failed to deliver and receive represent the contract value of securities that have not been delivered or received by settlement date. Receivable from customers includes amounts due on cash and margin transactions. The value of securities owned by customers and held as collateral for these receivables is not reflected in the consolidated statements of financial condition. Note A -Summary of Significant Accounting and Reporting Policies (continued) Customer security transactions are recorded on a settlement date basis with related commission revenue and expense recorded on a trade date basis. Principal securities transactions are recorded on a trade date basis. Fair Value The Company's financial instruments are carried at fair value or amounts that approximate fair value. Securities owned and securities sold, but not yet purchased are valued using quoted market or dealer prices, pricing models, or management's estimates. Customer receivables, primarily consisting of floating-rate loans collateralized by customer-owned securities, are charged interest at rates similar to other such loans made throughout the industry. The Company's remaining financial instruments are generally short-term in nature, and their carrying values approximate fair value. The Company has estimated the fair value of its long-term debt using the discounted cash flow analysis of payments. At December 31, 1998, the estimated fair value of the notes was $13,858. Income Taxes Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial reporting and income tax bases of assets and liabilities. Segment Reporting During 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of Enterprise and Related Information." SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 did not affect the Company's financial position or results of operations but did affect the disclosure of segment information (see Note N). Comprehensive Income The Company adopted SFAS No. 130, "Reporting Comprehensive Income," which requires entities to report changes in equity that result from transactions and economic events other than those with shareholders. The Company had no other comprehensive income items; accordingly net income and other comprehensive income are the same. Other Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions require Stifel Nicolaus to deposit cash or other collateral with the lender. With respect to securities loaned, Stifel Nicolaus receives collateral in the form of cash or other collateral in an amount generally in excess of the market value of securities loaned. Stifel Nicolaus monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary. Amortization of assets under capital lease is computed on a straight-line basis over the estimated useful life of the asset. Leasehold improvements are amortized over the remaining term of the lease. Depreciation of office equipment is computed on a straight-line basis for equipment purchased prior to January 1, 1994, and an accelerated method for equipment purchased thereafter. Goodwill recognized in business combinations accounted for as purchases is being amortized over 15 to 40 years on a straight- line basis. Basic earnings per share of common stock is computed by dividing income available to shareholders by the weighted average number of common shares outstanding during the periods. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted earnings include dilutive stock options under the treasury stock method and dilutive shares from Senior Convertible Notes under the if converted method. Note B -Special Reserve Bank Account At December 31, 1998, cash of $177 has been segregated in a special reserve bank account for the exclusive benefit of customers pursuant to Rule 15c3-3 under the Securities Exchange Act of 1934. Note C -Short-Term Borrowings From Banks In the normal course of business, Stifel Nicolaus borrows from various banks on a demand basis with company-owned and customer securities pledged as collateral. Available credit arrangements with banks totaled $245,000 at December 31, 1998, of which $182,110 was unused. There were no compensating balance requirements under these arrangements. The Company's floating interest rate short-term borrowings bore interest at a weighted average rate of 5.65% and 6.87% at December 31, 1998 and 1997, respectively. Short-term borrowings of $29,475 and $21,725 were collateralized by company-owned securities valued at approximately $38,301 and $28,452 on a settlement date basis at December 31, 1998 and 1997, respectively. Short-term borrowings of $33,415 and $67,425 used to finance receivables from customers were collateralized by customer-owned securities valued at approximately $60,846 and $108,821 at December 31, 1998 and 1997, respectively. Note D -Commitments and Contingencies In the normal course of business, Stifel Nicolaus enters into underwriting commitments. Settlement of transactions relating to such underwriting commitments which were open December 31, 1998, had no material effect on the consolidated financial statements. In connection with margin deposit requirements of The Options Clearing Corporation, Stifel Nicolaus has pledged cash and customer-owned securities valued at $62,768. At December 31, 1998, the amounts on deposit satisfied the minimum margin deposit requirement of $58,031. The future minimum rental commitments at December 31, 1998, with initial or remaining non-cancellable lease terms in excess of one year are as follows:
- --------------------------------------------------------------------------------------- Operating Leases --------------------------------------------- Minimum Future Lease Payments Under Minimum Rental Year Ending December 31, Capital Leases Commitments Related Sublease Commitment - --------------------------------------------------------------------------------------- 1999 $483 $ 4,063 $(115) $ 3,948 2000 362 4,129 (56) 4,073 2001 62 3,859 - - 3,859 2002 - - 3,304 - - 3,304 2003 - - 2,856 - - 2,856 Thereafter - - 14,084 - - 14,084 - --------------------------------------------------------------------------------------- Minimum Commitments $907 $32,295 $(171) $32,124 ======= ====== ======= Less Interest 59 ---- Net Present Value of Capital Lease Obligations $848 ====
Rental expense for the years ended 1998, 1997, and 1996 approximated $4,032, $2,899, and $3,541, respectively. Office equipment, under capital leases, with a recorded cost of approximately $828, net of amortization of $1,387, and $497, net of amortization of $1,036, at December 31, 1998 and 1997, respectively, collateralizes the above capital lease obligations and is included in the consolidated statements of financial condition in the caption of "Office equipment and leasehold improvements." Amortization and depreciation expense of assets under capital lease and owned furniture and equipment for 1998, 1997, and 1996 was $1,794, $1,224, and $1,384, respectively. Note E -Net Capital Requirements Stifel Nicolaus is subject to the Uniform Net Capital Rule, Rule 15c3-1 under the Securities Exchange Act of 1934 (the "rule"), which requires the maintenance of minimum net capital, as defined. Stifel Nicolaus has elected to use the alternative method permitted by the rule which requires maintenance of minimumnet capital equal to the greater of $250 or 2 percent of aggregate debit items arising from customer transactions, as defined. The rule also provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5 percent of aggregate debit items. At December 31, 1998, Stifel Nicolaus had net capital of $28,509, which was 10.6 percent of aggregate debit items and $23,106 in excess of minimum required net capital. Note F -Employee Benefit Plans The Company has a profit sharing 401(k) plan (the "PSP") covering qualified employees as defined in the plans. Contributions to the PSP were based upon a company match of 50% of the employees' first five hundred dollars in annual contributions for 1998, 1997, and 1996. Additional contributions by the Company are discretionary. The amounts charged to operations for the PSP were $158, $142, and $146, for 1998, 1997, and 1996, respectively. Stifel Nicolaus also has a deferred compensation plan available to investment executives whereby a certain percentage of their earnings is deferred as defined in the plan and vests over a five- year period. The investment executives have the right to elect to invest their individual deferred amounts into several investment options, including Company stock. The amounts charged to operations related to this plan were $507, $920, and $571, for 1998, 1997, and 1996, respectively. Note G -Stock-Based Compensation Plans The Company has several stock-based compensation plans, which are described below. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under the Fixed Stock Option and the Employee Stock Purchase Plans consistent with the method of FASB Statement 123, "Accounting for Stock- Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: - ----------------------------------------------------------------- Years Ended December 31, -------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------- Net income As reported $5,245 $5,671 $3,393 Pro forma $4,629 $5,283 $3,345 - ----------------------------------------------------------------- Basic earnings per share As reported $ 0.77 $ 1.01 $ 0.66 Pro forma $ 0.68 $ 0.94 $ 0.65 - ----------------------------------------------------------------- Diluted earnings per share As reported $ 0.73 $ 0.88 $ 0.59 Pro forma $ 0.64 $ 0.82 $ 0.58 - ----------------------------------------------------------------- All option plans are administered by the Compensation Committee of the Board of Directors of the Parent which has the authority to interpret the Plans, determine to whom options may be granted under the Plans, and determine the terms of each option. Fixed Stock Option Plans The Company has four fixed stock option plans and an incentive stock award plan. Under the Company's 1983 and 1985 Incentive Stock Option Plans, the Company granted options up to an aggregate of 450,000 shares to key employees. Under the Company's 1987 non-qualified stock option plan, the Company granted options up to an aggregate of 100,000 shares. Under the Company's 1997 "Incentive Stock Plan," the Company may grant incentive stock options, stock appreciation rights, restricted stock, performance awards, and stock units up to an aggregate of 600,000 shares. Options under these plans are generally granted at 100% of market value at the date of the grant and expire 10 years from the date of grant. The options vest ratably over a three- to five-year period or on a five-year cliff vesting period. The Company has also granted stock options to external board members under a non-qualified plan. These options are generally granted at 100% of market value at the date of the grant and are exercisable six months to one year from date of grant and expire 10 years from date of grant. Effective with options granted in 1995 and subsequently, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997, and 1996, respectively: dividend yield of 1.15%, 1.50%, and 1.88%; expected volatility of 41.9%, 42.7%, and 26.7%; risk-free interest rates of 5.15%, 6.22%, and 6.17%; and expected lives of 5.25 years for all grants. The summary of the status of the Company's fixed stock option plans as of December 31, 1998, 1997, and 1996, and changes during the years ending on those dates is presented below:
- ------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 --------------------------- -------------------------- -------------------------- Weighted-Average Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------------------------------------------------------------------------------------------------------------------ Outstanding at beginning of year 764,617 $ 7.49 477,857 $ 5.10 384,704 $ 5.04 - ------------------------------------------------------------------------------------------------------------------------ Granted 169,050 11.70 396,995 9.75 122,463 5.43 Exercised (123,069) 4.60 (44,427) 5.10 ( 712) 4.35 Forfeited ( 39,607) 9.42 (54,399) 4.83 ( 28,598) 5.23 Expired ( 1,907) 4.26 (11,409) 6.26 - - - - - ------------------------------------------------------------------------------------------------------------------------ Outstanding at end of year 769,084 $ 8.78 764,617 $ 7.49 477,857 $ 5.10 ======================================================================================================================== Options exercisable at year-end 384,475 360,180 280,909 Weighted-average fair value of options granted during the year $4.78 $4.07 $1.80
Notes To Consolidated Financial Statements (in thousands, except share and per share amounts) The following table summarizes information about fixed stock options outstanding at December 31, 1998:
- ------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------------------- ------------------------------------ Number Weighted-Average Number Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted Average Exercise Prices 12/31/98 Contractual Life Exercise Price 12/31/98 Exercise Price - ------------------------------------------------------------------------------------------------------------------- $ 3.73-$ 5.51 185,272 4.61 years $ 4.9167 156,614 $ 4.8173 5.58- 7.56 170,143 7.56 years 6.2306 117,444 6.0386 7.64- 10.48 83,248 8.81 years 9.4749 19,198 7.6560 10.83- 10.83 176,372 8.75 years 10.8276 80,824 10.8276 11.07- 15.31 154,049 9.23 years 13.5413 10,395 15.1215 - ------------------------------------------------------------------------------------------------------------------- $ 3.73-$ 15.31 769,084 7.59 years $ 8.7838 384,475 $ 6.8742 ===================================================================================================================
Employee Stock Purchase Plan Under the 1998 Employee Stock Purchase Plan (the "ESPP"), the Company was authorized to issue up to 157,500 shares of common stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the ESPP, employees can choose each year to have a specified percentage of their compensation withheld in 1% increments not to exceed 10%. The participant may also specify a maximum dollar amount to be withheld. At the beginning of every year, each participant will be granted an option to purchase 1,000 shares of common stock at a price equal to the lower of 85% of the beginning-of-year or end- of-year fair market value of the common stock. Approximately 29% to 37% of eligible employees have participated in the ESPP in the last three years. Under the ESPP, the Company sold 156,841 shares, 131,016 shares, and 120,978 shares, to employees in 1998, 1997, and 1996, respectively. Effective with options granted in 1995, the fair value of each employee's purchase rights is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997, and 1996, respectively: dividend yield of 1.15%, 1.50%, and 1.88%; expected volatility of 41.9%, 42.7%, and 26.7%; risk-free interest rates of 5.05%, 5.61%, and 5.09%; and expected lives of one year. The weighted-average fair value of those purchase rights granted in 1998, 1997, and 1996 was $2.67, $2.06, and $1.30, respectively. Restricted Stock Awards Restricted stock awards are made, and shares issued, to certain key employees without cash payment by the employee. Certain key employees were granted 98,275, 50,164, and 3,473 shares of restricted stock, with a fair value of $1,276, $337, and $18, during 1998, 1997, and 1996, respectively. At December 31, 1998, restricted stock awards covering 117,854 shares were outstanding, with the restrictions expiring at various dates through 2003. The shares are restricted as to resale. Restrictions generally lapse ratably over three-to five-year service periods. The deferred cost of the restricted stock awards is amortized on a straight-line basis. The Company charged to employee compensation and benefits $367, $249, and $73 for the amortization during 1998, 1997, and 1996, respectively. Stock Units During the year, the Board of Directors amended the 1997 Incentive Stock Plan to include stock units. A stock unit represents the right to receive a share of Common Stock from the Company at a designated time in the future without cash payment by the employee and is issued in lieu of cash incentive. The units vest over a three-to five-year period and are generally distributable upon vesting or at future specified dates. The Company granted 158,485 units and charged $210 to employee compensation and benefits for these units. Employee Stock Ownership Plan The Company has an employee stock ownership plan (the "ESOP") covering qualified employees as defined in the plan. Employer contributions are made to the ESOP as determined by the Compensation Committee of the Board of Directors of the Parent on behalf of all eligible employees based upon the relationship of individual compensation (up to a maximum of $160) to total compensation. In 1997, the Company purchased 248,063 shares for $3,178 and contributed these shares to the ESOP. The unallocated shares will be released for allocation to the participants based upon employer contributions to fund an internal loan between the Parent and the ESOP. At December 31, 1998, the plan held 543,222 shares and has allocated 307,356 shares of common stock valued at $5,400 and $3,055, respectively. The Company charged to employee compensation and benefits $165, $300, and $280 for the ESOP contributions for 1998, 1997, and 1996, respectively. Note H -Legal Proceedings The Company is a defendant in several lawsuits and arbitrations relating principally to its securities business. Some of these lawsuits and arbitrations claim substantial amounts, including punitive damages. One such claim involves a lawsuit filed by The Oklahoma Turnpike Authority ("OTA"). The OTA suit seeks $6.5 million in compensatory damages and an unspecified amount of punitive damages. The OTA suit alleges that an undisclosed fee paid to the Company by a third party for the placement of a forward purchase contract in an advance refunding escrow for the proceeds of the 1992 OTA $608 million municipal bond refinancing should have been paid to the OTA. Although the ultimate outcome of this and other actions cannot be ascertained at this time, management, based on its understanding of the facts and after consultation with outside counsel, does not believe the ultimate resolution of these matters will have a materially adverse effect on the Company's consolidated financial condition and results of operations. However, depending upon the period of resolution, such effects could be material to the financial results of an individual operating period. It is reasonably possible that certain of these lawsuits and arbitrations could be resolved in the next year, and management does not believe such resolutions will result in losses materially in excess of the amounts previously provided. Note I -Financial Instruments With Off-Balance Sheet Credit Risk In the normal course of business, the Company executes, settles, and finances customer and proprietary securities transactions. These activities expose the Company to off-balance sheet risk in the event that customers or other parties fail to satisfy their obligations. In accordance with industry practice, securities transactions are recorded on settlement date, generally three business days after trade date. Should a customer or broker fail to deliver cash or securities as agreed, the Company may be required to purchase or sell securities at unfavorable market prices. The Company borrows and lends securities to finance transactions and facilitate the settlement process, utilizing both firm proprietary positions and customer margin securities held as collateral. The Company monitors the adequacy of collateral levels on a daily basis. The Company periodically borrows from banks on a collateralized basis utilizing firm and customer margin securities in compliance with SEC rules. Should the counterparty fail to return customer securities pledged, the Company is subject to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. The Company controls its exposure to credit risk by continually monitoring its counterparties' position, and where deemed necessary, the Company may require a deposit of additional collateral and/or a reduction or diversification of positions. The Company sells securities it does not currently own (short sales), and is obligated to subsequently purchase such securities at prevailing market prices. The Company is exposed to risk of loss if securities prices increase prior to closing the transactions. The Company controls its exposure to price risk for short sales through daily review and setting position and trading limits. Concentrations of Credit Risk The Company maintains margin and cash security accounts for its customers located throughout the United States. The majority of the Company's customer receivables are serviced by branch locations in Missouri and Illinois. Derivatives The Company deals, on an agency basis, in listed options and other products such as collateralized mortgage obligations which derive their values from the price of some other security or index. The Company does not deal in complex derivative financial instruments, such as futures, forwards, and swaps. Note J -Long-Term Debt At December 31, 1996, the Parent had outstanding $10,000 aggregate principal amount of its 11.25 percent senior convertible notes due September 1, 1997, through September 1, 2000. During 1997, the notes were converted into 1,563,021 shares of the Company's $.15 par value common stock at a conversion price of $6.40 per share. Interest charged to operations for these notes was $886 and $1,125 for 1997 and 1996, respectively. The Company has outstanding $5,000 principal amount of notes due on June 30, 2004. Interest is payable monthly at the monthly libor rate plus 1% (6.06% at December 31, 1998) through July 1, 1999, at which time the note will bear interest at the rate of 8% per annum. In 1997, the Company formed a Limited Liability Corporation ("LLC") to be a certified capital company under the statutes of the state of Missouri. The LLC issued $4,600 non-interest bearing notes due May 15, 2008, and $10,600 non-interest bearing notes due February 15, 2009, which are included in the Company's consolidated statement of financial condition under the caption "long-term debt." Proceeds from the notes are invested in zero coupon U.S. Government securities in an amount sufficient to accrete to the repayment of the notes and are placed in an irrevocable trust. The securities, valued at approximately $8,440 and $2,507 at December 31, 1998 and 1997, respectively, are held to maturity and are included under the caption "other assets." Note K -Preferred Stock Purchase Rights On June 30, 1987, the Company's Board of Directors declared a distribution of one preferred stock purchase right for each share of the Company's common stock. On July 23, 1996, the Company's Board of Directors approved the redemption of these shareholder rights and the adoption of a new Shareholder Rights Plan. Shareholders of record on August 12, 1996, received a payment of $.05 per share, representing the redemption price for the existing rights. This payment was in lieu of the regular quarterly dividend of $.03 per share. In addition, on July 23, 1996, the Company's Board of Directors authorized and declared a dividend distribution of one preferred stock purchase right for each outstanding share of the Company's common stock, par value $0.15 per share. The dividend was distributed to stockholders of record on August 12, 1996. Each right will entitle the registered holder to purchase one one- hundredth of a share of a Series A Junior Participating Preferred Stock, par value $1.00 per share, at an exercise price of $35 per right. The rights become exercisable on the tenth day after public announcement that a person or group has acquired 15 percent or more of the Company's common stock or upon commencement of announcement of intent to make a tender offer for 15 percent or more of the outstanding shares of common stock without prior written consent of the Company. If the Company is acquired by any person after the rights become exercisable, each right will entitle its holder to purchase shares of common stock at one-half the then current market price, and in the event of a subsequent merger or other acquisition of the Company, to buy shares of common stock of the acquiring entity at one-half of the market price of those shares. The rights may be redeemed by the Company prior to becoming exercisable by action of the Board of Directors at a redemption price of $.01 per right. These rights will expire, if not previously exercised, on August 12, 2006. Note L -Income Taxes The Company's provision (benefit) for income taxes consists of: -------------------------------- Years Ended December 31, -------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------ Current: Federal $ 1,600 $ 3,760 $ 1,597 State 381 897 381 - ------------------------------------------------------------------------ 1,981 4,657 1,978 - ------------------------------------------------------------------------ Deferred: Federal 1,100 ( 732) 187 State 263 ( 175) 44 - ------------------------------------------------------------------------ 1,363 ( 907) 231 - ------------------------------------------------------------------------ $ 3,344 $ 3,750 $ 2,209 ======================================================================== The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes for the following reasons: - ------------------------------------------------------------------------ Years Ended December 31, -------------------------------- 1998 199 1996 - ------------------------------------------------------------------------ Federal tax computed at statutory rates $ 2,921 $ 3,203 $ 1,904 State income taxes, net of federal income tax benefit 441 476 281 Other, net ( 18) 71 24 - ------------------------------------------------------------------------- Provision for income taxes $ 3,344 $ 3,750 $ 2,209 ========================================================================= The net deferred tax asset consists of the following temporary differences:
- ----------------------------------------------------------------------------------------------------------- December 31, 1998 December 31, 1997 - ----------------------------------------------------------------------------------------------------------- Deferred Tax Receivables from customers, principally due to Asset allowance for doubtful accounts $ - - $ 217 Office equipment and leasehold improvements, principally book over tax depreciation 859 1,037 Deferred compensation 1,400 1,135 Deferred revenue 974 229 Investments, principally due to valuation allowance 92 26 Receivables from officers and employees, principally due to allowance for doubtful accounts 189 950 Accruals not currently deductible 1,212 1,277 Other 101 78 ------------------------------------------------------------------------------------------- Deferred Tax Asset 4,827 4,949 ------------------------------------------------------------------------------------------- Deferred Tax Customer and employee receivable (1,304) - - Liability Intangible assets, principally tax over book amortization ( 195) (203) Investment fee revenue installment receivable ( 115) (169) ------------------------------------------------------------------------------------------- Total Gross Deferred Tax Liability (1,614) (372) ------------------------------------------------------------------------------------------- Net Deferred Tax Asset $ 3,213 $ 4,577 ===========================================================================================
The Company believes that a valuation allowance with respect to the realization of the total gross deferred tax asset is not necessary. Based on the Company's historical earnings and taxes previously paid, future expectations of taxable income, and the future reversals of gross deferred tax liability, management believes it is more likely than not that the Company will realize the gross deferred tax asset. Note M -Related Party Transactions Four directors of the Parent are associated with firms which provide legal and consulting services to the Company. The Company charged approximately $761, $1,586, and $801 (primarily for legal fees) to operations for these services for 1998, 1997, and 1996, respectively. Additionally, several employees of Stifel Nicolaus, through their individual ownership or interest in a corporation or partnership, provide leasing services primarily for branch office space. The Company charged to operations approximately $46, $46, and $17 for 1998, 1997, and 1996, respectively, for these services. A director of the Parent has a general partnership interest in an enterprise in which the Company also holds general and limited partnership interests carried at approximately $628 at December 31, 1998, and $507 at December 31, 1997. Note N -Segment Reporting The Company's reportable segments include private client, capital markets, and other. The private client segment includes 146 branch offices of the Company's broker-dealer subsidiaries located throughout the U.S., primarily in the Midwest. These branches provide securities brokerage services, including the sale of equities, mutual funds, fixed income products, and insurance, to their private clients. The capital markets segment includes management and participation in underwritings (exclusive of sales credits, which are included in the private client segment), mergers and acquisitions, public finance, trading, research, and market making. Investment advisory fees and clearing income is included in other. Intersegment revenues and charges are eliminated between segments. The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenues. The Company has not disclosed asset information by segment, as the information is not produced internally and its preparation is impracticable. Information concerning operations in these segments of business is as follows: - ---------------------------------------------------------------- Years Ended December 31, ------------------------------- 1998 1997 1996 - ----------------------------------------------------------------- Revenues Private Client $112,050 $107,537 $ 85,726 Capital Markets 19,517 23,517 19,583 Other 5,721 5,042 4,504 - ----------------------------------------------------------------- Total Revenues $137,288 $136,096 $109,813 ================================================================= Operating Contribution Private Client $ 17,619 $ 14,108 $ 10,439 Capital Markets 1,286 6,293 4,690 Other 1,326 821 ( 421) - ----------------------------------------------------------------- Total Operating Contribution 20,231 21,222 14,708 Unallocated Overhead (11,642) (11,801) ( 9,106) - ----------------------------------------------------------------- Pre-Tax Income $ 8,589 $ 9,421 $ 5,602 ================================================================= Note O -Earnings Per Share The following table reflects a reconciliation between Basic EPS and Diluted EPS.
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, -------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------- --------------------------------- -------------------------------- Income Shares PerShare Income Shares Per Share Income Shares Per Share Net Income (Numerator)(Denominator) Amount (Numerator)(Denominator) Amount (Numerator)(Denominator) Amount - ------------------------------------------------------------------------------------------------------------------------------------ Basic Earnings Per Share Income available to shareholders $5,245 6,849,998 $0.77 $5,671 5,590,919 $1.01 $3,393 5,150,498 $0.66 Effect of Dilutive Securities Employee benefits plans - - 347,988 - - - - 292,328 - - - - 102,532 - - Convertible debt - - - - - - 541 1,215,692 - - 601 1,563,032 - - Diluted Earnings Per Share Income available to common stockholders and assumed conversions $5,245 7,197,986 $0.73 $6,212 7,098,939 $0.88 $3,994 6,816,062 $0.59 - ------------------------------------------------------------------------------------------------------------------------------------
Note P -Subsequent Event On January 27, 1999, the Company's Board of Directors approved a 5 percent stock dividend to be distributed and a $.03 per share cash dividend to be paid on February 25, 1999, to shareholders of record on February 11, 1999. On January 27, 1999, the Company's Board of Directors announced the agreement to sell Todd Investment Advisors' common stock to a subsidiary of Western & Southern Life Insurance Company, a significant shareholder of the Company. The sale is scheduled to close during the second quarter of 1999 and is expected to result in an after-tax gain of approximately $1.3 million. Note Q -Recent Accounting Pronouncements In 1998, the Company early adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidelines for capitalization of developmental costs of proprietary software and purchased software for internal use. The adoption of this SOP had no material effect on the statement of financial position or results of operations. Also in 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires that derivatives be recognized in the balance sheet at fair value. Designation as hedges of specific assets or liabilities is permitted only if certain conditions are met. Effective in calendar year 2000, the Company will be required to record and mark to market any derivative financial instruments and related underlying assets, liabilities, and firm commitments. Management has not determined what effect SFAS No. 133 will have on its financial statements. ****** Independent Auditor's ReportIndependent Auditor's Report To the Board of Directors and Stockholders of Stifel Financial Corp. St. Louis, Missouri We have audited the accompanying consolidated statements of financial condition of Stifel Financial Corp. and Subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Stifel Financial Corp. and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. St. Louis, Missouri March 5, 1999 Quarterly Results (in thousands, except share and per share amounts) - ------------------------------------------------------------------------------------------------ Quarterly Operating Results (Unaudited) - ------------------------------------------------------------------------------------------------
Earnings Basic Diluted Before Net Earnings Earnings Revenue Income Taxes Income Per Share Per Share - ------------------------------------------------------------------------------------------------ Year 1998 By Quarter - ------------------------------------------------------------------------------------------------ First $35,839 $3,418 $2,053 $.30 $ .29 Second 34,072 2,100 1,224 .18 .17 Third 34,259 1,561 967 .14 .13 Fourth 33,118 1,510 1,001 .15 .14 - ------------------------------------------------------------------------------------------------ Year 1997 By Quarter - ------------------------------------------------------------------------------------------------ First $31,845 $2,752 $1,647 $.31 $ .26 Second 30,660 1,564 921 .18 .15 Third 36,645 3,364 2,012 .38 .30 Fourth 36,946 1,741 1,091 .17 .15 - ------------------------------------------------------------------------------------------------
All earnings per share amounts have been adjusted to reflect the 5 percent stock dividend declared January 27, 1999. 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 Advisors, Inc. Inc. (3) 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 5 [Deloitte & Touche LLP letterhead] EXHIBIT 23 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, 33-20568, 333-37805, and 333- 37807,)and on Form S-3(file number 33-53699), of our report dated March 5, 1999, incorporated by reference in the Annual Report on Form 10-K of Stifel Financial Corp. for the year ended December 31, 1998. /s/ Deloitte & Touche LLP March 5, 1999 St. Louis, Missouri EX-27 6 1998 FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the consolidated statement of financial condition dated December 31, 1998 and the statement of operations for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 13,012 231,462 0 12,653 38,632 5,315 335,005 62,890 92,346 0 103,224 998 20,570 1,084 0 0 53,893 335,005 21,994 18,889 56,729 20,234 3,338 9,798 86,967 8,589 8,589 0 0 5,245 .77 .73
-----END PRIVACY-ENHANCED MESSAGE-----