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UNITED STATES FORM 10-K/A (Amendment No. 1) (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [ ] 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)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended December 31, 2005
DELAWARE |
43-1273600 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
501 N. Broadway, St. Louis, Missouri |
63102-2188 |
(Address of principal executive offices) |
(Zip Code) |
Registrant's telephone number, including area code |
314-342-2000 |
Securities registered pursuant to Section 12(b) of the Act: |
Title of Each Class |
Name of Each Exchange |
Common Stock, Par Value $.15 per share |
New York Stock Exchange |
Preferred Stock Purchase Rights |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by non-affiliates on June 30, 2005 (the last business day of the Registrant's second fiscal quarter), was approximately $226.8 million, based on the closing sale price of the Common Stock on the New York Stock Exchange on that date.
Shares of Common Stock outstanding at February 28, 2006: 11,789,080 shares, par value $.15 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit Index located on pages 40 and 41.
Page 1
STIFEL FINACIAL CORP.
Amendment No. 1 to the Annual Report on Form 10-K
For the Year Ended December 31, 2005
Explanatory Note
Stifel Financial Corp. (the "Company") is filing this Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 31, 2005 in order to correct an error in Part II. Item 8, specifically, the unaudited pro forma financial data contained in the Notes to Consolidated Financial Statements, Note T - Acquisition, and amend the exhibits to Part IV. Item 15(a)(3) to the Annual Report on Form 10-K originally filed with the United States Securities and Exchange Commission on March 16, 2006. In Part II Item 8, the Company has restated Note T - Acquisition of the Notes to Consolidated Financial Statements changing unaudited pro forma net income for the year ended December 31, 2005, from $15,581,000 to $13,147,000, and unaudited pro forma diluted earnings per share, from $1.01 to $0.85. The error had no effect on SFC's consolidated statement of financial condition as of December 31, 2005 and 2004, or its consolidated statements of operations, stockholders' equity, and cash flows for each of the three years ended December 31, 2005. In Part IV Item 15(a)(3), the Company has added three employment agreements and updated the certification pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. With the exception of the foregoing, no other information in the Form 10-K is being supplemented, updated or amended. This Form 10-K/A does not purport to provide a general update or discussion of any other developments subsequent to the original filing.
Page 2
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in Item 8 has been adjusted solely to correct the unaudited pro forma financial data contained in the Notes to Consolidated Financial Statements, Note T - Acquisition contained in this item. These disclosures do not purport to provide a general update or discussion of any other developments subsequent to the original filing.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
March 15, 2006
Page 3
Consolidated Statements of Financial Condition
(Dollars In Thousands) |
December 31, 2005 |
December 31, 2004 |
|
Assets |
Cash and cash equivalents |
$ 12,529 |
$ 21,145 |
Cash segregated under federal and other regulations |
6 |
6 |
|
Securities purchased under agreements to resell |
65,599 |
- - |
|
Receivable from brokers and dealers: |
|||
Securities failed to deliver |
9,137 |
977 |
|
|
56,278 |
15,887 |
|
|
24,553 |
21,559 |
|
89,968 |
38,423 |
||
Receivable from customers, net of allowance for doubtful receivables of $204 and $47, respectively |
|||
259,389 |
201,303 |
||
Securities owned, at fair value |
105,514 |
28,020 |
|
Securities owned and pledged, at fair value |
135,211 |
- - |
|
240,725 |
28,020 |
||
Investments |
46,628 |
34,824 |
|
Memberships in exchanges |
275 |
300 |
|
Office equipment and leasehold improvements, |
|||
11,422 |
9,116 |
||
Goodwill and intangible assets |
13,849 |
3,636 |
|
Loans and advances to investment executives and |
|||
21,105 |
16,455 |
||
Deferred tax asset |
10,336 |
7,637 |
|
Other assets |
70,170 |
21,449 |
|
TOTAL ASSETS |
$842,001 |
$382,314 |
See Notes to Consolidated Financial Statements.
Page 4
Consolidated Statements of Financial Condition (continued)
(In Thousands, Except Share Amounts) |
December 31, 2005 |
December 31, 2004 |
|
Liabilities |
Liabilities: |
||
Short-term borrowings from banks |
$141,000 |
$ - - |
|
Drafts payable |
29,697 |
21,963 |
|
Payable to brokers and dealers: |
|||
|
8,794 |
1,842 |
|
|
89,039 |
33,225 |
|
|
797 |
6,873 |
|
98,630 |
41,940 |
||
Payable to customers |
78,456 |
61,368 |
|
Securities sold, but not yet purchased, at fair value |
146,914 |
12,318 |
|
Accrued employee compensation |
35,154 |
28,599 |
|
Accounts payable and accrued expenses |
59,875 |
23,088 |
|
Debenture to Stifel Financial Capital Trust I |
34,500 |
34,500 |
|
Debenture to Stifel Financial Capital Trust II |
35,000 |
- - |
|
Other |
24,598 |
24,598 |
|
683,824 |
248,374 |
||
Liabilities subordinated to claims of general creditors |
3,084 |
2,628 |
|
Stockholders' equity: |
|||
Preferred stock -- $1 par value; authorized 3,000,000 shares; none issued |
|||
Common stock -- $.15 par value; authorized |
1,161 |
1,152 |
|
Additional paid-in capital |
75,225 |
64,419 |
|
Retained earnings |
80,279 |
73,525 |
|
156,665 |
139,096 |
||
Less: |
|||
Treasury stock, at cost, 4,316 and 342,202 |
9 |
6,012 |
|
Unearned employee stock ownership plan shares, at cost, 162,683 and 184,371 shares, |
1,563 |
1,772 |
|
155,093 |
131,312 |
||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$842,001 |
$382,314 |
|
See Notes to Consolidated Financial Statements.
Page 5
Consolidated Statements of Operations
Years Ended December 31, |
||||
(In Thousands, Except Per Share Amounts) |
2005 |
2004 |
2003 |
|
Revenues |
Commissions |
$ 107,976 |
$ 95,894 |
$ 82,232 |
Investment banking |
55,893 |
57,768 |
49,663 |
|
Principal transactions |
44,110 |
46,163 |
47,417 |
|
Asset management and service fees |
43,476 |
35,504 |
28,021 |
|
Interest |
18,022 |
13,101 |
12,285 |
|
Other |
533 |
2,759 |
2,002 |
|
Total revenues |
270,010 |
251,189 |
221,620 |
|
Less: Interest expense |
6,275 |
4,366 |
5,108 |
|
Net revenues |
263,735 |
246,823 |
216,512 |
|
Non-interest |
Employee compensation and benefits |
174,765 |
157,314 |
140,973 |
Occupancy and equipment rental |
22,625 |
21,445 |
19,278 |
|
Communications and office supplies |
12,087 |
10,330 |
10,740 |
|
Commissions and floor brokerage |
4,134 |
3,658 |
3,263 |
|
Other operating expenses |
17,402 |
17,459 |
17,198 |
|
Total non-interest expenses |
231,013 |
210,206 |
191,452 |
|
Income before income taxes |
32,722 |
36,617 |
25,060 |
|
Provision for income taxes |
13,078 |
13,469 |
10,053 |
|
Net income |
$ 19,644 |
$ 23,148 |
$ 15,007 |
|
Earnings Per |
||||
Net income per share: |
||||
Basic earnings per share |
$ 2.00 |
$ 2.39 |
$ 1.63 |
|
Diluted earnings per share |
$ 1.56 |
$ 1.88 |
$ 1.37 |
*All shares and earnings per share amounts reflect the four-for-three stock split distributed in September 2004.
See Notes to Consolidated Financial Statements.
Page 6
Consolidated Statements of Stockholders' Equity
Treasury Stock and |
||||||||
Additional |
Unamortized Expense of |
|||||||
(in thousands, |
Common Stock |
Retained |
||||||
Except share amounts) |
Shares |
Amount |
Shares |
Amount |
Total |
|||
Balance at December 31, 2002 |
7,675,781 |
$1,152 |
$53,337 |
$36,161 |
(903,037) |
$(10,655) |
$(5) |
$79,990 |
Purchase of treasury shares |
-- |
-- |
-- |
-- |
(80,263) |
(984) |
-- |
(984) |
Tender offer |
-- |
-- |
-- |
-- |
(87,471) |
(1,158) |
-- |
(1,158) |
Employee stock ownership plan |
-- |
-- |
(12) |
-- |
16,264 |
208 |
-- |
196 |
Employee benefit plans |
-- |
-- |
(266) |
-- |
195,633 |
2,262 |
-- |
1,996 |
Stock options exercised |
-- |
-- |
(414) |
-- |
95,684 |
1,112 |
-- |
698 |
Units and restricted stock awards |
-- |
-- |
4,294 |
-- |
-- |
-- |
5 |
4,299 |
Dividend reinvestment |
-- |
-- |
-- |
-- |
5 |
1 |
-- |
1 |
Net income for the year |
-- |
-- |
-- |
15,007 |
-- |
-- |
-- |
15,007 |
Balance at December 31, 2003 |
7,675,781 |
1,152 |
56,939 |
51,168 |
(763,185) |
(9,214) |
-- |
100,045 |
Purchase of treasury shares |
-- |
-- |
-- |
-- |
(370,478) |
(9,166) |
-- |
(9,166) |
Employee stock ownership plan |
-- |
-- |
184 |
-- |
17,623 |
208 |
-- |
392 |
Employee benefit plans |
-- |
-- |
2,310 |
(603) |
481,252 |
6,434 |
-- |
8,141 |
Stock options exercised |
-- |
-- |
(1,378) |
(185) |
244,460 |
3,953 |
-- |
2,390 |
Units amortization |
-- |
-- |
6,364 |
-- |
-- |
-- |
-- |
6,364 |
Dividend reinvestment |
-- |
-- |
-- |
-- |
5 |
1 |
-- |
1 |
4-for-3 Stock Split |
2,558,419 |
-- |
-- |
(3) |
(136,250) |
-- |
-- |
(3) |
Net income for the year |
-- |
-- |
-- |
23,148 |
-- |
-- |
-- |
23,148 |
Balance at December 31, 2004 |
10,234,200 |
1,152 |
64,419 |
73,525 |
(526,573) |
(7,784) |
-- |
131,312 |
Purchase of treasury shares |
-- |
-- |
-- |
-- |
(587,088) |
(14,103) |
-- |
(14,103) |
Employee stock ownership plan |
-- |
-- |
344 |
-- |
21,688 |
208 |
-- |
552 |
Employee benefit plans |
36,958 |
5 |
2,246 |
(9,616) |
682,667 |
14,378 |
-- |
7,013 |
Stock options exercised |
25,121 |
4 |
(15) |
(3,274) |
242,306 |
5,729 |
-- |
2,444 |
Units amortization |
-- |
-- |
8,231 |
-- |
-- |
-- |
-- |
8,231 |
Net income for the year |
-- |
-- |
-- |
19,644 |
-- |
-- |
-- |
19,644 |
Balance at December 31, 2005 |
10,296,279 |
$1,161 |
$75,225 |
$80,279 |
(166,999) |
$ (1,572) |
-- |
$155,093 |
See Notes to Consolidated Financial Statements.
Page 7
Consolidated Statements of Cash Flows
Years Ended December 31, |
||||
(in thousands) |
2005 |
2004 |
2003 |
|
Cash Flows |
Net income |
$ 19,644 |
$ 23,148 |
$ 15,007 |
Noncash items included in earnings: |
||||
|
5,436 |
4,151 |
3,266 |
|
|
7,476 |
5,799 |
7,860 |
|
|
(1,615) |
(876) |
736 |
|
Stock based compensation |
8,785 |
6,756 |
4,491 |
|
|
1,151 |
(1,123) |
(247) |
|
40,877 |
37,855 |
31,113 |
||
Decrease (increase) in operating receivables: |
||||
Customers |
(58,086) |
54,196 |
9,147 |
|
Brokers and dealers |
(51,545) |
(3,445) |
(1,984) |
|
(Decrease) increase in operating payables: |
||||
Customers |
17,088 |
17,265 |
(66,399) |
|
Brokers and dealers |
(4,324) |
89 |
(6,101) |
|
Decrease (increase) in assets: |
||||
Cash segregated under federal and other |
- - |
(1) |
25 |
|
Securities purchased under agreements to resell |
(65,599) |
- - |
- - |
|
Securities owned, including those pledged |
(212,705) |
(3,605) |
4,126 |
|
Loans and advancements to investment |
(11,976) |
(6,352) |
(3,785) |
|
Other assets |
(6,313) |
(3,599) |
(4,476) |
|
(Decrease) increase in liabilities: |
||||
Securities sold, not yet purchased |
134,596 |
6,279 |
2,175 |
|
Drafts payable, accounts payable and accrued expenses, and accrued employee compensation |
12,389 |
4,037 |
5,959 |
|
Cash From Operating Activities |
$(205,598) |
$102,719 |
$(30,200) |
See Notes to Consolidated Financial Statements.
Page 8
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, |
||||
(in thousands) |
2005 |
2004 |
2003 |
|
Cash From Operating Activities -- |
||||
$(205,598) |
$102,719 |
$(30,200) |
||
Cash Flows |
Proceeds from sale of investments |
14,649 |
3,623 |
2,683 |
Payments for: |
||||
Purchase of LM Capital Markets business, net of cash acquired |
(21,299) |
-- |
-- |
|
Purchase of office equipment and leasehold improvements |
||||
(4,797) |
(3,729) |
(2,383) |
||
Purchase of investments |
(15,388) |
(3,895) |
(5,349) |
|
Cash From Investing Activities |
(26,835) |
(4,001) |
(5,049) |
|
Cash Flows |
Net proceeds (payments) for short-term borrowings |
|||
from banks |
141,000 |
(5,650) |
(37,750) |
|
Securities loaned |
61,014 |
(82,866) |
71,902 |
|
Proceeds from: |
||||
Issuance of stock |
1,580 |
8,722 |
2,700 |
|
Issuance of debentures to Stifel Financial |
||||
Capital Trust II |
35,000 |
-- |
-- |
|
Payments for: |
||||
Purchases of stock for treasury |
(14,103) |
(9,166) |
(2,142) |
|
Principal payments under capital lease obligation |
(41) |
(151) |
(314) |
|
Reduction of subordinated debt |
(633) |
(698) |
(796) |
|
Cash From Financing Activities |
223,817 |
(89,809) |
33,600 |
|
Increase (decrease) in cash and cash equivalents |
(8,616) |
8,909 |
(1,649) |
|
Cash and cash equivalents -- beginning of year |
21,145 |
12,236 |
13,885 |
|
Cash and cash equivalents -- end of year |
$ 12,529 |
$ 21,145 |
$ 12,236 |
Supplemental disclosures of cash flow information: |
||||
Interest payments |
$ 5,657 |
$ 4,460 |
$ 5,015 |
|
Income tax payments |
$ 15,770 |
$ 15,817 |
$ 8,998 |
|
Schedule of Noncash Investing and Financing Activities: |
||||
Units, net of forfeitures |
$ 8,482 |
$ 6,908 |
$ 6,840 |
|
Employee stock ownership shares |
$ 208 |
$ 208 |
$ 208 |
|
Liabilities subordinated to claims of general creditors |
$ 1,391 |
$ 1,300 |
$ 918 |
See Notes to Consolidated Financial Statements.
Page 9
Notes To Consolidated Financial Statements
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 and two European offices, its major geographic area of concentration is in the Midwest, and Mid-Atlantic region. The Company's principal customers are individual investors, 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, as amended (the "Exchange Act"). All material intercompany balances and transactions are eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Management considers its significant estimates, which are most susceptible to change, to be the fair value of investments and the accrual for litigation.
Where appropriate, prior years' financial information has been reclassified to conform with the current year presentation. The Company changed the classification within the Consolidated Statements of Cash Flows of the activities associated with securities loaned, net of securities borrowed. Securities loaned will remain as a financing activity while securities borrowed will be classified as an operating activity. The Company believes these changes better reflect the primary business purpose of these transactions.
Common Stock Split
On August 23, 2004, Stifel Financial Corp. announced a four-for-three stock split in the form of a stock dividend. The additional shares were distributed on September 15, 2004, to shareholders on record as of September 1, 2004. Each shareholder received one additional share for every three shares owned. Cash was distributed in lieu of fractional shares. The number of shares outstanding and amounts per share in the Consolidated Statements of Operations and the Notes to Consolidated Financial Statements have been restated to give retroactive effect to the stock split.
Cash and Cash Equivalents
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
Securities owned, and securities sold, but not yet purchased, are carried at fair value, and unrealized gains and losses are included net in principal transaction revenues. Interest and dividends for securities owned and securities sold, but not yet purchased, are included in principal transaction revenues.
Securities failed to deliver and receive represent the contract value of securities that have not been delivered or received by settlement date.
Page 10
Notes To Consolidated Financial Statements
NOTE A -- Summary of Significant Accounting and Reporting Policies (Continued)
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.
Securities purchased under agreements to resell (Resale Agreements) and securities sold under agreements to repurchase are recorded at the contractual amounts that the securities will be resold/repurchased, including accrued interest. The Company's policy is to obtain possession or control of securities purchased under Resale Agreements and to obtain additional collateral when necessary to minimize the risk associated with this activity.
Customer security transactions are recorded on a settlement date basis, with related commission revenues and expenses recorded on a trade date basis. Principal securities transactions are recorded on a trade date basis.
Securities Borrowing and Lending Activities
Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions require the Company to deposit cash with the lender generally in excess of the market value of securities borrowed. With respect to securities loaned, the Company receives collateral in the form of cash in an amount generally in excess of the market value of securities loaned. The Company monitors the market value of securities borrowed and loaned generally on a daily basis, with additional collateral obtained or refunded as necessary. Substantially all of these transactions are executed under master netting agreements, which give the Company right of offset in the event of counterparty default; however, such receivables and payables with the same counterparty are not set off in the Company's Statements of Financial Condition.
Fair Value
Substantially all of 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. 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. Other than those separately discussed in the Notes to Consolidated Financial Statements, the Company's remaining financial instruments are generally short-term in nature and their carrying values approximate fair value.
Investments
The "Investments" caption on the Consolidated Statement of Financial Condition contains the Company's investments in securities that are marketable and securities that are not readily marketable. Marketable securities are carried at fair value, based on either quoted market or dealer prices, or accreted cost. The fair value of investments, for which a quoted market or dealer price is not available, is based on management's estimates. Among the factors considered by management in determining the fair value of investments are the cost of the investment, terms and liquidity, developments since the acquisition of the investment, the sales price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. The fair value of these investments is subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term. These investments were valued at $7,329 and $9,071 at December 31, 2005 and 2004, respectively. The marketable investments carried at fair value were $19,990 and $7,569 at December 31, 2005 and 2004 respectively. Investments carried at accreted cost were $19,309 and $18,184, at December 31, 2005 and 2004, respectively (See Note N).
Page 11
Notes To Consolidated Financial Statements
NOTE A -- Summary of Significant Accounting and Reporting Policies (Continued)
Loans and Advances
The Company offers transition pay, principally in the form of upfront loans, to investment executives and certain key revenue producers as part of the Company's overall growth strategy. These loans are generally forgiven by a charge to "Employee compensation and benefits" over a five- to ten-year period if the individual satisfies certain conditions, usually based on continued employment and certain performance standards. If the individual leaves before the term of the loan expires or fails to meet certain performance standards, the individual is required to repay the balance. Management monitors and compares individual investment executive production to each loan issued to ensure future recoverability.
Deferred Compensation
Deferred compensation costs are amortized on a straight-line basis over a three to five year deferral period.
Investment Banking
Investment banking revenues include advisory fees, management fees, underwriting fees, net of reimbursable expenses, and sales credits earned in connection with the distribution of the underwritten securities. Investment banking management fees are recorded on offering date, sales concessions on trade date, and underwriting fees at the time the underwriting is completed and the income is determinable. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded.
Asset Management and Service Fees
Asset management and service fees are recorded when earned and consist of customer account service fees, per account fees (such as IRA fees), and wrap fees on managed accounts.
Stock-Based Compensation
The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and related interpretations to account for its employees' participation in the Company's stock plans. Based on the provisions of the plans, no compensation expense has been recognized for options issued under these 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 SFAS No. 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:
Page 12
Notes To Consolidated Financial Statements
NOTE A -- Summary of Significant Accounting and Reporting Policies (Continued)
Years Ended December 31, |
|||
2005 |
2004 |
2003 |
|
Net income |
|||
As reported |
$19,644 |
$23,148 |
$15,007 |
Add: Stock-based employee compensation expense included in reported net income, net of related tax |
9,273 |
7,325 |
4,380 |
Deduct: Total stock-based employee compensation expense determined under SFAS 123 (1) |
(9,892) |
(7,870) |
(5,488) |
Pro forma |
$19,025 |
$22,603 |
$13,899 |
Basic earnings per share |
|||
As reported |
$ 2.00 |
$ 2.39 |
$ 1.63 |
Pro forma |
$ 1.94 |
$ 2.33 |
$ 1.51 |
Diluted earnings per share |
|||
As reported |
$ 1.56 |
$ 1.88 |
$ 1.37 |
Pro forma |
$ 1.51 |
$ 1.85 |
$ 1.27 |
For the Company's pro forma computation, 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 2005, 2004, and 2003, respectively: dividend yield of 0.00% for all years; expected volatility of 32.6%, 28.4%, and 25.8%; risk-free interest rates of 3.94%, 3.41%, and 3.05%, and expected lives of 5.79 years, 5.66 years, and 5.00 years.
Under the provisions of SFAS No. 123 the amended 2003 ESPP, is considered non-compensatory. In 2003, the ESPP was considered compensatory and the fair value of each employee's purchase rights was estimated using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants in 2003: dividend yield of 0.00; expected volatility of 23.7%; risk-free interest rates of 1.23%; and expected life of one year. The weighted-average fair value of those purchase rights granted in 2003 was $1.10.
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. Valuation allowances are established when necessary to reduce deferred taxes to amounts expected to be realized.
Comprehensive Income
The Company had no other comprehensive income items; accordingly, net income and other comprehensive income are the same.
Page 13
Notes To Consolidated Financial Statements
NOTE A -- Summary of Significant Accounting and Reporting Policies (Continued)
Goodwill and Intangible Assets
Goodwill represents the cost of acquired businesses in excess of the fair value of the related net assets acquired. The Company does not amortize goodwill. Goodwill is tested for impairment at least annually or whenever indications of impairment exist. In testing for the potential impairment of goodwill, management estimates the fair value of each of the Company's reporting units (generally defined as the Company's businesses for which financial information is available and reviewed regularly by management), and compares it to their carrying value. If the estimated fair value of a reporting unit is less than its carrying value, management is required to estimate the fair value of all assets and liabilities of the reporting unit, including goodwill. If the carrying value of the reporting unit's goodwill is greater than the estimated fair value, an impairment charge is recognized for the excess. The Company has elected July 31st as its annual impairment testing date.
Identifiable intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset or asset group may not be fully recoverable in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Other
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 provided over estimated useful lives of three to seven years using accelerated methods.
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 per share include dilutive stock options and stock units under the treasury stock method.
Page 14
Notes To Consolidated Financial Statements
NOTE A -- Summary of Significant Accounting and Reporting Policies (Continued)
Recent Accounting Pronouncements
In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations ("FIN 47")". FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS No. 143. FIN 47 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company's adoption of FIN 47 did not have a material impact on the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS No. 123R"), "Share-Based Payment," which requires companies to expense the estimated fair value of employee stock options and similar awards. The accounting provisions of SFAS No. 123R, as deferred by the United States Securities and Exchange Commission on April 21, 2005, will be effective for the Company for fiscal years beginning after June 15, 2005. The Company adopted the provisions of SFAS No. 123R, effective January 1, 2006, using a modified prospective application. Under the modified prospective application, SFAS No. 123R, which provides certain changes to the method for valuing stock-based compensation among other changes, will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service p eriod using the compensation cost calculated for pro forma disclosure purposes under SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). For option grants outstanding at December 31, 2005, compensation expense, as determined in accordance with SFAS No. 123R, will be approximately $595 before income taxes during 2006. The Company will incur additional expense during 2006 related to future awards granted that cannot yet be quantified. The adoption of SFAS No. 123R by the Company had a material impact on the consolidated financial statements beginning January 1, 2006 (See Note U).
In June 2005, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No. 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights" ("EITF No. 04-5"). EITF No 04-5 consensus requires a general partner in a limited partnership to consolidate the limited partnership unless the presumption of control is overcome. The general partner may overcome this presumption of control and not consolidate the entity if the limited partners have: (a) the substantive ability to dissolve or liquidate the limited partnership or otherwise remove the general partner without having to show cause; or (b) substantive participating rights in managing the partnership. This consensus is effective for general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified subsequent to the date of t he ratification of this consensus (June 29, 2005). The guidance in this issue is effective for existing partnerships no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of EITF No. 04-5 to have a material impact on the Company's consolidated financial statements.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3," ("SFAS No. 154"). SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS No. 154 to have a material impact on the Company's consolidated financial statements.
Page 15
Notes To Consolidated Financial Statements
NOTE B -- Cash Segregated Under Federal and Other Regulations
At December 31, 2005, cash of $6 has been segregated in a special reserve bank account for the exclusive benefit of customers pursuant to Rule 15c3-3 under the Exchange Act. Stifel Nicolaus performs a weekly reserve calculation for proprietary accounts of introducing brokers, which includes accounts of an affiliated introducing broker. At December 31, 2005, no deposit was required.
NOTE C -- Securities Owned and Securities Sold, But Not Yet Purchased
The components of securities owned and securities sold, but not yet purchased at December 31, 2005 and 2004, are as follows:
December 31, 2005 |
December 31, 2004 |
|||
Sold, But Not |
Sold, But Not |
|||
Securities, at fair value |
Owned |
Owned |
||
U.S. Government obligations |
$ 104,435 |
$ 143,569 |
$ 1,379 |
$ 911 |
State and municipal bonds |
55,733 |
427 |
13,659 |
411 |
Corporate obligations |
55,686 |
1,056 |
3,619 |
942 |
Corporate stocks |
24,871 |
1,862 |
9,363 |
10,054 |
240,725 |
$146,914 |
28,020 |
$12,318 |
|
Less: Securities owned and pledged |
135,211 |
- - |
||
Total |
$105,514 |
$28,020 |
The Company pledges securities owned as collateral to counterparties, who have the ability to repledge the collateral; therefore, the Company has reported the pledged securities under the caption "Securities owned and pledged at fair value" in the Consolidated Statements of Financial Condition.
NOTE D -- Short-Term Financing
The Company's short-term financing is generally obtained through the use of bank loans and securities lending arrangements. Stifel Nicolaus borrows from various banks on a demand basis with company-owned and customer securities pledged as collateral. Available ongoing credit arrangements with banks totaled $605,000 at December 31, 2005, of which $464,000 was unused. There are no compensating balance requirements under these arrangements. At December 31, 2005, short-term borrowings were $141,000 at an average rate of 4.40%, of which $18,250 were collateralized by customer-owned securities of $77,095. The value of the customer-owned securities is not reflected in the consolidated statement of financial condition. The remaining short-term borrowings of $122,750 were collateralized by company-owned securities valued at $135,211. There were no short-term borrowings at December 31, 2004. At December 31, 2003, short-term borrowings were $5,650 at an average rate of 1.38%, of which $3,650 were col lateralized by customer-owned securities of $13,858. The value of the customer-owned securities is not reflected in the consolidated statement of financial condition. The remaining short-term borrowings of $2,000 were collateralized by company-owned securities valued at $9,690. The average bank borrowing was $5,607, $3,672, and $8,003 in 2005, 2004, and 2003, respectively, at weighted average daily interest rates of 3.09%, 1.74%, and 1.66%, respectively. At December 31, 2005 and 2004, Stifel Nicolaus had a stock loan balance of $89,039 and $33,225, respectively, at weighted average daily interest rates of 4.15% and 2.12%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $52,193, $81,635, and $119,528 in 2005, 2004, and 2003, respectively, at weighted average daily effective interest rates of 2.39%, 1.37%, and 1.17%, respectively. Customer securities were utilized in these arrangements.
Page 16
Notes To Consolidated Financial Statements
NOTE E -- Commitments and Contingencies
In the normal course of business, the Company enters into underwriting commitments. Settlement of transactions relating to such underwriting commitments, which were open December 31, 2005, had no material effect on the consolidated financial statements.
In connection with margin deposit requirements of The Options Clearing Corporation ("OCC"), the Company had pledged customer-owned securities valued at $25,815, at December 31, 2005. The amounts on deposit satisfied the minimum margin deposit requirement of $21,614.
In connection with margin deposit requirements of the National Securities Clearing Corporation, the Company had pledged $6,000 in cash, at December 31, 2005. The amounts on deposit satisfied the minimum margin deposit requirement of $4,189.
The Company also provides guarantees to securities clearing houses and exchanges under their standard membership agreement, which requires members to guarantee the performance of other members. Under the agreement, if another member becomes unable to satisfy its obligations to the clearing house, other members would be required to meet shortfalls. The Company's liability under these agreements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these transactions.
The future minimum rental and third-party vendor service commitments at December 31, 2005, with initial or remaining non-cancelable terms in excess of one year, some of which contain escalation clauses and renewal options, are as follows:
Year Ended December 31 |
Operating Leases and Service Agreements |
2006 |
$17,006 |
2007 |
11,358 |
2008 |
8,389 |
2009 |
6,849 |
2010 |
5,751 |
Thereafter |
9,384 |
Minimum Commitments |
$58,737 |
Rental expense for the years ended December 31, 2005, 2004, and 2003, approximated $10,508, $11,025, and $10,135, respectively. The Company amortizes office lease incentives and rent escalations on a straight-line basis over the life of the lease.
Amortization and depreciation expense of owned furniture and equipment and assets under capital lease for 2005, 2004, and 2003 was $3,723, $2,931, and $3,053, respectively.
Page 17
Notes To Consolidated Financial Statements
NOTE E -- Commitments and Contingencies (Continued)
On February 19, 2002, the Company entered into a $4,000 sale-leaseback arrangement for certain office furniture and equipment. The Company made quarterly principal payments of approximately $320. At the time of the original sale, the Company's recorded net book value for the equipment was $2.9 million, resulting in a deferred gain of $1.1 million, which was amortized ratably over the life of the lease. The transaction was accounted for as an operating lease. The lease expired in February 2005 and the Company exercised its option to purchase the equipment at 15% of the original purchase price.
NOTE F -- Net Capital Requirements
As a register broker-dealer, Stifel Nicolaus is subject to the Uniform Net Capital Rule, Rule 15c3-1 under the Exchange Act (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 that requires maintenance of minimum net capital equal to the greater of $250 or 2% 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% of aggregate debit items. Another subsidiary, Century Securities Associates, Inc. ("CSA"), is also subject to minimum capital requirements that may restrict the payment of cash dividends and advances to the Company. CSA has consistently operated in excess of their capital adequacy requirements. The only restriction with regard to the payment of cash dividends by the Company is its ability to obtain cash through dividends and advances from its subsidiaries, if needed.
At December 31, 2005, Stifel Nicolaus had net capital of $106,700, which was 36.65% of aggregate debit items and $100,878 in excess of minimum required net capital. CSA had net capital of $1,899, which was $1,767 in excess of minimum required net capital.
The Company's international subsidiary, Stifel Nicolaus Limited, is subject to the regulatory supervision and requirements of the Financial Services Authority ("FSA") in the United Kingdom. The FSA also has the power to set minimum capital requirements, which Stifel Nicolaus Limited has met.
NOTE G - Goodwill and Intangible Assets
The carrying amount of goodwill and intangible assets attributable to each of the Company's reportable segments is presented in the following table:
Private |
Equity |
Fixed Income Capital Markets |
|
|
Goodwill |
||||
Balance at December 31, 2004 |
$ 454 |
$ 1,676 |
$ 1,180 |
$ 3,310 |
Goodwill acquired |
- - |
- - |
- - |
- - |
Impairment losses |
- - |
- - |
- - |
- - |
Balance at December 31, 2005 |
454 |
1,676 |
1,180 |
3,310 |
Intangible Assets |
||||
Balance at December 31, 2004 |
326 |
- - |
- - |
326 |
Intangible assets acquired |
385 |
8,232 |
1,887 |
10,504 |
Amortization of intangible assets |
(145) |
(146) |
- - |
(291) |
Impairment losses |
- - |
- - |
- - |
- - |
Balance at December 31, 2005 |
566 |
8,086 |
1,887 |
10,539 |
Total Goodwill and intangible assets |
$ 1,020 |
$ 9,762 |
$ 3,067 |
$ 13,849 |
Page 18
Notes To Consolidated Financial Statements
NOTE H -- Employee Benefit Plans
The Company has a profit sharing 401(k) plan (the "PSP") covering qualified employees as defined in the plan. Contributions to the PSP were based upon a company match of 50% of the employees' first one thousand dollars in annual contributions. Effective January 1, 2006 the company match was changed to 50% of the employees' first two thousand dollars in annual contributions. Additional contributions by the Company are discretionary. Under the PSP, participants can purchase up to 333,333 shares of the Company's common stock. The amounts charged to employee compensation and benefits for the PSP were $626, $419, and $418, for 2005, 2004, and 2003, respectively.
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 Company on behalf of all eligible employees based upon the relationship of individual compensation (up to a maximum of $170) to total compensation. In 1997, the Company purchased 330,750 shares for $3,178 and contributed these shares to the ESOP. The unallocated shares are being released for allocation to the participants based upon employer contributions to fund an internal loan between the Company and the ESOP. At December 31, 2005, the plan held 479,670 shares, of which 162,683 shares, with a fair value of $6,115, were unallocated. The Company charged to employee compensation and benefits $553, $392, and $196 for the ESOP contributions for 2005, 2004, and 2003, respectively.
NOTE I -- Stock-Based Compensation Plans
The Company has several stock-based compensation plans, which are described below. 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.
Stock Option/Incentive Award Plans
The Company has four incentive stock award plans. Under the Company's 1997 and 2001 Incentive Stock Plans, the Company may grant incentive stock options, stock appreciation rights, restricted stock, performance awards, and stock units up to an aggregate of 8,748,659 shares. Options under these plans are generally granted at market value at the date of the grant and expire ten years from the date of grant. The options generally vest ratably over a three- to five-year vesting period. The Company has also granted stock options to external board members under a non-qualified plan and the "Equity Incentive Plan for Non-Employee Directors." Under the Equity Incentive Plan for Non-Employee Directors, the Company may grant stock options and stock units up to 200,000 shares. The exercise price of the option is equal to market value at the date of the grant and are exercisable six months to one year from date of grant and expire ten years from date of grant. Under the Stifel, Nicolaus & Company, Incorporated Wealth Accumulation Plan ("SWAP"), a deferred compensation plan for Investment Executives, the Company may grant stock units up to 933,333 shares.
Page 19
Notes To Consolidated Financial Statements
NOTE I -- Stock-Based Compensation Plans (Continued)
The summary of the status of the Company's fixed stock option plans as of December 31, 2005, 2004, and 2003, and changes during the years ending on those dates is presented below:
2005 |
2004 |
2003 |
|||||
Weighted |
Weighted |
Weighted |
|||||
Fixed Options |
Shares |
Shares |
Shares |
||||
Outstanding at beginning of year |
1,869,121 |
$ 8.85 |
2,204,187 |
$ 8.50 |
2,067,377 |
$ 7.92 |
|
Granted |
93,208 |
26.90 |
55,164 |
19.24 |
322,000 |
10.98 |
|
Exercised |
(267,426) |
8.12 |
(317,795) |
8.09 |
(127,606) |
5.48 |
|
Forfeited |
(29,540) |
10.37 |
(72,435) |
9.56 |
(57,584) |
7.93 |
|
Outstanding at end of year |
1,665,363 |
$ 9.95 |
1,869,121 |
$ 8.85 |
2,204,187 |
$ 8.50 |
|
Options exercisable at year-end |
1,243,972 |
1,195,395 |
1,196,725 |
||||
Weighted-average fair value of options granted during the year |
$10.51 |
$6.54 |
$3.11 |
The following table summarizes information about fixed stock options outstanding at December 31, 2005:
Options Outstanding |
Options Exercisable |
||||
Range of Exercise Price |
Number Outstanding |
Weighted-Average Remaining Contractual Life |
Weighted-Average Exercise Price |
Number Exercisable |
Weighted-Average Exercise Price |
$4.70 $7.46 |
274,179 |
3.13 |
$ 7.09 |
274,179 |
$ 7.09 |
7.46 - 7.80 |
302,693 |
5.22 |
7.73 |
224,783 |
7.71 |
7.83 - 8.12 |
267,754 |
3.68 |
7.94 |
254,419 |
7.94 |
8.16 - 8.69 |
354,512 |
6.07 |
8.48 |
247,754 |
8.44 |
8.70 - 11.48 |
269,827 |
4.58 |
9.67 |
198,946 |
9.72 |
11.48 - 22.23 |
241,801 |
7.47 |
16.46 |
124,502 |
15.72 |
37.59 - 37.59 |
35,208 |
10.00 |
37.59 |
- |
0.00 |
$4.70 - $37.59 |
1,665,363 |
5.26 |
$ 9.95 |
1,243,972 |
$ 8.78 |
Employee Stock Purchase Plan
Under the 2003 Employee Stock Purchase Plan ("ESPP"), the Company was authorized to issue up to 266,667 shares of common stock, to its full-time employees, nearly all of whom were eligible to participate. Under the terms of the ESPP, employees could choose each year to have a specified percentage of their compensation withheld in 1% increments not to exceed 10%. The participant could also specify a maximum dollar amount to be withheld. At the beginning of every year, each participant was granted an option to purchase up to 1,333 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. In 2004, the 2003 ESPP was amended and the employees elected monthly to purchase a minimum of 5 shares to a maximum of 1,333 shares, not to exceed 1,333 shares for the calendar year. At the beginning of every month, each participant was granted an option to purchase up to 1,333 shares of common stock at a price equal to the lower of 5% of the beginning-of-month or end-of-month fair market value of the common stock. On January 1, 2005 the Company cancelled the ESPP. Approximately 32% to 36% of eligible employees participated in the ESPP in 2004 and 2003. Under the ESPP, the Company granted 266,661 and 252,144 shares to employees in 2004, and 2003, respectively.
Page 20
Notes To Consolidated Financial Statements
NOTE I -- Stock-Based Compensation Plans (Continued)
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. A deferred compensation plan is provided to certain revenue producers, officers, and key administrative employees, whereby a certain percentage of their incentive compensation is deferred as defined by the plan into Company stock units with a 25% matching contribution by the Company. Participants may elect to defer up to an additional 15% of their incentive compensation with a 25% matching contribution by the Company. Units generally vest over a three- to five-year period and are distributable upon vesting or at future specified dates. Deferred compensation costs are amortized on a straight-line basis over the vesting period. As of December 31, 2005, there were 950,175 units outstanding under this deferred compensation plan. The Company charged $3,644, $2,766, and $1,981 to employee com pensation and benefits relating to units granted under this plan for 2005, 2004, and 2003, respectively.
Stifel Nicolaus has a deferred compensation plan for its investment executives ("I.E.s") who achieve certain levels of production, whereby a certain percentage of their earnings is deferred as defined by the plan, of which 50% is deferred into Company stock units with a 25% matching contribution and 50% earns a return based on optional investments chosen by the I.E.s. Investment executives may choose to base their return on the performance of an index mutual fund as designated by the Company or a fixed income option. I.E.s have no ownership in the mutual funds. Included on the Consolidated Statement of Financial Condition under the caption "Investments" are $4,539 in 2005 and $4,308 in 2004 in mutual funds that were purchased by the Company to economically hedge its liability to the I.E.s that choose to base the performance of their return on the index mutual fund option. I.E.s may elect to defer an additional 1% of earnings into Company stock units with a 25% matching contribution. In add ition, certain I.E.s, upon joining the firm, may receive Company stock units in lieu of transition cash payments. Deferred compensation for both plans cliff vests over a five-year period. Deferred compensation costs are amortized on a straight-line basis over the deferral period. As of December 31, 2005, there were 1,917,992 units outstanding under this deferred compensation plan. Charges to employee compensation and benefits related to these plans were $5,308, $4,300, and $2,243 for 2005, 2004, and 2003, respectively.
Under the Equity Incentive Plan for Non-Employee Directors, the Company granted stock units to non-employee directors that elected to defer their director compensation. Participants that elected to defer their compensation were given a 25% matching contribution by the Company. Beginning in May 2004, all directors' compensation is deferred without a matching contribution by the Company. These units are 100% vested and are distributable after five full calendar years. Directors' fees are expensed on the grant date. As of December 31, 2005, there were 75,329 units outstanding under this plan. The Company charged $320, $259, and $156 to directors' fees relating to units granted under this plan for 2005, 2004, and 2003, respectively.
Page 21
Notes To Consolidated Financial Statements
NOTE J -- Legal Proceedings
The Company is named in and subject to various proceedings and claims incidental to its securities business activities, including lawsuits, arbitration claims and regulatory matters. While the ultimate outcome of pending litigation, claims and regulatory matters cannot be predicted with certainty, based upon information currently known, management believes that resolution of all such matters will not have a material adverse effect on the consolidated financial condition of the Company but could be material to its operating results in one or more future periods. It is reasonably possible that certain of these lawsuits, arbitrations, claims and regulatory matters 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 K -- Off-Balance Sheet Credit Risk
The Company clears and executes transactions for three introducing broker-dealers. Pursuant to the clearing agreement, the introducing broker-dealer guarantees the performance of its customers to the Company. To the extent the introducing broker-dealer is unable to satisfy its obligations under the terms of the clearing agreement, the Company would be secondarily liable. However, the potential requirement for the Company to fulfill these obligations under this arrangement is remote. Accordingly, no liability has been recognized for these transactions.
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 generally settle 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 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' positions, 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 ex posed 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.
The Company manages its risks associated with the aforementioned transactions through position and credit limits, and the continuous monitoring of collateral. Additional collateral is required from customers and other counterparties when appropriate.
Page 22
Notes To Consolidated Financial Statements
NOTE K -- Off-Balance Sheet Credit Risk (continued)
At December 31, 2005, securities, primarily from customer margin and securities borrowing transactions, of approximately $378,000 were available to the Company to utilize as collateral on various borrowings or other purposes. The Company had utilized a portion of these available securities as collateral for stock loans of $85,301, OCC margin requirements of $25,815, and customer short sales of $11,768.
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.
NOTE L -- Debenture to Stifel Financial Capital Trusts
On April 25, 2002, Stifel Financial Capital Trust I (the "Trust I"), a Delaware Trust and non-consolidated wholly- owned subsidiary of the Company, completed the offering of 1,380,000 shares of 9% Cumulative Trust Preferred Securities for $34.5 million (net proceeds of approximately $32.9 million after offering expenses and underwriting commissions). The trust preferred securities represent an indirect interest in a junior subordinated debenture purchased from the Company by the Trust I. The debenture bears the same terms as the trust preferred securities. The trust preferred securities may be redeemed by the Company, and in turn, the Trust would call the debenture no earlier than June 30, 2007, but no later than June 30, 2032. The interest payments on the debenture will be made quarterly, and undistributed payments will accumulate interest of 9% per annum compounded quarterly.
As of December 31, 2003, the Company elected to apply the provisions of FIN 46R to the Trust. The adoption resulted in the deconsolidation of the Trust and the trust preferred securities are now presented as "Debenture to Stifel Financial Capital Trust I" in the Consolidated Statements of Financial Condition.
On August 12, 2005, the Company completed its private placement of $35,000 of 6.38% Cumulative Trust Preferred Securities. The Preferred Securities were offered by Stifel Financial Capital Trust II (the "Trust II"), a non-consolidated wholly-owned Delaware business trust subsidiary of the Company. The Trust Preferred Securities mature on September 30, 2035, but may be redeemed by the Company and in turn, the Trust II would call the debenture beginning September 30, 2010. The Trust II requires quarterly distributions of interest to the holder of the Trust Preferred Securities. Distributions will be payable at a fixed interest rate equal to 6.38% per annum from the issue date to September 30, 2010 and then will be payable at a floating interest rate equal to three-month London Interbank Offered Rate ("LIBOR") plus 1.70% per annum. The trust preferred securities represent an indirect interest in a junior subordinated debenture purchased from the Company by the Trust II. The debenture bears th e same terms as the trust preferred securities and is presented as "Debenture to Stifel Financial Capital Trust II" in the Consolidated Statements of Financial Condition.
Page 23
Notes To Consolidated Financial Statements
NOTE M -- Liabilities Subordinated to Claims of General Creditors
The Company has a deferred compensation plan available to I.E.s who achieve a certain level of production, whereby a certain percentage of their earnings is deferred as defined by the plan, a portion of which is deferred in stock units and the balance into optional investment choices. The Company obtained approval from the New York Stock Exchange to subordinate the liability for future payments to I.E.s for that portion of compensation not deferred in stock units. The Company issued cash subordination agreements to participants in the plan pursuant to provisions of Appendix D of Exchange Act Rule 15c3-1 and included in its computation of net capital the following:
Distribution |
||
Plan Year |
Amount |
|
2000 |
2006 |
$ 779 |
2001 |
2007 |
720 |
2002 |
2008 |
914 |
2003 |
2009 |
1,300 |
2004 |
2010 |
1,391 |
5,104 |
||
Unamortized expense |
(2,020) |
|
$ 3,084 |
At December 31, 2005, the fair value of the liabilities subordinated to claims of general creditors using interest rates commensurate with borrowings of similar terms was $4,335.
NOTE N -- Investments in Qualified Missouri Businesses
The Company formed two Limited Liability Corporations, referred to collectively as the "LLC," to be certified capital companies under the statutes of the State of Missouri, which provide venture capital for qualified Missouri businesses, as defined. The LLC issued $4,600 non-interest bearing notes due May 15, 2008, $10,600 non-interest bearing notes due February 15, 2009, $8,417 non-interest bearing notes due February 15, 2010, and $981 non-interest bearing participating debentures due December 31, 2010, which are included in the Company's Consolidated Statement of Financial Condition under the caption "Other" liabilities. Proceeds from the notes are first invested in zero coupon U.S. Government securities in an amount sufficient to accrete to the repayment amount of the notes and are placed in an irrevocable trust. These securities, carried at accreted cost of $19,309 and $18,184 at December 31, 2005 and 2004, respectively, are held to maturity and are included under the caption "Investme nts." The fair value of the securities is $20,445 and $20,265 at December 31, 2005 and 2004, respectively. The remaining proceeds were invested in qualified Missouri businesses.
The LLC invests in qualified Missouri businesses in the form of debt, preferred, and/or common equity. These securities, valued at approximately $2,531 and $3,607 at December 31, 2005 and 2004, respectively, are included under the caption "Investments." Due to the structure of the LLC and under the statutes of the State of Missouri, the Company participates in a portion of the appreciation of these investments. Management monitors these investments on a continuous basis.
Page 24
Notes To Consolidated Financial Statements
NOTE O -- Preferred Stock Purchase Rights
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% or more of the Company's common stock or upon commencement of announcement of intent to make a tender offer for 15% 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 P -- Income Taxes
The Company's provision (benefit) for income taxes consists of:
Years Ended December 31, |
|||
2005 |
2004 |
2003 |
|
Current: |
|||
Federal |
$ 13,163 |
$ 12,669 |
$ 7,827 |
State |
2,614 |
2,912 |
1,799 |
15,777 |
15,581 |
9,626 |
|
Deferred: |
|||
Federal |
(2,252) |
(1,717) |
347 |
State |
(447) |
(395) |
80 |
(2,699) |
(2,112) |
427 |
|
$13,078 |
$13,469 |
$10,053 |
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, |
|||
2005 |
2004 |
2003 |
|
Federal tax computed at statutory rates |
$ 11,452 |
$ 12,816 |
$ 8,772 |
State income taxes, net of federal income tax benefit |
1,409 |
1,514 |
1,237 |
Settlement of a state tax matter |
- - |
(1,000) |
-- |
Other, net |
217 |
139 |
44 |
Provision for income taxes |
$13,078 |
$13,469 |
$10,053 |
The effective tax rates for the years ended December 31, 2005, 2004, and 2003 were 40.0%, 36.8%, and 40.1%, respectively. The change in 2004 was due to a $1.0 million tax benefit recorded in that year resulting from the settlement of a state tax matter covering a number of years. Excluding the $1.0 million tax benefit, the Company's effective tax rate for the year ending December 31, 2004 was 39.5%.
Page 25
Notes To Consolidated Financial Statements
NOTE P -- Income Taxes (continued)
The net deferred tax asset consists of the following temporary differences:
December 31, 2005 |
December 31, 2004 |
||
Deferred Tax |
Accruals not currently deductible |
$ 2,140 |
$1,131 |
Deferred compensation |
6,439 |
4,525 |
|
Acquired net operating loss |
520 |
624 |
|
Deferred revenue |
32 |
58 |
|
Office equipment and leasehold improvements |
112 |
-- |
|
Investment valuation |
1,530 |
1,970 |
|
Reserve for bad debt |
381 |
324 |
|
|
11,154 |
8,632 |
|
Deferred Tax |
Office equipment and leasehold improvements |
-- |
(325) |
Prepaid expenses |
(789) |
(565) |
|
Intangible assets, principally tax over book amortization |
(29) |
(105) |
|
|
(818) |
(995) |
|
Net Deferred Tax Asset |
$10,336 |
$7,637 |
The Company has a capital loss carry forward of $2,200 relating to its investment portfolio. This capital loss carry forward expires December 2007. The Company also has acquired a net operating loss that is being used for tax purposes over ten years and will expire in 2010.
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.
Page 26
Notes To Consolidated Financial Statements
NOTE Q - Segment Reporting
The Company's reportable segments include the Private Client Group, Equity Capital Markets, Fixed Income Capital Markets, and Other. Prior years' financial information has been reclassified to conform with the current year presentation. The Private Client Group segment includes branch offices and independent contractor 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 Equity Capital Markets segment includes corporate finance management and participation in underwritings (exclusive of sales credits, which are included in the Private Client Group segment), mergers and acquisitions, institutional sales, trading, research, and market making. The Fixed Income Capital Markets segment includes public finance, institutional sales and competitive underwriting, and trading. The "Other" segment includes clearing revenue, interest income from stock borrow activities, unallocated interest expense, interest income and gains and losses from investments held, and all unallocated overhead cost associated with the execution of orders; processing of securities transactions; custody of client securities; receipt, identification, and delivery of funds and securities; compliance with regulatory and legal requirements; internal financial accounting and controls; acquisition charges related to the Legg Mason Capital Markets business ("LM Capital Markets") acquisition; and general administration.
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.
Information concerning operations in these segments of business is as follows:
Years ended December 31, |
|||
2005 |
2004 |
2003 |
|
Net Revenues |
|||
Private Client Group |
$197,356 |
$187,477 |
$163,822 |
Equity Capital Markets |
43,415 |
38,855 |
35,533 |
Fixed Income Capital Markets |
18,155 |
16,630 |
15,384 |
Other |
4,809 |
3,861 |
1,773 |
Total Net Revenues |
$263,735 |
$246,823 |
$216,512 |
Operating Contributions |
|||
Private Client Group |
$ 48,157 |
$ 47,965 |
$ 36,309 |
Equity Capital Markets |
13,626 |
12,480 |
10,789 |
Fixed Income Capital Markets |
2,361 |
2,977 |
2,750 |
Other/Unallocated Overhead |
(31,422) |
(26,805) |
(24,788) |
Income before income taxes |
$ 32,722 |
$ 36,617 |
$ 25,060 |
Page 27
Notes To Consolidated Financial Statements
NOTE R -- Earnings per Share
The following table reflects a reconciliation between Basic Earnings Per Share and Diluted Earnings Per Share.
Years Ended December 31, |
|||||||||
2005 |
2004 |
2003 |
|||||||
Per Share |
Per Share |
Per Share |
|||||||
Income |
Shares |
Income |
Shares |
Income |
Shares |
||||
Basic Earnings Per Share |
|||||||||
Income available to shareholders |
$19,644 |
9,827,734 |
$2.00 |
$23,148 |
9,701,699 |
$2.39 |
$15,007 |
9,232,858 |
$1.63 |
Effect of Dilutive Securities |
|||||||||
Employee benefits plans |
-- |
2,758,200 |
-- |
-- |
2,579,794 |
-- |
-- |
1,738,468 |
-- |
Diluted Earnings Per Share |
|||||||||
Income available to common stockholders and assumed conversions |
|||||||||
$19,644 |
12,585,934 |
$1.56 |
$23,148 |
12,281,493 |
$1.88 |
$15,007 |
10,971,326 |
$1.37 |
NOTE S
-- Share RepurchasesOn May 5, 2005, the Company's board of directors authorized the repurchase of up to 2,000,000 additional shares on top of an existing authorization of 1,000,000 shares. These purchases may be made on the open market or in privately negotiated transactions, depending upon market conditions and other factors. Repurchased shares may be used to meet obligations under the Company's employee benefit plans and for general corporate purposes.
The Company repurchased 332,030, 472,872, and 107,017 shares for the years ending December 31, 2005, 2004, and 2003, respectively, using existing board authorizations, at average prices of $20.94, $19.38, and $9.19 per share, respectively, to meet obligations under the Company's employee benefit plans and for general corporate purposes. To satisfy the withholding obligations for the conversion of the Company's stock units, the Company withheld 255,058 shares in 2005. The Company reissued 924,974, 942,615, and 388,423 shares for the years ending December 31, 2005, 2004, and 2003, respectively, for employee benefit plans. In 2005, the Company issued 62,079 new shares for employee benefit plans. Under existing board authorizations, the Company is permitted to buy an additional 2,079,112 shares.
NOTE T - Acquisition (Restated)
On December 1, 2005, the Company closed on the acquisition of the LM Capital Markets, whose results have been included in the Company's consolidated financial statements since that date, from Citigroup Inc. The LM Capital Markets business was part of Legg Mason Wood Walker, Inc. ("LMWW"), which Citigroup Inc. acquired from Legg Mason, Inc. in a substantially simultaneous closing. The LM Capital Markets business acquired by the Company includes the Investment Banking, Equity and Fixed Income Research, Equity Sales and Trading, and Taxable Fixed Income Sales and Trading Departments of LMWW and employed approximately 500 professional and support staff who became employees of the Company on December 1, 2005. The acquisition was made to grow the Company's business and in particular the Company's Capital Markets business leveraging the skill set of the Legg Mason capital Markets associates. Under the terms of the agreement, the Company paid Citigroup Inc. an amount equal to the net book va lue of assets being acquired of $12,200 plus a premium of $7,000 paid in cash at closing with the balance of up to an additional $30,000 in potential earn-out payment by the Company to Citigroup Inc., based on the performance of the combined capital markets business of both the Company's pre-closing Fixed Income and Equity Capital Markets business and Legg Mason Capital Markets for calendar years 2006, 2007, and 2008. Such payments, if any, will be accounted for as additional purchase price. Additionally, the Company assumed $34,191 in Accrued Employee Compensation for which a receivable, from Citigroup Inc., for the same amount was included in Other Assets on the Consolidated Statement of Financial Condition as of December 31, 2005. In addition, the Company acquired $45,900 in net securities inventories associated with the LM Capital Markets in a broker to broker trade with LMWW.
Page 28
Notes To Consolidated Financial Statements
NOTE T -- Acquisition (Restated) (continued)
The following is unaudited pro forma financial data for the combined operations, assuming the transaction had taken place on January 1 of each year.
Years Ended |
December 31, 2005 |
December 31, 2004 |
Total revenues |
$460,260 |
$494,513 |
Net income |
$ 13,147 |
$ 30,069 |
Diluted earnings per share |
$0.85 |
$2.07 |
Diluted weighted average shares outstanding |
15,446 |
14,538 |
The above pro forma net income and diluted earnings per share for the year ended December 31, 2005 has been revised from the originally filed Form 10-K in order to correct an error. The pro forma net income and diluted earnings per share in the originally filed Form 10-K were$15,581 and $1.01, respectively.
The above pro forma data excludes reductions of certain administrative allocations by Legg Mason which as a result of synergies of the combined operations, management believes, will be significantly reduced. In addition, for each period presented the Company included compensation expense of $21,500 and $9,800 associated with the issuance of restricted stock units and the discounted offering price on its private placement respectively to key associates of the LM Capital Markets. (See Note U). These results do not purport to be indicative of the results which actually would have occurred.
A summary of the fair values of the net assets acquired as of December 1, 2005, based upon the current valuation estimate, is as follows:
Cash |
$ 325 |
Investments |
12,275 |
Furniture & fixtures |
1,513 |
Accounts receivables |
35,123 |
Prepaid expenses |
623 |
Intangible assets |
9,434 |
|
59,293 |
Accounts payables |
2,643 |
Accrued expenses |
35,026 |
|
37,669 |
|
$ 21,624 |
The intangible assets of $9,434 were assigned to the Equity Capital Markets and Fixed Income Capital Markets in the amounts of $7,547 and $1,887, respectively. The total amount of intangible assets of $9,434 are expected to be deductible for tax purposes.
The final allocation of the purchase price on the Company's consolidated financial statements may differ from that reflected herein as a result of (i) completion of the valuation study required to finalize the purchase price allocation and (ii) final resolution of contingent consideration for this acquisition. Management believes that the foregoing will not result in material changes to the consolidated financial statements.
Page 29
Notes To Consolidated Financial Statements
NOTE U -- Subsequent Events
Stock-Based Compensation
On January 2, 2006, the Company granted 1,807,610 restricted stock units to key associates of the LM Capital Markets. The units were granted in accordance with the Company's 2001 incentive stock award plan as amended with a grant date fair value of $37.59 per unit. The units vest ratably over a three year period, and accordingly, the Company will incur annual compensation expense of $21,517, net of estimated forfeitures.
On January 23, 2006, the Company completed its private placement of 1,052,220 shares of its common stock at $25.00 per share. The shares were purchased by key associates of the LM Capital Markets business. The Company is required to charge to compensation the difference of $25.00 per share and the grant date fair value, as determined in accordance with SFAS No. 123R, of $34.27 per share. As a result, the Company incurred a compensation charge of approximately $9,800 in January 2006.
Future Impact of Scheduled NYSE/Archipelago Merger
On March 7, 2006, the New York Stock Exchange ("NYSE") and Archipelago Holdings Inc. ("Archipelago") completed the combination of their business through a series of mergers into a new holding company, NYSE Group, Inc. ("NYSE Group"). Shares of NYSE Group common stock were listed on the NYSE under the ticker symbol "NYX" and commenced trading on March 8, 2006. As a result of the merger, NYSE members will be entitled to receive $300 in cash, a cash dividend of $71 and 80,177 shares of NYSE Group common stock for each NYSE seat membership. The shares are subject to certain transfer restrictions that expire ratably over a three-year period, unless the NYSE Group board of directors elects to remove or reduce the restrictions.
Stifel Nicolaus has one membership seat included in "Membership and exchanges" on the Consolidated Statement of Financial Condition at a cost of $107. As a result of the closing, the Company expects to receive consideration of approximately $6,668. The amount of the gain represented by the difference between the consideration received and the cost of $107 will be discounted for the transfer restrictions on the shares received and recorded in the first quarter 2006. Subsequent gains and losses will be recorded as the share price of NYSE Group stock fluctuates and the transfer restrictions lapse.
* * * * * *
Page 30
Quarterly Results
Quarterly Operating Results (Unaudited) |
||||||
Earnings |
Net |
Basic |
Diluted |
|||
Net |
||||||
(in thousands, except per share amounts) |
Revenue |
|||||
Year 2005 By Quarter |
||||||
First |
$61,293 |
$60,188 |
$7,264 |
$4,358 |
$0.44 |
$0.35 |
Second |
65,211 |
63,971 |
9,305 |
5,620 |
0.58 |
0.46 |
Third |
65,400 |
63,858 |
8,149 |
4,896 |
0.50 |
0.39 |
Fourth(1) |
78,106 |
75,718 |
8,004 |
4,770 |
0.48 |
0.38 |
Year 2004 By Quarter |
||||||
First (2) |
$68,535 |
$67,450 |
$9,800 |
$6,874 |
$0.71 |
$0.57 |
Second |
60,470 |
59,411 |
8,322 |
5,035 |
0.51 |
0.41 |
Third |
56,818 |
55,695 |
7,037 |
4,257 |
0.44 |
0.35 |
Fourth |
65,366 |
64,267 |
11,458 |
6,982 |
0.72 |
0.56 |
*All earnings per share amounts reflect the four-for-three stock split distributed in September 2004.
(1)
Fourth quarter results include $3.3 million in acquisition charges related to the LM Capital Markets acquisition.(2)
First quarter results include a $1.0 million tax benefit resulting from the settlement of a state tax matter covering a number of years. Page 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of the period covered by this report on Form 10-K/A, we carried out an evaluation under the supervision and with the participation of the company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedure. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are effective. The Report of Management, including internal control over financial reporting, is on page 33 of this annual report on Form 10-K/A.
On January 26, 2007, the company amended its 2005 Annual Report on Form 10-K filed March 15, 2006 to restate certain of the unaudited pro-forma financial data contained in Note T of the Notes to Consolidated Financial Statements. Management believes the restatement is immaterial for the following reasons:
Accordingly, management believes there is no material weakness in internal control and has not changed its conclusion that the company's internal controls over financial reporting are designed and operating effectively as of December 31, 2005. Management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is on page 3 of this annual report on Form 10-K/A.
There have been no changes in our internal controls or in other factors that could materially affect these controls subsequent to the date the controls were evaluated.
Page 32
Management's Report on Internal Control over Financial Reporting
Management of Stifel Financial Corp. and subsidiaries (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of the Company's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company's internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2005. In making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its assessment, management believes that, as of December 31, 2005, the Company's internal control over financial reporting is effective based on those criteria.
On December 1, 2005, the Company acquired substantially all of the Legg Mason Capital Markets business ("LM Capital Markets"). As permitted under Section 404 of the Sarbanes-Oxley Act, the Company excluded LM Capital Markets from the scope of the internal control evaluation. LM Capital Markets represented 5% of the Company's consolidated net revenues for the year ended December 31, 2005.
The Company's independent registered public accounting firm, Deloitte & Touche LLP, has audited management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, as stated in their report, appearing on page 34, which expresses unqualified opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting as of December 31, 2005.
March 15, 2006
Page 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Stifel Financial Corp.
St. Louis, Missouri
We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Stifel Financial Corp. and Subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management's Report on Internal Control Over Financial Reporting, management excluded from their assessment the internal control over financial for the Legg Mason Capital Markets business, which was acquired on December 1, 2005 and whose financial statements reflect five percent of total assets and revenues of the related consolidated financial statement amounts as of and for the year ended December 31, 2005. Accordingly, our audit did not include the internal control over financial reporting for the Legg Mason Capital Markets business. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2005 of the Company and our report dated March 15, 2006 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
March 15, 2006
Page 34
Changes in Internal Control Over Financial Reporting
Further, other than described above, there were no significant changes in the Company's internal controls over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None
Page 35
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) |
Consolidated Financial Statements are contained in Item 8 and made part hereof. |
|
(2) |
Consolidated Financial Statement Schedules: |
|
Schedule II - Valuation and Qualifying Accounts |
||
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. |
||
(3) |
Exhibits: See Exhibit Index on pages 80 and 81 hereof. |
Page 36
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 January 2007.
STIFEL FINANCIAL CORP. |
(Registrant) |
By /s/ Ronald J. Kruszewski |
Ronald J. Kruszewski |
Page 37
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
(In Thousands)
Description |
Balance at |
Additions |
Deductions (1) |
Balance |
Year Ended December 31, 2005 |
||||
Deducted from asset account: |
||||
Allowances for doubtful accounts |
$ 47 |
$ 203 |
$ 46 |
$ 204 |
Deducted from asset account: |
||||
Allowances for doubtful notes receivables |
782 |
242 |
257 |
767 |
Year Ended December 31, 2004 |
||||
Deducted from asset account: |
||||
Allowances for doubtful accounts |
82 |
41 |
76 |
47 |
Deducted from asset account: |
||||
Allowances for doubtful notes receivables |
1,397 |
142 |
757 |
782 |
Year Ended December 31, 2003 |
||||
Deducted from asset account: |
||||
Allowances for doubtful accounts |
144 |
82 |
144 |
82 |
Deducted from asset account: |
||||
Allowances for doubtful notes receivables |
677 |
1,233 |
513 |
1,397 |
(1)
Uncollected notes written off and recoveries. Page 38
EXHIBIT INDEX
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2005
Exhibit No. |
Description |
|
3. |
(a) |
Restated Certificate of Incorporation and as amended of Financial filed with the Secretary of State of Delaware on May31, 2001, incorporated herein by reference to Exhibit 3.(a) to Financial's Quarterly Report on Form 10-Q (File No. 001-9305) for the quarterly period ended June 30, 2001. |
(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) |
Preferred 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) |
Form of Indemnification Agreement with directors dated as of June 30, 1987, incorporated herein by reference to Exhibit10.2 to Financial's Current Report on Form 8-K (date of earliest event reported - June 22, 1987) filed July 14, 1987. |
(b) |
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. |
|
(c) |
Amended and Restated 1997 Incentive Plan of Financial, incorporated herein by reference to Financial's Registration Statement on Form S-8 (Registration File No. 333-84717) filed on August 6, 1999. * |
|
(d)(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.* |
|
(d)(2) |
Stock Unit Agreement with Ronald J. Kruszewski, incorporated herein by reference to Exhibit 10.(j)(2) to Financial's Annual Report on Form 10-K (File No. 1-9305) for the year ended December 31, 1998. * |
|
(e) |
1999 Executive Incentive Performance Plan of Financial, incorporated herein by reference to Appendix B of Financial's Proxy Statement for the 2004 Annual Meeting of Stockholders filed April 5, 2004. * |
|
(f) |
Equity Incentive Plan for Non-Employee Directors of Financial, incorporated herein by reference to Financial's Registration Statement on Form S-8 (Registration File No. 333-52694) filed December 22, 2000. * |
|
(g)(1) |
Stifel, Nicolaus & Company, Incorporated Wealth Accumulation Plan, incorporated herein by reference to Financial's Registration Statement on Form S-8 (Registration File No. 333-60506) filed May 9, 2001. * |
|
(g)(2) |
Stifel, Nicolaus & Company, Incorporated Wealth Accumulation Plan Amendment No. 1, incorporated herein by reference to Financial's Registration Statement on Form S-8 (Registration File No. 333-105759) filed June 2, 2003. * |
|
(h) |
Stifel Nicolaus Profit Sharing 401(k) Plan, incorporated herein by reference to Financial's Registration Statement on Form S-8 (Registration File No. 333-60516) filed May 9, 2001. * |
|
(i)(1) |
Stifel Financial Corp. 2001 Incentive Plan, incorporated herein by reference to Financial's Registration Statement on Form S-8 (Registration File No. 333-82328) filed February 7, 2002. * |
|
(i)(2) |
Stifel Financial Corp. 2001 Incentive Plan Amendment No. 2, incorporated herein by reference to Financial's Proxy Statement for the special meeting of stockholders filed September 28, 2005. |
|
(j) |
Stock Unit Agreement with James M. Zemlyak dated January 11, 2000, incorporated herein by reference to Exhibit 10.(s) to Financial's Annual Report on Form 10-K / A Amendment No. 1 (File No. 1-9305) for the year ended December 31, 2001, filed on April 9, 2002. * |
|
(k) |
Stock Unit Agreement with Scott B. McCuaig dated December 20, 1998, incorporated herein by reference to Exhibit 10.(t) to Financial's Annual Report on Form 10-K / A Amendment No. 1 (File No. 1-9305) for the year ended December 31, 2001, filed on April 9, 2002. * |
|
(l) |
Amended and Restated Promissory Note dated December 21, 1998, from Ronald J. Kruszewski payable to Financial, incorporated herein by reference to Exhibit 10.(u) to Financial's Annual Report on Form 10-K / A Amendment No. 1 (File No. 1-9305) for the year ended December 31, 2001, filed on April 9, 2002. * |
|
(m)(1) |
Third Amendment to Lease by and among EBS Building, L.L.C., Stifel Financial Corp., and Stifel, Nicolaus & Company, Incorporated, dated September 1, 1999, incorporated herein by reference to EBS Building, L.L.C.'s Annual Report on Form 10-K (File No. 000-24167) for the year ended December 31, 2001. |
|
(m)(2) |
Fourth Amendment to Lease by and among EBS Building, L.L.C., Stifel Financial Corp., and Stifel, Nicolaus & Company, Incorporated, dated November 1, 1999, incorporated herein by reference to EBS Building, L.L.C.'s Annual Report on Form 10-K (File No. 000-24167) for the year ended December 31, 2001. |
|
(m)(3) |
Fifth Amendment to Lease by and among EBS Building, L.L.C., Stifel Financial Corp., and Stifel, Nicolaus & Company, Incorporated dated June 11, 2001, incorporated herein by reference to EBS Building, L.L.C.'s Annual Report on Form 10-K (File No. 000-24167) for the year ended December 31, 2001. |
|
(n) |
Stifel Financial Corp. 2003 Employee Stock Purchase Plan, incorporated herein by reference to Financial's Registration Statement on Form S-8 (Registration File No. 333-100414) filed October 8, 2002. * |
|
(o)(1) |
Acquisition agreement by and between Stifel Financial Corp. and Citigroup Inc., incorporated herein by reference to Exhibit 10 to Financial's quarterly report on Form 10-Q/A No. 1 (File No. 1-9305) for the quarterly period ended September 30, 2005. |
|
(o)(2) |
Amendment No.1 to Acquisition Agreement by and between Stifel Financial Corp. and Citigroup Inc., incorporated herein by reference to Exhibit 10.(v)(2) to Financial's Annual Report on Form 10-K (File No. 1-9305) for the year ended December 31, 2005.* |
|
(o)(3) |
Amendment No.2 to Acquisition Agreement by and between Stifel Financial Corp. and Citigroup Inc., incorporated herein by reference to Exhibit 10.(v)(3) to Financial's Annual Report on Form 10-K (File No. 1-9305) for the year ended December 31, 2005. |
|
(p) |
Employment Agreement with Richard Himelfarb dated September 6, 2005, filed herewith. * |
|
(q) |
Employment Agreement with Thomas Mulroy dated September 7, 2005, filed herewith. * |
|
(r) |
Employment Agreement with Joseph Sullivan dated September 6, 2005, filed herewith. * |
|
21. |
List of Subsidiaries of Stifel Financial Corp., incorporated herein by reference to Exhibit 21. to Financial's Annual Report on Form 10-K (File No. 1-9305) for the year ended December 31, 2005. |
|
23. |
Consent of Independent Registered Public Accounting Firm, filed herewith. |
|
31(i).1 |
Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended, filed herewith. |
|
31(i).2 |
Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended, filed herewith. |
|
32. |
Certification pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, incorporated herein by reference to Exhibit 31.(i).2 to Financial's Annual Report on Form 10-K (File No. 1-9305) for the year ended December 31, 2005. This exhibit is furnished to the SEC. |
* Management contract or compensatory plan or arrangement.
Page 39
EXHIBIT 21
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
SUBSIDIARIES OF STIFEL FINANCIAL CORP.(1)
Name |
State (Jurisdiction) Of Incorporation |
Names Under Which Subsidiary |
Stifel, Nicolaus & Company, Incorporated |
Missouri |
Stifel, Nicolaus & Company, Incorporated |
Alliance Realty Corp. |
Missouri |
Alliance Realty Corp. |
Century Securities Associates, Inc. |
Missouri |
Century Securities Associates, Inc. |
S-N Capital Corp. (2) |
Missouri |
S-N Capital Corp. |
Stifel Venture Corp. |
Missouri |
Stifel Venture Corp. |
Stifel Asset Management Corp. |
Missouri |
Stifel Asset Management Corp. |
Stifel CAPCO, L.L.C. |
Missouri |
Stifel CAPCO, L.L.C. |
Stifel CAPCO II, L.L.C. |
Missouri |
Stifel CAPCO II, L.L.C. |
Hanifen, Imhoff Inc. |
Colorado |
Hanifen, Imhoff Inc. |
Stifel Nicolaus Insurance Agency of Missouri (2) |
Missouri |
Stifel Nicolaus Insurance Agency of Missouri |
CSA Insurance Agency, Incorporated |
Missouri |
CSA Insurance Agency, Incorporated |
Stifel Nicolaus Limited |
England and Wales |
Stifel Nicolaus Limited |
(1)
Does not include corporations in which registrant owns 50% or less of the stock.
Stifel Financial Capital Trust I and Stifel Financial Capital Trust II are wholly-owned subsidiaries of Stifel Financial Corp; however, they are considered Special Purpose Entities under the provisions of the Financial Accounting Standards Board Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and not consolidated.
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the registration statements of Stifel Financial Corp. and Subsidiaries on Form S-8 (File Numbers 333-37805, 333-37807, 333-84717, 333-52694, 333-60506, 333-60516, 333-100414, 333-105756, and 333-105759) and on Form S-3 (File Numbers 33-53699, 333-41304, and 333-84952) of our reports dated March 15, 2006, relating to the consolidated financial statements and financial statement schedule of Stifel Financial Corp. and Subsidiaries and management's report of the effectiveness of the internal control over financial reporting, appearing in the Annual Report on Form 10-K of Stifel Financial Corp. and Subsidiaries for the year ended December 31, 2005.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
March 16, 2006
EXHIBIT 31(i).1
CERTIFICATION
I, Ronald J. Kruszewski, certify that:
Date: January 26, 2007 |
By /s/ Ronald J. Kruszewski |
Ronald J. Kruszewski |
|
EXHIBIT 31(i).2
CERTIFICATION
I, James M. Zemlyak, certify that:
Date: January 26, 2007 |
By /s/ James M. Zemlyak |
James M. Zemlyak |
|
EXHIBIT 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 *
In connection with the Annual Report of Stifel Financial Corp. and subsidiaries on Form 10-K/A for the year ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
STIFEL FINANCIAL CORP. |
|
(Registrant) |
|
Date: January 26, 2007 |
By /s/ Ronald J. Kruszewski |
Ronald J. Kruszewski |
|
Date: January 26, 2007 |
By /s/ James M. Zemlyak |
James M. Zemlyak |
|
* A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Registrant and will be retained by the Registrant and furnished to the Commission or its staff upon request.
Stifel Financial Corp.
Exhibit 10(p)
Employment agreement with Richard Himelfarb
[Stifel Financial Corp. logo]
One Financial Plaza |
August 16, 2005
Confidential
Richard Himelfarb
c/o Legg Mason Wood Walker, Inc.
100 Light Street
Baltimore, MD 21202
Dear Richard:
Stifel Financial Corp., a Delaware corporation ("Stifel Financial"), has been negotiating a transaction (the "Legg Mason Capital Markets Transaction") with Citigroup Inc. ("Citigroup") whereby Stifel Financial would acquire the capital markets business of Legg Mason, Inc. ("Legg Mason"). This business is referred to in this letter as the "Legg Mason Capital Markets Business". Closing of the Legg Mason Capital Markets Transaction is expected to occur concurrently with the sale of the Legg Mason Wood Walker Inc. retail brokerage business to Citigroup (the "Citigroup Transaction").
In order for these negotiations and the ultimate transaction to be successful, Stifel Financial, Legg Mason and Citigroup strongly desire your agreement, and the agreement of a number of other key employees of the Legg Mason Capital Markets Business (including a number of key employees within each of the equity, tax-exempt fixed income and taxable fixed income groups), to remain employed in the Legg Mason Capital Markets Business, which will be a critical component of the capital markets business of our subsidiary Stifel Nicolaus, Incorporated (collectively, with Stifel Financial, "Stifel") following the completion of the Legg Mason Capital Markets Transaction. It is our desire to effect a transfer of substantially all executives and key employees of the Legg Mason Capital Markets Business. With significant help from the senior leadership team of the Legg Mason Capital Markets Business, we have structured and are offering a package that is designed to provide s ubstantial benefits, including a material equity ownership stake in Stifel, that we believe you will find very attractive.
We are very excited to make you an offer of employment in the combined capital markets group which, except as otherwise described in this letter, will be effective immediately upon the transfer of the Legg Mason Capital Markets Business to Stifel on the terms described in this letter. This transfer is expected to occur concurrently with the closing of the Citigroup Transaction, but may occur prior or subsequent thereto (the effective date of the transfer being referred to in this letter as the "Effective Date"). As you certainly will understand, except as otherwise stated in this letter, this employment offer is conditioned upon, and will be effective immediately following, the closing of the transfer of the Legg Mason Capital Markets Business to Stifel. Stifel's employment offer to you is also c onditioned upon a sufficient number of key employees, as determined by Stifel, within your group (i.e., within the equity, tax-exempt fixed income or taxable fixed income group, as applicable) entering into similar letter agreements with Stifel.
We emphasize that the contents of this letter and these discussions are of a confidential nature and should not be discussed by you except with your personal advisers with whom you enjoy a legally confidential relationship (such as an attorney or accountant) and who agree to be bound by this confidentiality restriction. We also note that you are bound by a confidentiality agreement relating to the possible sale of the Legg Mason Capital Markets Business. That agreement remains in effect.
Our proposal is summarized below:
Stifel will pay annual bonuses during the term of your employment by Stifel pursuant to the policies described in this paragraph (3) and in paragraph (4). The payment of bonuses will be performance based and determined and calculated on a basis consistent with the methodology and formulas used by Legg Mason Capital Markets in the past, except as provided below. Stifel pays bonuses based upon calendar year performance. These bonuses are paid during the month of February following the close of the calendar year in which the services were performed. It will be the responsibility of Legg Mason to compensate you for services rendered through the Effective Date, including any bonus payments applicable to such periods.
In the event the Effective Date occurs prior to December 31, 2005, as we expect it will, and subject to the other terms of this letter, Stifel will pay you, in February 2006, a stub period bonus for the period from the Effective Date through December 31, 2005. (the "2005 Stub Period"). In the unlikely event that the Effective Date occurs on or after January 1, 2006, the 2006 bonus payment by Stifel will be calculated and paid in accordance with this paragraph (3) for the period in 2006 following the Effective Date during which you were employed by Stifel. These bonuses payable for annual performance are payable no later than the date that bonuses are paid to other personnel at Stifel, and will be subject to a limited offset for any partial payments or advances of annual bon us (including the interim bonus for the 2006 Stub Period as described below), but not for any other payments to you under this letter. All bonus payments under this paragraph (3) shall be subject to partial deferral and company match under Stifel's wealth accumulation plan, as described in paragraph (4) below.
With respect to the bonus payable with respect to your performance in 2006, and subject to the other terms of this employment agreement, Stifel will pay you as an interim bonus (to be credited against your full year bonus entitlement) in August 2006 with respect to the period from the later of the Effective Date or January 1, 2006 through June 30, 2006 (the "2006 Stub Period"). This interim bonus will be in the amount of 75% of the amount otherwise calculated and payable for the 2006 Stub Period.
In the event of a termination of the employment agreement by you or by Stifel (except in the case of a termination of such employment agreement by Stifel without Cause (as defined below), by you for Good Reason (as defined below) or by reason of your death or disability), such bonus shall only be earned and payable if you are employed by Stifel on the date that the bonus is paid. In the event of a termination of employment by Stifel without Cause or a termination by you for Good Reason, you will be entitled to a partial bonus for the period from the start of the compensation year in question through the termination date calculated and paid in accordance with this paragraph (3). However, in all cases, for the compensation year (or partial year) ending on the third anniversary of the Effective Date, in order to be entitled to payment of a bonus for that period , you must remain employed by Stifel through the third anniversary date only, and are not required to be employed on the normal bonus payment date.
You acknowledge and agree that the appropriate tax withholding obligations will be met by the withholding of shares granted to you pursuant to this paragraph (5), or at your election, in cash withheld from other payments due you or paid to Stifel by you. In addition, your ownership of these shares would be subject to the ownership guidelines set forth on Exhibit C hereto.
7. Fringe Benefits. During the term of your employment by Stifel, you will be entitled to participate in all benefits plans and arrangements available to a Stifel employee of similar rank, with credit for prior service for your full service at Legg Mason to the extent credit for prior service is available under the terms of the applicable benefit plan or arrangement.
8. Event of Termination. If Stifel terminates your employment prior to the third anniversary of the Effective Date for any reason other than for Cause, or if you terminate for Good Reason, (a "Termination Event"), you will receive a severance payment equal to two week's pay per year of service with the Legg Mason Capital Markets Business and Stifel. In such circumstances, any payment of bonuses will be covered by paragraph 3. To the extent that Stifel is required to make any subjective determinations in making this bonus computation, Stifel's determination made in good faith shall be controlling in the absence of manifest error. In addition, in the event of a Termination Event (i.e., termination by Stifel other than for Cause or by you for Good Reason), all stock entitlements under all Stifel plans however named will bec ome fully vested. Payments will be structured to comply with all applicable tax rules.
If your employment is terminated by your death or Physical Disability (as defined below), you or your estate will receive regular compensation and benefits through the end of the month in which such termination occurred, the bonus for the year in question (computed as under paragraph 3 as applicable to termination by Stifel without Cause), and all other benefits due under Stifel's policies for such events, and the current year's stock units and "matching" stock issued in connection with the private placement (if any) above will become fully vested and the balance of such amounts shall be forfeited. "Physical Disability" means when you, by reason of physical condition, have been or shall be unable to perform a material portion of the services required of you for a continuous ninety (90) day period (successive periods of disability not separated by a two week disability-free period shall be deemed f or this purpose to constitute, in the aggregate, a continuous period of disability). In the event of a disagreement concerning the existence of any such condition, the matter shall be resolved based on the advice of a licensed physician mutually acceptable to the parties.
If your employment terminates on account of voluntary resignation (other than for Good Reason) or a termination for Cause, you will not be entitled to any further compensation, and any unvested stock units shall be forfeited.
The term "Cause" shall mean (i) fraud, embezzlement, misappropriation; or any gross or willful misconduct in connection with your employment by Stifel, as determined by Stifel in good faith; (ii) the reasonable determination by senior management of Stifel that you have committed an act which, in the senior management's opinion after investigation and advice of counsel of national reputation in the matters in question, constitutes a violation of any statutory or common law fiduciary duty or duty of loyalty to Stifel or any of its clients; (iii) the reasonable determination by senior management of Stifel that you have engaged in conduct which constitutes a violation of Stifel's employment policies, including but not limited to the Firm's Harassment Policy; (iv) any final finding or adjudication by a court, government agency or regulatory authority (including, without limitation, the United States Securities and Exchange Commission, the National Association of Secur ities Dealers, Inc., and any state securities commission) that you have violated any law, rule or regulation relating to the regulation of broker/dealers, investment advisers or securities, which finding or adjudication, in the reasonable judgment of senior management of Stifel, could have a significant adverse effect on the reputation or business of Stifel or any of its affiliates; (v) any final and non-appealable order, judgment or decree (whether entered by consent or after trial or adjudication) of any court, government agency or regulatory authority which censures or imposes any sanctions on you in connection with investment brokerage, investment advisory or securities related activities or which enjoins, bars, suspends or otherwise limits you from acting as a securities analyst, securities broker, investment adviser, an advisory affiliate or associated person of a securities broker-dealer or of an investment adviser, or from engaging in any activity in connection with the purchase or sale of securities , or otherwise from engaging in any activity in which you are currently engaged; (vi) the reasonable determination by senior management of Stifel that you have committed an act which, in senior management's reasonable opinion after investigation, is likely to lead to any such order, judgment or decree; (vii) conviction of a criminal offense punishable by imprisonment (whether or not you are, in fact, imprisoned) or the entry of a guilty plea in any such proceeding; (viii) your inability to be legally employed in the United States; or (ix) your failure to perform material duties reasonably assigned to you by Stifel which continues for a period of 30 days after a receipt by you of a written demand by Stifel identifying the manner in which it believes you have not performed your duties.
The term "Good Reason" means (i) a material reduction in the scope or nature of the duties that you were employed to perform for Stifel and were providing to Legg Mason prior to the transaction which occurs during the first year of your employment by Stifel; (ii) your relocation to a place of employment more than 25 miles away from your current place of employment; or (iii) a material breach of a material provision of this letter agreement by Stifel which is not cured within 30 days after written notice of such breach.
9. Non-Compete: In consideration of Stifel's obligations hereunder and effective as of your signing of this letter agreement, you agree that between the date of your signing of this letter agreement and the closing of the Legg Mason Capital Markets Transaction (provided such closing shall have occurred on or prior to March 31, 2006), during the term of your employment by Stifel and, in the event that the closing of the Legg Mason Capital Markets Transaction shall have occurred on or prior to March 31, 2006, in any event for a period of one year from and after the closing of the Legg Mason Capital Markets Transaction, you will not, directly or indirectly, whether as a principal, employee, partner, shareholder (other than your ownership of 2% or less of the outstanding equity securities of a publicly traded entity, including Legg Mason, Inc., which shall not be prohibited), member, officer, director, manager, agent or otherwise, compete, assist in or prov ide financial resources to any activity which competes with Stifel within the financial services industry.
10. Non-Solicitation. Effective as of your signing of this letter agreement, between the date of your signing of this letter agreement and the closing of the Legg Mason Capital Markets Transaction (provided such closing shall have occurred on or prior to March 31, 2006), during the term of your employment by Stifel and for a period of six months thereafter, and, in any event, if the closing of the Legg Mason Capital Markets Transaction shall have occurred on or prior to March 31, 2006, a period of six months from and after the closing of the Legg Mason Capital Markets Transaction, you will not solicit any person who is or was an employee, independent contractor, consultant or advisor of Stifel or its affiliates during the prior six months (an "Affected Person") to be employed by or perform services for another party in any capacity ("Alternative Employment") or to interfere with any contractual relationship of Stifel that may exist from time to time. S olicitation shall include your inducing, attempting to induce or encouraging an Affected Person to take Alternative Employment, but shall not include general forms of advertising and solicitation not specifically directed at employees of Stifel.
11. Confidentiality. Effective as of your signing of this letter agreement, you agree to keep confidential, and not disclose to third parties, the terms of these employment arrangements, any discussions relating to a possible transaction between Stifel and Citigroup relating to the Legg Mason Capital Markets Business or otherwise, or any other nonpublic information obtained during your employment. In addition, effective as of your signing of this letter agreement and both during and after the term of your employment by Stifel, you agree to keep secret and confidential, and not to use or disclose to any third parties, any of Stifel's proprietary confidential information except (i) as directly required to perform your employment responsibilities for Stifel, (ii) to your attorneys, accountants and representatives (each of whom shall observe confidentiality), and (iii) as required by law or pursuant to a court order.
12. Stifel's Right to Injunctive Relief; Tolling. In the event of a breach or threatened breach of any of your duties and obligations under the terms and provisions of paragraphs (9), (10) or (11), Stifel may be entitled, in addition to any other legal or equitable remedies it may have in connection therewith (including any right to damages that it may suffer), to temporary, preliminary and permanent injunctive relief restraining such breach or threatened breach. You hereby expressly acknowledge that the harm which might result to Stifel's business as a result of any noncompliance by you with any of the provisions of paragraphs (9), (10) or (11) would be largely irreparable. You specifically agree, effective as of your signing of this letter agreement, that if there is a question as to the enforceability of any of the provisions of paragraphs (9), (10) or (11), you will not engage in any conduct inconsistent with or contrary to such paragraphs until after the question has been resolved by a final judgment of a court of competent jurisdiction. You and Stifel agree that the running of the applicable period set forth in paragraph (9) or (10) shall be tolled during any period of time in which you violate the terms of such paragraph.
13. Arbitration. You agree that any dispute between you and Stifel arising out of this agreement, or relating to your employment, including disputes alleging employment discrimination or sexual harassment in violation of a statute, will be arbitrated in accordance with the rules of the National Association of Securities Dealers, Inc.
14. Effective Time. This is a conditional offer of employment and, except as otherwise set forth in this letter agreement, this letter agreement is conditioned upon your continued employment with the Legg Mason Capital Markets Business through the Effective Date (provided that the Effective Date is not later than March 31, 2006). By signing below, you are confirming, as of your execution of this letter agreement, your intention and agreement to remain with the Legg Mason Capital Markets Business through that period and to accept the employment offer made by Stifel pursuant to this letter agreement. The offer of employment shall terminate and be of no further force and effect on the earliest to occur of any of the following: (1) Stifel and Citigroup have not entered into a definitive acquisition agreement providing for the Legg Mason Capital Markets Transaction on or before September 15, 2005; (2) Stifel and Citigroup have not consummated the Legg Mas on Capital Markets Transaction on or before March 31, 2006; or (3) the termination of the definitive acquisition agreement by either Stifel or Citigroup at any time.
15. Amendments; Entire Agreement. No modification, amendment or waiver of any of the provisions of this letter agreement shall be effective unless in writing specifically referring hereto and signed by the parties hereto. This letter agreement supersedes all prior agreements and understandings between you and Stifel to the extent that any such agreements or understandings conflict with the terms of this letter agreement.
16. Assignments. This letter agreement shall be freely assignable by Stifel to, and shall inure to the benefit of and be binding upon, Stifel, its successors and assigns and/or any other entity which shall succeed to the business presently being conducted by Stifel. Being a letter agreement for personal services, neither this letter agreement nor any rights hereunder shall be assigned by you.
17. Governing Law. In light of Stifel's substantial contacts with the State of Delaware and the parties' interests in ensuring that disputes regarding the interpretation, validity and enforceability of this letter agreement are resolved on a uniform basis, the parties agree that this letter agreement shall be interpreted in accordance with and governed by the laws of the State of Delaware, without regard for any conflict of law principles.
18. Counterparts. This letter agreement may be executed in multiple counterparts, each of which shall be deemed an original (including any counterpart that is a facsimile copy of an original), but all of which taken together shall constitute one and the same instrument.
19. Severability. In the event that any provision or portion of this letter agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this letter agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
As with all employees of Stifel, you will be subject to all policies and practices of the firm as set forth in the employee handbook, the policy manual and other communications, as each may be updated, amended or changed from time to time, except that in the event of a direct conflict between the terms of this letter and the applicable policy manual or other communication, the terms of this letter shall control.
Agreed and acknowledged as of the 6th day of September 2005.
\s\ Richard J. Himelfarb
[Employee Name]
Agreed and accepted as of the 6th day of September 2005.
STIFEL NICOLAUS, INCORPORATED
By: \s\ Ronald J. Kruszewski
Ronald J. Kruszewski
Chairman & Chief Executive Officer
Stifel Financial Corp.
Exhibit 10(q)
Employment agreement with Thomas Mulroy
[Stifel Financial Corp. logo]
One Financial Plaza |
August 16, 2005
Confidential
Thomas Mulroy
c/o Legg Mason Wood Walker, Inc.
100 Light Street
Baltimore, MD 21202
Dear Thomas:
Stifel Financial Corp., a Delaware corporation ("Stifel Financial"), has been negotiating a transaction (the "Legg Mason Capital Markets Transaction") with Citigroup Inc. ("Citigroup") whereby Stifel Financial would acquire the capital markets business of Legg Mason, Inc. ("Legg Mason"). This business is referred to in this letter as the "Legg Mason Capital Markets Business". Closing of the Legg Mason Capital Markets Transaction is expected to occur concurrently with the sale of the Legg Mason Wood Walker Inc. retail brokerage business to Citigroup (the "Citigroup Transaction").
In order for these negotiations and the ultimate transaction to be successful, Stifel Financial, Legg Mason and Citigroup strongly desire your agreement, and the agreement of a number of other key employees of the Legg Mason Capital Markets Business (including a number of key employees within each of the equity, tax-exempt fixed income and taxable fixed income groups), to remain employed in the Legg Mason Capital Markets Business, which will be a critical component of the capital markets business of our subsidiary Stifel Nicolaus, Incorporated (collectively, with Stifel Financial, "Stifel") following the completion of the Legg Mason Capital Markets Transaction. It is our desire to effect a transfer of substantially all executives and key employees of the Legg Mason Capital Markets Business. With significant help from the senior leadership team of the Legg Mason Capital Markets Business, we have structured and are offering a package that is designed to provide s ubstantial benefits, including a material equity ownership stake in Stifel, that we believe you will find very attractive.
We are very excited to make you an offer of employment in the combined capital markets group which, except as otherwise described in this letter, will be effective immediately upon the transfer of the Legg Mason Capital Markets Business to Stifel on the terms described in this letter. This transfer is expected to occur concurrently with the closing of the Citigroup Transaction, but may occur prior or subsequent thereto (the effective date of the transfer being referred to in this letter as the "Effective Date"). As you certainly will understand, except as otherwise stated in this letter, this employment offer is conditioned upon, and will be effective immediately following, the closing of the transfer of the Legg Mason Capital Markets Business to Stifel. Stifel's employment offer to you is also c onditioned upon a sufficient number of key employees, as determined by Stifel, within your group (i.e., within the equity, tax-exempt fixed income or taxable fixed income group, as applicable) entering into similar letter agreements with Stifel.
We emphasize that the contents of this letter and these discussions are of a confidential nature and should not be discussed by you except with your personal advisers with whom you enjoy a legally confidential relationship (such as an attorney or accountant) and who agree to be bound by this confidentiality restriction. We also note that you are bound by a confidentiality agreement relating to the possible sale of the Legg Mason Capital Markets Business. That agreement remains in effect.
Our proposal is summarized below:
Stifel will pay annual bonuses during the term of your employment by Stifel pursuant to the policies described in this paragraph (3) and in paragraph (4). The payment of bonuses will be performance based and determined and calculated on a basis consistent with the methodology and formulas used by Legg Mason Capital Markets in the past, except as provided below. Stifel pays bonuses based upon calendar year performance. These bonuses are paid during the month of February following the close of the calendar year in which the services were performed. It will be the responsibility of Legg Mason to compensate you for services rendered through the Effective Date, including any bonus payments applicable to such periods.
In the event the Effective Date occurs prior to December 31, 2005, as we expect it will, and subject to the other terms of this letter, Stifel will pay you, in February 2006, a stub period bonus for the period from the Effective Date through December 31, 2005. (the "2005 Stub Period"). In the unlikely event that the Effective Date occurs on or after January 1, 2006, the 2006 bonus payment by Stifel will be calculated and paid in accordance with this paragraph (3) for the period in 2006 following the Effective Date during which you were employed by Stifel. These bonuses payable for annual performance are payable no later than the date that bonuses are paid to other personnel at Stifel, and will be subject to a limited offset for any partial payments or advances of annual bon us (including the interim bonus for the 2006 Stub Period as described below), but not for any other payments to you under this letter. All bonus payments under this paragraph (3) shall be subject to partial deferral and company match under Stifel's wealth accumulation plan, as described in paragraph (4) below.
With respect to the bonus payable with respect to your performance in 2006, and subject to the other terms of this employment agreement, Stifel will pay you as an interim bonus (to be credited against your full year bonus entitlement) in August 2006 with respect to the period from the later of the Effective Date or January 1, 2006 through June 30, 2006 (the "2006 Stub Period"). This interim bonus will be in the amount of 75% of the amount otherwise calculated and payable for the 2006 Stub Period.
In the event of a termination of the employment agreement by you or by Stifel (except in the case of a termination of such employment agreement by Stifel without Cause (as defined below), by you for Good Reason (as defined below) or by reason of your death or disability), such bonus shall only be earned and payable if you are employed by Stifel on the date that the bonus is paid. In the event of a termination of employment by Stifel without Cause or a termination by you for Good Reason, you will be entitled to a partial bonus for the period from the start of the compensation year in question through the termination date calculated and paid in accordance with this paragraph (3). However, in all cases, for the compensation year (or partial year) ending on the third anniversary of the Effective Date, in order to be entitled to payment of a bonus for that period , you must remain employed by Stifel through the third anniversary date only, and are not required to be employed on the normal bonus payment date.
You acknowledge and agree that the appropriate tax withholding obligations will be met by the withholding of shares granted to you pursuant to this paragraph (5), or at your election, in cash withheld from other payments due you or paid to Stifel by you. In addition, your ownership of these shares would be subject to the ownership guidelines set forth on Exhibit C hereto.
7. Fringe Benefits. During the term of your employment by Stifel, you will be entitled to participate in all benefits plans and arrangements available to a Stifel employee of similar rank, with credit for prior service for your full service at Legg Mason to the extent credit for prior service is available under the terms of the applicable benefit plan or arrangement.
8. Event of Termination. If Stifel terminates your employment prior to the third anniversary of the Effective Date for any reason other than for Cause, or if you terminate for Good Reason, (a "Termination Event"), you will receive a severance payment equal to two week's pay per year of service with the Legg Mason Capital Markets Business and Stifel. In such circumstances, any payment of bonuses will be covered by paragraph 3. To the extent that Stifel is required to make any subjective determinations in making this bonus computation, Stifel's determination made in good faith shall be controlling in the absence of manifest error. In addition, in the event of a Termination Event (i.e., termination by Stifel other than for Cause or by you for Good Reason), all stock entitlements under all Stifel plans however named will bec ome fully vested. Payments will be structured to comply with all applicable tax rules.
If your employment is terminated by your death or Physical Disability (as defined below), you or your estate will receive regular compensation and benefits through the end of the month in which such termination occurred, the bonus for the year in question (computed as under paragraph 3 as applicable to termination by Stifel without Cause), and all other benefits due under Stifel's policies for such events, and the current year's stock units and "matching" stock issued in connection with the private placement (if any) above will become fully vested and the balance of such amounts shall be forfeited. "Physical Disability" means when you, by reason of physical condition, have been or shall be unable to perform a material portion of the services required of you for a continuous ninety (90) day period (successive periods of disability not separated by a two week disability-free period shall be deemed f or this purpose to constitute, in the aggregate, a continuous period of disability). In the event of a disagreement concerning the existence of any such condition, the matter shall be resolved based on the advice of a licensed physician mutually acceptable to the parties.
If your employment terminates on account of voluntary resignation (other than for Good Reason) or a termination for Cause, you will not be entitled to any further compensation, and any unvested stock units shall be forfeited.
The term "Cause" shall mean (i) fraud, embezzlement, misappropriation; or any gross or willful misconduct in connection with your employment by Stifel, as determined by Stifel in good faith; (ii) the reasonable determination by senior management of Stifel that you have committed an act which, in the senior management's opinion after investigation and advice of counsel of national reputation in the matters in question, constitutes a violation of any statutory or common law fiduciary duty or duty of loyalty to Stifel or any of its clients; (iii) the reasonable determination by senior management of Stifel that you have engaged in conduct which constitutes a violation of Stifel's employment policies, including but not limited to the Firm's Harassment Policy; (iv) any final finding or adjudication by a court, government agency or regulatory authority (including, without limitation, the United States Securities and Exchange Commission, the National Association of Secur ities Dealers, Inc., and any state securities commission) that you have violated any law, rule or regulation relating to the regulation of broker/dealers, investment advisers or securities, which finding or adjudication, in the reasonable judgment of senior management of Stifel, could have a significant adverse effect on the reputation or business of Stifel or any of its affiliates; (v) any final and non-appealable order, judgment or decree (whether entered by consent or after trial or adjudication) of any court, government agency or regulatory authority which censures or imposes any sanctions on you in connection with investment brokerage, investment advisory or securities related activities or which enjoins, bars, suspends or otherwise limits you from acting as a securities analyst, securities broker, investment adviser, an advisory affiliate or associated person of a securities broker-dealer or of an investment adviser, or from engaging in any activity in connection with the purchase or sale of securities , or otherwise from engaging in any activity in which you are currently engaged; (vi) the reasonable determination by senior management of Stifel that you have committed an act which, in senior management's reasonable opinion after investigation, is likely to lead to any such order, judgment or decree; (vii) conviction of a criminal offense punishable by imprisonment (whether or not you are, in fact, imprisoned) or the entry of a guilty plea in any such proceeding; (viii) your inability to be legally employed in the United States; or (ix) your failure to perform material duties reasonably assigned to you by Stifel which continues for a period of 30 days after a receipt by you of a written demand by Stifel identifying the manner in which it believes you have not performed your duties.
The term "Good Reason" means (i) a material reduction in the scope or nature of the duties that you were employed to perform for Stifel and were providing to Legg Mason prior to the transaction which occurs during the first year of your employment by Stifel; (ii) your relocation to a place of employment more than 25 miles away from your current place of employment; or (iii) a material breach of a material provision of this letter agreement by Stifel which is not cured within 30 days after written notice of such breach.
9. Non-Compete: In consideration of Stifel's obligations hereunder and effective as of your signing of this letter agreement, you agree that between the date of your signing of this letter agreement and the closing of the Legg Mason Capital Markets Transaction (provided such closing shall have occurred on or prior to March 31, 2006), during the term of your employment by Stifel and, in the event that the closing of the Legg Mason Capital Markets Transaction shall have occurred on or prior to March 31, 2006, in any event for a period of one year from and after the closing of the Legg Mason Capital Markets Transaction, you will not, directly or indirectly, whether as a principal, employee, partner, shareholder (other than your ownership of 2% or less of the outstanding equity securities of a publicly traded entity, including Legg Mason, Inc., which shall not be prohibited), member, officer, director, manager, agent or otherwise, compete, assist in or prov ide financial resources to any activity which competes with Stifel within the financial services industry.
10. Non-Solicitation. Effective as of your signing of this letter agreement, between the date of your signing of this letter agreement and the closing of the Legg Mason Capital Markets Transaction (provided such closing shall have occurred on or prior to March 31, 2006), during the term of your employment by Stifel and for a period of six months thereafter, and, in any event, if the closing of the Legg Mason Capital Markets Transaction shall have occurred on or prior to March 31, 2006, a period of six months from and after the closing of the Legg Mason Capital Markets Transaction, you will not solicit any person who is or was an employee, independent contractor, consultant or advisor of Stifel or its affiliates during the prior six months (an "Affected Person") to be employed by or perform services for another party in any capacity ("Alternative Employment") or to interfere with any contractual relationship of Stifel that may exist from time to time. S olicitation shall include your inducing, attempting to induce or encouraging an Affected Person to take Alternative Employment, but shall not include general forms of advertising and solicitation not specifically directed at employees of Stifel.
11. Confidentiality. Effective as of your signing of this letter agreement, you agree to keep confidential, and not disclose to third parties, the terms of these employment arrangements, any discussions relating to a possible transaction between Stifel and Citigroup relating to the Legg Mason Capital Markets Business or otherwise, or any other nonpublic information obtained during your employment. In addition, effective as of your signing of this letter agreement and both during and after the term of your employment by Stifel, you agree to keep secret and confidential, and not to use or disclose to any third parties, any of Stifel's proprietary confidential information except (i) as directly required to perform your employment responsibilities for Stifel, (ii) to your attorneys, accountants and representatives (each of whom shall observe confidentiality), and (iii) as required by law or pursuant to a court order.
12. Stifel's Right to Injunctive Relief; Tolling. In the event of a breach or threatened breach of any of your duties and obligations under the terms and provisions of paragraphs (9), (10) or (11), Stifel may be entitled, in addition to any other legal or equitable remedies it may have in connection therewith (including any right to damages that it may suffer), to temporary, preliminary and permanent injunctive relief restraining such breach or threatened breach. You hereby expressly acknowledge that the harm which might result to Stifel's business as a result of any noncompliance by you with any of the provisions of paragraphs (9), (10) or (11) would be largely irreparable. You specifically agree, effective as of your signing of this letter agreement, that if there is a question as to the enforceability of any of the provisions of paragraphs (9), (10) or (11), you will not engage in any conduct inconsistent with or contrary to such paragraphs until after the question has been resolved by a final judgment of a court of competent jurisdiction. You and Stifel agree that the running of the applicable period set forth in paragraph (9) or (10) shall be tolled during any period of time in which you violate the terms of such paragraph.
13. Arbitration. You agree that any dispute between you and Stifel arising out of this agreement, or relating to your employment, including disputes alleging employment discrimination or sexual harassment in violation of a statute, will be arbitrated in accordance with the rules of the National Association of Securities Dealers, Inc.
14. Effective Time. This is a conditional offer of employment and, except as otherwise set forth in this letter agreement, this letter agreement is conditioned upon your continued employment with the Legg Mason Capital Markets Business through the Effective Date (provided that the Effective Date is not later than March 31, 2006). By signing below, you are confirming, as of your execution of this letter agreement, your intention and agreement to remain with the Legg Mason Capital Markets Business through that period and to accept the employment offer made by Stifel pursuant to this letter agreement. The offer of employment shall terminate and be of no further force and effect on the earliest to occur of any of the following: (1) Stifel and Citigroup have not entered into a definitive acquisition agreement providing for the Legg Mason Capital Markets Transaction on or before September 15, 2005; (2) Stifel and Citigroup have not consummated the Legg Mas on Capital Markets Transaction on or before March 31, 2006; or (3) the termination of the definitive acquisition agreement by either Stifel or Citigroup at any time.
15. Amendments; Entire Agreement. No modification, amendment or waiver of any of the provisions of this letter agreement shall be effective unless in writing specifically referring hereto and signed by the parties hereto. This letter agreement supersedes all prior agreements and understandings between you and Stifel to the extent that any such agreements or understandings conflict with the terms of this letter agreement.
16. Assignments. This letter agreement shall be freely assignable by Stifel to, and shall inure to the benefit of and be binding upon, Stifel, its successors and assigns and/or any other entity which shall succeed to the business presently being conducted by Stifel. Being a letter agreement for personal services, neither this letter agreement nor any rights hereunder shall be assigned by you.
17. Governing Law. In light of Stifel's substantial contacts with the State of Delaware and the parties' interests in ensuring that disputes regarding the interpretation, validity and enforceability of this letter agreement are resolved on a uniform basis, the parties agree that this letter agreement shall be interpreted in accordance with and governed by the laws of the State of Delaware, without regard for any conflict of law principles.
18. Counterparts. This letter agreement may be executed in multiple counterparts, each of which shall be deemed an original (including any counterpart that is a facsimile copy of an original), but all of which taken together shall constitute one and the same instrument.
19. Severability. In the event that any provision or portion of this letter agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this letter agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
As with all employees of Stifel, you will be subject to all policies and practices of the firm as set forth in the employee handbook, the policy manual and other communications, as each may be updated, amended or changed from time to time, except that in the event of a direct conflict between the terms of this letter and the applicable policy manual or other communication, the terms of this letter shall control.
Agreed and acknowledged as of the 7th day of September 2005.
\s\ Thomas Mulroy
[Employee Name]
Agreed and accepted as of the 7th day of September 2005.
STIFEL NICOLAUS, INCORPORATED
By: \s\ Ronald J. Kruszewski
Ronald J. Kruszewski
Chairman & Chief Executive Officer
Stifel Financial Corp.
Exhibit 10(r)
Employment agreement with Joseph Sullivan
[Stifel Financial Corp. logo]
One Financial Plaza |
August 16, 2005
Confidential
Joseph Sullivan
c/o Legg Mason Wood Walker, Inc.
100 Light Street
Baltimore, MD 21202
Dear Joseph:
Stifel Financial Corp., a Delaware corporation ("Stifel Financial"), has been negotiating a transaction (the "Legg Mason Capital Markets Transaction") with Citigroup Inc. ("Citigroup") whereby Stifel Financial would acquire the capital markets business of Legg Mason, Inc. ("Legg Mason"). This business is referred to in this letter as the "Legg Mason Capital Markets Business". Closing of the Legg Mason Capital Markets Transaction is expected to occur concurrently with the sale of the Legg Mason Wood Walker Inc. retail brokerage business to Citigroup (the "Citigroup Transaction").
In order for these negotiations and the ultimate transaction to be successful, Stifel Financial, Legg Mason and Citigroup strongly desire your agreement, and the agreement of a number of other key employees of the Legg Mason Capital Markets Business (including a number of key employees within each of the equity, tax-exempt fixed income and taxable fixed income groups), to remain employed in the Legg Mason Capital Markets Business, which will be a critical component of the capital markets business of our subsidiary Stifel Nicolaus, Incorporated (collectively, with Stifel Financial, "Stifel") following the completion of the Legg Mason Capital Markets Transaction. It is our desire to effect a transfer of substantially all executives and key employees of the Legg Mason Capital Markets Business. With significant help from the senior leadership team of the Legg Mason Capital Markets Business, we have structured and are offering a package that is designed to provide substantial b
We are very excited to make you an offer of employment in the combined capital markets group which, except as otherwise described in this letter, will be effective immediately upon the transfer of the Legg Mason Capital Markets Business to Stifel on the terms described in this letter. This transfer is expected to occur concurrently with the closing of the Citigroup Transaction, but may occur prior or subsequent thereto (the effective date of the transfer being referred to in this letter as the "Effective Date"). As you certainly will understand, except as otherwise stated in this letter, this employment offer is conditioned upon, and will be effective immediately following, the closing of the transfer of the Legg Mason Capital Markets Business to Stifel. Stifel's employment offer to you is also conditioned upon a sufficient number of key employees, as determined by Stifel, within your group (i.e., within the equity, tax-exempt fixed income or taxable fixed income group, as applicable) entering into similar letter agreements with Stifel.
We emphasize that the contents of this letter and these discussions are of a confidential nature and should not be discussed by you except with your personal advisers with whom you enjoy a legally confidential relationship (such as an attorney or accountant) and who agree to be bound by this confidentiality restriction. We also note that you are bound by a confidentiality agreement relating to the possible sale of the Legg Mason Capital Markets Business. That agreement remains in effect.
Our proposal is summarized below:
Stifel will pay annual bonuses during the term of your employment by Stifel pursuant to the policies described in this paragraph (3) and in paragraph (4). The payment of bonuses will be performance based and determined and calculated on a basis consistent with the methodology and formulas used by Legg Mason Capital Markets in the past, except as provided below. Stifel pays bonuses based upon calendar year performance. These bonuses are paid during the month of February following the close of the calendar year in which the services were performed. It will be the responsibility of Legg Mason to compensate you for services rendered through the Effective Date, including any bonus payments applicable to such periods.
In the event the Effective Date occurs prior to December 31, 2005, as we expect it will, and subject to the other terms of this letter, Stifel will pay you, in February 2006, a stub period bonus for the period from the Effective Date through December 31, 2005. (the "2005 Stub Period"). In the unlikely event that the Effective Date occurs on or after January 1, 2006, the 2006 bonus payment by Stifel will be calculated and paid in accordance with this paragraph (3) for the period in 2006 following the Effective Date during which you were employed by Stifel. These bonuses payable for annual performance are payable no later than the date that bonuses are paid to other personnel at Stifel, and will be subject to a limited offset for any partial payments or advances of annual bonus (including th e interim bonus for the 2006 Stub Period as described below), but not for any other payments to you under this letter. All bonus payments under this paragraph (3) shall be subject to partial deferral and company match under Stifel's wealth accumulation plan, as described in paragraph (4) below.
With respect to the bonus payable with respect to your performance in 2006, and subject to the other terms of this employment agreement, Stifel will pay you as an interim bonus (to be credited against your full year bonus entitlement) in August 2006 with respect to the period from the later of the Effective Date or January 1, 2006 through June 30, 2006 (the "2006 Stub Period"). This interim bonus will be in the amount of 75% of the amount otherwise calculated and payable for the 2006 Stub Period.
In the event of a termination of the employment agreement by you or by Stifel (except in the case of a termination of such employment agreement by Stifel without Cause (as defined below), by you for Good Reason (as defined below) or by reason of your death or disability), such bonus shall only be earned and payable if you are employed by Stifel on the date that the bonus is paid. In the event of a termination of employment by Stifel without Cause or a termination by you for Good Reason, you will be entitled to a partial bonus for the period from the start of the compensation year in question through the termination date calculated and paid in accordance with this paragraph (3). However, in all cases, for the compensation year (or partial year) ending on the third anniversary of the Effective Date, in order to be entitled to payment of a bonus for that period, you must remai n employed by Stifel through the third anniversary date only, and are not required to be employed on the normal bonus payment date.
You acknowledge and agree that the appropriate tax withholding obligations will be met by the withholding of shares granted to you pursuant to this paragraph (5), or at your election, in cash withheld from other payments due you or paid to Stifel by you. In addition, your ownership of these shares would be subject to the ownership guidelines set forth on Exhibit C hereto.
7. Fringe Benefits. During the term of your employment by Stifel, you will be entitled to participate in all benefits plans and arrangements available to a Stifel employee of similar rank, with credit for prior service for your full service at Legg Mason to the extent credit for prior service is available under the terms of the applicable benefit plan or arrangement.
8. Event of Termination. If Stifel terminates your employment prior to the third anniversary of the Effective Date for any reason other than for Cause, or if you terminate for Good Reason, (a "Termination Event"), you will receive a severance payment equal to two week's pay per year of service with the Legg Mason Capital Markets Business and Stifel. In such circumstances, any payment of bonuses will be covered by paragraph 3. To the extent that Stifel is required to make any subjective determinations in making this bonus computation, Stifel's determination made in good faith shall be controlling in the absence of manifest error. In addition, in the event of a Termination Event (i.e., termination by Stifel other than for Cause or by you for Good Reason), all stock entitlements under all Stifel plans however named will become fully vested . Payments will be structured to comply with all applicable tax rules.
If your employment is terminated by your death or Physical Disability (as defined below), you or your estate will receive regular compensation and benefits through the end of the month in which such termination occurred, the bonus for the year in question (computed as under paragraph 3 as applicable to termination by Stifel without Cause), and all other benefits due under Stifel's policies for such events, and the current year's stock units and "matching" stock issued in connection with the private placement (if any) above will become fully vested and the balance of such amounts shall be forfeited. "Physical Disability" means when you, by reason of physical condition, have been or shall be unable to perform a material portion of the services required of you for a continuous ninety (90) day period (successive periods of disability not separated by a two week disability-free period shall be deemed for this purpose to constitute, in the aggregate, a continuous period of disability). In the event of a disagreement concerning the existence of any such condition, the matter shall be resolved based on the advice of a licensed physician mutually acceptable to the parties.
If your employment terminates on account of voluntary resignation (other than for Good Reason) or a termination for Cause, you will not be entitled to any further compensation, and any unvested stock units shall be forfeited.
The term "Cause" shall mean (i) fraud, embezzlement, misappropriation; or any gross or willful misconduct in connection with your employment by Stifel, as determined by Stifel in good faith; (ii) the reasonable determination by senior management of Stifel that you have committed an act which, in the senior management's opinion after investigation and advice of counsel of national reputation in the matters in question, constitutes a violation of any statutory or common law fiduciary duty or duty of loyalty to Stifel or any of its clients; (iii) the reasonable determination by senior management of Stifel that you have engaged in conduct which constitutes a violation of Stifel's employment policies, including but not limited to the Firm's Harassment Policy; (iv) any final finding or adjudication by a court, government agency or regulatory authority (including, without limitation, the United States Securities and Exchange Commission, the National Association of Securities Dealers, I nc., and any state securities commission) that you have violated any law, rule or regulation relating to the regulation of broker/dealers, investment advisers or securities, which finding or adjudication, in the reasonable judgment of senior management of Stifel, could have a significant adverse effect on the reputation or business of Stifel or any of its affiliates; (v) any final and non-appealable order, judgment or decree (whether entered by consent or after trial or adjudication) of any court, government agency or regulatory authority which censures or imposes any sanctions on you in connection with investment brokerage, investment advisory or securities related activities or which enjoins, bars, suspends or otherwise limits you from acting as a securities analyst, securities broker, investment adviser, an advisory affiliate or associated person of a securities broker-dealer or of an investment adviser, or from engaging in any activity in connection with the purchase or sale of securities, or otherwise from engaging in any activity in which you are currently engaged; (vi) the reasonable determination by senior management of Stifel that you have committed an act which, in senior management's reasonable opinion after investigation, is likely to lead to any such order, judgment or decree; (vii) conviction of a criminal offense punishable by imprisonment (whether or not you are, in fact, imprisoned) or the entry of a guilty plea in any such proceeding; (viii) your inability to be legally employed in the United States; or (ix) your failure to perform material duties reasonably assigned to you by Stifel which continues for a period of 30 days after a receipt by you of a written demand by Stifel identifying the manner in which it believes you have not performed your duties.
The term "Good Reason" means (i) a material reduction in the scope or nature of the duties that you were employed to perform for Stifel and were providing to Legg Mason prior to the transaction which occurs during the first year of your employment by Stifel; (ii) your relocation to a place of employment more than 25 miles away from your current place of employment; or (iii) a material breach of a material provision of this letter agreement by Stifel which is not cured within 30 days after written notice of such breach.
9. Non-Compete: In consideration of Stifel's obligations hereunder and effective as of your signing of this letter agreement, you agree that between the date of your signing of this letter agreement and the closing of the Legg Mason Capital Markets Transaction (provided such closing shall have occurred on or prior to March 31, 2006), during the term of your employment by Stifel and, in the event that the closing of the Legg Mason Capital Markets Transaction shall have occurred on or prior to March 31, 2006, in any event for a period of one year from and after the closing of the Legg Mason Capital Markets Transaction, you will not, directly or indirectly, whether as a principal, employee, partner, shareholder (other than your ownership of 2% or less of the outstanding equity securities of a publicly traded entity, including Legg Mason, Inc., which shall not be prohibited), member, officer, director, manager, agent or otherwise, compete, assist in or provide financial re sources to any activity which competes with Stifel within the financial services industry.
10. Non-Solicitation. Effective as of your signing of this letter agreement, between the date of your signing of this letter agreement and the closing of the Legg Mason Capital Markets Transaction (provided such closing shall have occurred on or prior to March 31, 2006), during the term of your employment by Stifel and for a period of six months thereafter, and, in any event, if the closing of the Legg Mason Capital Markets Transaction shall have occurred on or prior to March 31, 2006, a period of six months from and after the closing of the Legg Mason Capital Markets Transaction, you will not solicit any person who is or was an employee, independent contractor, consultant or advisor of Stifel or its affiliates during the prior six months (an "Affected Person") to be employed by or perform services for another party in any capacity ("Alternative Employment") or to interfere with any contractual relationship of Stifel that may exist from time to time. Solicitation shal l include your inducing, attempting to induce or encouraging an Affected Person to take Alternative Employment, but shall not include general forms of advertising and solicitation not specifically directed at employees of Stifel.
11. Confidentiality. Effective as of your signing of this letter agreement, you agree to keep confidential, and not disclose to third parties, the terms of these employment arrangements, any discussions relating to a possible transaction between Stifel and Citigroup relating to the Legg Mason Capital Markets Business or otherwise, or any other nonpublic information obtained during your employment. In addition, effective as of your signing of this letter agreement and both during and after the term of your employment by Stifel, you agree to keep secret and confidential, and not to use or disclose to any third parties, any of Stifel's proprietary confidential information except (i) as directly required to perform your employment responsibilities for Stifel, (ii) to your attorneys, accountants and representatives (each of whom shall observe confidentiality), and (iii) as required by law or pursuant to a court order.
12. Stifel's Right to Injunctive Relief; Tolling. In the event of a breach or threatened breach of any of your duties and obligations under the terms and provisions of paragraphs (9), (10) or (11), Stifel may be entitled, in addition to any other legal or equitable remedies it may have in connection therewith (including any right to damages that it may suffer), to temporary, preliminary and permanent injunctive relief restraining such breach or threatened breach. You hereby expressly acknowledge that the harm which might result to Stifel's business as a result of any noncompliance by you with any of the provisions of paragraphs (9), (10) or (11) would be largely irreparable. You specifically agree, effective as of your signing of this letter agreement, that if there is a question as to the enforceability of any of the provisions of paragraphs (9), (10) or (11), you will not engage in any conduct inconsistent with or contrary to such paragraphs until after the questi on has been resolved by a final judgment of a court of competent jurisdiction. You and Stifel agree that the running of the applicable period set forth in paragraph (9) or (10) shall be tolled during any period of time in which you violate the terms of such paragraph.
13. Arbitration. You agree that any dispute between you and Stifel arising out of this agreement, or relating to your employment, including disputes alleging employment discrimination or sexual harassment in violation of a statute, will be arbitrated in accordance with the rules of the National Association of Securities Dealers, Inc.
14. Effective Time. This is a conditional offer of employment and, except as otherwise set forth in this letter agreement, this letter agreement is conditioned upon your continued employment with the Legg Mason Capital Markets Business through the Effective Date (provided that the Effective Date is not later than March 31, 2006). By signing below, you are confirming, as of your execution of this letter agreement, your intention and agreement to remain with the Legg Mason Capital Markets Business through that period and to accept the employment offer made by Stifel pursuant to this letter agreement. The offer of employment shall terminate and be of no further force and effect on the earliest to occur of any of the following: (1) Stifel and Citigroup have not entered into a definitive acquisition agreement providing for the Legg Mason Capital Markets Transaction on or before September 15, 2005; (2) Stifel and Citigroup have not consummated the Legg Mason Capital Marke ts Transaction on or before March 31, 2006; or (3) the termination of the definitive acquisition agreement by either Stifel or Citigroup at any time.
15. Amendments; Entire Agreement. No modification, amendment or waiver of any of the provisions of this letter agreement shall be effective unless in writing specifically referring hereto and signed by the parties hereto. This letter agreement supersedes all prior agreements and understandings between you and Stifel to the extent that any such agreements or understandings conflict with the terms of this letter agreement.
16. Assignments. This letter agreement shall be freely assignable by Stifel to, and shall inure to the benefit of and be binding upon, Stifel, its successors and assigns and/or any other entity which shall succeed to the business presently being conducted by Stifel. Being a letter agreement for personal services, neither this letter agreement nor any rights hereunder shall be assigned by you.
17. Governing Law. In light of Stifel's substantial contacts with the State of Delaware and the parties' interests in ensuring that disputes regarding the interpretation, validity and enforceability of this letter agreement are resolved on a uniform basis, the parties agree that this letter agreement shall be interpreted in accordance with and governed by the laws of the State of Delaware, without regard for any conflict of law principles.
18. Counterparts. This letter agreement may be executed in multiple counterparts, each of which shall be deemed an original (including any counterpart that is a facsimile copy of an original), but all of which taken together shall constitute one and the same instrument.
19. Severability. In the event that any provision or portion of this letter agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this letter agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
As with all employees of Stifel, you will be subject to all policies and practices of the firm as set forth in the employee handbook, the policy manual and other communications, as each may be updated, amended or changed from time to time, except that in the event of a direct conflict between the terms of this letter and the applicable policy manual or other communication, the terms of this letter shall control.
Agreed and acknowledged as of the 6th day of September 2005.
\s\ Joseph Sullivan
[Employee Name]
Agreed and accepted as of the 7th day of September 2005.
STIFEL NICOLAUS, INCORPORATED
By: \s\ Ronald J. Kruszewski
Ronald J. Kruszewski
Chairman & Chief Executive Officer