UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the Quarterly Period Ended September 30, 2007
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
to
Commission File No. 001-31720
PIPER JAFFRAY COMPANIES
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction of
incorporation or organization)
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30-0168701
(IRS Employer Identification No.)
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800 Nicollet Mall, Suite 800
Minneapolis, Minnesota
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55402
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(Address of principal executive offices)
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(Zip Code)
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(612) 303-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
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.
Large Accelerated Filer
þ
Accelerated Filer
o
Non-Accelerated Filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes
o
No
þ
As
of November 2, 2007, the registrant had
17,496,059 shares of Common Stock outstanding.
Piper Jaffray Companies
Index to Quarterly Report on Form 10-Q
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Piper Jaffray Companies
Consolidated Statements of Financial Condition
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September 30,
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December 31,
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2007
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2006
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(Amounts in thousands, except share data)
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(Unaudited)
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Assets
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Cash and cash equivalents
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$
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40,758
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$
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39,903
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Cash and cash equivalents segregated for regulatory purposes
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20,000
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25,000
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Receivables:
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Customers
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113,012
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51,441
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Brokers, dealers and clearing organizations
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120,271
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312,874
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Deposits with clearing organizations
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26,837
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30,223
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Securities purchased under agreements to resell
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134,042
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139,927
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Trading securities owned
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602,857
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776,684
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Trading securities owned and pledged as collateral
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150,302
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89,842
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Total trading securities owned
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753,159
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866,526
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Fixed assets (net of accumulated depreciation and amortization of $54,283 and $48,603, respectively)
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27,442
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25,289
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Goodwill
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264,938
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231,567
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Intangible assets (net of accumulated amortization of $4,649 and $3,333, respectively)
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17,854
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1,467
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Other receivables
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38,857
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39,347
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Other assets
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99,886
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88,283
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Total assets
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$
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1,657,056
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$
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1,851,847
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Liabilities and Shareholders Equity
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Payables:
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Customers
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$
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69,755
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$
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83,899
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Checks and drafts
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12,403
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13,828
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Brokers, dealers and clearing organizations
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63,626
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210,955
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Securities sold under agreements to repurchase
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155,184
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91,293
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Trading securities sold, but not yet purchased
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261,478
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217,584
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Accrued compensation
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91,357
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164,346
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Other liabilities and accrued expenses
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114,093
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145,503
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Total liabilities
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767,896
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927,408
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Shareholders equity:
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Common stock, $0.01 par value:
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Shares authorized: 100,000,000 at September 30, 2007 and December 31, 2006;
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Shares issued: 19,487,319 at September 30, 2007 and
December 31, 2006;
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Shares outstanding: 15,655,255 at September 30, 2007 and 16,984,474 at December 31, 2006
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195
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195
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Additional paid-in capital
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729,739
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723,928
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Retained earnings
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352,784
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325,684
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Less common stock held in treasury at cost: 3,832,930 shares at September 30, 2007 and
2,502,845 shares at December 31, 2006
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(194,482
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)
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(126,026
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)
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Other comprehensive income
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|
924
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|
658
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Total shareholders equity
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889,160
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924,439
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Total liabilities and shareholders equity
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$
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1,657,056
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$
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1,851,847
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See Notes to Consolidated Financial Statements
3
Piper Jaffray Companies
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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(Amounts in thousands, except per share data)
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2007
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2006
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2007
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2006
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Revenues:
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Investment banking
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$
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50,276
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$
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71,261
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$
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208,881
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$
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205,346
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Institutional brokerage
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31,624
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|
|
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36,618
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111,451
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|
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119,436
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Interest
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15,003
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|
|
|
16,663
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|
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46,229
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|
|
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44,869
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|
Asset management
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|
903
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|
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|
2
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|
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1,102
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|
17
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|
Other income
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|
735
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|
53
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1,523
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|
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12,434
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|
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Total revenues
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98,541
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|
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124,597
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369,186
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382,102
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Interest expense
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5,647
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|
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8,490
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16,766
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|
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25,786
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|
|
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|
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Net revenues
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|
92,894
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116,107
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352,420
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356,316
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Non-interest expenses:
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|
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|
|
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|
|
|
|
|
|
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|
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Compensation and benefits
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54,343
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|
|
|
69,079
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206,166
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|
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202,656
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|
Occupancy and equipment
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|
7,201
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|
|
|
6,878
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23,772
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|
|
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21,705
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Communications
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6,040
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5,761
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18,296
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16,737
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|
Floor brokerage and clearance
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3,564
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|
|
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3,759
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|
|
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11,255
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|
|
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9,807
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|
Marketing and business development
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6,064
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|
|
|
5,820
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|
|
|
18,125
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|
|
|
17,121
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|
Outside services
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|
|
8,134
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|
|
|
6,344
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|
|
|
24,573
|
|
|
|
19,472
|
|
Cash award program
|
|
|
450
|
|
|
|
512
|
|
|
|
1,196
|
|
|
|
2,673
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|
Other operating expenses
|
|
|
1,064
|
|
|
|
2,905
|
|
|
|
5,268
|
|
|
|
10,252
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total non-interest expenses
|
|
|
86,860
|
|
|
|
101,058
|
|
|
|
308,651
|
|
|
|
300,423
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
Income from continuing operations before
income tax expense
|
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|
6,034
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|
|
|
15,049
|
|
|
|
43,769
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|
|
|
55,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income tax expense
|
|
|
1,222
|
|
|
|
5,521
|
|
|
|
13,858
|
|
|
|
19,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
4,812
|
|
|
|
9,528
|
|
|
|
29,911
|
|
|
|
36,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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Discontinued operations:
|
|
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|
|
|
|
|
|
|
|
|
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Income/(loss) from discontinued operations, net of tax
|
|
|
(456
|
)
|
|
|
177,085
|
|
|
|
(2,811
|
)
|
|
|
178,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,356
|
|
|
$
|
186,613
|
|
|
$
|
27,100
|
|
|
$
|
214,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.30
|
|
|
$
|
0.53
|
|
|
$
|
1.79
|
|
|
$
|
1.97
|
|
Income/(loss) from discontinued operations
|
|
|
(0.03
|
)
|
|
|
9.82
|
|
|
|
(0.17
|
)
|
|
|
9.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic common share
|
|
$
|
0.27
|
|
|
$
|
10.35
|
|
|
$
|
1.62
|
|
|
$
|
11.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.28
|
|
|
$
|
0.50
|
|
|
$
|
1.70
|
|
|
$
|
1.87
|
|
Income/(loss) from discontinued operations
|
|
|
(0.03
|
)
|
|
|
9.29
|
|
|
|
(0.16
|
)
|
|
|
9.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted common share
|
|
$
|
0.26
|
|
|
$
|
9.79
|
|
|
$
|
1.54
|
|
|
$
|
11.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,096
|
|
|
|
18,031
|
|
|
|
16,743
|
|
|
|
18,348
|
|
Diluted
|
|
|
16,904
|
|
|
|
19,071
|
|
|
|
17,610
|
|
|
|
19,294
|
|
See Notes to Consolidated Financial Statements
4
Piper Jaffray Companies
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27,100
|
|
|
$
|
214,607
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,660
|
|
|
|
10,512
|
|
Gain on sale of PCS branch network
|
|
|
|
|
|
|
(327,749
|
)
|
Deferred income taxes
|
|
|
3,822
|
|
|
|
(11,598
|
)
|
Loss on disposal of fixed assets
|
|
|
304
|
|
|
|
|
|
Stock-based compensation
|
|
|
19,791
|
|
|
|
21,433
|
|
Amortization of intangible assets
|
|
|
1,316
|
|
|
|
1,200
|
|
Decrease (increase) in operating assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents segregated for regulatory purposes
|
|
|
5,000
|
|
|
|
(35,000
|
)
|
Receivables:
|
|
|
|
|
|
|
|
|
Customers
|
|
|
(61,516
|
)
|
|
|
33,058
|
|
Brokers, dealers and clearing organizations
|
|
|
192,541
|
|
|
|
(141,257
|
)
|
Deposits with clearing organizations
|
|
|
3,386
|
|
|
|
24,701
|
|
Securities purchased under agreements to resell
|
|
|
5,885
|
|
|
|
44,952
|
|
Net trading securities owned
|
|
|
157,503
|
|
|
|
(113,311
|
)
|
Other receivables
|
|
|
3,451
|
|
|
|
(5,099
|
)
|
Other assets
|
|
|
(15,337
|
)
|
|
|
(11,859
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Payables:
|
|
|
|
|
|
|
|
|
Customers
|
|
|
(14,200
|
)
|
|
|
(18,900
|
)
|
Checks and drafts
|
|
|
(1,446
|
)
|
|
|
(38,524
|
)
|
Brokers, dealers and clearing organizations
|
|
|
(147,317
|
)
|
|
|
275,066
|
|
Securities sold under agreements to repurchase
|
|
|
71,539
|
|
|
|
(13,527
|
)
|
Accrued compensation
|
|
|
(74,409
|
)
|
|
|
(41,662
|
)
|
Other liabilities and accrued expenses
|
|
|
(31,849
|
)
|
|
|
166,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
152,224
|
|
|
|
33,875
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of PCS branch network
|
|
|
|
|
|
|
701,861
|
|
Business acquisition, net of cash acquired
|
|
|
(52,681
|
)
|
|
|
|
|
Purchases of fixed assets, net
|
|
|
(8,280
|
)
|
|
|
(6,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(60,961
|
)
|
|
|
695,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in securities loaned
|
|
|
|
|
|
|
(234,676
|
)
|
Decrease in securities sold under agreements to repurchase
|
|
|
(7,648
|
)
|
|
|
(228,699
|
)
|
Increase in short-term bank financing
|
|
|
|
|
|
|
50,000
|
|
Repayment of subordinated debt
|
|
|
|
|
|
|
(180,000
|
)
|
Repurchase of common stock
|
|
|
(87,489
|
)
|
|
|
(100,000
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
2,072
|
|
|
|
|
|
Proceeds from stock option transactions
|
|
|
2,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(90,682
|
)
|
|
|
(693,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency adjustment:
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
274
|
|
|
|
982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
855
|
|
|
|
36,887
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
39,903
|
|
|
|
60,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
40,758
|
|
|
$
|
97,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information -
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
17,058
|
|
|
$
|
35,137
|
|
Income taxes
|
|
$
|
4,115
|
|
|
$
|
36,981
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities -
|
|
|
|
|
|
|
|
|
Issuance of common stock for retirement plan obligations:
|
|
|
|
|
|
|
|
|
8,619 shares and 190,966 shares for the nine months ended September 30, 2007 and 2006 respectively
|
|
$
|
598
|
|
|
$
|
9,013
|
|
See Notes to Consolidated Financial Statements
5
Piper Jaffray Companies
Notes to the
Consolidated Financial Statements
(Unaudited)
Note 1
Background
Piper Jaffray Companies is the parent company of Piper Jaffray & Co. (Piper Jaffray), a
securities broker dealer and investment banking firm; Piper Jaffray Ltd., a firm providing
securities brokerage and investment banking services in Europe headquartered in London, England;
Piper Jaffray Financial Products Inc., an entity that facilitates customer derivative transactions;
Piper Jaffray Financial Products II Inc., an entity dealing primarily in variable rate municipal
products; Fiduciary Asset Management, LLC (FAMCO), an entity providing asset management services
to clients through separately managed accounts and closed end funds; and other immaterial
subsidiaries. Piper Jaffray Companies and its subsidiaries (collectively, the Company) operate as
one reporting segment providing investment banking services, institutional sales, trading and
research services, and asset management services. As discussed more fully in Note 4, the Company
completed the sale of its Private Client Services branch network and certain related assets to UBS
Financial Services, Inc., a subsidiary of UBS AG (UBS), on August 11, 2006, thereby exiting the
Private Client Services (PCS) business.
Basis of Presentation
The consolidated financial statements include the accounts of Piper Jaffray Companies, its
wholly owned subsidiaries and other entities in which the Company has a controlling financial
interest. All material intercompany balances have been eliminated. Certain financial information
for prior periods has been reclassified to conform to the current period presentation.
The consolidated financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (SEC) with respect to Form 10-Q and reflect
all adjustments that in the opinion of management are normal and recurring and that are necessary
for a fair statement of the results for the interim periods presented. In accordance with these
rules and regulations, certain disclosures that are normally included in annual financial
statements have been omitted. The consolidated financial statements included in this Form 10-Q
should be read in conjunction with the consolidated financial statements and notes thereto included
in the Companys Annual Report on Form 10-K for the year ended December 31, 2006.
The consolidated financial statements are prepared in conformity with U.S. generally accepted
accounting principles. These principles require management to make certain estimates and
assumptions that may affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The nature of the Companys
business is such that the results of any interim period may not be indicative of the results to be
expected for a full year.
Note 2
Summary of Significant Accounting Policies
Refer to the Companys Annual Report on Form 10-K for the year ended December 31, 2006, for a
full description of the Companys significant accounting policies. Changes to the Companys
significant accounting policies are described below.
Revenue Recognition
Asset management asset management fees, which are derived from providing contract investment
advisory services, are recognized in the period in which services are provided. Fees are defined in
client contracts as either fixed or based on a percentage of portfolio assets under management.
Note 3
Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments,
(SFAS 155), which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities,(SFAS 133), and SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities (SFAS 140). The provisions of SFAS 155 provide a fair
value measurement option for certain hybrid financial instruments that contain an embedded
derivative that would otherwise require bifurcation. SFAS 155 also provides clarification that only
the simplest separations of interest payments and principal payments qualify for the exception
afforded to interest-only strips and principal-only strips from derivative accounting under
paragraph 14 of SFAS 133. The standard also clarifies that concentration of credit risk in the form
of subordination is not an embedded derivative. Lastly, the new standard amends SFAS 140 to
eliminate the prohibition on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another derivative financial
instrument. SFAS 155 was effective for the Company for all financial instruments acquired or issued
beginning January 1, 2007. The adoption of SFAS 155 did not have a material effect on the
consolidated financial statements of the Company.
6
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in accordance with FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 prescribes a two-step process to recognize and measure a tax position taken
or expected to be taken in a tax return. The first step is recognition, whereby a determination is
made whether it is more-likely-than-not that a tax position will be sustained upon examination
based on the technical merits of the position. The second step is to measure a tax position that
meets the recognition threshold to determine the amount of benefit to recognize. FIN 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 was effective for fiscal years beginning after December
15, 2006. The adoption of FIN 48 did not have a material effect on the consolidated financial
statements of the Company.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value
measurements, but its application may, for some entities, change current practice. Changes to current
practice stem from the revised definition of fair value and the application of this definition
within the framework established by SFAS 157. SFAS 157 is
effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating
the impact of SFAS 157 on the Companys consolidated results of operations and financial condition.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits
entities to choose to measure certain financial assets and liabilities and other eligible items at
fair value, which are not otherwise currently allowed to be measured at fair value. Under SFAS 159,
the decision to measure items at fair value is made at specified election dates on an irrevocable
instrument-by-instrument basis. Entities electing the fair value option would be required to
recognize changes in fair value in earnings and to expense upfront costs and fees associated with
the item for which the fair value option is elected. Entities electing the fair value option are
required to distinguish on the face of the statement of financial position, the fair value of
assets and liabilities for which the fair value option has been elected and similar assets and
liabilities measured using another measurement attribute. If elected, SFAS 159 is effective as of
the beginning of the first fiscal year that begins after November 15, 2007, with earlier adoption
permitted provided that the entity also early adopts all of the requirements of SFAS 157. The
Company is currently evaluating the impact of SFAS 159 on the Companys consolidated results of
operations and financial condition.
In April 2007, the FASB issued FSP No. FIN 39-1, Amendment of FASB Interpretation No. 39
(FSP FIN 39-1). FSP FIN 39-1 modifies FIN No. 39, Offsetting of Amounts Related to Certain
Contracts, and permits companies to offset cash collateral receivables or payables with net
derivative positions under certain circumstances. FSP FIN 39-1 is effective for fiscal years
beginning after November 15, 2007, with early adoption permitted. FSP FIN 39-1 is not expected to
have a material affect on our consolidated financial statements.
Note 4
Discontinued Operations
On August 11, 2006, the Company and UBS completed the sale of the Companys PCS branch network
under a previously announced asset purchase agreement. The purchase price under the asset purchase
agreement was approximately $750 million, which included $500 million for the branch network and
approximately $250 million for the net assets of the branch network, consisting principally of
customer margin receivables.
In accordance with the provisions of Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), the results of PCS
operations have been classified as discontinued operations for all periods presented. The Company
recorded a loss from discontinued operations, net of tax, of $0.5 million and $2.8 million for the
three months and nine months ended September 30, 2007, respectively, related to the cost of
decommissioning a PCS-oriented back office system, litigation-related expenses and restructuring
charges. The decommissioning of the PCS-oriented back office system was completed in the third
quarter, and the Company does not expect to incur any additional costs related to this system. The
Company may incur discontinued operations expense or income related to changes in litigation
reserve estimates for retained PCS litigation matters and for changes in estimates to occupancy and
severance restructuring charges if the facts that support the Companys estimates change.
In connection with the sale of the Companys PCS branch network, the Company initiated a plan
in 2006 to significantly restructure the Companys support infrastructure. All restructuring costs
related to the sale of the PCS branch network are included within discontinued operations in
accordance with SFAS 144. See Note 13 for additional information regarding the Companys
restructuring activities.
7
Note 5
Acquisition of Fiduciary Asset Management, LLC
On September 14, 2007, the Company acquired FAMCO, a St. Louis-based asset management firm,
which significantly expands the Companys asset management capabilities. At the time of closing,
the Company recorded $33.4 million in goodwill, $17.7 million in identifiable intangible assets and
$1.7 million in net assets in connection with this acquisition. The Company may make an additional
cash payment for FAMCO of up to $15.1 million contingent on net new assets under management secured
through December 15, 2007. In addition, the acquisition of FAMCO includes the potential for
additional cash consideration to be paid in the form of three annual payments contingent upon
revenue exceeding certain revenue run-rate thresholds. The amount of the three annual payments
(assuming the revenue run-rate threshold has been met) will be equal to a percentage of earnings
before income taxes, depreciation and amortization for the previous year. The percentage in 2008 is
120% and 110% in 2009 and 2010. An allocation of the purchase price, not including any additional
cash payments described above, to assets acquired and liabilities assumed has been recorded as of
September 30, 2007. For more information regarding the Companys acquisition of FAMCO, please refer
to the Companys Form 8-K, filed with the SEC on September 14, 2007.
Note 6
Derivatives
Derivative contracts are financial instruments such as forwards, futures, swaps or option
contracts that derive their value from underlying assets, reference rates, indices or a combination
of these factors. A derivative contract generally represents future commitments to purchase or sell
financial instruments at specified terms on a specified date or to exchange currency or interest
payment streams based on the contract or notional amount. Derivative contracts exclude certain cash
instruments, such as mortgage-backed securities, interest-only and principal-only obligations and
indexed debt instruments that derive their values or contractually required cash flows from the
price of some other security or index.
The Company uses interest rate swaps, interest rate locks, and forward contracts to facilitate
customer transactions and as a means to manage risk in certain inventory positions. Interest rate
swaps are also used to manage interest rate exposure associated with holding residual interest
securities from the Companys tender option bond program. In addition, the Company enters into
total return loan swap agreements to receive the total return on $36.4 million in certain loan
assets without transferring actual ownership of the underlying loan to the Company. As of September
30, 2007 and December 31, 2006, the Company was counterparty to notional/contract amounts of $7.2
billion and $5.8 billion, respectively, of derivative instruments.
The market or fair values related to derivative contract transactions are reported in trading
securities owned and trading securities sold, but not yet purchased on the consolidated statements
of financial condition. The Company does not utilize hedge accounting as described within SFAS
No. 133. Derivatives are reported on a net-by-counterparty basis when a legal right of offset
exists under a legally enforceable master netting agreement in accordance with FASB Interpretation
No. 39, Offsetting of Amounts Related to Certain Contracts.
Fair values for derivative contracts represent amounts estimated to be received from or paid
to a counterparty in settlement of these instruments. These derivatives are valued using quoted
market prices when available or pricing models based on the net present value of estimated future
cash flows. The valuation models used require inputs including contractual terms, market prices,
yield curves, credit curves and measures of volatility. The net fair value of derivative contracts
was approximately $24.9 million and $19.7 million as of September 30, 2007 and December 31, 2006,
respectively.
Note 7
Securitizations
In connection with its tender option bond program, the Company securitizes highly rated
municipal bonds. At September 30, 2007 and December 31, 2006, the Company had $315.6 million and
$279.2 million, respectively, of par value of municipal bonds in securitization. Each municipal
bond is sold into a separate trust that is funded by the sale of variable rate certificates to
institutional customers seeking variable rate tax-free investment products. These variable rate
certificates reprice weekly. Securitization transactions meeting certain SFAS 140 criteria are
treated as sales, with the resulting gain included in other income on the consolidated statements
of operations. If a securitization does not meet the sale-of-asset requirements of SFAS 140, the
transaction is recorded as a borrowing. The Company retains a residual interest in each structure
and accounts for the residual interest as a trading security, which is recorded at fair value on
the consolidated statements of financial condition. The fair value of retained interests was $8.9
million and $8.1 million at September 30, 2007 and December 31, 2006, respectively, with a weighted
average life of 8.2 years and 8.4 years, respectively. The fair value of retained interests is
estimated based on the present value of future cash flows using managements best estimates of the
key assumptions expected yield, credit losses of 0 percent and a 12 percent discount rate. At
September 30, 2007, the sensitivity of the current fair value of retained interests to immediate 10
percent and 20 percent adverse changes in the key economic assumptions was not material. The
Company receives a fee to remarket the variable rate certificates derived from the securitizations.
8
Certain cash flow activity for the municipal bond securitizations described above includes:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
(Dollars in thousands)
|
|
2007
|
|
2006
|
Proceeds from new securitizations
|
|
$
|
48,471
|
|
|
$
|
7,578
|
|
Remarketing fees received
|
|
|
95
|
|
|
|
106
|
|
Cash flows
received on retained interests
|
|
|
4,569
|
|
|
|
5,525
|
|
Three securitization transactions were designed such that they did not meet the asset sale
requirements of SFAS 140, causing the Company to consolidate these trusts. Accordingly, the Company
recorded an asset for the underlying bonds of $49.6 million and $51.2 million as of September 30,
2007 and December 31, 2006, respectively, in trading securities owned and a liability for the
certificates sold by the trust for $48.6 million and $50.1 million as of September 30, 2007 and
December 31, 2006, respectively, in other liabilities and accrued expenses on the consolidated
statements of financial condition.
The Company enters into interest rate swap agreements to manage interest rate exposure
associated with holding the residual interest securities from its securitizations, which have been
recorded at fair value and resulted in a liability of approximately $5.8 million and $5.7 million
at September 30, 2007 and December 31, 2006, respectively.
The Company has contracted with a major third-party financial institution to act as the
liquidity provider for the Companys tender option bond securitized trusts. The Company has agreed
to reimburse this party for any losses associated with providing liquidity to the trusts. The
maximum exposure to loss at September 30, 2007 was $288.7 million, representing the outstanding
amount of all trust certificates at those dates. This exposure to loss is mitigated by the
underlying bonds in the trusts, which are either AAA or AA rated. These bonds had a market value of
approximately $300.3 million at September 30, 2007. The Company believes the likelihood it will be
required to fund the reimbursement agreement obligation under any provision of the arrangement is
remote, and accordingly, no liability for such a guarantee has been recorded in the accompanying
consolidated financial statements.
Note 8
Receivables from and Payables to Brokers, Dealers and Clearing Organizations
Amounts receivable from brokers, dealers and clearing organizations at September 30, 2007 and
December 31, 2006 included:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
Receivable arising from unsettled
securities transactions, net
|
|
$
|
|
|
|
$
|
18,233
|
|
Deposits paid for securities borrowed
|
|
|
64,163
|
|
|
|
271,028
|
|
Receivable from clearing organizations
|
|
|
18,311
|
|
|
|
6,811
|
|
Securities failed to deliver
|
|
|
27,304
|
|
|
|
1,674
|
|
Other
|
|
|
10,493
|
|
|
|
15,128
|
|
|
|
|
|
|
|
|
|
|
$
|
120,271
|
|
|
$
|
312,874
|
|
|
|
|
|
|
|
|
Amounts payable to brokers, dealers and clearing organizations at September 30, 2007 and
December 31, 2006 included:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
Payable arising from unsettled securities
transactions, net
|
|
$
|
35,003
|
|
|
$
|
|
|
Deposits received for securities loaned
|
|
|
|
|
|
|
189,214
|
|
Payable to clearing organizations
|
|
|
23,199
|
|
|
|
17,140
|
|
Securities failed to receive
|
|
|
5,246
|
|
|
|
4,531
|
|
Other
|
|
|
178
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
$
|
63,626
|
|
|
$
|
210,955
|
|
|
|
|
|
|
|
|
Deposits paid for securities borrowed and deposits received for securities loaned declined
significantly from December 31, 2006 as
the Company discontinued its stock loan conduit business in the first quarter of 2007.
Deposits paid for securities borrowed and deposits received for securities loaned approximate
the market value of the securities. Securities failed to deliver and receive represent the contract
value of securities that have not been delivered or received by the Company on settlement date.
9
Note 9
Trading Securities Owned and Trading Securities Sold, but Not Yet Purchased
Trading securities owned and trading securities sold, but not yet purchased were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
Owned:
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
27,532
|
|
|
$
|
14,163
|
|
Convertible securities
|
|
|
98,946
|
|
|
|
59,118
|
|
Fixed income securities
|
|
|
105,098
|
|
|
|
235,120
|
|
Asset-backed securities
|
|
|
151,900
|
|
|
|
158,108
|
|
U.S. government securities
|
|
|
26,328
|
|
|
|
10,715
|
|
Municipal securities
|
|
|
304,295
|
|
|
|
364,160
|
|
Other
|
|
|
39,060
|
|
|
|
25,142
|
|
|
|
|
|
|
|
|
|
|
$
|
753,159
|
|
|
$
|
866,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sold, but not yet purchased:
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
70,096
|
|
|
$
|
31,452
|
|
Convertible securities
|
|
|
3,314
|
|
|
|
2,543
|
|
Fixed income securities
|
|
|
31,498
|
|
|
|
16,378
|
|
Asset-backed securities
|
|
|
86,485
|
|
|
|
51,001
|
|
U.S. government securities
|
|
|
62,783
|
|
|
|
109,719
|
|
Municipal securities
|
|
|
201
|
|
|
|
5
|
|
Other
|
|
|
7,101
|
|
|
|
6,486
|
|
|
|
|
|
|
|
|
|
|
$
|
261,478
|
|
|
$
|
217,584
|
|
|
|
|
|
|
|
|
At September 30, 2007 and December 31, 2006, trading securities owned in the amount of $150.3
million and $89.8 million, respectively, had been pledged as collateral for the Companys
repurchase agreements, secured borrowings and securities loaned activities.
Trading securities sold, but not yet purchased represent obligations of the Company to deliver
the specified security at the contracted price, thereby creating a liability to purchase the
security in the market at prevailing prices. The Company is obligated to acquire the securities
sold short at prevailing market prices, which may exceed the amount reflected on the consolidated
statements of financial condition. The Company economically hedges changes in market value of its
trading securities owned utilizing trading securities sold, but not yet purchased, interest rate
swaps, futures and exchange-traded options.
Note 10
Goodwill and Intangible Assets
The following table presents the changes in the carrying value of goodwill and intangible
assets for the nine months ended September 30, 2007:
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Goodwill
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
231,567
|
|
Goodwill acquired
|
|
|
33,371
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
$
|
264,938
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Intangible assets
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
1,467
|
|
Intangible assets acquired
|
|
|
17,703
|
|
Amortization of intangible assets
|
|
|
(1,316
|
)
|
Impairment losses
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
$
|
17,854
|
|
|
|
|
|
The addition of goodwill and intangible assets during 2007 were based on the purchase price
allocation of FAMCO, which the Company acquired on September 14, 2007, as discussed in Note 5.
Management identified $17.7 million of intangible assets, consisting principally of asset
management contracts, that will be amortized over a weighted average life of 8.8 years.
10
The following table illustrates the aggregate future amortization of the Companys intangible
assets:
|
|
|
|
|
|
(Dollars in thousands)
|
|
Years Ended December 31,
|
Amortization
|
|
Remainder of 2007
|
|
|
$
|
961
|
|
2008
|
|
|
|
2,575
|
|
2009
|
|
|
|
2,423
|
|
2010
|
|
|
|
2,282
|
|
2011
|
|
|
|
2,148
|
|
Thereafter
|
|
|
|
7,465
|
|
|
|
|
|
|
Total
|
|
|
$
|
17,854
|
|
|
|
|
|
|
Note 11
Financing
The Company had uncommitted credit agreements with banks totaling $677 million at September
30, 2007, comprised of $557 million in discretionary secured lines under which no amount was
outstanding at September 30, 2007 and December 31, 2006, and $120 million in discretionary
unsecured lines under which no amount was outstanding at September 30, 2007 and December 31, 2006.
In addition, the Company has established arrangements to obtain financing using as collateral the
Companys securities held by its clearing bank and by another broker dealer at the end of each
business day. Repurchase agreements and securities loaned to other broker dealers are also used as
sources of funding.
The Companys short-term financing bears interest at rates based on the federal funds rate. At
September 30, 2007 and December 31, 2006, the weighted average interest rate on borrowings was 5.70
percent and 5.72 percent, respectively. At September 30, 2007 and December 31, 2006, no formal
compensating balance agreements existed, and the Company was in compliance with all debt covenants
related to these facilities.
Note 12
Legal Contingencies
The Company has been named as a defendant in various legal proceedings arising primarily from
securities brokerage and investment banking activities, including certain class actions that
primarily allege violations of securities laws and seek unspecified damages, which could be
substantial. Also, the Company is involved from time to time in investigations and proceedings by
governmental agencies and self-regulatory organizations.
The Company has established reserves for potential losses that are probable and reasonably
estimable that may result from pending and potential complaints, legal actions, investigations and
proceedings. In addition to the Companys established reserves, U.S. Bancorp, from whom the Company
spun-off on December 31, 2003, has agreed to indemnify the Company in an amount up to $17.5 million
for certain legal and regulatory matters. Approximately $13.2 million of this amount remained
available as of September 30, 2007.
As part of the asset purchase agreement between UBS and the Company for the sale of the PCS
branch network, UBS agreed to assume certain liabilities of the PCS business, including certain
liabilities and obligations arising from litigation, arbitration, customer complaints and other
claims related to the PCS business. In certain cases, we have agreed to indemnify UBS for
litigation matters after UBS has incurred costs of $6.0 million related to these matters. In
addition, we have retained liabilities arising from regulatory matters and certain litigation
relating to the PCS business prior to the sale. The amount of exposure in excess of the $6.0
million indemnification threshold and for other PCS litigation matters deemed to be probable and
reasonably estimable are included in the Companys established reserves. Adjustment to litigation
reserves for matters pertaining to the PCS business are included within discontinued operations on
the consolidated statements of operations.
Given uncertainties regarding the timing, scope, volume and outcome of pending and potential
litigation, arbitration and regulatory proceedings and other factors, the amounts of reserves are
difficult to determine and of necessity subject to future revision. Subject to the foregoing,
management of the Company believes, based on its current knowledge, after consultation with outside
legal counsel and after taking into account its established reserves, the U.S. Bancorp indemnity
agreement and the assumption by UBS of certain liabilities of the PCS business, that pending legal
actions, investigations and proceedings will be resolved with no material adverse effect on the
consolidated financial condition of the Company. However, if during any period a potential adverse
contingency should become probable or resolved for an amount in excess of the established reserves,
U.S. Bancorp indemnification and/or the assumption obligation of UBS, the results of operations in
that period could be materially adversely affected.
Note 13
Restructuring
The Company implemented a specific restructuring plan in 2006 to reorganize the Companys
support infrastructure as a result of the PCS branch network sale to UBS.
11
The restructuring charges included the cost of severance, benefits, outplacement costs and
equity award accelerated vesting costs associated with the termination of employees. The severance
amounts were determined based on a one-time severance benefit enhancement to the Companys existing
severance pay program in place at the time of termination notification and will be paid out over a
benefit period of up to one year from the time of termination. Approximately 295 employees received
a severance package. In addition, the Company incurred restructuring charges for contract
termination costs related to the reduction of office space and the modification of technology
contracts. Contract termination fees are determined based on the provisions of Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, which requires the recognition of a liability for contract termination under a
cease-use date concept. The Company also incurred restructuring charges for the impairment or
disposal of long-lived assets determined in accordance with SFAS 144. All restructuring costs
related to the sale of the PCS branch network are included within discontinued operations in
accordance with SFAS 144.
For the nine months ended September 30, 2007, the Company incurred $0.4 million of expense to
revise contract termination cost estimates.
The following table presents a summary of activity with respect to the restructuring-related
liabilities included in other liabilities and accrued expenses on the statements of financial
condition:
|
|
|
|
|
|
|
|
|
|
|
|
PCS
|
|
(Dollars in thousands)
|
|
Restructuring
|
|
Balance at December 31, 2006
|
|
$
|
28,583
|
|
Provisions charged to discontinued operations
|
|
|
382
|
|
Cash outlays
|
|
|
(13,117
|
)
|
Non-cash write-downs
|
|
|
(398
|
)
|
|
|
|
|
Balance at September 30, 2007
|
|
$
|
15,450
|
|
|
|
|
|
Note 14
Shareholders Equity
Share Repurchase Program
In the third quarter of 2006, the Companys board of directors authorized the repurchase of up
to $180.0 million in common shares through December 31, 2007. The Company executed an accelerated
stock repurchase under this authorization in the amount of $100 million during 2006. During the
nine months ended September 30, 2007, the Company repurchased 1,590,477 shares of the Companys
common stock at an average price of $50.28 per share for an aggregate purchase price of $80.0
million. This repurchase activity completed the $180.0 million share repurchase authorization.
Issuance of Shares
During the nine months ended September 30, 2007, the Company reissued 8,619 common shares out
of treasury in fulfillment of $0.6 million in obligations under the Piper Jaffray Companies
Retirement Plan and reissued 255,410 common shares out of treasury as a result of vesting and
exercise transactions under the Piper Jaffray Companies Amended and Restated 2003 Annual and
Long-Term Incentive Plan (the Long-Term Incentive Plan).
Note 15
Earnings Per Share
Basic earnings per common share is computed by dividing net income by the weighted average
number of common shares outstanding for the period. Diluted earnings per common share is calculated
by adjusting the weighted average outstanding shares to assume conversion of all potentially
dilutive restricted stock and stock options. The computation of earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
(Amounts in thousands, except per share data)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Net income
|
|
$
|
4,356
|
|
|
$
|
186,613
|
|
|
$
|
27,100
|
|
|
$
|
214,607
|
|
Shares for basic and diluted calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares used in basic computation
|
|
|
16,096
|
|
|
|
18,031
|
|
|
|
16,743
|
|
|
|
18,348
|
|
Restricted stock
|
|
|
722
|
|
|
|
949
|
|
|
|
755
|
|
|
|
869
|
|
Stock options
|
|
|
86
|
|
|
|
91
|
|
|
|
112
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares used in diluted computation
|
|
|
16,904
|
|
|
|
19,071
|
|
|
|
17,610
|
|
|
|
19,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
|
$
|
10.35
|
|
|
$
|
1.62
|
|
|
$
|
11.70
|
|
Diluted
|
|
$
|
0.26
|
|
|
$
|
9.79
|
|
|
$
|
1.54
|
|
|
$
|
11.12
|
|
12
Note 16
Stock-Based Compensation and Cash Award Program
The Company maintains one stock-based compensation plan, the Long-Term Incentive Plan. The
plan permits the grant of equity awards, including non-qualified stock options and restricted
stock, to the Companys employees and directors for up to 4.5 million shares of common stock. The
Company periodically grants shares of restricted stock and options to purchase Piper Jaffray
Companies common stock to employees and grants options to purchase Piper Jaffray Companies common
stock or shares of Piper Jaffray Companies common stock to its non-employee directors. The Company
believes that such awards help align the interests of employees and directors with those of
shareholders and serve as an employee retention tool. The awards granted to employees have
three-year cliff vesting periods. The director awards are fully vested upon grant. The maximum term
of the stock options granted to employees and directors is ten years. The plan provides for
accelerated vesting of option and restricted stock awards if there is a change in control of the
Company (as defined in the plan), in the event of a participants death, and at the discretion of
the compensation committee of the Companys board of directors.
Prior to January 1, 2006, the Company accounted for stock-based compensation under the fair
value method of accounting as prescribed by SFAS 123, as amended by SFAS 148. As such, the Company
recorded stock-based compensation expense in the consolidated statements of operations at fair
value, net of estimated forfeitures.
Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R) using the
modified prospective transition method. SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the statement of operations based
on fair value, net of estimated forfeitures. Because the Company historically expensed all equity
awards based on the fair value method, net of estimated forfeitures, SFAS 123(R) did not have a
material effect on the Companys measurement or recognition methods for stock-based compensation.
Employee and director stock options granted prior to January 1, 2006, were expensed by the
Company on a straight-line basis over the option vesting period, based on the estimated fair value
of the award on the date of grant using a Black-Scholes option-pricing model. Employee and director
stock options granted after January 1, 2006, are expensed by the Company on a straight-line basis
over the required service period, based on the estimated fair value of the award on the date of
grant using a Black-Scholes option-pricing model. At the time it adopted SFAS 123(R), the Company
changed the expensing period from the vesting period to the required service period, which
shortened the period over which options are expensed for employees who are retiree-eligible on the
date of grant or become retiree-eligible during the vesting period. The number of employees that
fell within this category at January 1, 2006 was not material. In accordance with SEC guidelines,
the Company did not alter the expense recorded in connection with prior option grants for the
change in the expensing period.
Employee restricted stock grants prior to January 1, 2006, are amortized on a straight-line
basis over the vesting period based on the market price of Piper Jaffray Companies common stock on
the date of grant. Restricted stock grants after January 1, 2006, are valued at the market price of
the Companys common stock on the date of grant and amortized on a straight-line basis over the
required service period. The majority of the Companys restricted stock grants provide for
continued vesting after termination, so long as the employee does not violate certain
post-termination restrictions, as set forth in the award agreements or any agreements entered into
upon termination. The Company considers the required service period to be the greater of the
vesting period or the post-termination restricted period. The Company believes that the
post-termination restrictions meet the SFAS 123(R) definition of a substantive service requirement.
The Company recorded compensation expense, net of estimated forfeitures, within continuing
operations of $7.3 million and $5.4 million for the three months ended September 30, 2007 and 2006,
respectively, and $19.7 million and $15.6 million for the nine months ended September 30, 2007 and
2006, respectively, related to employee stock option and restricted stock grants. The tax benefit
related to the total compensation cost for stock-based compensation arrangements totaled $2.8
million and $2.1 million for the three months ended September 30, 2007 and 2006, respectively and
$7.5 million and $6.0 million for the nine months ended September 30, 2007 and 2006, respectively.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes
option-pricing model, which is based on assumptions such as the risk-free interest rate, the
dividend yield, the expected volatility and the expected life of the option. The risk-free interest
rate assumption is derived from the U.S. treasury bill rate with a maturity equal to the expected
life of the option. The dividend yield assumption is derived from the assumed dividend payout over
the expected life of the option. The expected volatility assumption for 2007 grants is derived from
a combination of Company historical data and industry comparisons. The Company has only been a
publicly traded company for approximately 45 months; therefore, it does not have sufficient
historical data to determine an appropriate expected volatility solely from the Companys own
historical data. The expected life assumption is based on an average of the following two factors:
1) industry comparisons; and 2) the guidance provided by the SEC in Staff Accounting Bulletin No.
107, (SAB 107). SAB 107 allows the use of an acceptable methodology under which the Company can
take the midpoint of the vesting date and the full contractual term. The following table provides a
summary of the valuation assumptions used by the Company to determine the estimated value of stock
option grants in Piper Jaffray Companies common stock for the nine months ended September 30, 2007:
13
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Weighted average assumptions in option valuation:
|
|
|
|
|
|
|
|
|
Risk-free interest rates
|
|
|
4.68
|
%
|
|
|
4.55
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Stock volatility factor
|
|
|
32.20
|
%
|
|
|
40.08
|
%
|
Expected life of options (in years)
|
|
|
6.00
|
|
|
|
6.00
|
|
Weighted average fair value of options granted
|
|
$
|
28.57
|
|
|
$
|
22.14
|
|
The following table summarizes the changes in the Companys outstanding stock options for the
nine months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
Remaining
|
|
Aggregate
|
|
|
Options
|
|
Average
|
|
Contractual
|
|
Intrinsic
|
|
|
Outstanding
|
|
Exercise Price
|
|
Term (Years)
|
|
Value
|
December 31, 2006
|
|
|
510,181
|
|
|
$
|
43.25
|
|
|
|
7.8
|
|
|
$
|
11,172,964
|
|
Granted
|
|
|
35,641
|
|
|
|
70.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(50,759
|
)
|
|
|
46.92
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(20,989
|
)
|
|
|
40.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
474,074
|
|
|
$
|
44.98
|
|
|
|
7.3
|
|
|
$
|
4,086,518
|
|
|
Options exercisable at September 30, 2007
|
|
|
183,497
|
|
|
$
|
46.33
|
|
|
|
6.7
|
|
|
$
|
1,334,023
|
|
As of September 30, 2007, there was $1.5 million of total unrecognized compensation cost related to stock options expected to be
recognized over a weighted average period of 1.6 years.
Cash received from option exercises for the nine months ended September 30, 2007 was $2.4 million. The tax benefit realized for
the tax deduction from option exercises totaled $0.9 million for the nine months ended September 30, 2007. There were no option
exercis es for the nine months ended September 30, 2006.
The following table summarizes the changes in the Companys non-vested restricted stock for
the nine months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Non-Vested
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
Stock
|
|
|
Fair Value
|
|
December 31, 2006
|
|
|
1,556,801
|
|
|
$
|
43.81
|
|
Granted
|
|
|
654,885
|
|
|
|
68.51
|
|
Vested
|
|
|
(314,905
|
)
|
|
|
48.70
|
|
Canceled
|
|
|
(166,186
|
)
|
|
|
49.40
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
1,730,595
|
|
|
$
|
51.73
|
|
As of September 30, 2007, there was $48.8 million of total unrecognized compensation cost
related to restricted stock expected to be recognized over a weighted average period of 2.0 years.
In connection with the Companys spin-off from U.S. Bancorp on December 31, 2003, the Company
established a cash award program pursuant to which it granted cash awards to a broad-based group of
employees to aid in retention of employees and to compensate employees for the value of U.S.
Bancorp stock options and restricted stock lost by employees. The cash awards are being expensed
over a four-year period ending December 31, 2007. Participants must be employed on the date of
payment to receive payment under the award. Expense related to the cash award program is included
as a separate line item on the Companys consolidated statements of operations.
14
Note 17
Geographic Areas
The following table presents revenues and long-lived assets by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic operations
|
|
$
|
89,749
|
|
|
$
|
106,615
|
|
|
$
|
312,247
|
|
|
$
|
330,995
|
|
International operations
|
|
|
3,145
|
|
|
|
9,492
|
|
|
|
40,173
|
|
|
|
25,321
|
|
Consolidated
|
|
$
|
92,894
|
|
|
$
|
116,107
|
|
|
$
|
352,420
|
|
|
$
|
356,316
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
Domestic operations
|
|
$
|
24,724
|
|
|
$
|
22,503
|
|
International operations
|
|
|
2,718
|
|
|
|
2,786
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
27,442
|
|
|
$
|
25,289
|
|
|
|
|
|
|
|
|
Note 18
Net Capital Requirements and Other Regulatory Matters
As a registered broker dealer and member firm of the Financial Industry Regulatory Authority
(FINRA), Piper Jaffray is subject to the uniform net capital rule of the SEC and the net capital
rule of the New York Stock Exchange (NYSE). Piper Jaffray has elected to use the alternative
method permitted by the SEC rule, which requires that it maintain minimum net capital of the
greater of $1.0 million or 2 percent of aggregate debit balances arising from customer
transactions, as such term is defined in the SEC rule. Under the NYSE rule, the NYSE may prohibit a
member firm from expanding its business or paying dividends if resulting net capital would be less
than 5 percent of aggregate debit balances. Advances to affiliates, repayment of subordinated debt,
dividend payments and other equity withdrawals by Piper Jaffray are subject to certain notification
and other provisions of the SEC and NYSE rules. In addition, Piper Jaffray is subject to certain
notification requirements related to withdrawals of excess net capital.
At September 30, 2007, net capital calculated under the SEC rule was $240.8 million, and
exceeded the minimum net capital required under the SEC rule by $238.4 million.
Piper Jaffray Ltd., which is a registered United Kingdom broker dealer, is subject to the
capital requirements of the Financial Services Authority (FSA). As of September 30, 2007, Piper
Jaffray Ltd. was in compliance with the capital requirements of the FSA.
Note 19
Income Taxes
The Company adopted the provisions of FIN 48 on January 1, 2007. Implementation of FIN 48
resulted in no adjustment to the Companys liability for unrecognized tax benefits. As of the date
of adoption the total amount of unrecognized tax benefits was $1.1 million, all of which relates to
tax benefits that if recognized, would impact the annual effective tax rate. Included in the total
liability for unrecognized tax benefits is $0.2 million of interest and penalties, both of which
the Company recognizes as a component of income tax expense. The Company or one of its subsidiaries
file income tax returns with the U.S. federal jurisdiction, all states, and various foreign
jurisdictions. The Company is not subject to U.S. federal, state and local or non-U.S. income tax
examination by tax authorities for taxable years before 2004.
There was no change in the unrecognized tax benefit during the nine month period ended
September 30, 2007.
Note 20
Acquisition of Goldbond Capital Holdings Limited
On October 2, 2007, the Company acquired Goldbond Capital Holdings Limited (Goldbond), a
Hong Kong-based investment bank which provides the Company with capital markets capabilities in
Hong Kong. As consideration for the transaction, the Company paid $47.1 million in cash and $4.1
million in the form of restricted stock of the Company. An allocation of the purchase price will be
recorded in the fourth quarter of 2007. For more information regarding the Companys acquisition of
Goldbond, please refer to the Companys Form 8-K, filed with the SEC on July 3, 2007.
15
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the accompanying consolidated
financial statements and related notes and exhibits included elsewhere in this report. Certain
statements in this report may be considered forward-looking. Statements that are not historical or
current facts, including statements about beliefs and expectations, are forward-looking statements.
These forward looking statements include, among other things, statements other than historical
information or statements of current condition and may relate to our future plans and objectives
and results, and also may include our belief regarding the effect of various legal proceedings, as
set forth under Legal Proceedings in Part I, Item 3 of our Annual Report on Form 10-K for the
year ended December 31, 2006, as updated in our subsequent reports filed with the SEC.
Forward-looking statements involve inherent risks and uncertainties, and important factors could
cause actual results to differ materially from those anticipated, including those factors discussed
below under External Factors Impacting Our Business as well as the factors identified under Risk
Factors in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006,
as updated in our subsequent reports filed with the SEC. These reports are available at our Web
site at www.piperjaffray.com and at the SEC Web site at www.sec.gov. Forward-looking statements
speak only as of the date they are made, and we undertake no obligation to update them in light of
new information or future events.
Executive Overview
Our continuing operations are principally engaged in providing investment banking,
institutional brokerage, asset management and related financial services to middle-market
companies, private equity groups, public entities, non-profit entities and institutional investors
in the United States, Europe and Asia. Our revenues are generated primarily through the receipt of
advisory and financing fees earned on investment banking activities, commissions and sales credits
earned on equity and fixed income institutional sales and trading activities, net interest earned
on securities inventories, profits and losses from trading activities related to these securities
inventories and asset management fees.
The securities business is a human capital business; accordingly, compensation and benefits
comprise the largest component of our expenses, and our performance is dependent upon our ability
to attract, develop and retain highly skilled employees who are motivated and committed to
providing the highest quality of service and guidance to our clients.
Discontinued operations include the operating results of our Private Client Services (PCS)
retail brokerage business and related restructuring costs. We closed on the sale of our PCS branch
network and certain related assets to UBS Financial Services, Inc., a subsidiary of UBS AG (UBS),
on August 11, 2006. Our PCS retail brokerage business provided financial advice and a wide range of
financial products and services to individual investors through a network of approximately 90
branch offices. In the third quarter of 2007, discontinued operations recorded a net loss of $0.5
million, which included costs related to decommissioning a retail-oriented back-office system,
costs for PCS litigation-related expenses and additional restructuring charges. The decommissioning
of our retail-oriented back-office system was completed in the third quarter and we do not
anticipate incurring any additional expenses related to this system in the future. Costs
associated with implementing a new back-office system to support our capital markets business are
recorded in continuing operations. We may incur additional discontinued operations expenses or
income in the future related to changes in litigation reserve estimates for retained PCS litigation
matters and for changes in estimates to occupancy and severance restructuring charges if the facts
that support our estimates change. See Notes 4 and 13 to our unaudited consolidated financial
statements for a further discussion of our discontinued operations and restructuring.
On September 14, 2007, we completed the acquisition of Fiduciary Asset Management, LLC
(FAMCO) a St. Louis-based asset management firm that serves clients through separately managed
accounts and closed end funds, and offers investment products that include traditional core equity,
quantitative and hedged equity, master limited partnerships and fixed income. This acquisition
significantly expands our asset management capabilities and helps to diversify our revenue base.
FAMCO results of operations are included in our consolidated results of operations from the date of
acquisition. At the time of closing, we paid $51.3 million in cash and may make an additional cash
payment of up to $15.1 million contingent on new assets under management secured through December
15, 2007. In addition, we may pay future cash consideration contingent on the performance of FAMCO
in each of the 2008, 2009 and 2010 calendar years.
On October 2, 2007, we completed the acquisition of Goldbond Capital Holdings Limited
(Goldbond), a Hong Kong investment bank, for $47.1 million in cash and $4.1 million in restricted
stock. Goldbond focuses primarily on raising capital for and providing
financial advisory services to companies listed or to be listed on the Hong Kong Stock Exchange.
Our Asia platform now includes corporate finance, sales and trading, equity capital markets and
research and will be referred to as Piper Jaffray Asia going forward.
16
We plan to continue our focus on revenue growth through expansion of our capital markets and
asset management businesses. Within our capital markets business, our efforts will be focused on
growing our sector expertise, product depth and geographic reach. We expect that
continued growth of both our capital markets and asset management businesses will come from a
combination of organic growth and acquisitions. In addition, we have begun to use our own capital
to a greater extent by engaging in principal activities that leverage our expertise. These
activities include, among other things, proprietary positions in equity and debt securities of
public and private companies, arbitrage trading strategies and private equity funds. We intend to
increase the amount of capital we have committed to principal activities as opportunities arise.
We anticipate leveraging our balance sheet with the addition of long-term debt to facilitate these
growth initiatives. All of these growth initiatives will require investments in personnel and
other expenses, which may have a short-term negative impact on our profitability as it may take
time to develop meaningful revenues.
RESULTS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007
The turmoil in the credit markets created challenging capital markets conditions in the third
quarter of 2007, negatively impacting nearly all of our businesses. Net revenues from continuing
operations for the three months ended September 30, 2007 were $92.9 million, a decline of 20.0
percent compared with the prior-year period. For the three months ended September 30, 2007, net
income from continuing operations totaled $4.8 million, or $0.28 per diluted share, compared to
$9.5 million, or $0.50 per diluted share, for the corresponding period in 2006. For the three
months ended September 30, 2007, our net income, including continuing and discontinued operations,
was $4.4 million, or $0.26 per diluted share, compared to net income of $186.6 million, or $9.79
per diluted share, for the prior-year period. Net income for the third quarter of 2006 included a
gain of $179.7 million after tax and net of restructuring and transaction costs from the sale of
our PCS branch network to UBS.
For the nine months ended September 30, 2007, net revenues from continuing operations were
$352.4 million, a slight decrease from the year-ago period. For the nine months ended September 30,
2007, net income from continuing operations totaled $29.9 million, or $1.70 per diluted share,
compared to $36.2 million, or $1.87 per diluted share, for the corresponding period in 2006. Net
income, including continuing and discontinued operations, for the nine months ended September 30,
2007 was $27.1 million, or $1.54 per diluted share, compared to net income of $214.6 million, or
$11.12 per diluted share, for the prior-year period.
EXTERNAL FACTORS IMPACTING OUR BUSINESS
Performance in the financial services industry in which we operate is highly correlated to the
overall strength of economic conditions and financial market activity. Overall market conditions
are a product of many factors, which are beyond our control and mostly unpredictable. These factors
may affect the financial decisions made by investors, including their level of participation in the
financial markets. In turn, these decisions may affect our business results. With respect to
financial market activity, our profitability is sensitive to a variety of factors, including the
volume and value of trading in securities, the volatility of the equity and fixed income markets,
the level and shape of various yield curves, the demand for investment banking services as
reflected by the number and size of equity and debt financings and merger and acquisition
transactions, and the demand for asset management services as reflected by the amount of assets
under management.
Factors that differentiate our business within the financial services industry also may affect
our financial results. For example, our business focuses on specific industry sectors. These
sectors may experience growth or downturns independently of general economic and market conditions,
or may face market conditions that are disproportionately better or worse than those impacting the
economy and markets generally. In either case, our business could be affected differently than
overall market trends. Given the variability of the capital markets and securities businesses, our
earnings may fluctuate significantly from period to period, and results of any individual period
should not be considered indicative of future results.
17
Results of Operations
FINANCIAL SUMMARY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006
The following table provides a summary of the results of our operations and the results of our
operations as a percentage of net revenues for the three months ended September 30, 2007 and
September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as a Percentage of Net
|
|
|
|
Results of Operations
|
|
|
Revenues
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
v2006
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
50,276
|
|
|
$
|
71,261
|
|
|
|
(29.4
|
)%
|
|
|
54.1
|
%
|
|
|
61.4
|
%
|
Institutional brokerage
|
|
|
31,624
|
|
|
|
36,618
|
|
|
|
(13.6
|
)
|
|
|
34.0
|
|
|
|
31.5
|
|
Interest
|
|
|
15,003
|
|
|
|
16,663
|
|
|
|
(10.0
|
)
|
|
|
16.2
|
|
|
|
14.4
|
|
Asset management
|
|
|
903
|
|
|
|
2
|
|
|
|
N/M
|
|
|
|
1.0
|
|
|
|
0.0
|
|
Other income
|
|
|
735
|
|
|
|
53
|
|
|
|
N/M
|
|
|
|
0.8
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
98,541
|
|
|
|
124,597
|
|
|
|
(20.9
|
)
|
|
|
106.1
|
|
|
|
107.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
5,647
|
|
|
|
8,490
|
|
|
|
(33.5
|
)
|
|
|
6.1
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
92,894
|
|
|
|
116,107
|
|
|
|
(20.0
|
)
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
54,343
|
|
|
|
69,079
|
|
|
|
(21.3
|
)
|
|
|
58.5
|
|
|
|
59.5
|
|
Occupancy and equipment
|
|
|
7,201
|
|
|
|
6,878
|
|
|
|
4.7
|
|
|
|
7.8
|
|
|
|
5.9
|
|
Communications
|
|
|
6,040
|
|
|
|
5,761
|
|
|
|
4.8
|
|
|
|
6.5
|
|
|
|
5.0
|
|
Floor brokerage and clearance
|
|
|
3,564
|
|
|
|
3,759
|
|
|
|
(5.2
|
)
|
|
|
3.8
|
|
|
|
3.2
|
|
Marketing and business development
|
|
|
6,064
|
|
|
|
5,820
|
|
|
|
4.2
|
|
|
|
6.5
|
|
|
|
5.0
|
|
Outside services
|
|
|
8,134
|
|
|
|
6,344
|
|
|
|
28.2
|
|
|
|
8.8
|
|
|
|
5.5
|
|
Cash award program
|
|
|
450
|
|
|
|
512
|
|
|
|
(12.1
|
)
|
|
|
0.5
|
|
|
|
0.4
|
|
Other operating expenses
|
|
|
1,064
|
|
|
|
2,905
|
|
|
|
(63.4
|
)
|
|
|
1.1
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
86,860
|
|
|
|
101,058
|
|
|
|
(14.0
|
)
|
|
|
93.5
|
|
|
|
87.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before tax expense
|
|
|
6,034
|
|
|
|
15,049
|
|
|
|
(59.9
|
)
|
|
|
6.5
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
1,222
|
|
|
|
5,521
|
|
|
|
(77.9
|
)
|
|
|
1.3
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
4,812
|
|
|
|
9,528
|
|
|
|
(49.5
|
)
|
|
|
5.2
|
|
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from discontinued operations, net of tax
|
|
|
(456
|
)
|
|
|
177,085
|
|
|
|
N/M
|
|
|
|
(0.5
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,356
|
|
|
$
|
186,613
|
|
|
|
(97.7
|
)%
|
|
|
4.7
|
%
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M Not Meaningful
For the three months ended September 30, 2007, net income, including continuing and discontinued
operations, totaled $4.4 million. Net revenues from continuing operations decreased 20.0 percent to
$92.9 million for the third quarter of 2007. The difficult capital markets conditions in the third
quarter of 2007 negatively impacted nearly all of our businesses. For the three months ended
September 30, 2007, investment banking revenues decreased 29.4 percent to $50.3 million, compared
with revenues of $71.3 million in the prior-year period. This decline in investment banking
revenues was primarily due to lower equity financing activity and lower advisory services revenue.
Institutional brokerage revenues decreased 13.6 percent to $31.6 million for the third quarter of
2007, compared with $36.6 million in the corresponding
18
period in the prior year, due primarily to
increased trading losses as a result of the volatility in the markets. In the third quarter of
2007, net interest income increased to $9.4 million, compared with $8.2 million in the third
quarter of 2006. In August 2006, we repaid $180 million in subordinated debt with proceeds from the
sale of our PCS branch network, reducing interest expense. For the three months ended September 30,
2007, asset management fees were $0.9 million, of which substantially all was generated by FAMCO.
In the third quarter of 2007, other income was $0.7 million, compared with $0.1 million in the
prior-year period, as a result of other income gains recorded on our investments in private equity
funds. Non-interest expenses decreased to $86.9 million for the three months ended September 30,
2007, from $101.1 million in the corresponding period in the prior year. This decrease was
primarily due to lower compensation and benefits expenses.
NON-INTEREST EXPENSES FROM CONTINUING OPERATIONS
Compensation and Benefits
- Compensation and benefits expenses, which are the largest
component of our expenses, include salaries, bonuses, commissions, benefits, amortization of
stock-based compensation, employment taxes and other employee costs. A substantial portion of
compensation expense is comprised of variable incentive arrangements, including discretionary
bonuses, the amount of which fluctuates in proportion to the level of business activity, increasing
with higher revenues and operating profits. Other compensation costs, primarily base salaries and
benefits, are more fixed in nature. The timing of bonus payments, which generally occur in
February, have a greater impact on our cash position and liquidity, than is reflected in our
statements of operations.
For the three months ended September 30, 2007, compensation and benefits expenses decreased
21.3 percent to $54.3 million, from $69.1 million in the corresponding period in 2006. This
decrease was due to a decline in variable compensation costs resulting from lower revenues.
Compensation and benefits expenses as a percentage of net revenues decreased to 58.5 percent for
the third quarter of 2007, compared with 59.5 percent for the third quarter of 2006.
Occupancy and Equipment
- In the third quarter of 2007, occupancy and equipment expenses were
$7.2 million, compared with $6.9 million for the corresponding period in 2006. This increase was
primarily due to base rent increases associated with new leases during 2007.
Communications
- Communication expenses include costs for telecommunication and data
communication, primarily consisting of expenses for obtaining third-party market data information.
For the three months ended September 30, 2007, communication expenses were $6.0 million, an
increase of 4.8 percent from the prior-year period. This increase was due to higher market data
service expenses from obtaining expanded services and price increases.
Floor Brokerage and Clearance
- For the three months ended September 30, 2007, floor brokerage
and clearance expenses were $3.6 million, compared with $3.8 million for the three months ended
September 30, 2006, a decrease of 5.2 percent. This decrease was attributed to a decline in
clearing fees associated with lower equity trading activity. Partially offsetting this decrease
were higher expenses associated with accessing electronic communication networks as we increased
after-market support of deal-related stocks.
Marketing and Business Development
- Marketing and business development expenses include
travel and entertainment and promotional and advertising costs. In the third quarter of 2007,
marketing and business development expenses increased to $6.1 million, compared with $5.8 million
in the third quarter of 2006.
Outside Services
- Outside services expenses include securities processing expenses,
outsourced technology functions, outside legal fees and other professional fees. Outside services
expenses increased to $8.1 million in the third quarter of 2007, compared with $6.3 million for the
prior-year period, an increase of 28.2 percent. This increase primarily was due to expenses related
to the implementation of a new back-office system to support our capital markets business, which we
completed in the third quarter of 2007.
Cash Award Program
- As part of our spin-off from U.S. Bancorp in 2003, we established a cash
award program pursuant to which we granted cash awards to a broad-based group of our employees. The
award program was designed to aid in retention of employees and to compensate for the value of U.S.
Bancorp stock options and restricted stock lost by our employees as a result of the spin-off. The
cash awards are being expensed over a four-year period ending December 31, 2007. For the three
months ended September 30, 2007, cash awards expense remained flat at $0.5 million, compared with
the prior-year period. We anticipate incurring approximately $0.5 million of cash award expense
within continuing operations in the fourth quarter of 2007.
Other Operating Expenses
- Other operating expenses include insurance costs, license and
registration fees, expenses related to our charitable giving program, amortization of intangible
assets and litigation-related expenses, which consist of the amounts we reserve and/or pay out
related to legal and regulatory matters. Other operating expenses decreased to $1.1 million in the
third quarter
of 2007, compared with $2.9 million in third quarter of 2006, primarily due to a decline in
litigation-related expenses. We anticipate other operating expenses will increase in future
periods as a result of amortization of intangible assets acquired in the FAMCO acquisition.
19
Income Taxes
- For the three months ended September 30, 2007, our provision for income taxes
from continuing operations was $1.2 million, equating to an effective tax rate of 20.3 percent. For
the three months ended September 30, 2006, income taxes from continuing operations were $5.5
million, equating to an effective tax rate of 36.7 percent. The unusually low 20.3 percent
effective tax rate for the third quarter of 2007 was a result of an increase in the expected ratio
of municipal interest income, which is non-taxable, to taxable income and the sharp decline in
pre-tax income. This tax rate is not representative of our annual effective tax rate, which was
31.7 percent for the nine months ended September 30, 2007.
NET REVENUES FROM CONTINUING OPERATIONS (DETAIL)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2007 vs.
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
18,211
|
|
|
$
|
31,417
|
|
|
|
(42.0
|
)%
|
Debt
|
|
|
18,211
|
|
|
|
19,395
|
|
|
|
(6.1
|
)
|
Advisory services
|
|
|
16,120
|
|
|
|
21,948
|
|
|
|
(26.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total investment banking
|
|
|
52,542
|
|
|
|
72,760
|
|
|
|
(27.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional sales and trading
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
25,192
|
|
|
|
27,946
|
|
|
|
(9.9
|
)
|
Fixed income
|
|
|
13,649
|
|
|
|
15,814
|
|
|
|
(13.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total institutional sales and trading
|
|
|
38,841
|
|
|
|
43,760
|
|
|
|
(11.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management
|
|
|
903
|
|
|
|
2
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
608
|
|
|
|
(415
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
92,894
|
|
|
$
|
116,107
|
|
|
|
(20.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking revenues comprise all the revenues generated through financing and advisory
services activities including derivative activities that relate to debt financing. To assess the
profitability of investment banking, we aggregate investment banking fees with the net interest
income or expense associated with these activities.
For the three months ended September 30, 2007, investment banking revenues decreased 27.8
percent to $52.5 million, compared with $72.8 million in the corresponding period in the prior
year. The adverse market conditions in the third quarter significantly impacted investment banking
revenues, particularly within the equity finance business. Equity financing revenues declined 42.0
percent to $18.2 million, compared with $31.4 million in the corresponding period in the prior
year. The decrease was due to a sharp decline in number of completed public offerings in the
healthcare and consumer sectors and a decline in the average revenues per transaction. In the
third quarter of 2007, we completed 14 equity financings, raising $2.4 billion in capital, compared
with 20 equity financings, raising $2.0 billion in capital, in the prior-year period. In the third
quarter of 2007, debt financing revenues decreased 6.1
percent to $18.2 million due to a decline in taxable debt financing revenues. Public finance
revenues were consistent with the prior year period as higher revenues per transaction offset a
reduction in the number of underwritings. We were the sole underwriter of 91 municipal issues with
a par value of $1.3 billion during the third quarter of 2007, compared with 111 municipal issues
with a par value of $1.5 billion in the prior-year period. Advisory services revenues decreased
26.6 percent to $16.1 million in the third quarter of 2007. This decrease in revenues was due to
lower average revenues per transaction as we completed 12 mergers and acquisitions transactions
during the third quarter of 2007, compared with 9 mergers and acquisitions transactions in the
prior-year period.
20
Institutional sales and trading revenues comprise all the revenues generated through trading
activities, which consist primarily of facilitating customer trades. To assess the profitability of
institutional sales and trading activities, we aggregate institutional brokerage revenues with the
net interest income or expense associated with financing, economically hedging and holding long or
short inventory positions. Our results may vary from quarter to quarter as a result of changes in
trading margins, trading gains and losses, net interest spreads, trading volumes and the timing of
transactions based on market opportunities. Increased price transparency in the fixed income
market, pressure from institutional clients in the equity market to reduce commissions and the use
of alternative trading systems in the equity market have put pressure on trading margins. We expect
this pressure to continue.
For the three months ended September 30, 2007, institutional sales and trading revenues were
$38.8 million, a decline of 11.2 percent compared with the prior-year period. Equity institutional
sales and trading revenue decreased 9.9 percent, to $25.2 million due to higher trading losses
resulting from greater market volatility during the quarter. Fixed income institutional sales and
trading revenues decreased 13.7 percent to $13.6 million in the third quarter of 2007. This decline
was a result of increased trading losses in high yield and structured products and taxable
products.
Asset management fees include FAMCO asset management advisory services and management fees
from our private equity funds. In the third quarter of 2007, asset management fees were $0.9
million due primarily to the acquisition of FAMCO, which was completed in September 2007.
Other income/loss includes gains and losses from our investments in private equity and venture
capital funds as well as other firm investments. In addition, other income/loss included interest
expense from our subordinated debt prior to its repayment in August 2006. In the third quarter of
2007, other income totaled $0.6 million, compared with a loss of $0.4 million in the three months
ended September 30, 2006. In the third quarter of 2006, we repaid $180 million in subordinated
debt, resulting in lower on-going interest expense.
DISCONTINUED OPERATIONS
Discontinued operations include the operating results of our PCS business and restructuring
costs. The sale of the PCS branch network to UBS closed on August 11, 2006.
Our PCS retail brokerage business provided financial advice and a wide range of financial
products and services to individual investors through a network of approximately 90 branch offices.
Revenues were generated primarily through the receipt of commissions earned on equity and fixed
income transactions and for distribution of mutual funds and annuities, fees earned on fee-based
client accounts and net interest from customers margin loan balances.
In the third quarter of 2007, discontinued operations recorded a net loss of $0.5 million that
included costs related to decommissioning a retail-oriented back-office system, PCS
litigation-related expenses and restructuring charges. The decommissioning of our retail-oriented
back-office system was completed in the third quarter of 2007 and we do not expect to incur any
additional costs related to this system. We may incur discontinued operations expense or income in
future periods related to changes in litigation reserve estimates for retained PCS litigation
matters and for changes in estimates to occupancy and severance restructuring charges if the facts
that support our estimates change. See Note 4 and Note 13 to our unaudited consolidated financial
statements for further discussion of our discontinued operations and restructuring activities.
21
FINANCIAL SUMMARY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
The following table provides a summary of the results of our operations and the results of our
operations as a percentage of net revenues for the nine months ended September 30, 2007 and
September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as a Percentage of Net
|
|
|
|
Results of Operations
|
|
|
Revenues
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
v2006
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
208,881
|
|
|
$
|
205,346
|
|
|
|
1.7
|
%
|
|
|
59.3
|
%
|
|
|
57.6
|
%
|
Institutional brokerage
|
|
|
111,451
|
|
|
|
119,436
|
|
|
|
(6.7
|
)
|
|
|
31.6
|
|
|
|
33.5
|
|
Interest
|
|
|
46,229
|
|
|
|
44,869
|
|
|
|
3.0
|
|
|
|
13.1
|
|
|
|
12.6
|
|
Asset management
|
|
|
1,102
|
|
|
|
17
|
|
|
|
N/M
|
|
|
|
0.3
|
|
|
|
0.0
|
|
Other income
|
|
|
1,523
|
|
|
|
12,434
|
|
|
|
(87.8
|
)
|
|
|
0.5
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
369,186
|
|
|
|
382,102
|
|
|
|
(3.4
|
)
|
|
|
104.8
|
|
|
|
107.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
16,766
|
|
|
|
25,786
|
|
|
|
(35.0
|
)
|
|
|
4.8
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
352,420
|
|
|
|
356,316
|
|
|
|
(1.1
|
)
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
206,166
|
|
|
|
202,656
|
|
|
|
1.7
|
|
|
|
58.5
|
|
|
|
56.9
|
|
Occupancy and equipment
|
|
|
23,772
|
|
|
|
21,705
|
|
|
|
9.5
|
|
|
|
6.8
|
|
|
|
6.1
|
|
Communications
|
|
|
18,296
|
|
|
|
16,737
|
|
|
|
9.3
|
|
|
|
5.2
|
|
|
|
4.7
|
|
Floor brokerage and clearance
|
|
|
11,255
|
|
|
|
9,807
|
|
|
|
14.8
|
|
|
|
3.2
|
|
|
|
2.7
|
|
Marketing and business development
|
|
|
18,125
|
|
|
|
17,121
|
|
|
|
5.9
|
|
|
|
5.1
|
|
|
|
4.8
|
|
Outside services
|
|
|
24,573
|
|
|
|
19,472
|
|
|
|
26.2
|
|
|
|
7.0
|
|
|
|
5.5
|
|
Cash award program
|
|
|
1,196
|
|
|
|
2,673
|
|
|
|
(55.3
|
)
|
|
|
0.3
|
|
|
|
0.7
|
|
Other operating expenses
|
|
|
5,268
|
|
|
|
10,252
|
|
|
|
(48.6
|
)
|
|
|
1.5
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
308,651
|
|
|
|
300,423
|
|
|
|
2.7
|
|
|
|
87.6
|
|
|
|
84.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before tax expense
|
|
|
43,769
|
|
|
|
55,893
|
|
|
|
(21.7
|
)
|
|
|
12.4
|
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
13,858
|
|
|
|
19,730
|
|
|
|
(29.8
|
)
|
|
|
3.9
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
29,911
|
|
|
|
36,163
|
|
|
|
(17.3
|
)
|
|
|
8.5
|
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from discontinued
operations, net of tax
|
|
|
(2,811
|
)
|
|
|
178,444
|
|
|
|
N/M
|
|
|
|
(0.8
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27,100
|
|
|
$
|
214,607
|
|
|
|
(87.4
|
)%
|
|
|
7.7
|
%
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Except as discussed below, the description of non-interest expenses from continuing
operations, net revenues from continuing operations and discontinued operations as well as the
underlying reasons for variances to prior year are substantially the same as the comparative
quarterly discussion, and the statements in the foregoing discussion also apply.
22
For the nine months ended September 30, 2007, net income, which includes both continuing and
discontinued operations, totaled $27.1 million, compared with $214.6 million from the year-ago
period. The nine months ended September 30, 2006 included a gain of $169.1 million after tax and
net of restructuring and transaction costs from the sale of our PCS branch network to UBS. Net
revenues from continuing operations decreased slightly to $352.4 million for the nine months ended
September 30, 2007, compared with the corresponding period in the prior year. Investment banking
revenues increased 1.7 percent to $208.9 million for the nine months ended September 30, 2007,
compared with revenues of $205.3 million in the prior-year period. This increase was a result of
higher equity and debt financing revenues, offset by a decline in advisory services revenues.
Institutional brokerage revenues decreased 6.7 percent over the prior-year period to $111.5 million
as a result of decreased equity commissions due to lower trading volumes. Net interest income for
the first nine months of 2007 increased to $29.5 million, up from $19.1 million for the first nine
months of 2006. This increase was primarily driven by significantly reduced borrowing needs
following the sale of our PCS branch network in August 2006. For the nine months ended September
30, 2007, asset management fees were $1.1 million, primarily as a result of the FAMCO acquisition
completed in September 2007. Other income for the nine months ended September 30, 2007 was $1.5
million, compared with $12.4 million for the corresponding period in the prior year. In the first
nine months of 2006, we recorded a $9.3 million gain related to our ownership of two seats on the
New York Stock Exchange, Inc. (NYSE), which were exchanged for cash and restricted shares of the
NYSE Group, Inc. Non-interest expenses increased to $308.7 million for the nine months ended
September 30, 2007, from $300.4 million for the nine months ended September 30, 2006. This increase
was attributable to increased benefits expenses and increased outside services expense due to costs
related to implementation of a new back-office system to support our capital markets business.
NON-INTEREST EXPENSES FROM CONTINUING OPERATIONS
Compensation and Benefits
- For the nine months ended September 30, 2007, compensation and
benefits expenses increased to $206.2 million, from $202.7 million in the corresponding period in
2006. Compensation and benefits expenses as a percentage of net revenues increased to 58.5 percent
for the nine months ended September 30, 2007, compared with 56.9 percent for the corresponding
period in 2006. The $9.3 million gain related to our ownership of two seats on the NYSE lowered
our compensation ratio by 150 basis points for the nine months ended September 30, 2006. Excluding
this gain, our compensation ratio for the nine months ended September 30, 2006 was flat compared to
the nine months ended September 30, 2007.
Occupancy and Equipment
For the nine months ended September 30, 2007, occupancy and
equipment expenses were $23.8 million, compared with $21.7 million in the prior year period, an
increase of 9.5 percent. In the second quarter of 2007, we incurred costs of $0.9 million to
relocate office space in New York City. We also have incurred increased base rent costs
associated with new and existing locations during 2007.
Floor Brokerage and Clearance
- For the nine months ended September 30, 2007, floor brokerage
and clearance expenses were $11.3 million, compared with $9.8 million for the corresponding period
in 2006. This increase was attributable to higher expenses associated with accessing electronic
communication networks as we increased after-market support of deal-related stocks.
Income Taxes
- For the nine months ended September 30, 2007, our provision for income taxes
from continuing operations was $13.9 million, equating to an effective tax rate of 31.7 percent.
For the nine months ended September 30, 2006, income taxes from continuing operations were $19.7
million, equating to an effective tax rate of 35.3 percent. The decreased effective tax rate for
the nine months ended September 30, 2007, was attributable to an increase in the ratio of
non-taxable municipal interest income to total taxable income.
23
NET REVENUES FROM CONTINUING OPERATIONS (DETAIL)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2007 vs.
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
98,996
|
|
|
$
|
91,171
|
|
|
|
8.6
|
%
|
Debt
|
|
|
63,513
|
|
|
|
56,120
|
|
|
|
13.2
|
|
Advisory services
|
|
|
52,702
|
|
|
|
62,473
|
|
|
|
(15.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total investment banking
|
|
|
215,211
|
|
|
|
209,764
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional sales and trading
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
85,049
|
|
|
|
90,907
|
|
|
|
(6.4
|
)
|
Fixed income
|
|
|
48,978
|
|
|
|
48,877
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Total institutional sales and trading
|
|
|
134,027
|
|
|
|
139,784
|
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management
|
|
|
1,102
|
|
|
|
17
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
2,080
|
|
|
|
6,751
|
|
|
|
(69.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
352,420
|
|
|
$
|
356,316
|
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2007, investment banking revenues increased 2.6
percent to $215.2 million, compared with $209.8 million in the prior-year period. Equity financing
revenues were $99.0 million, an increase of 8.6 percent, which was due to higher revenues per
transaction. During the nine months ended September 30, 2007, we completed 73 equity financings,
raising $10.5 billion in capital, compared with 74 equity offerings, raising $9.5 billion in
capital, during the nine months ended September 30, 2006. For the nine months ended September 30,
2007, debt financing revenues rose 13.2 percent to $63.5 million. This increase resulted from
higher public finance revenues due to increased average revenues per transaction. We were the sole
underwriter of 324 public finance issues with a par value of $5.1 billion in the first nine months
of 2007, compared with 329 public finance issues with a par value of $4.7 billion in the prior-year
period. Advisory services revenues decreased 15.6 percent to $52.7 million for the nine months
ended September 30, 2007 due to a decline in our domestic merger and acquisition revenues. We
completed 29 U.S. mergers and acquisitions transactions for the first nine months of 2007, compared
with 33 deals for the first nine months of 2006.
For the nine months ended September 30, 2007, institutional sales and trading revenues
declined 4.1 percent to $134.0 million, compared with the prior-year period. Equity institutional
sales and trading revenue decreased 6.4 percent to $85.0 million, due to lower volumes and lower
commission rates. Fixed income institutional sales and trading revenues were flat for the nine
months ended September 30, 2007, compared with the corresponding period in 2006.
DISCONTINUED OPERATIONS
For the nine months ended September 30, 2007, discontinued operations recorded a net loss of
$2.8 million. The underlying reasons for costs recorded to discontinued operations for the nine
months ended September 30, 2007 are substantially the same as those described in the discussion for
the three months ended September 30, 2007.
24
Recent Accounting Pronouncements
Recent accounting pronouncements are set forth in Note 3 to our unaudited consolidated
financial statements and are incorporated herein by reference.
Critical Accounting Policies
Our accounting and reporting policies comply with generally accepted accounting principles
(GAAP) and conform to practices within the securities industry. The preparation of financial
statements in compliance with GAAP and industry practices requires us to make estimates and
assumptions that could materially affect amounts reported in our consolidated financial statements.
Critical accounting policies are those policies that we believe to be the most important to the
portrayal of our financial condition and results of operations and that require us to make
estimates that are difficult, subjective or complex. Most accounting policies are not considered by
us to be critical accounting policies. Several factors are considered in determining whether or not
a policy is critical, including whether the estimates are significant to the consolidated financial
statements taken as a whole, the nature of the estimates, the ability to readily validate the
estimates with other information (e.g. third-party or independent sources), the sensitivity of the
estimates to changes in economic conditions and whether alternative accounting methods may be used
under GAAP.
For a full description of our significant accounting policies, see Note 2 to our consolidated
financial statements included in our Annual Report on Form 10-K for the year-ended December 31,
2006. We believe that of our significant accounting policies, the following are our critical
accounting policies.
VALUATION OF FINANCIAL INSTRUMENTS
Trading securities owned, trading securities owned and pledged as collateral, and trading
securities sold, but not yet purchased, on our consolidated statements of financial condition
consist of financial instruments recorded at fair value. Unrealized gains and losses related to
these financial instruments are reflected on our consolidated statements of operations.
The fair value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a forced or liquidation
sale. When available, we use observable market prices, observable market parameters, or broker or
dealer prices (bid and ask prices) to derive the fair value of the instrument. In the case of
financial instruments transacted on recognized exchanges, the observable market prices represent
quotations for completed transactions from the exchange on which the financial instrument is
principally traded. Bid prices represent the highest price a buyer is willing to pay for a
financial instrument at a particular time. Ask prices represent the lowest price a seller is
willing to accept for a financial instrument at a particular time.
A substantial percentage of the fair value of our trading securities owned, trading securities
owned and pledged as collateral, and trading securities sold, but not yet purchased, are based on
observable market prices, observable market parameters, or derived from broker or dealer prices.
The availability of observable market prices and pricing parameters can vary from product to
product. Where available, observable market prices and pricing or market parameters in a product
may be used to derive a price without requiring significant judgment. In certain markets,
observable market prices or market parameters are not available for all products, and fair value is
determined using techniques appropriate for each particular product. These techniques involve some
degree of judgment.
For investments in illiquid or privately held securities that do not have readily determinable
fair values, the determination of fair value requires us to estimate the value of the securities
using the best information available. Among the factors considered by us in determining the fair
value of financial instruments are the cost, terms and liquidity of the investment, the financial
condition and
operating results of the issuer, the quoted market price of publicly traded securities with
similar quality and yield, and other factors generally pertinent to the valuation of investments.
In instances where a security is subject to transfer restrictions, the value of the security is
based primarily on the quoted price of a similar security without restriction but may be reduced by
an amount estimated to reflect such restrictions. In addition, even where the value of a security
is derived from an independent source, certain assumptions may be required to determine the
securitys fair value. For instance, we assume that the size of positions in securities that we
hold would not be large enough to affect the quoted price of the securities if we sell them, and
that any such sale would happen in an orderly manner. The actual value realized upon disposition
could be different from the currently estimated fair value.
25
Fair values for derivative contracts represent amounts estimated to be received from or paid
to a third party in settlement of these instruments. These derivatives are valued using quoted
market prices when available or pricing models based on the net present value of estimated future
cash flows. Management deemed the net present value of estimated future cash flows model to be the
best estimate of fair value as most of our derivative products are interest rate products. The
valuation models used require inputs including contractual terms, market prices, yield curves,
credit curves and measures of volatility. The valuation models are monitored over the life of the
derivative product. If there are any changes in the underlying inputs, the model is updated for
those new inputs.
The following table presents the carrying value of our trading securities owned, trading
securities owned and pledged as collateral and trading securities sold, but not yet purchased for
which fair value is measured based on quoted prices or other independent sources versus those for
which fair value is determined by management.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
Trading
|
|
|
Securities Sold,
|
|
September 30, 2007
|
|
Securities Owned
|
|
|
But Not Yet
|
|
(Dollars in thousands)
|
|
or Pledged
|
|
|
Purchased
|
|
Fair value of securities excluding derivatives, based on quoted prices and independent sources
|
|
$
|
711,620
|
|
|
$
|
254,377
|
|
Fair value of securities excluding derivatives, as determined by management
|
|
|
9,311
|
|
|
|
|
|
Fair value of derivatives, as determined by management
|
|
|
32,228
|
|
|
|
7,101
|
|
|
|
|
|
|
|
|
|
|
$
|
753,159
|
|
|
$
|
261,478
|
|
|
|
|
|
|
|
|
Financial instruments carried at contract amounts that approximate fair value have short-term
maturities (one year or less), are repriced frequently or bear market interest rates and,
accordingly, are carried at amounts approximating fair value. Financial instruments carried at
contract amounts on our consolidated statements of financial condition include receivables from and
payables to brokers, dealers and clearing organizations, securities purchased under agreements to
resell, securities sold under agreements to repurchase, receivables from and payables to customers
and short-term financing.
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines
fair value, establishes a framework for measuring fair value and expands disclosures regarding fair
value measurements. SFAS 157 does not require any new fair value measurements, but its application
may, for some entities, change current practice. SFAS 157 is effective for fiscal years beginning
after November 15, 2007. We are currently evaluating the impact of SFAS 157 on our results of
operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure certain
financial assets and liabilities and other eligible items at fair value, which are not otherwise
currently allowed to be measured at fair value. Under SFAS 159, the decision to measure items at
fair value is made at specified election dates on an irrevocable instrument-by-instrument basis.
Entities electing the fair value option would be required to recognize changes in fair value in
earnings and to expense upfront costs and fees associated with the item for which the fair value
option is elected. Entities electing the fair value option are required to distinguish on the face
of the statement of financial position, the fair value of assets and liabilities for which the fair
value option has been elected and similar assets and liabilities measured using another measurement
attribute. If elected, SFAS 159 is effective as of the beginning of the first fiscal year that
begins after November 15, 2007, with earlier adoption permitted provided that the entity also early
adopts all of the requirements of SFAS 157. We are currently evaluating the impact of SFAS 159 on
our results of operations and financial condition.
GOODWILL AND INTANGIBLE ASSETS
We record all assets and liabilities acquired in purchase acquisitions, including goodwill and
other intangible assets, at fair value as required by Statement of Financial Accounting Standards
No. 141, Business Combinations. Determining the fair value of assets and liabilities acquired
requires certain management estimates. In September 2007, we recorded $33.4 million of goodwill
and $17.7 million of identifiable intangible assets related to the acquisition of FAMCO. At
September 30, 2007, we had goodwill of $264.9
million. Of this goodwill balance, $220.0 million is a result of the 1998 acquisition of our
predecessor, Piper Jaffray Companies Inc., and its subsidiaries by U.S. Bancorp. In conjunction
with the sale of our PCS branch network to UBS, we wrote-off $85.6 million of goodwill during the
third quarter of 2006.
Under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, we are required to perform impairment tests of our goodwill and indefinite-lived
intangible assets annually and more frequently in certain circumstances. We have elected to test
for goodwill impairment in the fourth quarter of each calendar year. The goodwill impairment test
is a two-step process, which requires management to make judgments in determining what assumptions
to use in the calculation. The first step of the process consists of estimating the fair value of
our two operating segments based on a discounted cash flow model using revenue and profit forecasts
and comparing those estimated fair values with carrying values, which includes the allocated
goodwill. If the
estimated fair value is less than the carrying values, a second step is performed
to compute the amount of the impairment by determining an implied fair value of goodwill. The
determination of a reporting units implied fair value of goodwill requires us to allocate the
estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any
unallocated fair value represents the implied fair value of goodwill, which is compared to its
corresponding carrying value. We completed our last goodwill impairment test as of October 31,
2006, and no impairment was identified.
26
As noted above, the initial recognition of goodwill and other intangible assets and the
subsequent impairment analysis requires management to make subjective judgments concerning
estimates of how the acquired assets or businesses will perform in the future using valuation
methods including discounted cash flow analysis. Events and factors that may significantly affect
the estimates include, among others, competitive forces and changes in revenue growth trends, cost
structures, technology, discount rates and market conditions. Additionally, estimated cash flows
may extend beyond ten years and, by their nature, are difficult to determine over an extended time
period. To assess the reasonableness of cash flow estimates and validate assumptions used in our
estimates, we review historical performance of the underlying assets or similar assets.
In assessing the fair value of our operating segments, the volatile nature of the securities
markets and our industry requires us to consider the business and market cycle and assess the stage
of the cycle in estimating the timing and extent of future cash flows. In addition to estimating
the fair value of an operating segment based on discounted cash flows, we consider other
information to validate the reasonableness of our valuations, including public market comparables
and multiples of recent mergers and acquisitions of similar businesses. Valuation multiples may be
based on revenues, price-to-earnings and tangible capital ratios of comparable public companies and
business segments. These multiples may be adjusted to consider competitive differences including
size, operating leverage and other factors. If during any future period it is determined that an
impairment exists, the results of operations in that period could be materially adversely affected.
STOCK-BASED COMPENSATION
As part of our compensation to employees and directors, we use stock-based compensation,
consisting of stock options and restricted stock. Prior to January 1, 2006, we elected to account
for stock-based employee compensation on a prospective basis under the fair value method, as
prescribed by Statement of Financial Accounting Standards No. 123, Accounting and Disclosure of
Stock-Based Compensation, and as amended by Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure. The fair value method
required stock based compensation to be expensed in the consolidated statement of operations at
their fair value.
Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, (SFAS 123(R)), using the modified prospective
transition method. SFAS 123(R) requires all stock-based compensation to be expensed in the
consolidated statement of operations at fair value, net of estimated forfeitures. Because we had
historically expensed all equity awards based on the fair value method, net of estimated
forfeitures, SFAS 123(R) did not have a material effect on our measurement or recognition methods
for stock-based compensation.
Compensation paid to employees in the form of stock options or restricted stock is generally
amortized on a straight-line basis over the required service period of the award, which is
typically three years, and is included in our results of operations as compensation expense, net of
estimated forfeitures. The majority of our restricted stock grants provide for continued vesting
after termination, provided the employee does not violate certain post-termination restrictions as
set forth in the award agreements. We consider the required service period to be the greater of the
vesting period or the post-termination restricted period. We believe that our non-competition
restrictions meet the SFAS 123(R) definition of a substantive service requirement.
Stock-based compensation granted to our non-employee directors is in the form of common shares
of Piper Jaffray Companies stock and/or stock options. Stock-based compensation paid to directors is immediately vested
(i.e., there is no continuing service requirement) and is included in our results of operations as
outside services expense as of the date of grant.
In determining the estimated fair value of stock options, we use the Black-Scholes
option-pricing model. This model requires management to exercise judgment with respect to certain
assumptions, including the expected dividend yield, the expected volatility, and the expected life
of the options. The expected dividend yield assumption is derived from the assumed dividend payout
over the expected life of the option. The expected volatility assumption for grants subsequent to
December 31, 2006 was derived from a combination of our historical data and industry comparisons,
as we had limited information on which to base our volatility estimates because we have only been a
public company since the beginning of 2004. The expected volatility assumption for grants prior to
December 31, 2006 were based solely on industry comparisons. The expected life of options
assumption is derived from the average of the following two factors: industry comparisons and the
guidance provided by the SEC in Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 allowed the
use of an acceptable methodology under which we can take the midpoint of the vesting date and the
full contractual term. We believe our approach for calculating an expected life to be an
appropriate method in light of the limited historical data regarding employee exercise behavior or
employee post-termination behavior. Additional information regarding assumptions used in the
Black-Scholes pricing model can be found in Note 16 to our unaudited consolidated financial
statements.
27
CONTINGENCIES
We are involved in various pending and potential legal proceedings related to our business,
including litigation, arbitration and regulatory proceedings. Some of these matters involve claims
for substantial amounts, including claims for punitive and other special damages. We have, after
consultation with outside legal counsel and consideration of facts currently known by management,
recorded estimated losses in accordance with Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies, to the extent that claims are probable of loss and the amount of
the loss can be reasonably estimated. The determination of these reserve amounts requires
significant judgment on the part of management. In making these determinations, we consider many
factors, including, but not limited to, the loss and damages sought by the plaintiff or claimant,
the basis and validity of the claim, the likelihood of a successful defense against the claim, and
the potential for, and magnitude of, damages or settlements from such pending and potential
litigation and arbitration proceedings, and fines and penalties or orders from regulatory agencies.
Under the terms of our separation and distribution agreement with U.S. Bancorp and ancillary
agreements entered into in connection with the spin-off in December 2003, we generally are
responsible for all liabilities relating to our business, including those liabilities relating to
our business while it was operated as a segment of U.S. Bancorp under the supervision of its
management and board of directors and while our employees were employees of U.S. Bancorp servicing
our business. Similarly, U.S. Bancorp generally is responsible for all liabilities relating to the
businesses U.S. Bancorp retained. However, in addition to our established reserves, U.S. Bancorp
agreed to indemnify us in an amount up to $17.5 million for losses that result from certain
matters, primarily third-party claims relating to research analyst independence. U.S. Bancorp has
the right to terminate this indemnification obligation in the event of a change in control of our
company. As of September 30, 2007, approximately $13.2 million of the indemnification remained
available.
As part of the asset purchase agreement for the sale of our PCS branch network to UBS that
closed in August 2006, UBS agreed to assume certain liabilities of the PCS business, including
certain liabilities and obligations arising from litigation, arbitration, customer complaints and
other claims related to the PCS business. In certain cases we have agreed to indemnify UBS for
litigation matters after UBS has incurred costs of $6.0 million related to these matters. In
addition, we have retained liabilities arising from regulatory matters and certain PCS litigation
arising prior to the sale.
Subject to the foregoing, we believe, based on our current knowledge, after appropriate
consultation with outside legal counsel and after taking into account our established reserves, the
U.S. Bancorp indemnity agreement and the assumption by UBS of certain liabilities of the PCS
business, that pending litigation, arbitration and regulatory proceedings will be resolved with no
material adverse effect on our financial condition. However, if, during any period, a potential
adverse contingency should become probable or resolved for an amount in excess of the established
reserves and indemnification and assumption obligations, the results of operations in that period
could be materially adversely affected.
Liquidity and Capital Resources
Liquidity is of critical importance to us given the nature of our business. Insufficient
liquidity resulting from adverse circumstances contributes to, and may be the cause of, financial
institution failure. Accordingly, we regularly monitor our liquidity position, including our cash
and net capital positions, and we have implemented a liquidity strategy designed to enable our
business to continue to operate even under adverse circumstances, although there can be no assurance that
our strategy will be successful under all circumstances.
We have a liquid balance sheet. Most of our assets consist of cash and assets readily
convertible into cash. Securities inventories are stated at fair value and are generally readily
marketable in most market conditions. Receivables and payables with customers and brokers and
dealers usually settle within a few days. As part of our liquidity strategy, we emphasize
diversification of funding sources. We utilize a mix of funding sources and, to the extent
possible, maximize our lower-cost financing alternatives. Our assets are financed by our cash flows
from operations, equity capital, proceeds from securities sold under agreements to repurchase and
bank lines of credit. The fluctuations in cash flows from financing activities are directly related
to daily operating activities from our various businesses.
28
A significant component of our employees compensation is paid in an annual discretionary
bonus. The timing of these bonus payments, which generally are paid in February, has a significant
impact on our cash position and liquidity when paid.
We currently do not pay cash dividends on our common stock.
In August 2006, we sold our PCS branch network to UBS for approximately $750 million. Most of
these proceeds have been either redeployed to our shareholders or invested back into our business.
The following summarizes the use of these proceeds: approximately $100 million was used to repay
stock loan liabilities related to financing the PCS customer margin accounts receivable, $180
million was utilized to extinguish our subordinated debt, $180 million was utilized to repurchase
our outstanding common stock, $160 million was paid in corporate and state income taxes on the PCS
sale gain, $51 million was used in September 2007 to purchase FAMCO and $47 million was used in
October 2007 to purchase Goldbond.
As
of September 30, 2007, our balance sheet is not leveraged with
any long-term debt. We anticipate adding long-term debt financing to facilitate certain growth initiatives.
FUNDING SOURCES
We have available discretionary short-term financing on both a secured and unsecured basis.
Secured financing is obtained through the use of repurchase agreements and secured bank loans.
Repurchase agreements and bank loans are typically collateralized by the firms securities
inventory. Short-term funding is generally obtained at rates based upon the federal funds rate.
To finance customer receivables we utilized an average of $5 million in short-term bank loans
and an average of $0.4 million in securities lending arrangements in the third quarter of 2007.
This compares to an average of $4 million in short-term bank loans and an average of $81 million in
securities lending arrangements in the third quarter of 2006. Average net repurchase agreements
(excluding economic hedges) of $83 million and $55 million in the third quarter of 2007 and 2006,
respectively, were primarily used to finance inventory. Growth in our securities inventory is
generally financed through repurchase agreements. Bank financing supplements repurchase agreement
financing as necessary. On September 30, 2007, we had no outstanding short-term bank financing.
As of September 30, 2007, we had uncommitted credit agreements with banks totaling $677
million, comprised of $557 million in discretionary secured lines and $120 million in discretionary
unsecured lines. We have been able to obtain necessary short-term borrowings in the past and
believe we will continue to be able to do so in the future. We also have established arrangements
to obtain financing using as collateral our securities held by our clearing bank or by another
broker dealer at the end of each business day.
CONTRACTUAL OBLIGATIONS
Our contractual obligations have not materially changed from those reported in our Annual
Report to Shareholders on Form 10-K for the year ended December 31, 2006.
CAPITAL REQUIREMENTS
As a registered broker dealer and member firm of the Financial Industry Regulatory Authority
(FINRA), our broker dealer subsidiary is subject to the uniform net capital rule of the SEC and
the net capital rule of the NYSE. We have elected to use the alternative method permitted by the
uniform net capital rule, which requires that we maintain minimum net capital of the greater of
$1.0 million or 2 percent of aggregate debit balances arising from customer transactions, as this
is defined in the rule. The NYSE may prohibit a member firm from expanding its business or paying
dividends if resulting net capital would be less than 5 percent of aggregate debit balances. Advances to affiliates, repayment of subordinated liabilities,
dividend payments and other equity withdrawals are subject to certain notification and other
provisions of the uniform net capital rule and the net capital rule of the NYSE. We expect that
these provisions will not impact our ability to meet current and future obligations. In addition,
we are subject to certain notification requirements related to withdrawals of excess net capital
from our broker dealer subsidiary. Piper Jaffray Ltd., our registered United Kingdom broker dealer
subsidiary, is subject to the capital requirements of the U.K. Financial Services Authority.
At September 30, 2007, net capital under the SECs Uniform Net Capital Rule was $240.8 million
and $238.4 million in excess of the minimum required net capital.
29
Off-Balance Sheet Arrangements
We enter into various types of off-balance sheet arrangements in the ordinary course of
business. We hold retained interests in non-consolidated entities, incur obligations to commit
capital to non-consolidated entities, enter into derivative transactions, enter into non-derivative
guarantees, commit to short-term bridge loan financing for our clients, make commitments to
underwrite corporate debt and enter into other off-balance sheet arrangements.
We enter into arrangements with special-purpose entities (SPEs), also known as variable
interest entities. SPEs are corporations, trusts or partnerships that are established for a limited
purpose. SPEs, by their nature, generally are not controlled by their equity owners, as the
establishing documents govern all material decisions. Our primary involvement with SPEs relates to
securitization transactions related to our tender option bond program in which highly rated fixed
rate municipal bonds are sold to an SPE. We follow Statement of Financial Accounting Standards No.
140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
a Replacement of FASB Statement No. 125, (SFAS 140), to account for securitizations and other
transfers of financial assets. Therefore, we derecognize financial assets transferred in
securitizations provided that such transfer meets all of the SFAS 140 criteria. See Note 7,
Securitizations, in the notes to our unaudited consolidated financial statements for a complete
discussion of our securitization activities.
We have investments in various entities, typically partnerships or limited liability
companies, established for the purpose of investing in emerging growth companies or other private
or public equity. We commit capital or act as the managing partner or member of these entities.
These entities are reviewed under variable interest entity and voting interest entity standards. If
we determine that an entity should not be consolidated, we record these investments on the equity
method of accounting. The lower of cost or market method of accounting is applied to investments
where we do not have the ability to exercise significant influence over the operations of an
entity. For a complete discussion of our activities related to these types of partnerships, see
Note 7, Variable Interest Entities, to our consolidated financial statements included in our
Annual Report to Shareholders on Form 10-K for the year ended December 31, 2006.
We enter into derivative contracts in a principal capacity as a dealer to satisfy the
financial needs of clients. We also use derivative products to manage the interest rate and market
value risks associated with our security positions. In addition, we enter into loan swap agreements
to receive the total return of certain loan assets without transferring actual ownership of the
underlying loan to us. For a complete discussion of our activities related to derivative products,
see Note 6, Derivatives, in the notes to our unaudited consolidated financial statements.
Our other types of off-balance-sheet arrangements include contractual commitments
and guarantees. For a discussion of our activities related to these off-balance sheet
arrangements, see Note 15, Contingencies, Commitments and Guarantees, to our consolidated
financial statements included in our Annual Report to Shareholders on Form 10-K for the year ended
December 31, 2006.
Enterprise Risk Management
Risk is an inherent part of our business. In the course of conducting business operations, we
are exposed to a variety of risks. Market risk, credit risk, liquidity risk, operational risk, and
legal, regulatory and compliance risk are the principal risks we face in operating our business. We
seek to identify, assess and monitor each risk in accordance with defined policies and procedures.
The extent to which we properly identify and effectively manage each of these risks is critical to
our financial condition and profitability. For a full description of our risk management framework,
see Managements Discussion and Analysis of Financial Condition and Results of Operations included
in our Annual Report on Form 10-K for the year-ended December 31, 2006.
VALUE-AT-RISK
Value-at-Risk (VaR) is the potential loss in value of our trading positions due to adverse
market movements over a defined time horizon with a specified confidence level. We use a VaR model
because it provides a common metric for assessing market risk across business lines and products.
The modeling of the market risk characteristics of our trading positions involves a number of
assumptions and approximations. While we believe that these assumptions and approximations are reasonable,
different assumptions and approximations could produce materially different VaR estimates.
30
We perform a daily historical simulated VaR analysis on substantially all of our trading
positions, including fixed income, equities, convertible bonds and all associated economic hedges.
This analysis includes empirical VaR and simulated VaR as described below. Consistent with industry
practice, when calculating VaR we use a 95 percent confidence level and a one-day time horizon for
calculating both empirical and simulated VaR. This means, that over time, there is a 1 in 20 chance
that daily trading net revenues will fall below the expected daily trading net revenues by an
amount at least as large as the reported VaR. There can be no assurance that actual losses
occurring on any given day arising from changes in market conditions will not exceed the VaR
amounts shown below or that such losses will not occur more than once in a 20-day trading period.
Changes in VaR between reporting periods are generally due to changes in levels of risk exposure,
volatilities and/or correlations among asset classes. We anticipate our aggregate VaR may increase
in future periods as we commit more of our own capital to proprietary investments.
We report an empirical VaR based on net realized trading revenue volatility. Empirical VaR
presents an inclusive measure of our historical risk exposure, as it incorporates virtually all
trading activities and types of risk including market, credit, liquidity and
operational risk. The exhibit below presents VaR using the past 250 days of net trading
revenue.
The following table quantifies the empirical VaR for each component of market risk for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
At December 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
Interest Rate Risk
|
|
$
|
609
|
|
|
$
|
281
|
|
Equity Price Risk
|
|
|
371
|
|
|
|
261
|
|
|
|
|
|
|
|
|
Aggregate Undiversified Risk
|
|
|
980
|
|
|
|
542
|
|
Diversification Benefit
|
|
|
(221
|
)
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
Aggregate Diversified Value-at-Risk
|
|
$
|
759
|
|
|
$
|
430
|
|
The table below illustrates the daily high, low and average empirical VaR calculated for each
component of market risk during the nine months ended September 30, 2007 and the year ended
December 31, 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
High
|
|
Low
|
|
Average
|
Interest Rate Risk
|
|
$
|
609
|
|
|
$
|
354
|
|
|
$
|
439
|
|
Equity Price Risk
|
|
|
372
|
|
|
|
257
|
|
|
|
296
|
|
Aggregate Undiversified Risk
|
|
|
981
|
|
|
|
623
|
|
|
|
735
|
|
Aggregate Diversified Value-at-Risk
|
|
|
759
|
|
|
|
411
|
|
|
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
High
|
|
Low
|
|
Average
|
Interest Rate Risk
|
|
$
|
355
|
|
|
$
|
262
|
|
|
$
|
308
|
|
Equity Price Risk
|
|
|
346
|
|
|
|
254
|
|
|
|
290
|
|
Aggregate Undiversified Risk
|
|
|
679
|
|
|
|
521
|
|
|
|
598
|
|
Aggregate Diversified Value-at-Risk
|
|
|
541
|
|
|
|
404
|
|
|
|
474
|
|
31
We use simulated VaR for managing risk on a daily basis. Simulated VaR involves constructing a
distribution of hypothetical daily changes in the value of our positions based on market risk
factors embedded in the current portfolio and historical observations of daily changes in these
factors. These models have inherent limitations, including reliance on historical data to predict
future market risk and the parameters established in creating the models that limit quantitative
risk information outputs. Different VaR methodologies and distribution assumptions used in the
models could produce materially different VaR numbers.
The following table quantifies the simulated VaR for each component of market risk for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
At December 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
Interest Rate Risk
|
|
$
|
908
|
|
|
$
|
574
|
|
Equity Price Risk
|
|
|
308
|
|
|
|
177
|
|
|
|
|
|
|
|
|
Aggregate Undiversified Risk
|
|
|
1,216
|
|
|
|
751
|
|
Diversification Benefit
|
|
|
(257
|
)
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
Aggregate Diversified Value-at-Risk
|
|
$
|
959
|
|
|
$
|
601
|
|
Supplementary measures used to monitor and manage market risk exposure include net market
position, duration exposure, option sensitivities, and inventory turnover. All metrics are
aggregated by asset concentration and are used for monitoring limits and exception approvals.
We anticipate our aggregate VaR may increase in future periods as we commit more of our own
capital to proprietary investments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption Enterprise Risk Management in Item 2, Managements
Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-Q is
incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our principal executive officer and principal financial
officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934). Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange Commission rules and
forms and (b) accumulated and communicated to our management, including our principal executive
officer and principal financial officer to allow timely decisions regarding disclosure.
During the third quarter of fiscal 2007, we decommissioned a retail-oriented back office
system and completed the conversion to a new back-office system. Our back-office system is
responsible for the execution, comparison and settlement of securities transactions, and as a
result, it has a material impact on our operations and our ability to properly process and record
financial information. Implementation of this system required us to revise certain key financial
statement controls. Except for the change relating to the conversion of our back-office system,
during the third quarter of our fiscal year ended December 31, 2007, there was no change in our
system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following supplements and amends our discussion set forth under Item 3 Legal Proceedings in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as updated by our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007.
Initial Public Offering Allocation Litigation
Plaintiffs petitioned the Second Circuit for rehearing and rehearing en banc of its decision. The
Second Circuit denied the petition for rehearing. Plaintiffs have filed amended complaints in the
class certification focus cases.
Initial Public Offering Fee Antitrust Litigation
The Second Circuit reversed and remanded the decision denying class certification.
ITEM 1A. RISK FACTORS
The discussion of our business and operations should be read together with the risk factors
contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006
filed with the SEC, as updated in our subsequent reports on Form 10-Q filed with the SEC. These
risk factors describe various risks and uncertainties to which we are or may become subject. These
risks and uncertainties have the potential to affect our business, financial condition, results of
operations, cash flows, strategies or prospects in a material and adverse manner.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below sets forth the information with respect to purchases made by or on behalf of
Piper Jaffray Companies or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the quarter
ended September 30, 2007.
In addition, a third-party trustee makes open-market purchases of our common stock from time
to time pursuant to the Piper Jaffray Companies Retirement Plan, under which participating
employees may allocate assets to a company stock fund.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Approximate Dollar Value
|
|
|
|
Total Number
|
|
|
|
|
|
|
Part of Publicly
|
|
|
of Shares that May Yet Be
|
|
|
|
of Shares
|
|
|
Average Price Paid
|
|
|
Announced Plans or
|
|
|
Purchased Under the Plans
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Programs
|
|
|
or Programs(1)
|
|
Month #1 (July 1,
2007 to July 31,
2007)
|
|
|
846,397
|
(2)
|
|
$
|
49.17
|
|
|
|
846,140
|
|
|
|
$28 million
|
|
Month #2 (August 1,
2007 to August 31,
2007)
|
|
|
586,792
|
(3)
|
|
$
|
48.45
|
|
|
|
585,650
|
|
|
|
$0
|
|
Month #3 (September
1, 2007 to
September 30, 2007)
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,433,189
|
|
|
$
|
48.87
|
|
|
|
1,431,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On August 14, 2006 we announced that our board of directors had authorized the repurchase of
up to $180 million of common shares over a period commencing with the closing of the sale of
our PCS branch network to UBS and ending on December 31, 2007. On August 8, 2007, we completed
the repurchase authorization.
|
|
(2)
|
|
Consists of 846,140 shares of common stock repurchased on the open market pursuant to a
10b5-1 plan established with an independent agent at an average price per share of $49.17, and
257 shares of common stock from recipients of restricted stock to pay taxes upon the vesting
of the restricted stock at an average price per share of $55.73.
|
|
(3)
|
|
Consists of 585,650 shares of common stock repurchased on the open market pursuant to a
10b5-1 plan established with an independent agent at an average price per share of $48.44, and
1,142 shares of common stock from recipients of restricted stock to pay taxes upon the vesting
of the restricted stock at an average price per share of $53.42.
|
33
ITEM 6. EXHIBITS
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Method of
|
Number
|
|
Description
|
|
Filing
|
2.1
|
|
Amendment to Agreement of Purchase and Sale dated September 14,
2007 among Piper Jaffray Companies, Piper Jaffray Investment
Management Inc. (formerly known as Piper Jaffray Newco Inc.), WG
CAR, LLC, Charles D. Walbrandt, Joseph E. Gallagher, Jr., Wiley D.
Angell, James J. Cunnane, Jr. and Mohammed Riad.
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
|
|
Filed herewith
|
|
|
|
|
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
|
|
Filed herewith
|
|
|
|
|
|
|
|
32.1
|
|
Certifications furnished pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
|
|
|
(1)
|
|
Incorporated herein by reference to Item 2.2 of the Companys Form 8-K, filed with the
Commission on September 14, 2007.
|
34
SIGNATURES
Pursuant to the requirements 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 on
November 9, 2007.
|
|
|
|
|
|
PIPER JAFFRAY COMPANIES
|
|
|
By
|
/s/ Andrew S. Duff
|
|
|
Its Chairman and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
By
|
/s/ Thomas P. Schnettler
|
|
|
Its Vice Chairman and Chief Financial Officer
|
|
|
|
|
35
Exhibit Index
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Method of
|
Number
|
|
Description
|
|
Filing
|
2.1
|
|
Amendment to Agreement of Purchase and Sale dated September 14, 2007 among
Piper Jaffray Companies, Piper Jaffray Investment Management Inc. (formerly
known as Piper Jaffray Newco Inc.), WG CAR, LLC, Charles D. Walbrandt,
Joseph E. Gallagher, Jr., Wiley D. Angell, James J. Cunnane, Jr. and
Mohammed Riad.
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
|
|
Filed herewith
|
|
|
|
|
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
|
|
Filed herewith
|
|
|
|
|
|
|
|
32.1
|
|
Certifications furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
|
|
|
(1)
|
|
Incorporated herein by reference to Item 2.2 of the Companys Form 8-K, filed with the
Commission on September 14, 2007.
|
36