TWPG Thomas Weisel Prtns Grp (MM)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

Commission file number: 000-51730

 

 

 

 

 

One Montgomery Street

San Francisco, California 94104

(415) 364-2500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o      No  þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes  o      No  þ

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K.   þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o      No  þ

 

The aggregate market value of the common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price of the registrants’ common stock on June 30, 2007 as reported on The NASDAQ Stock Market, Inc. was $368,909,788.

 

As of March 11, 2008 there were 32,419,246 shares of the registrant’s common stock outstanding, including 6,639,478 shares of TWP Acquisition Company (Canada), Inc., a wholly-owned subsidiary of the registrant. Each exchangeable share is exchangeable at any time into common stock of the registrant on a one-for-one basis, entitles the holder to dividend and other rights economically equivalent to those of the common stock, and through a voting trust, votes at meetings of stockholders of the registrant.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive Proxy Statement for the registrants’ Annual Meeting of Shareholders to be held on May 19, 2008 have been incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

TABLE OF CONTENTS

 

Special Note Regarding Forward-Looking Statements

 

We have made statements in this Annual Report on Form 10-K in Item 1 — “Business”, Item 1A — “Risk Factors”, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Annual Report on Form 10-K that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may”, “might”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “intend” or “continue”, the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include expectations as to our future financial performance, which in some cases may be based on our growth strategies and anticipated trends in our business. These statements are based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the numerous risks outlined in Part  I, Item 1A — “Risk Factors” in this Annual Report on Form 10-K.

 

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this filing to conform our prior statements to actual results or revised expectations.

 

Forward-looking statements include, but are not limited to, the following:

 

 

 

 

 

 

 

 

When we use the terms “Thomas Weisel Partners”, “we”, “us”, “our” and the “firm” we mean Thomas Weisel Partners Group, Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, as well as any predecessor entities, unless the context otherwise indicates.

 

securities. Within corporate finance, our capital markets group executes a variety of transactions, both public underwritten securities offerings and private offerings, assists clients with investor relations advice and introduces companies seeking to raise capital to investors that we believe will be supportive long-term investors. We assist the efforts of our corporate finance practice by providing aftermarket trading support for our corporate finance clients.

 

Strategic Advisory.   Our strategic advisory services include general strategic advice as well as transaction specific advice regarding mergers and acquisitions, divestitures, spin-offs, privatizations, special committee assignments and takeover defenses. Our specialized advisory professionals work in conjunction with the industry groups in advising our corporate clients. We seek to become a trusted advisor to the leading growth companies and to achieve a balance between our buy- and sell-side assignments. Our buy- and sell-side assignments are generated through our network of business relationships and our reputation for quality execution. Our strategic advisory services are also supported by our capital markets professionals, who provide assistance in acquisition financing and market intelligence in connection with mergers and acquisitions transactions.

 

Brokerage

 

We provide two principal categories of services within our brokerage operations: (i) institutional brokerage, which comprises institutional sales, sales trading, trading and special situations and (ii) private client services.

 

Institutional Brokerage.   We provide equity and convertible debt securities sales and trading services to more than 1,000 institutional investors, which includes investors acquired as a result of the Westwind acquisition.

 

Institutional Sales.   Our institutional sales professionals provide equity and convertible debt securities sales services to institutional investors and seek to develop strong relationships with the portfolio managers they serve by developing expertise and working closely with our equity research department. Our institutional sales professionals focus on growth companies identified by our equity research department and seek to develop a thorough understanding of those companies.

 

Sales Trading.   Our sales traders are experienced in the industry and are knowledgeable regarding both the markets for growth company securities and the institutional traders who buy and sell them. Through our sales trading professionals, we connect with many large and active buy-side trading desks in the United States, Canada and Europe.

 

Trading.   Our trading professionals provide support to our institutional clients in their pursuit of best execution, including facilitating block trades, providing electronic trading services, committing capital and otherwise providing liquidity. In addition, our convertible debt trading desk maintains securities inventory in connection with the execution of customer trades and to service the needs of clients, which include both investors and issuers of convertible debt securities, and in connection with certain proprietary trading activities.

 

Special Situations.   Our special situations group focuses on sourcing liquidity via overnight block trades, reverse inquiries and quiet accumulations for investment banking, institutional, private equity and high net worth clients in a confidential manner and in connection with these activities engages in certain proprietary trading activities.

 

Non-Deal Road Shows.   We work to leverage our industry knowledge and relationships by helping our institutional clients maintain and build corporate contacts through coordinating company and investor meetings that are unrelated to planned or pending investment banking transactions, commonly referred to as non-deal road shows. We believe these non-deal road shows underscore our high-service approach, promote our brokerage services and are valued by our institutional brokerage clients. Non-deal road shows present an environment for investors to further their understanding of companies in which they have an equity position or that may be attractive investment opportunities

and for company executives to broaden relationships with their investors and develop relationships with potential investors.

 

Private Client Services.   Our private client services department offers brokerage and advisory services to high-net-worth individuals and cash management services to corporate clients. Our private client professionals emphasize capital preservation and growth through prudent planning and work closely with clients to personalize solutions that address their individual needs.

 

Research

 

Equity Research.   Our research analysts perform independent research to help our clients understand the dynamics that drive the sectors and companies they cover. We seek to differentiate ourselves through originality of perspective, depth of insight and ability to uncover industry trends.

 

As of January 2, 2008, our equity research professionals covered 600 companies headquartered in 20 countries. Approximately 85% of the companies covered had market capitalizations of $10 billion or less.

 

 

Equity Research by Geographic Location

(as of January 2, 2008)

 

 

Equity Research by Market Capitalization

(as of January 2, 2008)

 

The sectors and industry components we focus on within equity research are set forth in the table and chart below:

 

 

Equity Research by Sector

(based on number of companies covered as of January 2, 2008)

 

 

Our research analysts analyze major trends, publish research on new areas of growth, provide fundamental, company-specific coverage and work with our institutional clients to identify and evaluate investment opportunities in publicly traded companies. They periodically publish comprehensive “white-paper” studies of an industry or a long-term investment theme, provide analysis and commentary on growth companies and publish detailed primary research on investment opportunities.

 

We annually host several conferences targeting growth companies and investors, including our Technology, Telecom and Internet Conference, Alternative Energy Conference, Healthcare Conference, Consumer Conference, Natural Resource Conference and Growth Stock Conference. We use these specialized events to showcase companies to institutional investors focused on investing in these growth sectors. We believe that our conferences differentiate us from smaller investment banks that may lack the relationships and resources to host broadly attended industry events.

 

Asset Management

 

Our asset management division is divided into three principal units: (i) private investment funds, (ii) public equity investment products and (iii) distribution management.

Private Investment Funds.   We are currently the general partner of four groups of investment funds:

 

 

In the future we expect to continue to sponsor and raise follow-on or new investment funds.

 

For certain of the funds for which we are a general partner we also act as manager of the fund and receive management fees generally based on committed capital or net assets of the partnerships.

 

Public Equity Investment Products.   We have a small/mid-cap growth public equity investment team based in Portland, Oregon. Between the hiring of this team in the fourth quarter of 2006 and December 31, 2007, we have provided approximately $20 million of seed investment capital for the products they manage. This public equity investment team manages these products through an asset management subsidiary and collectively is entitled to receive approximately 50% of the profits generated.

 

In addition, we have provided seed investment funds for an asset management product managed in our San Francisco office that is invested in long and short positions in publicly traded equities and related options and other derivative instruments.

 

In the future, we expect to continue to expand our asset management business and provide additional seed investment funds for new asset management products.

 

Distribution Management.   Distribution management actively manages securities distributions from private equity and venture capital funds. We seek to enhance the returns realized by distributions made from private equity and venture capital funds. The distribution management services we provide include dedicated portfolio management, execution, consolidated reporting and administrative support.

 

Employees

 

At December 31, 2007, we had approximately 650 employees. As a result of our acquisition of Westwind on January 2, 2008, our number of employees increased. At March 11, 2008, we had approximately 690 employees.

 

Our professionals draw upon their experience and market expertise to provide differentiated advice and customized services for our clients. We believe our professionals are attracted to our firm by our specialized market focus, entrepreneurial culture and commitment to our clients. None of our employees are represented by collective bargaining agreements. We have not experienced any work stoppages and believe our relationship with our employees to be good.

Competition

 

As an investment bank, all aspects of our business are intensely competitive. Our competitors are investment banking firms, other brokerage firms, merchant banks and financial advisory firms. We compete with some of our competitors nationally or regionally and with others on a product or service basis. Many of our competitors have substantially greater capital and resources than we do and offer a broader range of financial products. We believe that the principal factors affecting competition in our business include client relationships, reputation, the abilities of our professionals, market focus and the relative quality and price of our services and products.

 

In recent years there has been substantial consolidation and convergence among companies in the financial services industry. Legislative and regulatory changes in the United States have allowed commercial banks to enter businesses previously limited to investment banks, and a number of large commercial banks, insurance companies and other broad-based financial services firms have established or acquired broker-dealers or merged with other financial institutions. This trend toward consolidation and convergence has significantly increased the capital base and geographic reach of many of our competitors. Many of our competitors have the ability to offer a wider range of products and services that may enhance their competitive position. They may also have the ability to support investment banking and securities products and services with commercial banking, insurance and other financial services capabilities in an effort to gain market share, which could result in pricing pressure in our businesses.

 

We experience price competition with respect to our investment banking business. One trend, particularly in the equity underwriting business, toward multiple book runners and co-managers has increased the competitive pressure in the investment banking industry and may lead to lower average transaction fees.

 

We also experience intense price competition with respect to our brokerage business, including large block trades, spreads and trading commissions. The ability to execute trades electronically and through other alternative trading systems has increased the pricing pressure on trading commissions and spreads, as well as affected the volume of trades being executed through traditional full-service platforms. We believe that this trend toward alternative trading systems will continue.

 

In addition, we experience competition with respect to our asset management business both in the pursuit of investors for our investment funds and products and in the identification and completion of investments in attractive portfolio companies for our investment funds. We compete for individual and institutional clients on the basis of price, the range of products we offer, the quality of our services as well as on the basis of financial resources available to us and invested in our products. We may be competing with other investors and corporate buyers for the investments that we make.

 

We may experience competitive pressures in these and other areas in the future, including if some of our competitors seek to increase market share by reducing prices.

 

Competition is also intense for the recruitment and retention of qualified professionals. Our ability to continue to compete effectively in our businesses will depend upon our continued ability to attract new professionals and retain and motivate our existing professionals.

 

Regulation

 

Our business, as well as the financial services industry in general, is subject to extensive regulation in the United States and elsewhere. As a matter of public policy, regulatory bodies in the United States and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets. These regulatory bodies adopt and amend rules (which are subject to approval by government agencies) for regulating the industry and conduct periodic examinations of members. In the United States, the Securities and Exchange Commission (the “SEC”) is the federal agency responsible for the administration of the federal

securities laws. Thomas Weisel Partners LLC, our wholly-owned subsidiary, is registered as a broker-dealer with the SEC and FINRA, the Financial Industry Regulatory Authority (successor to the National Association of Securities Dealers, Inc., or the NASD) and in all 50 states and the District of Columbia, and Thomas Weisel Partners (USA) Inc. (formerly Westwind Partners (USA) Inc.), our wholly-owned indirect subsidiary, is registered as a broker-dealer with the SEC and FINRA and in 15 states. Accordingly, each of Thomas Weisel Partners LLC and Thomas Weisel Partners (USA) Inc. is subject to regulation and oversight by the SEC and FINRA, a self-regulatory organization which is itself subject to oversight by the SEC and which adopts and enforces rules governing the conduct, and examines the activities, of its member firms, including Thomas Weisel Partners LLC and Thomas Weisel Partners (USA) Inc. In 2007, Thomas Weisel Partners LLC opened and registered branch offices in London, England, Zurich, Switzerland, Chicago, Illinois, Palo Alto, California, Independence, Ohio and Baltimore, Maryland. In 2008, Thomas Weisel Partners LLC opened and registered branch offices in Denver, Colorado, and Toronto, Ontario, Canada, and deregistered its branch office in Mumbai, India. State securities regulators also have regulatory or oversight authority over Thomas Weisel Partners LLC and Thomas Weisel Partners (USA) Inc. In addition, Thomas Weisel Partners LLC and several other wholly-owned subsidiaries of ours, including Thomas Weisel Capital Management LLC, Thomas Weisel Asset Management LLC, TW Asset Management LLC and Thomas Weisel Global Growth Partners LLC, are registered as investment advisers with the SEC and subject to regulation and oversight by the SEC. Thomas Weisel Partners LLC is also a member of, and is subject to regulation by, the New York Stock Exchange (the “NYSE”), and the American Stock Exchange. Thomas Weisel Partners LLC is also registered as an introducing broker with the Commodity Futures Trading Commission and is a member of the National Futures Association. In Canada, investment dealers are also subject to regulation by self-regulatory organizations which are responsible for the enforcement of and conformity with securities legislation for their members and have been granted the powers to prescribe their own rules of conduct and financial requirements of members.

 

Thomas Weisel Partners Canada, Inc. (formerly Westwind Partners Inc.), our registered Canadian broker-dealer subsidiary, is subject to regulation by the securities commissions of Ontario, Quebec, British Columbia, Manitoba, Saskatchewan and Nova Scotia, is a member of the Investment Dealers Association of Canada and is a participating organization of the Toronto Stock Exchange, the TSX Venture Exchange and Canada’s New Stock Exchange. Thomas Weisel Partners Canada, Inc., is required by the Investment Dealers Association to belong to the Canadian Investors Protection Fund (“CIPF”), whose primary role is investor protection. The CIPF may charge member firms assessments based on revenues and risk premiums. The CIPF provides protection for securities and cash held in client accounts up to CDN$1,000,000 per client with separate coverage of CDN$1,000,000 for certain types of accounts. This coverage does not protect against market fluctuations. Each of Thomas Weisel Partners International Limited and Thomas Weisel Partners (UK) Limited, each a registered U.K. broker-dealer subsidiary, is subject to regulation by the Financial Securities Authority in the United Kingdom. Thomas Weisel Partners (UK) Limited is a member of the London Stock Exchange. Thomas Weisel International Private Limited, our Indian subsidiary, is subject to the oversight of Indian regulatory authorities. Our broker-dealer branch office in Zurich, Switzerland is subject to the oversight of the Swiss Federal Banking Commission (SFBC).

 

Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure, record-keeping, the financing of customers’ purchases and the conduct and qualifications of directors, officers and employees. In particular, as a registered broker-dealer and member of various self-regulatory organizations, each of Thomas Weisel Partners LLC and Thomas Weisel Partners (USA) Inc. is subject to the SEC’s uniform net capital rule, Rule 15c3-1. Rule 15c3-1 specifies the minimum level of net capital a broker-dealer must maintain and also requires that a significant part of its assets be kept in relatively liquid form. The SEC and various self-regulatory organizations impose rules that require notification when net capital falls below certain predefined criteria, that limit the ratio of subordinated debt to equity in the regulatory capital composition of a broker-dealer and that constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the SEC’s

uniform net capital rule imposes certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain withdrawals of capital. The SEC has adopted rule amendments that establish alternative net capital requirements for broker-dealers that are part of a consolidated supervised entity. As a condition to its use of the alternative method, a broker-dealer’s ultimate holding company and affiliates (referred to collectively as a consolidated supervised entity) must consent to group-wide supervision and examination by the SEC. If we elect to become subject to the SEC’s group-wide supervision, we will be required to report to the SEC computations of our capital adequacy. Thomas Weisel Partners Canada, Inc. is subject to the Minimum Capital Rule (By-Law No. 17 of the Investment Dealers Association) and the Early Warning System (By-Law No. 30 of the Investment Dealers Association). The Minimum Capital Rule requires that every member shall have and maintain at all times Risk Adjusted Capital greater than zero calculated in accordance with Form 1 (Joint Regulatory Financial Questionnaire and Report) and with such requirements as the Board of Directors of the Investment Dealers Association may from time to time prescribe. Insufficient Risk Adjusted Capital may result in suspension from membership of the Investment Dealers Association. The Early Warning System is designed to provide advance warning that a member firm is encountering financial difficulties. This system imposes certain sanctions on any member who is designated in Early Warning Level 1 or Level 2 according to its capital, profitability, liquidity position, frequency of designation or at the discretion of the Investment Dealers Association. Restrictions on business activities and capital transactions, early filing requirements, and mandated corrective measures are sanctions that may be imposed as part of the Early Warning System. Thomas Weisel Partners Canada, Inc. was not in Early Warning Level 1 or Level 2 during fiscal 2007 or 2006.

 

The research areas of investment banks have been and remain the subject of increased regulatory scrutiny. In 2002 and 2003, acting in part pursuant to a mandate contained in the Sarbanes-Oxley Act of 2002, the SEC, the NYSE and the NASD adopted rules imposing heightened restrictions on the interaction between equity research analysts and investment banking personnel at member securities firms. In addition, in 2003 and 2004, several securities firms in the United States, including Thomas Weisel Partners LLC, reached a settlement with certain federal and state securities regulators and self-regulatory organizations to resolve investigations into their equity research analysts’ alleged conflicts of interest. Under this settlement, the firms have been subject to certain restrictions and undertakings. As part of this settlement, restrictions have been imposed on the interaction between research and investment banking departments, and these securities firms are required to fund the provision of independent research to their customers. In connection with the research settlement, the firm has also subscribed to a voluntary initiative imposing restrictions on the allocation of shares in initial public offerings to executives and directors of public companies.

 

The effort to combat money laundering and terrorist financing is a priority in governmental policy with respect to financial institutions. The USA PATRIOT Act of 2001 contains anti-money laundering and financial transparency laws and mandates the implementation of various new regulations applicable to broker-dealers and other financial services companies, including standards for verifying client identification at account opening and obligations to monitor client transactions and report suspicious activities. Anti-money laundering laws outside the United States contain some similar provisions. The obligation of financial institutions, including us, to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial institutions, has required the implementation and maintenance of internal practices, procedures and controls which have increased, and may continue to increase, our costs, and any failure with respect to our programs in this area could subject us to regulatory consequences, including substantial fines and potentially other liabilities.

 

In addition to U.S. federal regulations, certain of our businesses are subject to compliance with laws and regulations of U.S. state governments, non-U.S. governments, their respective agencies and/or various self-regulatory organizations or exchanges relating to the privacy of client information. Any failure to comply with these regulations could expose us to liability and/or reputational damage.

Additional legislation, changes in rules promulgated by the SEC and self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules, either in the United States or elsewhere, may directly affect the mode of our operations and profitability.

 

U.S. and non-U.S. government agencies and self-regulatory organizations, as well as state securities commissions in the United States, are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or its directors, officers or employees. Occasionally, our subsidiaries have been subject to investigations and proceedings, and sanctions have been imposed for infractions of various regulations relating to our activities.

 

Where You Can Find More Information

 

We are required to file annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended, with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov.

 

We maintain a public internet site at http://www.tweisel.com and make available free of charge through this site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers, as well as any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We also post on our website the charters for our Board of Directors’ Audit Committee, Compensation Committee and Corporate Governance and Nominations Committee, as well as our Corporate Governance Guidelines, our Code of Conduct and Ethics governing our directors, officers and employees and other related materials. In addition, we also post on our website, under “Investment Banking — Transactions” and “International — Investment Banking — Completed Transactions”, links to listings of our completed, filed and announced investment banking transactions. The information on our website is not part of this Annual Report.

 

Our Investor Relations Department can be contacted at Thomas Weisel Partners Group, Inc., One Montgomery Street, San Francisco, California 94104, Attention: Investor Relations; telephone: 415-364-2500; e-mail: investorrelations@tweisel.com.

 

Risks Related to Our Business

 

We focus principally on specific sectors of the economy, and a deterioration in the business environment in these sectors generally or decline in the market for securities of companies within these sectors could materially adversely affect our businesses.

 

We focus principally on the technology, healthcare, consumer, energy and mining sectors of the economy. Therefore, volatility in the business environment in these sectors generally, or in the market for securities of companies within these sectors particularly, could substantially affect our financial results and the market value of our common stock. The business environment for companies in these sectors can experience substantial volatility, and our financial results may consequently be subject to significant variations from year to year. The market for securities in each of our focus sectors may also be subject to industry-specific risks. For example, changes in policies by the United States Food and Drug Administration may affect the market for securities of biotechnology and healthcare companies and volatility in the commodities markets may affect the market for securities of energy or mining companies that operate in the affected markets. Underwriting transactions, strategic advisory engagements and related trading activities in our focus sectors represent a significant portion of our businesses. This concentration exposes us to the risk of substantial declines in revenues in the event of downturns in these sectors of the economy.

 

Any future downturns in our focus sectors could materially adversely affect our business and results of operations.

 

Our financial results may fluctuate substantially from period to period, which may impair our stock price.

 

We have experienced, and expect to experience in the future, significant periodic variations in our revenues and results of operations. These variations may be attributed in part to the fact that our investment banking revenues are typically earned upon the successful completion of a transaction, the timing of which is uncertain and beyond our control. In most cases we receive little or no payment for investment banking engagements that do not result in the successful completion of a transaction. As a result, our business is highly dependent on market conditions as well as the decisions and actions of our clients and interested third parties. For example, a client’s acquisition transaction may be delayed or terminated because of a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents or board or shareholder approvals, failure to secure necessary financing, adverse market conditions or unexpected financial or other problems in the client’s or counterparty’s business. If the parties fail to complete a transaction on which we are advising or an offering in which we are participating, we will earn little or no revenue from the transaction. This risk may be intensified by our focus on growth companies in the technology, healthcare, consumer, energy and mining sectors, as the market for securities of many of these companies has experienced significant variations in the number and size of equity offerings. Recently, more companies initiating the process of an initial public offering are simultaneously exploring merger and acquisition opportunities. If we are not engaged as a strategic advisor in any such dual-tracked process, our investment banking revenues would be adversely affected in the event that an initial public offering is not consummated.

 

In addition, our investments and warrants we receive from time to time as compensation for investment banking services are adjusted to fair value in accordance with U.S. generally accepted accounting principles at the end of each quarter, which could increase the volatility of our quarterly earnings.

 

As a result, we are unlikely to achieve steady and predictable earnings on a quarterly basis, which could in turn adversely affect our stock price.

Our ability to retain our professionals and recruit additional professionals is critical to the success of our business, and our failure to do so may materially adversely affect our reputation, business and results of operations.

 

Our ability to obtain and successfully execute our business depends upon the personal reputation, judgment, business generation capabilities and project execution skills of our senior professionals, particularly Thomas W. Weisel, our founder, Chairman and Chief Executive Officer, Lionel F. Conacher, our President and Chief Operating Officer, and the other members of our Executive Committee. Our senior professionals’ personal reputations and relationships with our clients are a critical element in obtaining and executing client engagements. We encounter intense competition for qualified employees from other companies in the investment banking industry as well as from businesses outside the investment banking industry, such as investment advisory firms, hedge funds, private equity funds and venture capital funds. From time to time, we have experienced losses of investment banking, brokerage, research and other professionals, and losses of our key personnel may occur in the future. For example, during 2007 we experienced the departures of Blake J. Jorgensen and Robert W. Kitts, who were our Co-Directors of Investment Banking and members of our Executive Committee at the beginning of 2007. In addition, since January 1, 2008 we have announced that two other officers who were members of our Executive Committee at the beginning of 2007 (David A. Baylor, our Chief Financial Officer, and Stephen J. Buell, our former Director of Research) will be resigning to pursue other opportunities. The departure or other loss of Mr. Weisel, Mr. Conacher, any other member of our Executive Committee or any other senior professional who manages substantial client relationships and possesses substantial experience and expertise, could impair our ability to secure or successfully complete engagements, protect our market share or retain assets under management, each of which, in turn, could materially adversely affect our business and results of operations. Certain of our investment funds may be subject to key man provisions which, upon the departure or other loss of some or all of the investment professionals managing the fund, may permit the investors in the fund to dissolve the fund or may result in a reduction of the management fees paid with respect to the investment fund.

 

In connection with our initial public offering and our conversion to corporate form, many of our professionals received substantial amounts of common stock in exchange for their membership interests. Ownership of, and the ability to realize equity value from, our common stock, unlike that of membership interests in Thomas Weisel Partners Group LLC (the predecessor to Thomas Weisel Partners Group, Inc.), does not depend upon continued employment and our professionals are not restricted from leaving us by the potential loss of the value of their ownership interests. Similarly, in connection with our acquisition of Westwind, many of the Westwind professionals received substantial amounts of common stock (or shares exchangeable for common stock) in consideration of their ownership interests in Westwind. Ownership of, and the ability to realize equity value from our common stock (or shares exchangeable for our common stock), unlike that of ownership interests in Westwind, does not depend on continued employment and these professionals are not restricted from leaving us by potential loss of the value of their ownership interests. These shares of common stock (and shares exchangeable for common stock) are subject to certain restrictions on transfer and a portion are pledged to secure liquidated damages obligations to us as set forth in the Partners’ Equity Agreement and the Westwind Capital Corporation Shareholders’ Equity Agreement, each of which has been filed as an exhibit to this Annual Report on Form 10-K. However, these agreements will survive for only a limited period and will permit any professional that is party thereto to leave us without losing any of their shares of common stock (or shares exchangeable for common stock) if they comply with these agreements, and, in some cases, compliance with these agreements may also be waived. Consequently, the steps we have taken to encourage the continued service of these individuals after our initial public offering may not be effective.

 

In connection with our acquisition of Westwind, any management disruption or difficulties in integrating Thomas Weisel Partners’ and Westwind’s professionals could result in a loss of clients and customers or revenues from clients and customers and could significantly affect our business and results of operations. The success of the Westwind transaction depends in part on our ability to retain our personnel, including personnel formerly employed by Westwind. It is possible that these employees might decide not to remain with us as we continue to integrate the companies. If key employees terminate their employment, or

insufficient numbers of employees are retained to maintain effective operations, our business activities might be adversely affected, management’s attention might be diverted from successfully continuing to integrate Westwind’s operations to hiring suitable replacements, and our business might suffer.

 

If any of our professionals were to join an existing competitor or form a competing company, some of our clients could choose to use the services of that competitor instead of our services. The compensation arrangements, non-competition agreements and lock-up agreements we have entered into with certain of our professionals may not prove effective in preventing them from resigning to join our competitors and the non-competition agreements may not be upheld if we were to seek to enforce our rights under these agreements.

 

If we are unable to retain our professionals or recruit additional professionals, our reputation, business, results of operations and financial condition may be materially adversely affected.

 

Our efforts to limit compensation and benefits expense may hinder our ability to retain our professionals and recruit additional professionals.

 

In connection with our initial public offering, we announced that we intended to target aggregate annual compensation and benefits expense (excluding expenses relating to equity awards made in connection with our initial public offering) within the range of 55% to 58% of annual net revenues (excluding investment gains and losses attributable to investments in partnerships and other securities). Our compensation and benefits expense (excluding expenses relating to share-based awards made in connection with our initial public offering and excluding the one-time compensation expense in the fourth quarter of 2007 attributable to the acceleration of the payment of 2008 mid-year retention bonuses and certain severance expenses, each of which were related to the integration of Westwind), as a percentage of net revenues (excluding investment gains and losses attributable to investments in partnerships and other securities) was 58% for the year ended December 31, 2007. Including the one-time compensation expense in the fourth quarter discussed above, our compensation and benefits expense (excluding expenses relating to equity awards made in connection with our initial public offering), as a percentage of net revenues (excluding investment gains and losses attributable to investments in partnerships and other securities) was 67% for the year ended December 31, 2007. We do not intend to have a target ratio of aggregate annual compensation and benefits expense to net revenues in 2008 and subsequent years.

 

Competitive pressures may require that our compensation and benefits expense as a percentage of net revenues increase in order to retain our professionals and recruit additional professionals. Further, new business initiatives and efforts to expand existing businesses generally require that we incur compensation and benefits expense before realizing associated additional revenues. Additionally, we have granted equity awards in connection with our IPO and as part of our compensation and hiring process, the full expense of which is recognized pro rata over a three- or four-year vesting period. The future expense associated with these grants and grants in 2008 and thereafter could result in an increase to our ratio of compensation and benefits expense to net revenues in 2008 and subsequent years.

 

The following table represents the amount of compensation expense we have recorded during the years ended December 31, 2007 and 2006, as well as compensation expense we expect to record in future years for share-based awards granted through March 7, 2008 (amounts in thousands):

 

 

 

Pricing and other competitive pressures may impair the revenues and profitability of our brokerage business.

 

We derive a significant portion of our revenues from our brokerage business. Along with other brokerage firms, we have experienced intense price competition in this business in recent years. In particular, the ability to execute trades electronically and through other alternative trading systems has increased the pressure on trading commissions, volume and spreads and has required us to make investments in our brokerage business in order to compete. We expect this trend toward alternative trading systems to continue. We believe we may experience competitive pressures in these and other areas as some of our competitors seek to obtain market share by competing on the basis of price. In addition, we face pressure from our larger competitors, which may be better able to offer a broader range of complementary products and services to brokerage clients in order to win their trading business. As we are committed to maintaining our comprehensive research coverage to support our brokerage business, we may be required to make substantial investments in our research capabilities. If we are unable to compete effectively with our competitors in these areas, brokerage revenues may decline and our business, financial condition and results of operations may be adversely affected.

 

Difficult market conditions could adversely affect our business in many ways.

 

Difficult market and economic conditions and geopolitical uncertainties have in the past adversely affected and may in the future adversely affect our business and profitability in many ways. Weakness in equity markets and diminished trading volume of securities could adversely impact our brokerage business. Industry-wide declines in the size and number of underwritings and mergers and acquisitions transactions also would likely have an adverse effect on our revenues. In addition, reductions in the trading prices for equity securities also tend to reduce the deal value of investment banking transactions, such as underwritings and mergers and acquisitions transactions, which in turn may reduce the fees we earn from these transactions. Also, difficult market conditions would likely decrease the value of assets under management in our asset management and private client business, which would decrease the amount of asset-based fees we receive, and may also affect our ability to attract additional, or retain existing, assets under management within these businesses. As we may be unable to reduce expenses correspondingly, our profits and profit margins may decline.

 

As an investment bank focused principally on the growth sectors of the economy, we depend significantly on transactions by venture capital-backed companies for sources of revenues and potential business opportunities. To the extent venture capital investment activities slow down due to difficult market conditions or otherwise, our business, financial condition and results of operations may be adversely affected. In addition, as we are headquartered in California and a substantial percentage of our growth company clients are located in California, a natural disaster or a regional economic downturn in California could harm our business even when the market conditions elsewhere are not affected. With respect to the energy and mining sectors, any prolonged, substantial reduction in commodity prices may affect the activity levels of companies in those sectors and the consequent demand for our products and services from those companies.

 

Adverse market or economic conditions or a slowdown of activity in the sectors in which the portfolio companies of our investment funds operate could have an adverse effect on the earnings of those portfolio companies, and therefore, our earnings.

 

We face strong competition from larger firms.

 

The brokerage, investment banking and asset management industries are intensely competitive, and we expect them to remain so. We compete on the basis of a number of factors, including client relationships, reputation, the abilities and past performance of our professionals, market focus and the relative quality and price of our services and products. We have experienced intense price competition with respect to our brokerage business, including large block trades, spreads and trading commissions, as well as competition due to the increased use of commission sharing arrangements. Pricing and other

competitive pressures in investment banking, including the trends toward multiple book runners, co-managers and multiple financial advisors handling transactions, have continued and could adversely affect our revenues, even during periods where the volume and number of investment banking transactions are increasing. Competitive factors with respect to our asset management activities include the amount of firm capital we can invest in new products and our ability to increase assets under management, including our ability to attract capital for new investment funds. We believe we may experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by competing on the basis of price.

 

We are a relatively small investment bank with approximately 690 employees as of March 11, 2008 and net revenues of $289.0 million in 2007. Many of our competitors in the brokerage, investment banking and asset management industries have a broader range of products and services, greater financial and marketing resources, larger customer bases, greater name recognition, more senior professionals to serve their clients’ needs, greater global reach and more established relationships with clients than we have. These larger and better capitalized competitors may be better able to respond to changes in the brokerage, investment banking and asset management industries, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally.

 

The scale of our competitors has increased over time as a result of substantial consolidation among companies in the brokerage and investment banking industries. In addition, a number of large commercial banks, insurance companies and other broad-based financial services firms have established or acquired underwriting or financial advisory practices and broker-dealers or have merged with other financial institutions. These firms have the ability to offer a wider range of products than we do, which may enhance their competitive position. They also have the ability to support investment banking with commercial banking, insurance and other financial services in an effort to gain market share, which has resulted, and could further result, in pricing pressure in our businesses. In particular, the ability to provide financing has become an important advantage for some of our larger competitors and, because we do not provide such financing, we may be unable to compete as effectively for clients in a significant part of the brokerage and investment banking market.

 

If we are unable to compete effectively with our competitors, our business, financial condition and results of operations will be adversely affected.

 

We have incurred losses and may incur losses in the future.

 

We have incurred losses in the recent past. We recorded net losses of $57.9 million for the year ended December 31, 2002 and $7.1 million for the year ended December 31, 2005. We also recorded net losses in certain quarters within 2007 (including the third and fourth quarters of 2007) and other past fiscal years. We may incur losses in any of our future periods. If we are unable to finance future losses, those losses may have a significant effect on our liquidity as well as our ability to operate.

 

In addition, we may incur significant expenses in connection with initiating new business activities or in connection with any expansion of our underwriting, brokerage or asset management businesses. We may also engage in strategic acquisitions and investments for which we may incur significant expenses. Accordingly, we will need to increase our revenues at a rate greater than our expenses to achieve and maintain profitability. If our revenues do not increase sufficiently, or even if our revenues increase but we are unable to manage our expenses, we will not achieve and maintain profitability in future periods.

 

Our capital markets and strategic advisory engagements are singular in nature and do not generally provide for subsequent engagements.

 

Our strategy is to take a lifecycle approach in providing investment banking services to our clients, however, our investment banking clients generally retain us on a short-term, engagement-by-engagement basis in connection with specific capital markets or mergers and acquisitions transactions, rather than on a recurring basis under long-term contracts. As these transactions are typically singular in nature and our engagements with these clients may not recur, we must seek out new engagements when our current

engagements are successfully completed or are terminated. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in any subsequent period. If we are unable to generate a substantial number of new engagements and generate fees from the successful completion of these transactions, our business and results of operations would likely be adversely affected.

 

A significant portion of our brokerage revenues are generated from a relatively small number of institutional clients.

 

A significant portion of our brokerage revenues are generated from a relatively small number of institutional clients. For example, in 2007 we generated 22% of our brokerage revenues, or approximately 9% of our net revenues, from our ten largest brokerage clients. Similarly, in 2006 we generated 26% of our brokerage revenues, or approximately 12% of our net revenues, from our ten largest brokerage clients. If any of our key clients departs or reduces its business with us and we fail to attract new clients that are capable of generating significant trading volumes, our business and results of operations will be adversely affected.

 

Poor investment performance, pricing pressure and other competitive factors may reduce our asset management revenues or result in losses.

 

As part of our strategy, we are investing in the expansion of our asset management business. Our revenues from this business are primarily derived from management fees which are based on committed capital and/or assets under management and incentive fees, which are earned if the return of our investment funds exceeds certain threshold returns. Our ability to maintain or increase assets under management is subject to a number of factors, including investors’ perception of our past performance, market or economic conditions, competition from other fund managers and our ability to negotiate terms with major investors.

 

Investment performance is one of the most important factors in retaining existing clients and competing for new asset management and private equity business and our historical performance may not be indicative of future results. Poor investment performance and other competitive factors could reduce our revenues and impair our growth in many ways:

 

 

Our investment funds include gains and losses that have not yet been realized through sales or other transactions. The ultimate realization of these gains and losses will depend on whether these funds achieve satisfactory investment performance. These unrealized gains and losses are recognized in our results of operations because these investments are accounted for in accordance with GAAP using the fair value method based on the percentage interest in the underlying partnerships. The underlying investments held by such partnerships are valued based on quoted market prices, or estimated fair value if there is no public market. Due to the inherent uncertainty of valuation, fair values of these non-marketable investments may differ from the values that would have been used had a ready market existed for these investments, which differences could be material, and these differences may result in increased volatility in our asset management revenues.

 

To the extent our future investment performance is perceived to be poor in either relative or absolute terms, our asset management revenues will likely be reduced and our ability to raise new funds will

likely be impaired. Even when market conditions are generally favorable, our investment performance may be adversely affected by our investment style and the particular investments that we make.

 

In addition, over the past several years, the size and number of investment funds, including exchange-traded funds, hedge funds and private equity funds, has continued to increase. If this trend continues, it is possible that it will become increasingly difficult for us to raise capital for new investment funds or price competition may mean that we are unable to maintain our current fee structure. We have historically competed primarily on the performance of our investment funds and other asset management products and services, and not on the level of our fees relative to those of our competitors. However, there is a risk that fees in the asset management industry will decline, without regard to the historical performance of a manager, including our historical performance. Fee reductions on our existing or future investment funds and other asset management products and services, without corresponding decreases in our cost structure, would adversely affect our revenues and results of operations.

 

Increases in capital commitments in our trading, underwriting and other businesses increase the potential for significant losses.

 

The trend in capital markets is toward larger and more frequent commitments of capital by financial services firms in many of their activities. For example, in order to attract clients, investment banks are increasingly committing capital to purchase large blocks of stock from publicly-traded issuers or their significant shareholders, instead of the more traditional marketed underwriting process, in which marketing is typically completed before an investment bank commits capital to purchase securities for resale. We have participated in this trend and expect to continue to do so. As a result, we will be subject to increased risk as we commit greater amounts of capital to facilitate primarily client-driven business. Furthermore, we may suffer losses even when economic and market conditions are generally favorable for others in the industry.

 

We may enter into large transactions in which we commit our own capital as part of our trading business. The number and size of these large transactions may materially affect our results of operations in a given period. We may also incur significant losses from our trading activities due to market fluctuations and volatility from quarter to quarter. We maintain trading positions in the fixed income and equity markets to facilitate client trading activities, and, at times, these positions can be large and concentrated in a single issuer. In addition, our convertible debt trading group maintains proprietary trading positions. To the extent that we own assets, i.e. , have long positions, a downturn in the value of those assets or in those markets could result in losses. Conversely, to the extent that we have sold assets we do not own, i.e. , have short positions, an upturn in those markets could expose us to potentially unlimited losses as we attempt to cover our short positions by acquiring assets in a rising market.

 

We also commit capital to investment funds we sponsor and utilize our own funds as seed capital for new products and services in our asset management business. These investments may diminish in value or may be lost entirely if market conditions are not favorable.

 

Limitations on our access to capital could impair our liquidity and our ability to conduct our businesses.

 

Liquidity, or ready access to funds, is essential to financial services firms. Failures of financial institutions have often been attributable in large part to insufficient liquidity. Liquidity is of particular importance to our trading business and perceived liquidity issues may affect our clients’ and counterparties’ willingness to engage in brokerage transactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects our trading clients, third parties or us. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time.

 

Our asset management business is also subject to liquidity risk due to investments in high-risk, illiquid assets. We have made substantial principal investments in our investment funds and may make additional investments in future funds, which often invest in securities that are not publicly traded. There is a

significant risk that we may be unable to realize our investment objectives by sale or other disposition at attractive prices or may otherwise be unable to complete any exit strategy. In particular, these risks could arise from changes in the financial condition or prospects of the portfolio companies in which investments are made, changes in national or international economic conditions or changes in laws, regulations, fiscal policies or political conditions of countries in which investments are made. It takes a substantial period of time to identify attractive investment opportunities and then to realize the cash value of our investments through resale. Even if an investment proves to be profitable, it may be several years or longer before any profits can be realized in cash.

 

We have several broker-dealer subsidiaries in several different jurisdictions which are each subject to the capital requirements of the relevant governmental and self-regulatory authorities in those jurisdictions. For example, Thomas Weisel Partners LLC, our largest broker-dealer subsidiary, is subject to the net capital requirements of the SEC and various self-regulatory organizations of which it is a member. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also mandate that a significant part of its assets be kept in relatively liquid form. Any failure to comply with these net capital requirements could impair our ability to conduct our core business as a brokerage firm. Furthermore, Thomas Weisel Partners LLC and our other broker-dealer subsidiaries are subject to laws and regulations that authorize regulatory bodies to block or reduce the flow of funds from them to Thomas Weisel Partners Group, Inc. As a holding company, Thomas Weisel Partners Group, Inc. depends on distributions and other payments from its subsidiaries to fund all payments on its obligations, including debt obligations. As a result, regulatory actions could impede access to funds that Thomas Weisel Partners Group, Inc. needs to make payments on obligations, including debt obligations.

 

Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk.

 

Our risk management strategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk.

 

Among other risks, we are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, breach of contract or other reasons. We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances. As a clearing member firm, we finance our customer positions and could be held responsible for the defaults or misconduct of our customers. Although we regularly review credit exposures to specific clients and counterparties and to specific industries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect or foresee. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect us. Also, risk management policies and procedures that we utilize with respect to investing our own funds or committing our capital with respect to investment banking, trading activities or asset management activities may not protect us or mitigate our risks from those activities. If any of the variety of instruments, processes and strategies we utilize to manage our exposure to various types of risk are not effective, we may incur losses.

 

Our operations and infrastructure may malfunction or fail.

 

Our businesses are highly dependent on our ability to process, on a daily basis, a large number of increasingly complex transactions across diverse markets. Our financial, accounting or other data processing systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our offices. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses. If any of these systems do not operate properly or are disabled, if we experience difficulties in conforming these systems to changes in law or regulation or changes in our business activities or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer an impairment to

our liquidity, financial loss, disruption of our businesses, liability to clients, regulatory intervention or reputational damage.

 

We also face the risk of operational failure of any of our clearing agents, the exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. Any such failure could adversely affect our ability to effect transactions and to manage our exposure to risk. In addition, our continuing integration of Westwind will require operational and systems changes. If the implementation of these changes results in operational failures or disruptions, it could adversely affect our ability to effect transactions and impact our results of operations.

 

In addition, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which we are located. This may include a disruption due to transitioning from one third-party service provider to another or due to a disruption involving electrical, communications, transportation or other services used by us or third parties with which we conduct business, whether due to fire, other natural disaster, power or communications failure, act of terrorism or war or otherwise. Nearly all of our employees in our primary locations, including San Francisco, New York, Toronto, London and Boston, work in close proximity to each other. If a disruption occurs in one location and our employees in that location are unable to communicate with or travel to other locations, our ability to service and interact with our clients may suffer and we may not be able to implement successfully contingency plans that depend on communication or travel. Insurance policies to mitigate these risks may not be available or may be more expensive than the perceived benefit. Further, any insurance that we may purchase to mitigate certain of these risks may not cover our loss.

 

Our operations also rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

 

Strategic investments or acquisitions and joint ventures may result in additional risks and uncertainties in our business.

 

We intend to grow our business through both internal expansion and through strategic investments, acquisitions or joint ventures. To the extent we make strategic investments or acquisitions or enter into joint ventures, we face numerous risks and uncertainties combining or integrating businesses, including integrating relationships with customers, business partners and internal data processing systems. In the case of joint ventures, we are subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, systems, controls and personnel that are not under our control. In addition, conflicts or disagreements between us and our joint venture partners may negatively impact our businesses.

 

Our recent acquisition of Westwind and any future acquisitions or joint ventures could entail a number of risks, including problems with the effective integration of operations, the inability to maintain key pre-acquisition business relationships, the inability to retain key employees, increased operating costs, exposure to unanticipated liabilities, risks of misconduct by employees not subject to our control, difficulties in realizing projected efficiencies, synergies and cost savings, and exposure to new or unknown liabilities.

Any future growth of our business may require significant resources and/or result in significant unanticipated losses, costs or liabilities. In addition, expansions, acquisitions or joint ventures may require significant managerial attention, which may be diverted from our other operations.

 

Our international activities are subject to political, economic, legal, operational and other risks that are inherent in operating in a foreign country.

 

In 2007, we expanded our international operations through the opening of our Zurich, Switzerland office, and we recently completed our acquisition of Westwind Partners, which resulted in our acquisition of operations and offices in Canada and the expansion of our operations in London, England. In connection with our business activities in Canada, England, Switzerland and India, and to the extent that we pursue other business opportunities outside the United States, we will be subject to political, economic, legal, operational and other risks that are inherent in operating in a foreign country, including risks of possible nationalization, expropriation, price controls, capital controls, exchange controls and other restrictive governmental actions, as well as the outbreak of hostilities. In many countries, the laws and regulations applicable to the securities and financial services industries are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market. Our inability to remain in compliance with local laws in a particular foreign market could have a significant and negative effect not only on our businesses in that market but also on our reputation generally. We are also subject to the enhanced risk that transactions we structure might not be legally enforceable in the relevant jurisdictions. Westwind’s business is conducted and its revenues are substantially derived from activities outside of the United States. Accordingly, following our acquisition of Westwind, our exposure to risks relating to international operations have increased significantly.

 

As we expand our international operations, we will increase our exposure to foreign currency risk.

 

As a result of the expanded international operations, we hold assets, incur liabilities, earn revenues and pay expenses in foreign currencies, including the Canadian dollar, the Swiss franc and the pound sterling. Because our financial statements will continue to be presented in U.S. dollars, we will be required to translate assets, liabilities, income and expenses that relate to our international operations and that are denominated in foreign currencies into U.S. dollars at the then-applicable exchange rates. Consequently, increases and decreases in the value of the U.S. dollar versus the various foreign currencies will affect the value of these items in our financial statements, even if their value has not changed in such foreign currencies. As a result, our financial results could be more volatile as a result of our international operations. Although we may enter into transactions to hedge portions of this foreign currency translation exposure, we will not be able to eliminate this exposure.

 

Thomas Weisel Partners may experience difficulties, significant additional expenses, unexpected costs and delays as we continue to integrate our business, business model and culture with those of the former Westwind Capital Corporation and the combined company may not realize synergies, efficiencies or cost savings.

 

Prior to the completion of the acquisition of Westwind, Thomas Weisel Partners and Westwind operated independently. The success of the combined company following the completion of the transaction may depend in large part on the ability to integrate the two companies’ businesses, business models and cultures. As we continue the integration of Thomas Weisel Partners and Westwind, we may experience difficulties, unanticipated costs and delays. The challenges involved in the continued integration include:

 

 

 

As we continue the integration, we expect to incur significant additional expenses in connection with the integration of the two businesses, including integrating personnel, geographically diverse operations, information technology systems, customers and strategic partners of each company.

 

We have made and expect to continue making changes to certain aspects of Westwind’s operations to integrate Westwind’s operations with those of Thomas Weisel Partners. For example, we have made changes to the way in which Westwind’s research professionals interact with its investment banking professionals to conform to Thomas Weisel Partners’ policies and procedures in this regard. In addition, we expect that Westwind’s combination with a larger firm could affect its existing client relationships or its ability to enter into new client relationships. Any changes that we have made or will make to Westwind’s operations, in addition to the fact that Westwind is now part of a larger organization, could disrupt Westwind’s business and client relationships and could substantially affect our ability to achieve the expected benefits of the transaction and our business and results of operations.

 

The integration of certain operations, in particular regarding the two companies’ research and brokerage businesses, following the transaction will continue to take time and will require the dedication of significant management resources, which may temporarily distract management’s attention from the routine business of the combined company. The acquisition of Westwind represented our first significant acquisition as a public company. Employee uncertainty and lack of focus as we continue the integration process may also disrupt the business of the combined company.

 

It is possible that the continuation of the integration process could result in the loss of key employees, diversion of the combined company’s management’s attention, the disruption or interruption of, or the loss of momentum in, the combined company’s ongoing business or inconsistencies in standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with clients and employees, our ability to achieve the anticipated benefits of the transaction, or otherwise adversely affect the business and financial results of the combined company. In addition, the integration process may strain the combined company’s financial and managerial controls and reporting systems and procedures. This may result in the diversion of management and financial resources from the combined company’s core business objectives.

 

Even if Thomas Weisel Partners and Westwind are able to integrate such businesses and operations successfully, there can be no assurance that this integration will result in any synergies, efficiencies or cost savings or that any of these benefits will be achieved within a specific time frame.

 

Evaluation of our prospects may be more difficult in light of our limited operating history.

 

Our company was formed in 1998 and we have a limited operating history upon which to evaluate our business and prospects. In addition we recently acquired Westwind, which was formed in 2002 and which also has a limited operating history. As a relatively young enterprise, we are subject to the risks and uncertainties that face a company during its formative development. Some of these risks and uncertainties relate to our ability to attract and retain clients on a cost-effective basis, expand and enhance our service offerings, raise additional capital and respond to competitive market conditions. We may not be able to address these risks adequately, and our failure to do so may adversely affect our business and the value of an investment in our common stock.

We could be subject to unknown liabilities of Westwind, which could cause us to incur substantial financial obligations and harm our business.

 

Although the former Westwind shareholders are required to indemnify us for certain breaches of representations and warranties made in the arrangement agreement governing our acquisition of Westwind, the shareholders’ obligation is subject to monetary and time limitations. In addition, if we are entitled to indemnification by the former Westwind shareholders, it may be costly to enforce those rights and/or we may not be successful in collecting amounts we are entitled to. If there are liabilities of Westwind of which we are not aware, we may have little or no recourse against the former Westwind shareholders and may be obligated to bear the costs of those liabilities. In addition, many of the former Westwind shareholders will continue as employees of the combined company following closing of the transaction. Accordingly, if an indemnifiable claim does arise, we may need to weigh the need to be indemnified for that claim against the potential employee distraction or damage to employee relations that may result if we were to seek recourse for that claim.

 

As a result of the acquisition of Westwind, we are subject to additional risks relating to Westwind’s business.

 

As a result of the acquisition of Westwind, we are subject to the risks relating to Westwind’s business. Because the risks and uncertainties facing us may differ from those that faced Westwind, the market price, results of operations and financial condition of the combined company may be affected by risks and uncertainties different from those affecting us prior to the acquisition. These risks include the following:

 

 

Risks Related to Our Industry

 

Risks associated with regulatory impact on capital markets.

 

Highly-publicized financial scandals in recent years have led to investor concerns over the integrity of the U.S. financial markets, and have prompted Congress, the SEC and FINRA to significantly expand corporate governance and public disclosure requirements. To the extent that private companies, in order to avoid becoming subject to these new requirements, decide to forgo initial public offerings, our equity underwriting business may be adversely affected. In addition, provisions of the Sarbanes-Oxley Act of 2002 and the corporate governance rules imposed by self-regulatory organizations have diverted many companies’ attention away from capital market transactions, including securities offerings and acquisition and disposition transactions. In particular, companies that are or are planning to be public are incurring significant expenses in complying with the SEC and accounting standards relating to internal control over financial reporting, and companies that disclose material weaknesses in such controls under the new

standards may have greater difficulty accessing the capital markets. These factors, in addition to adopted or proposed accounting and disclosure changes or changes in laws and regulations governing brokerage and research activities, may have an adverse effect on our business.

 

Financial services firms have been subject to increased scrutiny over the last several years, increasing the risk of financial liability and reputational harm resulting from adverse regulatory actions.

 

Firms in the financial services industry have been operating in a difficult regulatory environment. The U.S. financial services industry has experienced increased scrutiny from a variety of regulators, including the SEC, FINRA and state attorneys general. Penalties and fines sought by regulatory authorities have increased substantially over the last several years. This regulatory and enforcement environment has created uncertainty with respect to a number of transactions that had historically been entered into by financial services firms and that were generally believed to be permissible and appropriate. We may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. We also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other United States or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. Among other things, we could be fined, prohibited from engaging in some of our business activities or subject to limitations or conditions on our business activities. Substantial legal liability or significant regulatory action against us could have material adverse financial effects or cause significant reputational harm to us, which could seriously harm our business prospects.

 

In addition, financial services firms are subject to numerous conflicts of interest or perceived conflicts. The SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest. We have adopted various policies, controls and procedures to address or limit actual or perceived conflicts and regularly seek to review and update our policies, controls and procedures. However, appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with conflicts of interest. Our policies and procedures to address or limit actual or perceived conflicts may also result in increased costs, additional operational personnel and increased regulatory risk. Failure to adhere to these policies and procedures may result in regulatory sanctions or client litigation. For example, the research areas of investment banks have been and remain the subject of heightened regulatory scrutiny which has led to increased restrictions on the interaction between equity research analysts and investment banking personnel at securities firms. Several securities firms in the United States, including our wholly-owned U.S. broker-dealer subsidiary, Thomas Weisel Partners LLC, reached a global settlement in 2003 and 2004 with certain federal and state securities regulators and self-regulatory organizations to resolve investigations into equity research analysts’ alleged conflicts of interest. Under this settlement, the firms have been subject to certain restrictions and undertakings, which have imposed additional costs and limitations on the conduct of our businesses. Potential civil lawsuits implicating investment research analysts’ conflicts of interest were not settled as part of the global settlement. The global settlements also did not resolve potential charges involving individual employees, including supervisors, and regulatory investigations are continuing. Our total potential liability in respect of such civil cases cannot be reasonably estimated but could be material to our results of operations.

 

Financial service companies have experienced a number of highly publicized regulatory inquiries concerning market timing, late trading and other activities that focus on the mutual fund industry. These inquiries have resulted in increased scrutiny within the industry and new rules and regulations for mutual funds, investment advisers and broker-dealers. Although we do not act as an investment adviser to mutual funds, the regulatory scrutiny and rulemaking initiatives may result in an increase in operational and compliance costs or the assessment of significant fines or penalties against our business, and may otherwise limit our ability to engage in certain activities.

Our exposure to legal liability is significant, and damages that we may be required to pay and the reputational harm that could result from legal action against us could materially adversely affect our businesses.

 

We face significant legal risks in our businesses, and, in recent years, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial institutions have been increasing. These risks include potential liability under securities or other laws for materially false or misleading statements made in connection with securities offerings and other transactions, potential liability for “fairness opinions” and other advice we provide to participants in strategic transactions and disputes over the terms and conditions of complex trading arrangements. We are also subject to claims arising from disputes with employees for alleged discrimination or harassment, among other things. These risks often may be difficult to assess or quantify, and their existence and magnitude often remain unknown for substantial periods of time.

 

Our role as advisor to our clients on important underwriting or mergers and acquisitions transactions involves complex analysis and the exercise of professional judgment, including rendering “fairness opinions” in connection with mergers and other transactions. Therefore, our activities may subject us to the risk of significant legal liabilities to our clients and aggrieved third parties, including shareholders of our clients who could bring securities class actions against us. Our investment banking engagements typically include broad indemnities from our clients and provisions to limit our exposure to legal claims relating to our services, but these provisions may not protect us or may not be enforceable in all cases. For example, an indemnity from a client that subsequently is placed into bankruptcy is likely to be of little value to us in limiting our exposure to claims relating to that client. As a result, we may incur significant legal and other expenses in defending against litigation and may be required to pay substantial damages for settlements and adverse judgments. Substantial legal liability or significant regulatory action against us could have a material adverse effect on our results of operations or cause significant reputational harm to us, which could seriously harm our business and prospects.

 

Employee misconduct could harm us and is difficult to detect and deter.

 

There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur at our company. For example, misconduct by employees could involve the improper use or disclosure of confidential information, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter employee misconduct and the precautions we take to detect and prevent this activity may not be effective in all cases, and we may suffer significant reputational harm for any misconduct by our employees.

 

Risks Related to Ownership of Our Common Stock

 

Taken together, a significant percentage of our outstanding common stock and shares exchangeable for common stock is owned or controlled by our senior professionals and other employees and their interests may differ from those of other shareholders.

 

Our senior professionals and other employees collectively own more than 40% of the total shares of common stock outstanding (including shares exchangeable for common stock). Our Chief Executive Officer, Thomas W. Weisel, beneficially owns approximately 7.5% of our common stock and our President and Chief Operating Officer, Lionel F. Conacher, beneficially owns approximately 4.8% of our common stock (including shares exchangeable for common stock). Mr. Weisel and Mr. Conacher, together with the other members of our Executive Committee, collectively own approximately 16.1% of our common stock (including shares exchangeable for common stock). As a result of these shareholdings, our senior professionals and employees are effectively able to elect our entire board of directors, control our management and policies, in general, determine without the consent of the other stockholders the outcome of any corporate transaction or other matter submitted to the shareholders for

approval, including mergers, consolidations and the sale of all or substantially all of our assets. Our employees are effectively able to prevent or cause a change in control of us. These actions may be taken even if other shareholders oppose them.

 

Provisions of our organizational documents may discourage an acquisition of us.

 

Our organizational documents contain provisions that will impede the removal of directors and may discourage a third party from making a proposal to acquire us. For example, our board of directors may, without the consent of shareholders, issue preferred stock with greater voting rights than our common stock. If a change of control or change in management that shareholders might otherwise consider to be favorable is prevented or delayed, the market price of our common stock could decline.

 

Future sales of our common stock could cause our stock price to decline and the trading volume of our common stock may be volatile.

 

Sales of substantial amounts of common stock by our senior professionals, employees and other shareholders, or the possibility of such sales, may adversely affect the price of our common stock, may impede our ability to raise capital through the issuance of equity securities, and may cause trading volume in our common stock to be volatile.

 

As of March 11, 2008, there are 32,419,246 shares of our common stock outstanding, including 6,639,478 exchangeable shares of TWP Acquisition Company (Canada) Inc., one of our wholly-owned subsidiaries. Each exchangeable share is exchangeable at any time into common stock of the registrant on a one-for-one basis, entitles the holder to dividend and other rights economically equivalent to those of the common stock, and through a voting trust, votes at our stockholder meetings.

 

Of these shares, up to approximately 15.1 million shares are freely transferable without restriction or further registration under the Securities Act of 1933. Subject to certain exceptions, the remaining approximately 17.3 million shares of common stock and shares exchangeable for common stock will be available for future sale upon the expiration or the waiver of transfer restrictions or in accordance with registration rights. In addition, since we became a public company we have granted (and will continue to grant in the future) equity awards to our employees that began to vest and become deliverable in 2007. Upon vesting and delivery of the shares of common stock underlying these awards many employees may decide to sell all or a portion of their shares in the public markets and these sales may happen at or around the same time due to similar vesting dates or due to the limited periods of time (trading windows) when we allow our employees to trade our common stock. These factors may affect both the price of our common stock and the volume of shares traded. For further information refer to the “Securities Authorized for Issuance under Equity Compensation Plans” within Item 5 — “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Annual Report on Form 10-K.

 

The market price of our common stock may decline.

 

The price of our common stock may fluctuate widely, depending upon many factors, including our perceived prospects and those of the financial services industry in general, differences between our actual financial and operating results and those expected by investors, changes in general economic or market conditions, broad market fluctuations and failure to be covered by securities analysts. Declines in the price of our stock may adversely affect our ability to recruit and retain key employees, including our senior professionals.

 

Your interest in our firm may be diluted due to issuance of additional shares of common stock.

 

Owners of our common stock may experience dilution of their equity investment as a result of our issuance of additional shares of common stock or securities that are convertible into, or exercisable for, shares of our common stock. We may issue additional shares of common stock in connection with any

merger or acquisition we undertake, in future public or private offerings to raise additional capital or in satisfaction of currently outstanding restricted stock units, warrants and options. For example, on January 2, 2008, we issued a total of 7,009,112 shares of our common stock (and shares exchangeable for common stock) to former shareholders of Westwind in connection with our acquisition of Westwind. We also have granted and will continue to grant equity awards under our Equity Incentive Plan as part of our compensation and hiring processes, and when these awards are vested or become deliverable we will issue additional shares of common stock in satisfaction thereof.

 

As of December 31, 2007, there were 2,341,570 restricted stock units outstanding. Of these restricted stock units, 851,976 were made in connection with our initial public offering and have a three-year vesting period. The remaining 1,489,594 restricted stock units outstanding as of December 31, 2007 have a four-year vesting period. On February 8, 2008, we made an additional grant of 2,220,178 restricted stock units as part of our regular compensation process with a four-year vesting period.

 

For further information refer to the “Securities Authorized for Issuance under Equity Compensation Plans” within Item 5 — “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Annual Report on Form 10-K.

 

We may be required to make substantial payments under indemnification agreements.

 

In connection with our initial public offering and our conversion to corporate form, we entered into agreements that provide for the indemnification of our members, partners, directors, officers and certain other persons authorized to act on our behalf against certain losses that may arise out of our initial public offering or the related reorganization transactions, certain liabilities of our partners relating to the time they were members of Thomas Weisel Partners Group LLC, and certain tax liabilities of our former members that may arise in respect of periods prior to our initial public offering when we operated as a limited liability company.

 

In addition, in connection with acquisition transactions, such as our acquisition of Westwind, and in connection with the ordinary conduct of our business, such as in our relationship with out clearing brokers, we have provided and will continue to provide indemnities to counterparties.

 

We may be required to make payments under these indemnification agreements, which could adversely affect our financial condition.

 

We do not expect to pay any cash dividends in the foreseeable future.

 

We intend to retain any future earnings to fund the operation and expansion of our business, and, therefore, we do not anticipate paying cash dividends in the foreseeable future. Accordingly, our shareholders must rely on sales of their shares of common stock after price appreciation, which may never occur, as the only way to realize any future gains on an investment in our common stock. Investors seeking cash dividends should not purchase our common stock.

 

We have broad discretion over the use of the net proceeds to us from our initial public offering of common stock in February 2006 and our follow-on offering of common stock in May 2006.

 

We have broad discretion to use the net proceeds to us from our initial public offering of common stock in February 2006 and our follow-on offering of common stock in May 2006, and our shareholders rely on the judgment of our board of directors and our management regarding the application of these proceeds. Through December 31, 2007, we have used a portion of the net proceeds of our common stock offerings to repay notes to third parties, to increase the capital in our broker-dealer subsidiary, Thomas Weisel Partners LLC, to provide seed investment funds for new asset management products and for other general corporate purposes. In January 2008, we paid $45 million in cash from these proceeds to former shareholders of Westwind in connection with our acquisition of Westwind. The remaining portion of these net proceeds have been invested in municipal debt securities, auction rate securities and

tax exempt money market funds. We expect to use the remaining net proceeds from these offerings for general corporate purposes, including support and expansion of our underwriting, trading and asset management businesses and strategic acquisitions and investments, but we have not allocated all of these net proceeds for specific purposes. We may not be able to find appropriate opportunities to deploy these funds and any investments, whether for specific corporate purposes, such as investment in our underwriting, trading or asset management businesses, or for strategic acquisitions, may not generate favorable returns.

 

Our common stock has only been publicly traded since February 2, 2006 and we expect that the price of our common stock will fluctuate substantially.

 

There has only been a public market for our common stock since February 2, 2006 and since that date through March 11, 2008 our stock price on the Nasdaq stock market has fluctuated between a low of $7.22 per share and a high of $24.35 per share. The closing price of our common stock on March 11, 2008 on the Nasdaq stock market was $8.00 per share.

 

Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuations in our stock price may include, among others, actual or anticipated variations in quarterly operating results, changes in financial estimates by us or by any securities analysts who might cover our stock, or our failure to meet the estimates made by securities analysts, announcements by us or our competitors or significant acquisitions, strategic partnerships or divestitures, announcements by our competitors of their financial or operating results, to the extent those announcements are perceived by investors to be indicative of our future financial results or market conditions, additions or departures of key personnel, sales of our common stock, including sales of our common stock by our directors, officers and employees or by our other principal stockholders, and cyclical changes in the market in the growth sectors of the economy.

 

 

 

The table below shows the results of the shareholders’ voting:

 

 

England). He is also past Chairman of the Accounting Standards Oversight Council of Canada and a former member of the Advisory Board of the Office of the Superintendent of Financial Institutions of Canada and past Chairman of the Corporate Finance Committee of the Investment Dealers Association of Canada (IDA), a former public director of the IDA, and a former member of the IDA’s Executive Committee. Mr. Allen holds a bachelor of arts degree and an LL.B, both from the University of Western Ontario.

 

Matthew R. Barger has been a director of Thomas Weisel Partners Group, Inc. since February 2007. Mr. Barger is currently a Senior Advisor to Hellman & Friedman LLC, a private equity firm. Mr. Barger joined Hellman & Friedman in 1984 and has held several positions during his tenure, including that of Managing General Partner. Prior to joining Hellman & Friedman, Mr. Barger was an associate in the Corporate Finance Department of Lehman Brothers Kuhn Loeb. Mr. Barger serves as a Director of Hall Capital Partners, an investment advisory firm, and as an Advisory Board member of Artisan Partners and of Mondrian Investment Partners, both investment advisory firms. Mr. Barger holds a bachelor’s degree from Yale University and an M.B.A. from the Stanford Graduate School of Business.

 

Michael W. Brown has been a director of Thomas Weisel Partners Group, Inc. since February 2007. Mr. Brown was an officer of Microsoft Corporation from December 1989 through July 1997, serving as Vice President and Chief Financial Officer from August 1994 to July 1997, as Vice President — Finance from April 1993 to August 1994 and as Treasurer from January 1990 to April 1993. Prior to joining Microsoft, Mr. Brown spent 18 years with Deloitte & Touche LLP in various positions. Mr. Brown is also a Director of EMC Corporation, a provider of information management systems, software and services, a Director of VMware, Inc., a provider of computer virtualization solutions, and a Director of Administaff, Inc., a professional employer organization providing services such as payroll and benefits administration. Mr. Brown is also a director of several private companies. Mr. Brown is a past Chairman of the Nasdaq Stock Market Board of Directors and a past governor of the National Association of Securities Dealers and is a member of the University of Washington Business School Advisory Board. Mr. Brown holds a bachelor of science degree in economics from the University of Washington in Seattle.

 

B. Kipling Hagopian has been a director of Thomas Weisel Partners Group, Inc. since January 2006. Mr. Hagopian was a founder of Brentwood Associates, a venture capital investment company, and was a general partner of all of the funds started by Brentwood Associates from inception in 1972 until 1989. He was a General Partner of Brentwood Associates until 1996. He has been a Special Limited Partner of each of the five Brentwood funds started since 1989, and he is a Special Advisory Partner to Redpoint Ventures I, which is a successor to Brentwood Associates’ information technology funds. Mr. Hagopian is also Chairman and President of Segue Productions, a feature film production company, and he is a Managing Partner of Apple Oaks Partners LLC, a private investment company which manages his own capital and the capital of one other individual. Mr. Hagopian serves on the board of directors of Maxim Integrated Products, a semiconductor company. Mr. Hagopian holds a bachelor of arts degree and an M.B.A., both from the University of California, Los Angeles.

 

Alton F. Irby III has been a director of Thomas Weisel Partners, Group, Inc. since February 2008. Mr. Irby is a founding partner of London Bay Capital LLC, a privately held investment firm, which was founded in May 2006 and he was founding partner of Tricorn Partners LLP, a privately held investment bank from May 2003 to May 2006. Prior to founding Tricorn Partners, Mr. Irby was a partner of Gleacher & Co. Ltd., was Chairman and Chief Executive Officer of HawkPoint Partners, formerly known as National Westminster Global Corporate Advisory, and was a founding partner of Hambro Magan Irby Holdings. He is the chairman of ContentFilm plc and also serves as a director of Catlin Group Limited, McKesson Corporation (and of one of McKesson Corporation’s U.K. subsidiaries) and several other privately held firms. Mr. Irby holds a bachelor’s degree from the Georgia Institute of Technology and served four years on active duty as an intelligence officer in the U.S. Marine Corps.

 

Timothy A. Koogle has been a director of Thomas Weisel Partners Group, Inc. since January 2006. In 1978, Mr. Koogle founded Phase 2, Inc., which was sold to Motorola, Inc. in 1981. Mr. Koogle served in a number of executive management positions with Motorola between 1981 and 1990. He was President

of Intermec Corporation and Corporate Vice President of its parent company, Western Atlas/ Litton, a multinational technology company from 1990 to 1995. Mr. Koogle was the founding Chief Executive Officer of Yahoo! Inc. from July 1995 to May 2001 and Chairman of the Board of Directors of Yahoo! from 1999 to 2001. Mr. Koogle served as Vice Chairman and Director of Yahoo! from May 2001 to August 2003. He is currently a private venture investor engaged in the formation and growth of early stage technology companies. He is also founder and Chief Executive Officer of Serendipity Land Holdings, LLC, a private land development company, and the Managing Director of The Koogle Foundation, a private philanthropic organization focused on the education of underprivileged youth. Mr. Koogle holds a bachelor of science degree from the University of Virginia and M.S. and D. Engr. degrees in mechanical engineering from Stanford University.

 

Michael G. McCaffery has been a director of Thomas Weisel Partners Group, Inc. since January 2006. Mr. McCaffery was the President and Chief Executive Officer of Stanford Management Company, a division of Stanford University that manages the university’s financial and real estate assets, from September 2000 to June 2006. Prior to joining Stanford Management Company, Mr. McCaffery spent twelve years at Robertson Stephens & Company Group, L.L.C., an investment banking and financial services firm, serving as President and Chief Executive Officer from January 1993 to December 1999 and subsequently as Chairman from January 2000 to December 2000. Mr. McCaffery is a director of KB Home and serves as the Chief Executive Officer and as a director of Makena Capital LLC, an investment management firm. Mr. McCaffery received a bachelor of arts degree from Princeton University and an M.B.A. from Stanford Business School. He also holds a B.A. Honours and an M.A. as a Rhodes Scholar from Merton College at Oxford University.

 

Lionel F. Conacher joined Thomas Weisel Partners as President in January 2008 in connection with the acquisition of Westwind Capital Corporation and was also named our Chief Operating Officer in March 2008. Prior to joining Thomas Weisel Partners, Mr. Conacher served as an officer of Westwind since 2002, first as a Managing Director and then as the Chief Executive Officer and President. Prior to his employment by Westwind, Mr. Conacher held positions with Citigroup, Brookfield Asset Management and National Bank Financial. Mr. Conacher holds a bachelor’s degree from Dartmouth College in Economics and Art History.

 

David A. Baylor has served as our Chief Financial Officer since April 2007. Mr. Baylor has previously served as our Chief Administrative Officer from January 2004 to March 2007 and as our General Counsel from October 1998 until March 2004. Previously, Mr. Baylor was a certified public accountant with Deloitte & Touche LLP, a corporate and securities attorney with Howard, Rice, Nemerovski, Canady, Falk & Rabkin, and a managing director with Montgomery Securities. Mr. Baylor received a bachelor of science degree from Arizona State University and a J.D. from the University of California, Berkeley. On March 5, 2008, we announced that Mr. Baylor had given notice of his intention to resign his position to pursue other opportunities and that he would remain as Chief Financial Officer through a transition period.

 

Keith Gay joined Thomas Weisel Partners in 1999 and has served as our Director of Research since February 2008 and served as our Associate Director of Research prior to that time. Prior to his becoming Associate Director of Research, Mr. Gay was a Research Analyst who followed Applications Software in the Technology sector from 2000 to 2005 at Thomas Weisel Partners. From 1996 until 1999, he was a Managing Director and a Senior Research Analyst at NationsBanc Montgomery Securities, where he followed the Education and Training sectors. Prior to his employment with NationsBanc Montgomery Securities, Mr. Gay was a Vice President in Investment Banking at Merrill Lynch & Co., where he covered the General Industrials sector. He entered the investment banking business following a ten-year career in the U.S. Air Force, where he was an Assistant Professor at the U.S. Air Force Academy Department of Management. Mr. Gay received a Bachelor of Arts degree in Economics from the University of California at Los Angeles and a Master of Business Administration degree from the Anderson School at the University of California at Los Angeles.

Mark P. Fisher has served as our General Counsel since May 2005. From January 1998 until May 2005, prior to joining Thomas Weisel Partners, Mr. Fisher practiced corporate and securities law at Sullivan & Cromwell LLP. Mr. Fisher received a bachelor of arts degree from Stanford University, a J.D. from Harvard Law School and a Ph.D. in economics from the University of Chicago.

 

William L. McLeod joined Thomas Weisel Partners in 2004 and has served as Co-Director of Investment Banking and Director of Capital Markets since July 2007. Prior to serving as Co-Director of Investment Banking, Mr. McLeod served as a Managing Director with Thomas Weisel Partners’ Investment Banking department. Mr. McLeod has over 17 years of Wall Street investment banking experience, including, prior to joining Thomas Weisel Partners, at Banc of America Securities, as Co-Head of U.S. Equity Capital Markets, and at J.P. Morgan Securities. Mr. McLeod has a bachelor’s degree from Southern Methodist University and an M.B.A. from the University of Chicago.

 

Brad Raymond joined Thomas Weisel Partners in 2004 and has served as Co-Director of Investment Banking since July 2007. Prior to serving as Co-Director of Investment Banking, Mr. Raymond served as a Managing Director with Thomas Weisel Partners’ Investment Banking department. Mr. Raymond has more than 14 years of investment banking experience, with a focus on the technology sector. Prior to joining Thomas Weisel Partners, Mr. Raymond was affiliated with Morgan Stanley from 1999 to 2004, including serving as Co-Head of Software Investment Banking. In addition, Mr. Raymond worked within the technology investment banking groups at both J.P. Morgan Securities and Alex. Brown & Sons. Mr. Raymond has a bachelor’s degree from Harvard College and an M.B.A. from the Haas School of Business at the University of California at Berkeley.

 

Paul C. Slivon joined Thomas Weisel Partners as a Partner in Institutional Sales in 1999 and has served as our Director of Institutional Sales since May 2001. From January 1993 until January 1999, prior to joining Thomas Weisel Partners, Mr. Slivon served as Managing Director of Institutional Sales at Robertson Stephens & Company Group, L.L.C., an investment banking and financial services firm. Previously, Mr. Slivon was Senior Vice President of Kemper Securities. Mr. Slivon received a bachelor of arts degree from Amherst College and an M.B.A. from the University of California, Los Angeles.

 

Anthony V. Stais has served as our Director of Trading since September 2006, and previously served as Co-Director of Trading since June 2005. Mr. Stais joined Thomas Weisel Partners in January 2001 and served as our Director of Sales-Trading from January 2001 to June 2005. Prior to joining Thomas Weisel Partners, between August 1987 and January 2001, Mr. Stais worked at Goldman Sachs, Merrill Lynch and Salomon Brothers in both institutional sales trading and wealth management. Mr. Stais received a bachelor of arts degree from Bowdoin College.

 

There are no family relationships among any of our directors and executive officers. There are no contractual obligations regarding election of our directors, except that we have agreed with Mr. Weisel in his employment agreement to take all reasonable action to cause him to be appointed or elected to our board of directors during his employment with us.

PART II

 

4,914,440 shares, after subtracting the unaffiliated underwriters’ discount and other expenses, were approximately $66.2 million.

 

The proceeds of our initial public offering were used as follows: (i) $7.9 million was used to payoff notes payable, (ii) $18.3 million was used to increase the capital of our broker-dealer subsidiary, Thomas Weisel Partners LLC, (iii) $25.0 million was used to provide seed investment funds for new asset management products and (iv) $15.0 million was used to pay transaction consideration to shareholders of Westwind in connection with our acquisition of Westwind on January 2, 2008.

 

 

These repurchases were funded through cash and cash equivalents. The shares were retired upon repurchase.

 

 

As of December 31, 2007, there were approximately 115 holders of record of our common stock. This number does not include stockholders for whom shares were held in “nominee” or “street” name. No dividends have been declared or paid on our common stock. We do not currently anticipate that we will pay any cash dividends on our common stock in the foreseeable future.

 

On January 9, 2008, our shares of common stock were approved for listing on the Toronto Stock Exchange (“TSX”) under the symbol “TWP”. The listing on the TSX was undertaken in connection with our acquisition of Westwind. Shares of our common stock are quoted in Canadian dollars on the TSX.

 

 

Performance Graph

 

The following graph and table compare:

 

 

The graph and table assume $100 was invested on the starting date at the price indicated above and that dividends, if any, were reinvested on the date of payment without payment of any commissions. The performance shown in the graph and table represents past performance and should not be considered an indication of future performance.

 

 

 

The information provided above under the heading “Performance Graph” shall not be considered “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

Set forth below is selected consolidated financial and other data of Thomas Weisel Partners Group, Inc. ( in thousands, except Selected Data and Ratios ). The Selected Data and Ratios have been obtained or derived from our records. The data below should be read in conjunction with Item 1A — “Risk Factors”, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements and the notes to our consolidated financial statements.

 

 

 

 

 

 

 

 

We are currently facing difficult market and economic conditions. Due to the recent downturn in the market and possibility of recession within the U.S. economy, client activity levels have decreased resulting in, among other things, lower overall investment banking activity. It is difficult to predict when conditions will change.

 

The following table provides a summary of the results of our operations (dollar amounts in thousands):

 

 

 

Investment Banking Revenue

 

Our investment banking revenues include (i) management fees, underwriting fees, selling concessions and agency placement fees earned through our participation in public offerings and private placements of equity and debt securities, including convertible debt, and (ii) fees earned as strategic advisor in mergers and acquisitions and similar transactions. Investment banking revenues are typically recognized at the completion of each transaction. Underwriting revenues are presented net of related expenses.

Unreimbursed expenses associated with private placement and advisory transactions are recorded as non-compensation expenses.

 

The following table sets forth our investment banking revenues and the number of investment banking transactions (dollar amounts in thousands):

 

 

2007 versus 2006.   Investment banking revenue increased $3.1 million in 2007 from 2006. Our average revenue per transaction increased to $1.5 million in 2007 from $1.4 million in 2006. During 2007 and 2006, we closed 83 and 87 investment banking transactions, respectively. During 2007 and 2006, approximately 31% and 34%, respectively, of our investment banking revenue was earned from the ten largest transactions during the respective year. We joint book-managed our own initial public offering and follow-on offering in 2006 but did not include those transactions in our transaction count, did not recognize revenue relating to those transactions and did not include those transactions in calculating our revenue per transaction measures.

 

Capital raising revenue accounted for 61.0% and 75.0% of our investment banking revenue in 2007 and 2006, respectively. Capital raising revenue decreased $15.4 million in 2007 from 2006. Our average revenue per capital raising transaction decreased to $1.2 million in 2007 from $1.3 million in 2006. During 2007 and 2006, we closed 66 and 72 capital raising transactions, respectively.

 

Strategic advisory revenue accounted for 39.0% and 25.0% of our total investment banking revenue in 2007 and 2006, respectively. Strategic advisory revenue increased $18.5 million in 2007 from 2006. Our average revenue per strategic advisory transaction increased to $2.9 million in 2007 from $2.1 million in 2006. The increase in our average revenue per strategic advisory transaction was primarily due to a single strategic advisory transaction which resulted in $13.4 million of revenue. During 2007 and 2006, we closed 17 and 15 strategic advisory transactions, respectively.

 

2006 versus 2005.   Investment banking revenue increased $48.8 million in 2006 from 2005. Our average revenue per transaction increased to $1.4 million in 2006 from $1.2 million in 2005. During 2006 and 2005, we closed 87 and 63 investment banking transactions, respectively. During 2006 and 2005, approximately 34% and 43%, respectively, of our investment banking revenue was earned from the ten largest transactions during the respective year.

 

Capital raising revenue accounted for 75.0% and 57.7% of our investment banking revenue in 2006 and 2005, respectively. Capital raising revenue increased $49.6 million in 2006 from 2005. Our average revenue per capital raising transaction increased to $1.3 million in 2006 from $0.9 million in 2005. During 2006 and 2005, we closed 72 and 48 capital raising transactions, respectively.

 

Strategic advisory revenue accounted for 25.0% and 42.3% of our total investment banking revenue in 2006 and 2005, respectively. Strategic advisory revenue decreased $0.8 million in 2006 from 2005. Our number of strategic advisory transactions and our average revenue per strategic advisory transaction were 15 and $2.1 million for both 2006 and 2005. Strategic advisory revenues for 2005 included

approximately $13.2 million of revenues generated from multiple advisory services we performed for a single client.

 

Our investment banking engagements usually relate to only one potential transaction and do not provide us with long-term contracted sources of revenue. As a result, our investment banking revenues have and likely will continue to vary significantly between periods. In addition, our investment banking revenues are affected by the overall level of capital raising and mergers and acquisitions activity in the marketplace. Based on data from Dealogic, PrivateRaise, Bloomberg, Securities Data Corp. and other data sources, U.S. equity capital markets transactions (including IPOs, secondary offerings, convertible debt securities offerings, registered direct offerings and private placements) and mergers and acquisitions activity is estimated as follows:

 

 

 

 

Based upon the market information presented above, for 2007, within our target sectors the number of transactions decreased 7.5% while the revenue increased 6.2% from 2006. This compares to our number of transactions which decreased 4.6% and our revenue which increased 2.5% in 2007 compared to 2006.

 

Brokerage Revenues

 

Our brokerage revenues include (i) commissions paid by customers from brokerage transactions in equity securities, (ii) spreads paid by customers on convertible debt securities, (iii) trading gains and losses which result from market making activities, from our commitment of capital to facilitate customer transactions and from proprietary trading activities relating to our convertible debt and special situations trading groups, (iv) advisory fees paid to us by high-net-worth individuals and institutional clients of our private client services group, which are generally based on the value of the assets we manage and (v) fees paid to us for research.

 

The concentration in brokerage revenues among our ten largest brokerage clients was 22%, 26% and 32% in 2007, 2006 and 2005, respectively, which represents approximately $26 million, $32 million and $45 million of brokerage revenues, respectively.

 

2007 versus 2006.   Brokerage revenue decreased $3.6 million in 2007 from 2006. The decreases were primarily attributable to decreases in trading volumes in our institutional equity business, partially offset by improvements in our convertible bonds and private client services businesses.

 

The combined average daily volume on the New York Stock Exchange and Nasdaq was approximately 3.7 billion shares in 2007, an increase of 3.4% from 2006. Our combined average daily customer trading volume decreased 11.0% in 2007 from 2006 primarily due to declines in the volume of shares we traded for our institutional brokerage customers. We believe the decline in our trading volume for institutional customers is partially due to the increased use of alternative trading systems by our customers, a decrease in the willingness of our traditional brokerage customers to pay full-service commissions in order to access our equity research and other factors.

In response to these factors, we have taken several steps, including (i) increasing our focus on middle markets customers, who account for an increasing amount of trading commissions with the brokerage industry and who, in many cases, are engaging in investing activities that utilize our equity research, (ii) developing our product offerings within electronic trading in order to attract and retain trading volume from customers who are shifting away from utilizing full-service brokerage services and increasing their use of alternative trading systems and (iii) broadening our geographic coverage.

 

2006 versus 2005.   Brokerage revenue decreased $14.7 million in 2006 from 2005. The decrease was primarily attributable to lower revenue from our institutional business due to a reduction in our average daily volume of shares traded for our customers as well, as a decline in our average commissions per share. This overall decrease in brokerage revenue was partially offset by an increase in research fees and our private client services business.

 

The combined average daily volume on the New York Stock Exchange and Nasdaq was approximately 3.6 billion shares in 2006, an increase of 9.5% from 2005. Our combined average daily customer trading volume decreased 11.9% in 2006 from 2005 primarily due to declines in the volume of shares we traded for our institutional brokerage customers.

 

In March 2006, we entered into an arrangement with Fidelity Management & Research Company, one of our largest institutional brokerage clients in terms of commission revenue, under which Fidelity will separate payments for research products or services from trading commissions for brokerage services and will pay for research directly in cash, instead of compensating us through trading commissions as under soft dollar practices. Since entering into this agreement, our brokerage revenues from Fidelity have materially decreased as compared to those we received in 2005.

 

Asset Management Revenue

 

Our asset management revenues include (i) fees from investment partnerships we manage, (ii) allocation of the appreciation and depreciation in the fair value of our investments in the underlying partnerships, (iii) fees we earn from the management of equity distributions received by our clients and (iv) other asset management-related realized and unrealized gains and losses on investments not associated with investment partnerships, which investments are primarily equity securities.

 

The following table sets forth our asset management revenues (dollar amounts in thousands):

 

 

2007 versus 2006.   Asset management revenue increased $7.7 million in 2007 from 2006. The increase was primarily due to increased investment gains in partnerships of $5.3 million due to gains from several of our investment funds, as well as increased management fees of $3.5 million. These increases were partially offset by a decrease of $1.2 million in investment gains in other securities in 2007 compared to 2006.

 

Management fees increased $3.5 million in 2007 from 2006. This increase was primarily attributable to an increase in fees received from Thomas Weisel Global Growth Partners (“TWGGP”) and Thomas Weisel Healthcare Venture Partners (“TWHVP”) of $2.2 million and $1.1 million, respectively. These increases were the result of certain management fees being waived in 2006 that were not waived in 2007. In addition, in 2007, the Thomas Weisel India Opportunity fund was created which resulted in management fees of $0.6 million.

Investment gains in partnerships increased $5.3 million in 2007 from 2006. This increase was primarily due to an increase in investment gains from Thomas Weisel Venture Partners, TWHVP and TWGGP of $9.6 million, $1.5 million and $0.6 million, respectively. These increases in investment gains in partnerships were partially offset by a decrease in investment gains in partnerships of $6.3 million from Thomas Weisel Capital Partners (“TWCP”).

 

2006 versus 2005.   Asset management revenue decreased by $10.9 million in 2006 from 2005. The decrease was primarily due to the fact that in 2006 we no longer received management fees from TWCP, which were $15.6 million in 2005. TWCP is a late-stage private equity fund whose management was transferred to a third-party in the fourth quarter of 2005. Although we no longer receive management fees from TWCP, we have retained our capital account in TWCP and will receive gain and loss allocations in respect of our capital account balance.

 

Management fees decreased $16.8 million in 2006 from 2005. As discussed above, the decrease is primarily attributable to the transfer of management of TWCP from which we received $15.6 million in management fees in 2005.

 

Investment gains in partnerships increased $8.0 million in 2006 from 2005, primarily due to an increase in investment gains received from TWCP and TWHVP of $5.4 million and $2.6 million, respectively. The increase in investment gains from partnerships was offset by a decrease in investment gains in other securities of $2.2 million in 2006 compared to 2005.

 

 

2007 versus 2006.   Other revenue of $0.9 million recorded in 2007 relates to the gain, net of selling costs, on the sale of certain software previously developed for internal use. At the time of sale there were no amounts capitalized relating to this software.

 

 

Compensation and Benefits Expense

 

Compensation and benefits expenses to secure the services of our employees have been the largest component of our total expenses. Compensation and benefits expense includes salaries, overtime, bonuses, commissions, share-based compensation, benefits, severance, employment taxes and other employee costs.

We have a discretionary bonus plan based on a combination of firm and individual performance and we have entered into guaranteed contractual agreements with employees that require specified bonus payments, both of which are accrued over the service periods. These bonuses make up a significant portion of our compensation and benefits expense, particularly for our senior professionals.

 

In connection with the integration of Westwind, we have more closely aligned the compensation practices of the two firms with one another and with industry practice by discontinuing the payment of retention bonuses. We accelerated the payment of our 2008 retention bonuses, which were historically established at year-end and paid in the following July, so that they became part of the 2007 year-end bonuses, which were paid in February 2008. The Company recorded a one-time compensation expense of $22.0 million in the fourth quarter of 2007 related to this change in compensation practice, as well as a one-time expense of $2.8 million related to certain acquisition-related severance payments.

 

Share-based awards constitute a portion of our compensation expense, vest over a four-year service period (except for the share-based awards issued in connection with our initial public offering, which vest over a three-year period), are subject to continued employment and, accordingly, are recorded as non-cash compensation expense ratably over the service period beginning at the date of grant. As a result, our aggregate compensation expense has been, and will continue to be, impacted as we recognize multiple years of share-based compensation expense associated with the vesting of prior year grants in 2007 and subsequent years. As of December 31, 2007, there was (i) $7.4 million of unrecognized compensation expense related to non-vested restricted stock unit awards made in connection with our initial public offering, which is expected to be recognized over a weighted-average period of 1.1 years and (ii) an additional $17.9 million of unrecognized compensation expense related to non-vested restricted stock unit awards made subsequent to our initial public offering, which is expected to be recognized over a weighted-average period of 3.1 years. In addition, in February 2008 we granted share-based awards of $15.4 million, net of expected forfeitures, which will be recognized in compensation expense over the four-year vesting period beginning in February 2008 and ending in January 2012.

 

In connection with our initial public offering, we announced that we intended to target aggregate annual compensation and benefits expense (excluding expenses relating to share-based awards made in connection with our initial public offering) within the range of 55% to 58% of annual net revenues (excluding investment gains and losses attributable to investments in partnerships and other securities). In 2007, we were not able to comply with this policy due to the one-time compensation expense we incurred in the fourth quarter of 2007 related to the acceleration of 2008 mid-year retention bonuses and certain severance expenses.

 

Competitive pressures may require that we incur compensation and benefits expense in order to retain our professionals and recruit additional professionals regardless of the level of our net revenues. Further, new business initiatives and efforts to expand existing businesses generally require that we incur compensation and benefits expense before realizing associated additional revenues. As a result in 2008, we will not establish a target ratio of aggregate annual compensation and benefits expense to net revenues, although we will continue to evaluate thoroughly business and personnel decisions with respect to their impact on compensation and benefits expense.

 

2007 versus 2006.   Compensation and benefits expense increased $35.7 million in 2007 from 2006. The increase primarily relates to the one-time compensation expense of $24.8 million in the fourth quarter of 2007 attributable to the acceleration of the payment of 2008 mid-year retention bonuses and certain severance expenses, each of which were related to the integration of Westwind. In addition, the average number of employees increased during the year ended December 31, 2007 as compared to the year ended December 31, 2006 which has increased the salary related expenses during 2007. Compensation and benefits expense in 2007 and 2006 included $6.1 million and $7.0 million, respectively, of non-cash compensation expense relating to share-based awards made in connection with our initial public offering.

 

Compensation and benefits expense (excluding expenses relating to share-based awards made in connection with our initial public offering and excluding the one-time compensation expense in the

fourth quarter of 2007 attributable to the acceleration of the payment of 2008 mid-year retention bonuses and certain severance expenses, each of which were related to the integration of Westwind), as a percentage of net revenues (excluding investment gains and losses attributable to investments in partnerships and other securities) was 58% in 2007 compared to 55% in 2006. Including the one-time compensation expense in the fourth quarter discussed above, compensation and benefits expense (excluding expenses relating to share-based awards made in connection with our initial public offering), as a percentage of net revenues (excluding investment gains and losses attributable to investments in partnerships and other securities) was 67% in 2007.

 

2006 versus 2005.   Compensation and benefits expense decreased $2.0 million in 2006 from 2005. The decrease was primarily due to lower bonus expense as well as decreased use of temporary employees and consultants during 2006 as compared to 2005. Compensation and benefits expense in 2006 included $7.0 million of non-cash compensation expense relating to share-based awards made in connection with our initial public offering.

 

Compensation and benefits expense (excluding expenses relating to share-based awards made in connection with our initial public offering), as a percentage of net revenues (excluding investment gains and losses attributable to investments in partnerships and other securities) decreased to 55% in 2006 from 63% in 2005.

 

Non-Compensation Expenses

 

Our non-compensation expenses include brokerage execution, clearance and account administration, communications and data processing, depreciation and amortization, marketing and promotion, occupancy and equipment and other expenses.

 

2007 versus 2006.   Non-compensation expenses increased $5.9 million in 2007 from 2006. The overall increase in non-compensation expenses was primarily due to increases in marketing and promotion expense, other expenses and communication expense of $3.6 million, $3.3 million and $2.3 million, respectively. Marketing and promotion expense increased primarily due to increased travel and entertainment related to the geographic expansion of our business. Other expense increased as a result of expenses related to a third-party private equity management agreement which began in late 2006 and communications expenses increased due to our opening additional offices during the year ended December 31, 2007. These increases were partially offset by a decrease of $2.3 million in brokerage, execution, clearance and account administration expense due to improved efficiencies in our trade execution practices and lower NYSE exchange rate fees, as well as less clearance charges associated with lower trading volume.

 

2006 versus 2005.   Non-compensation expenses decreased $3.6 million in 2006 from 2005. The overall decrease in non-compensation expenses was primarily due to brokerage execution, clearance and account administration expense decreasing $4.3 million due to lower share volume and decreased execution expenses as a result of our conversion to a new primary clearing broker. In addition, communications and data processing expense decreased $0.8 million as a result of lower data communications and IT equipment expenses, offset slightly by costs incurred in connection with converting our trading systems to a new primary clearing broker in May 2006. We received insurance recoveries during both 2006 and 2005, however, such recoveries received were greater in 2006 as compared to amounts received in 2005, which resulted in a decrease to other expense in 2006. This overall decrease was partially offset by an increase in occupancy and equipment expense primarily due to our decision to sublease, at a lower rate than our current lease rate, certain premises in San Francisco, Menlo Park and Boston. Finally, other expense increased $0.4 million due to increased professional services associated with operating as a public company, which included audit related fees and Sarbanes-Oxley consulting fees.

Provision for Taxes

 

Before completion of our initial public offering on February 7, 2006, we were a limited liability company and all of our income and losses were reportable by our individual members, and, accordingly, the U.S. Federal and state income taxes payable by our members, based upon their share of our net income, had not been reflected in our historical consolidated financial statements.

 

In connection with our initial public offering, we reorganized from a limited liability company into a corporation, and following that reorganization became subject to U.S. Federal and state income taxes. We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes , which requires the recognition of deferred tax assets and liabilities based upon temporary differences between the financial reporting and tax bases of our assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. During the three months ended March 31, 2006, we recognized a one-time tax benefit upon conversion to a corporation in connection with the establishment of our deferred tax asset balances, partially offset by a valuation allowance of $9.9 million. The valuation allowance was recorded because management at that time, concluded that a portion of the deferred tax benefit, which resulted from unrealized capital losses, more likely than not would not be realized due to the uncertainty of our ability to generate future capital gains to offset such capital losses. Based on the performance of the underlying investments in our investments in partnerships during the year ended December 31, 2006, we reduced the valuation allowance by $8.5 million. As of December 31, 2006, the deferred tax asset recorded to reflect these net unrealized losses was $1.4 million, and the related valuation allowance was $1.4 million.

 

In 2007, based upon the performance of the underlying investments in our investments in partnerships and our expectation as to the future performance of such investments, we reduced the valuation allowance from $1.4 million to zero and recognized a deferred tax benefit of $1.6 million on the increase in net unrealized losses. This resulted in a deferred tax asset balance at December 31, 2007 of $3.0 million. As a result we recognized deferred tax benefits during 2007 resulting in a 49.8% reduction in the effective tax rate for 2007.

 

Our effective tax rates for 2007 and 2006 were 100.7% and (33.7)%, respectively. The increase in our effective tax rate in 2007 from 2006 is primarily due to the one-time tax benefit in 2006, discussed above.

 

Business Combination

 

On January 2, 2008, we announced the completion of our acquisition of Westwind. Under the agreement, we indirectly acquired all of Westwind’s outstanding shares and Westwind became our indirect subsidiary. The purchase price was approximately $155 million, which consisted of $45 million in cash, 7,009,112 shares of our common stock valued at $15.35 per share (based on the average closing price over a five day period starting two days prior to the acquisition announcement date of October 1, 2007 and ending two days after the announcement date) and direct acquisition costs of $2.6 million consisting primarily of legal, accounting and advisory fees. Direct acquisition costs are included in other assets on our statements of financial condition. Common stock includes exchangeable shares, which are shares of our wholly owned Canadian subsidiary that are exchangeable for shares of our common stock.

 

operating activities and funds available under temporary loan agreements, will be adequate to meet our liquidity and regulatory capital requirements for the next 12 months.

 

The following table represents our cash and cash equivalents and other investments balances as of December 31, 2007 (in thousands):

 

 

Other investments includes $46.2 million in auction rate securities (“ARS”), which are variable rate debt instruments, having long-term maturity dates (approximately 2 to 33 years), but whose interest rates are reset through an auction process, most commonly at intervals of 7, 28 and 35 days. All of our auction rate securities are backed by pools of student loans and all were rated AAA/Aaa as of December 31, 2007. Our intent with respect to these investments is not to hold these securities to maturity, but rather to use the periodic auction feature to provide liquidity.

 

In January 2008 we sold a substantial portion of our auction rate securities holdings through the normal auction process and used the proceeds to fund our acquisition of Westwind. The net proceeds from these sales were $35.8 million, resulting in a balance of $10.4 million at January 31, 2008.

 

In February 2008, liquidity issues in the global credit markets resulted in the failure of auctions for our remaining $10.4 million of ARS. We continue to receive interest when due on our ARS at a weighted-average interest rate that is currently 5.6% and expect to continue to receive interest when due in the future. The principal associated with failed auctions will not be accessible until successful auctions occur, a buyer is found outside of the auction process, the issuers and the underwriters establish a different form of financing to replace these securities, or final payments come due according to contractual maturities ranging from 18 to 33 years. While the recent auction failures will limit our ability to liquidate these investments for some period of time, we do not believe the auction failures will materially impact our ability to fund our working capital needs, capital expenditures, or other business requirements.

 

 

In connection with our initial public offering of common stock, we issued $33 million of unsecured senior notes to our former Class D and Class D-1 shareholders and are required to make principal and interest payments on these notes in accordance with their terms. As of December 31, 2007, the outstanding principal balance under these notes was $25.4 million and is due in 2011.

 

We also have a secured financing arrangement with General Electric Capital Corporation that is secured by furniture, equipment and leasehold improvements, with a 3-year term and a variable interest rate at LIBOR plus 2.85%. As of December 31, 2007, the outstanding balance under this facility was $3.7 million and is due in 2008.

 

 

The timing of bonus and retention compensation payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees are generally paid salaries semi-monthly during the year, bonus payments, which make up a larger portion of total compensation, have historically been paid in February and July. In February 2008, we made aggregate cash bonus payments to our employees of approximately $25.6 million and, in addition, granted equity awards with a grant date fair value of $22.4 million. In addition, in February 2008 we made aggregate cash payments of $24.8 million to our employees attributable to the acceleration of the payment of 2008 mid-year retention bonuses, which had historically been paid in July, and certain severance expenses, each of which were related to the integration of Westwind.

 

On February 9, 2008, 249,649 shares of freely transferable common stock became deliverable to our employees in respect of share-based awards granted on February 9, 2007. We elected to settle a portion

of these vesting shares through a net settlement feature provided for in SFAS No. 123(R), Share-Based Payment, to meet the minimum statutory income tax withholding requirements of our employees. We made a payment of $0.8 million related to the net settlement of shares that vested on February 9, 2008. Our cash position and liquidity will be affected to the extent we elect to continue to settle a portion of vesting shares through net settlement in the future.

 

 

Thomas Weisel Partners LLC, our wholly-owned subsidiary and a registered securities broker-dealer, is subject to the net capital requirements of the NYSE and the SEC’s uniform net capital rule. NYSE and SEC regulations also provide that equity capital may not be withdrawn or cash dividends paid if certain minimum net capital requirements are not met. At December 31, 2007, 2006 and 2005 Thomas Weisel Partners LLC had excess net capital of $14.8 million, $51.9 million, and $34.6 million, respectively. Thomas Weisel Partner LLC’s excess net capital decreased from December 31, 2006 to December 31, 2007 primarily due to an increase in a receivable from Thomas Weisel Partners Group relating to operating expenses incurred by Thomas Weisel Partner LLC on behalf of Thomas Weisel Partners Group. Thomas Weisel Partners Group repaid $25 million of the receivable to Thomas Weisel Partners LLC in January 2008. Regulatory net capital requirements change based on certain investment and underwriting activities.

 

Our primary clearing broker is also the primary source of the short-term financing of our securities inventory. In connection with the provision of the short-term financing, Thomas Weisel Partners LLC is required to maintain deposits with our clearing broker. These deposits are included in our net receivable from or payable to clearing brokers. During the year ended December 31, 2007, increases in our securities inventory resulted in an increase of $14.0 million in the deposits we were required to maintain.

 

Due to the nature of our investment banking and brokerage businesses, liquidity is of critical importance to us. Accordingly, we regularly monitor our liquidity position, including our cash and net capital positions. From time to time we may borrow funds under temporary subordinated loan agreements with our primary clearing broker. Such funds would constitute capital for purposes of calculating our net capital position.

 

 

On January 2, 2008, we completed our acquisition of Westwind. At the closing of this transaction we made a cash payment of $45 million as the cash portion of the consideration for this acquisition. In addition, we expect to make cash payments of approximately $2.6 million for acquisition related costs.

 

 

As of December 31, 2007, we do not have any off-balance sheet arrangements that are expected to have or are reasonably likely to have an effect on our consolidated statements of financial condition, operations or cash flows.

 

Cash Flows

 

Cash and cash equivalents increased $12.9 million to $157.0 million at December 31, 2007 from $144.1 million at December 31, 2006.

 

Operating activities provided $4.6 million of cash in 2007. Our net income less non-cash items used $4.8 million of cash and cash equivalents during the year ended December 31, 2007. Non-cash items included in our net income of $20,000 were gains from partnership and other securities of $17.7 million and a deferred tax benefit of $5.2 million, offset partially by share-based compensation expenses and depreciation of $10.9 million and $6.5 million, respectively. The net effect of changes in operating assets and liabilities provided $9.4 million of cash during 2007. Accrued compensation increased $18.9 million

due to the acceleration of the payment of 2008 mid-year retention bonuses and certain severance expenses related to the integration of Westwind. These expenses were accrued as of December 31, 2007, however, as discussed above, were paid to our employees in February 2008. Offsetting the increase in our accrued compensation was the 2007 tax benefit of $9.5 million, which was recorded as an income tax receivable, resulting in a decrease of cash and cash equivalents. In addition, we capitalized $2.6 million of costs associated with the acquisition of Westwind resulting in a decrease of cash and cash equivalents during 2007. Finally, our net securities owned increased from December 31, 2006 to December 31, 2007 by $10.2 million which decreased cash and cash equivalents. This was offset by distributions received from investment partnerships of $11.5 million.

 

Investing activities provided $15.5 million of cash in 2007, which is the result of receiving proceeds from the sale of other investments of $177.8 million. This cash increase is offset by the purchase of $155.6 million of municipal and auction-rate securities, purchases of investments in private equity partnerships of $3.5 million and property and equipment of $3.2 million.

 

In 2007, financing activities used $7.1 million of cash, primarily due to repayments of notes payable of $30.8 million and share repurchases of $1.2 million partially offset by an addition to notes payable of $25.0 million. We entered into and subsequently repaid the $25.0 million under a temporary subordinated loan in May 2007.