UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
2008
|
or
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE TRANSITION PERIOD FROM ______ TO
______.
|
Commission
File Number: 000-51730
Thomas
Weisel Partners Group, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
20-3550472
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
San Francisco,
California 94104
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive office)
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.
þ
Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer
o
|
Accelerated
filer
þ
|
Non-accelerated
filer
o
|
Smaller
reporting company
o
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
o
Yes
þ
No
APPLICABLE
ONLY TO CORPORATE ISSUERS:
As of
November 5, 2008 there were 30,814,420 shares of the registrant’s common stock
outstanding, including 6,639,478 exchangeable shares of TWP Acquisition Company
(Canada), Inc., a wholly-owned subsidiary of the registrant. Each exchangeable
share is exchangeable at any time into a share of common stock of the
registrant, entitles the holder to dividend and other rights substantially
economically equivalent to those of a share of common stock, and, through a
voting trust, entitles the holder to a vote on matters presented to common
shareholders.
TABLE
OF CONTENTS
Item
Number
|
|
Page
|
|
PART I. FINANCIAL
INFORMATION
|
|
|
|
|
1. Unaudited Condensed
Consolidated Financial Statements
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
7
|
|
|
|
|
9
|
|
|
|
|
9
|
|
|
|
|
9
|
|
|
|
|
10
|
|
|
|
|
11
|
|
|
|
|
12
|
|
|
|
|
13
|
|
|
|
|
14
|
|
|
|
|
14
|
|
|
|
|
15
|
|
|
|
|
16
|
|
|
|
|
19
|
|
|
|
|
20
|
|
|
|
|
20
|
|
|
|
|
21
|
|
|
|
|
34
|
|
|
|
|
38
|
|
|
|
|
|
|
PART II. OTHER
INFORMATION
|
|
|
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
40
|
|
|
|
|
40
|
|
|
|
|
40
|
|
|
|
|
40
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
S-1
|
|
|
|
|
E-1
|
|
PART
I — FINANCIAL INFORMATION
Item 1.
Unaudited Condensed Consolidated Financial Statements
THOMAS
WEISEL PARTNERS GROUP, INC. AND SUBSIDIARIES
(In
thousands, except share and per share data)
(Unaudited)
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
110,443
|
|
|
$
|
157,003
|
|
Restricted
cash
|
|
|
6,718
|
|
|
|
6,718
|
|
Securities
owned
|
|
|
48,218
|
|
|
|
220,440
|
|
Receivable
from clearing brokers
|
|
|
6,328
|
|
|
|
—
|
|
Corporate
finance and syndicate receivables—net of allowance for doubtful accounts
of $308 and $725, respectively
|
|
|
4,6811
|
|
|
|
18,609
|
|
Investments
in partnerships and other securities
|
|
|
49,369
|
|
|
|
60,502
|
|
Other
investments
|
|
|
10,792
|
|
|
|
51,184
|
|
Property
and equipment—net of accumulated depreciation and amortization of $100,796
and $93,389, respectively
|
|
|
20,773
|
|
|
|
21,317
|
|
Receivables
from related parties—net of allowance for doubtful loans of $1,880 and
$1,849, respectively
|
|
|
2,7511
|
|
|
|
3,190
|
|
Other
intangible assets—net of accumulated amortization of $11,564 and zero,
respectively
|
|
|
31,1677
|
|
|
|
—
|
|
Deferred
tax asset
|
|
|
36,9722
|
|
|
|
21,093
|
|
Other
assets
|
|
|
45,3033
|
|
|
|
26,624
|
|
Total
assets
|
|
$
|
373,5155
|
|
|
$
|
586,680
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Securities
sold, but not yet purchased
|
|
$
|
23,514
|
|
|
$
|
163,933
|
|
Payable
to clearing brokers
|
|
|
190
|
|
|
|
4,778
|
|
Accrued
compensation
|
|
|
22,130
|
|
|
|
56,863
|
|
Accrued
expenses and other liabilities
|
|
|
57,308
|
|
|
|
60,094
|
|
Notes
payable
|
|
|
21,999
|
|
|
|
27,385
|
|
Deferred
tax liability
|
|
|
11,326
|
|
|
|
—
|
|
Total
liabilities
|
|
|
136,467
|
|
|
|
313,053
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Refer to Note 14 to the unaudited condensed
consolidated financial statements)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Exchangeable
common stock—par value $0.01 per share, 6,639,478 and zero
shares
authorized, issued and outstanding, respectively
|
|
|
66
|
|
|
|
—
|
|
Common
stock—par value $0.01 per share, 100,000,000 shares authorized, 25,683,803
and 25,235,470
shares
issued, respectively
|
|
|
257
|
|
|
|
252
|
|
Additional
paid–in capital
|
|
|
478,164
|
|
|
|
358,720
|
|
Accumulated
deficit
|
|
|
(222,299
|
)
|
|
|
(85,188
|
)
|
Accumulated
other comprehensive loss—net of tax benefits
|
|
|
(9,723
|
)
|
|
|
(157
|
)
|
Treasury
stock—at cost, 1,517,247 and zero shares, respectively
|
|
|
(9,417
|
)
|
|
|
—
|
|
Total
shareholders’ equity
|
|
|
237,048
|
|
|
|
273,627
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
373,515
|
|
|
$
|
586,680
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
THOMAS
WEISEL PARTNERS GROUP, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
(Unaudited)
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
banking
|
|
$
|
17,531
|
|
|
$
|
25,542
|
|
|
$
|
51,966
|
|
|
$
|
94,439
|
|
Brokerage
|
|
|
33,652
|
|
|
|
30,344
|
|
|
|
104,646
|
|
|
|
85,426
|
|
Asset
management
|
|
|
(2,329
|
)
|
|
|
6,714
|
|
|
|
(115
|
)
|
|
|
26,711
|
|
Interest
income
|
|
|
1,828
|
|
|
|
3,799
|
|
|
|
6,701
|
|
|
|
12,686
|
|
Other
revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
920
|
|
Total
revenues
|
|
|
50,682
|
|
|
|
66,399
|
|
|
|
163,198
|
|
|
|
220,182
|
|
Interest
expense
|
|
|
(1,636
|
)
|
|
|
(2,687
|
)
|
|
|
(5,214
|
)
|
|
|
(8,042
|
)
|
Net
revenues
|
|
|
49,046
|
|
|
|
63,712
|
|
|
|
157,984
|
|
|
|
212,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
excluding interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
36,869
|
|
|
|
38,304
|
|
|
|
119,046
|
|
|
|
119,689
|
|
Brokerage
execution, clearance and account administration
|
|
|
7,461
|
|
|
|
5,287
|
|
|
|
20,333
|
|
|
|
14,970
|
|
Communications
and data processing
|
|
|
5,502
|
|
|
|
4,642
|
|
|
|
17,101
|
|
|
|
13,794
|
|
Depreciation
and amortization of property and equipment
|
|
|
1,901
|
|
|
|
1,536
|
|
|
|
5,721
|
|
|
|
4,781
|
|
Amortization
of other intangible assets
|
|
|
3,833
|
|
|
|
—
|
|
|
|
11,564
|
|
|
|
—
|
|
Goodwill
impairment
|
|
|
92,597
|
|
|
|
—
|
|
|
|
92,597
|
|
|
|
—
|
|
Marketing
and promotion
|
|
|
3,329
|
|
|
|
3,868
|
|
|
|
11,151
|
|
|
|
10,523
|
|
Occupancy
and equipment
|
|
|
7,588
|
|
|
|
5,134
|
|
|
|
18,249
|
|
|
|
13,835
|
|
Other
expenses
|
|
|
9,445
|
|
|
|
7,055
|
|
|
|
25,039
|
|
|
|
17,351
|
|
Total
expenses excluding interest
|
|
|
168,525
|
|
|
|
65,826
|
|
|
|
320,801
|
|
|
|
194,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes
|
|
|
(119,479
|
)
|
|
|
(2,114
|
)
|
|
|
(162,817
|
)
|
|
|
17,197
|
|
Provision
for taxes (tax benefit)
|
|
|
(10,300
|
)
|
|
|
(1,314
|
)
|
|
|
(25,706
|
)
|
|
|
5,994
|
|
Net
income (loss)
|
|
$
|
(109,179
|
)
|
|
$
|
(800
|
)
|
|
$
|
(137,111
|
)
|
|
$
|
11,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$
|
(3.41
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(4.22
|
)
|
|
$
|
0.43
|
|
Diluted
net income (loss) per share
|
|
$
|
(3.41
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(4.22
|
)
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computation of per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
31,992
|
|
|
|
26,196
|
|
|
|
32,498
|
|
|
|
26,188
|
|
Diluted
weighted average shares outstanding
|
|
|
31,992
|
|
|
|
26,196
|
|
|
|
32,498
|
|
|
|
26,539
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
THOMAS
WEISEL PARTNERS GROUP, INC. AND SUBSIDIARIES
(In
thousands)
(Unaudited)
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOW FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(137,111
|
)
|
|
$
|
11,203
|
|
Non-cash
items included in net income (loss):
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
5,721
|
|
|
|
4,781
|
|
Amortization
of other intangible assets
|
|
|
11,564
|
|
|
|
—
|
|
Goodwill
impairment
|
|
|
92,597
|
|
|
|
—
|
|
Share-based
compensation expense
|
|
|
13,013
|
|
|
|
9,209
|
|
Excess
tax benefits from share-based compensation
|
|
|
—
|
|
|
|
(19
|
)
|
Deferred
tax benefit
|
|
|
(18,910
|
)
|
|
|
(986
|
)
|
Provision
for doubtful corporate finance and syndicate receivable
accounts
|
|
|
862
|
|
|
|
625
|
|
Provision
(credit) for facility lease loss
|
|
|
2,555
|
|
|
|
(208
|
)
|
Deferred
rent expense
|
|
|
(519
|
)
|
|
|
(533
|
)
|
Unrealized
and realized loss (gain) on investments in partnership and other
securities and other investments—net
|
|
|
4,414
|
|
|
|
(14,276
|
)
|
Unrealized
loss on warrants—net
|
|
|
5,246
|
|
|
|
—
|
|
Interest
amortization on notes payable
|
|
|
749
|
|
|
|
784
|
|
Other
|
|
|
(98
|
)
|
|
|
44
|
|
Net
effect of changes in operating assets and liabilities—net of effects from
acquisition:
|
|
|
|
|
|
|
|
|
Cash
segregated under Federal or other regulations
|
|
|
—
|
|
|
|
(250
|
)
|
Securities
owned and securities sold, but not yet purchased—net
|
|
|
34,046
|
|
|
|
(6,045
|
)
|
Corporate
finance and syndicate receivables—net
|
|
|
16,847
|
|
|
|
9,420
|
|
Distributions
from investment partnerships
|
|
|
6,902
|
|
|
|
7,250
|
|
Other
assets
|
|
|
(19,593
|
)
|
|
|
(10,471
|
)
|
Receivable
from/payable to clearing brokers—net
|
|
|
(4,434
|
)
|
|
|
(11,188
|
)
|
Accrued
expenses and other liabilities
|
|
|
(19,768
|
)
|
|
|
(7,046
|
)
|
Accrued
compensation
|
|
|
(47,587
|
)
|
|
|
(22,460
|
)
|
Net
cash used in operating activities
|
|
|
(53,504
|
)
|
|
|
(30,166
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOW FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(3,469
|
)
|
|
|
(1,846
|
)
|
Sale
of property and equipment
|
|
|
262
|
|
|
|
—
|
|
Acquisition—net
of cash received
|
|
|
(8,109
|
)
|
|
|
—
|
|
Partnership
investments purchased
|
|
|
(3,895
|
)
|
|
|
(2,019
|
)
|
Purchases
of other investments
|
|
|
(3,292
|
)
|
|
|
(112,143
|
)
|
Proceeds
from sale of other investments
|
|
|
44,146
|
|
|
|
94,910
|
|
Net
cash provided by (used in) investing activities
|
|
|
25,643
|
|
|
|
(21,098
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOW FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayment
of capital lease obligations
|
|
|
(110
|
)
|
|
|
(65
|
)
|
Addition
of notes payable
|
|
|
—
|
|
|
|
25,000
|
|
Repayment
of notes payable
|
|
|
(6,117
|
)
|
|
|
(29,833
|
)
|
Excess
tax benefits from share-based compensation
|
|
|
—
|
|
|
|
19
|
|
Cash
paid for net settlement of equity awards
|
|
|
(936
|
)
|
|
|
—
|
|
Share
repurchases
|
|
|
(9,417
|
)
|
|
|
(1,242
|
)
|
Net
cash used in financing activities
|
|
|
(16,580
|
)
|
|
|
(6,121
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(2,119
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(46,560
|
)
|
|
|
(57,385
|
)
|
CASH
AND CASH EQUIVALENTS—Beginning of period
|
|
|
157,003
|
|
|
|
144,085
|
|
CASH
AND CASH EQUIVALENTS—End of period
|
|
$
|
110,443
|
|
|
$
|
86,700
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW DISCLOSURE
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
4,262
|
|
|
$
|
7,213
|
|
Cash
paid for taxes
|
|
$
|
6,171
|
|
|
$
|
14,270
|
|
|
|
|
|
|
|
|
|
|
Non-cash
operating activities:
|
|
|
|
|
|
|
|
|
Warrants
received as partial payment for investment banking
services
|
|
$
|
1,049
|
|
|
$
|
—
|
|
Non-cash
investing activities:
|
|
|
|
|
|
|
|
|
Issuance
of common shares and exchangeable common shares for acquisition of
Westwind
|
|
$
|
107,450
|
|
|
$
|
—
|
|
Addition
of capital lease obligations
|
|
$
|
247
|
|
|
$
|
—
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
THOMAS
WEISEL PARTNERS GROUP, INC. AND SUBSIDIARIES
(Unaudited)
NOTE 1
— ORGANIZATION AND BASIS OF PRESENTATION
Organization
Thomas
Weisel Partners Group, Inc., a Delaware corporation, together with its
subsidiaries (collectively, the “Company”), is an investment banking firm
headquartered in San Francisco. The Company operates on an integrated basis and
is managed as a single operating segment providing investment services that
include investment banking, brokerage, research and asset
management.
The
Company conducts its investment banking, brokerage and research business through
the following subsidiaries:
|
·
|
Thomas
Weisel Partners LLC (“TWP”) – TWP is a registered broker-dealer under the
Securities Exchange Act of 1934, is a member of the New York Stock
Exchange, Inc. (“NYSE”), American Stock Exchange and the Financial
Industry Regulatory Authority (“FINRA”) and is also a registered
introducing broker under the Commodity Exchange Act and a member of the
National Futures Association. TWP introduces on a fully disclosed basis
its proprietary and customer securities transactions to other
broker-dealers for clearance and settlement. TWP conducts certain of its
activities through affiliates and branch offices in Canada and the United
Kingdom (“U.K.”) and through a representative office in
Switzerland.
|
|
·
|
Thomas
Weisel Partners Canada Inc. (“TWPC”) – TWPC is an investment dealer
registered in the Canadian provinces of Ontario, Quebec, Alberta, British
Columbia, Saskatchewan, Manitoba and Nova Scotia and is a member of the
Investment Industry Regulatory Organization of Canada. TWPC introduces on
a fully disclosed basis its proprietary and customer securities
transactions to another broker-dealer for clearance and
settlement.
|
|
·
|
Thomas
Weisel Partners International Limited (“TWPIL”) – TWPIL is a U.K.
securities firm authorized by the Financial Services Authority in the
U.K. In September 2008, TWPIL acquired the business and net
assets of Thomas Weisel Partners (UK) Limited (“TWP UK”), both wholly
owned subsidiaries, in exchange for shares of capital stock in
TWPIL.
|
|
·
|
Thomas
Weisel Partners (USA), Inc. (“TWP USA”) – TWP USA is a U.S. broker-dealer
and is registered with the Securities and Exchange Commission and FINRA.
Under an operating agreement it has with TWPC, TWP USA introduces on a
fully disclosed basis its proprietary and customer securities transactions
to another broker-dealer for clearance and
settlement. Subsequent to September 30, 2008, in October 2008
the business of TWP USA was consolidated with and into the business of
TWP.
|
TWPC, TWP
UK and TWP USA were acquired by the Company in January 2008 as a result of its
acquisition of Westwind Capital Corporation (refer to Note 2 –
Acquisition).
The
Company primarily conducts its asset management business through Thomas Weisel
Capital Management LLC (“TWCM”), a registered investment adviser under the
Investment Advisers Act of 1940, which is a general partner of a series of
investment funds in venture capital and fund of funds through the following
subsidiaries (the “Asset Management Subsidiaries”):
|
·
|
Thomas
Weisel Global Growth Partners LLC (“TWGGP”), a registered investment
adviser under the Investment Advisers Act of 1940, which provides fund
management and private investor access to venture and growth managers.
TWGGP also manages investment funds that are active buyers of secondary
interests in private equity funds, as well as portfolios of direct
interests in venture-backed
companies;
|
|
·
|
Thomas
Weisel Healthcare Venture Partners LLC (“TWHVP”), the managing general
partner of a venture capital fund that invests in the emerging life
sciences and medical technology sectors, including medical devices,
specialty pharmaceuticals, emerging biopharmaceuticals, drug delivery
technologies and biotechnology;
|
|
·
|
Thomas
Weisel India Opportunity LLC (“TWIO”), the managing general partner of a
fund of funds targeting venture capital and private equity funds primarily
investing in growth businesses in India;
and
|
|
·
|
Thomas
Weisel Venture Partners LLC (“TWVP”), the managing general partner of an
early stage venture capital fund that invests in emerging information
technology companies.
|
Basis
of Presentation
These
unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) for interim financial information and Regulation S-X,
Article 10 under the Securities Exchange Act of 1934. Because the Company
provides investment services to its clients, it follows certain accounting
guidance used by the brokerage and investment industry.
The
preparation of the Company’s condensed consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual amounts could differ from those
estimates, and such differences could be material to the condensed consolidated
financial statements.
The
condensed consolidated financial statements and these notes are unaudited and
exclude some of the disclosures required in annual financial statements.
Management believes it has made all necessary adjustments (consisting of only
normal recurring items) so that the condensed consolidated financial statements
are presented fairly and that estimates made in preparing its condensed
consolidated financial statements are reasonable and prudent. The condensed
consolidated statements of operations may not be indicative of future
results.
These
condensed consolidated financial statements should be read in conjunction with
the Company’s consolidated financial statements included in its Annual Report on
Form 10-K for the year ended December 31, 2007.
On
January 2, 2008, the Company acquired Westwind Capital Corporation (“Westwind”),
a full-service, institutionally oriented, independent investment bank focused on
the energy and mining sectors. Westwind, which was founded in 2002 and
headquartered in Toronto, has additional offices in Calgary and the U.K. Under
the agreement, the Company indirectly acquired 100 percent of Westwind’s
outstanding shares and Westwind became an indirect subsidiary of the Company.
The Company acquired Westwind in order to further expand its geographic coverage
in both Canada and the U.K., as well as expand its industry coverage into the
energy and mining sectors of the economy.
The
purchase price was allocated between the business acquisition and the
non-compete agreements executed with Westwind’s employee shareholders on a fair
value basis. Total consideration was approximately $156 million,
which consisted of $45 million in cash, 7,009,112 shares of the Company’s 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 $3.1 million consisting primarily of legal, accounting and
advisory fees. Common stock issued includes 6,639,478 exchangeable
shares, which are shares issued by a Canadian subsidiary of the Company and are
exchangeable for shares of the Company’s common stock.
The
Company accounted for its acquisition of Westwind utilizing the purchase method
as required by Statement of Financial Accounting Standards No. 141,
Business Combinations
(“SFAS
No. 141”). The results of operations for the acquired business are
included in the accompanying condensed consolidated statements of operations
since the acquisition date and, in accordance with the purchase method, all
assets and liabilities were recorded at fair value as of the acquisition
date.
The
following sets forth the Company’s allocation of the purchase price
consideration (
in
thousands
):
Cash
|
|
$
|
36,891
|
|
Securities
owned
|
|
|
9,917
|
|
Goodwill
|
|
|
98,204
|
|
Other
intangible assets
|
|
|
21,000
|
|
Other
tangible liabilities assumed–net
|
|
|
(19,284
|
)
|
Deferred
tax liabilities on acquired identifiable intangible assets
|
|
|
(7,106
|
)
|
|
|
|
|
|
Total
purchase price allocation for the business acquisition
|
|
|
139,622
|
|
|
|
|
|
|
Non-compete
agreements
|
|
|
24,033
|
|
Deferred
tax liability on acquired non-compete agreements
|
|
|
(8,133
|
)
|
|
|
|
|
|
Total
consideration
|
|
$
|
155,522
|
|
Under
business combination accounting, the total purchase price was allocated to
Westwind’s net tangible and identifiable intangible assets based on their
estimated fair values as of January 2, 2008. The excess of the purchase price
over the net tangible and identifiable intangible assets was recorded as
goodwill. In addition to the acquisition of the business, the Company also
entered into non-compete agreements with a majority of the Westwind employee
shareholders who became employees of the Company subsequent to the
acquisition. These non-compete agreements generally apply for a
period of 1 to 3 years following the employee’s departure from the Company (if
that departure occurs within the first three years following the Company’s
acquisition of Westwind) and include a liquidated damages provision that would
require employees who breach the non-compete agreement to pay the Company an
amount equal to 50% of the consideration received for their shares in
Westwind.
We
recorded goodwill as of the acquisition date of $98.2 million as a result of the
premium paid to acquire a full service investment bank with seasoned banking and
institutional personnel primarily focused on the energy and mining sectors of
the economy.
In
accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(“SFAS No. 142”), the Company is required to annually evaluate goodwill
to determine whether it is impaired. Goodwill is also required to be
tested between annual impairment tests if an event occurs or circumstances
change that would reduce the fair value of a reporting unit below its carrying
amount.
During
the nine months ended September 30, 2008, the Company experienced a significant
decline in its market capitalization which was affected by the uncertainty in
the financial markets. Further, the tightening of the credit markets
contributed to a sharp decline in the Company’s capital raising activities and a
significant decrease in revenues during this same period. Based on
the adverse change in business climate and the Company’s perception that the
climate is unlikely to change in the near term, the Company recorded an
estimated full impairment charge to the goodwill asset of $92.6
million. The estimated impairment charge was determined based on an
estimated fair value of the Company utilizing a discounted cash flow analysis,
reconciled to the Company’s market capitalization. In accordance with
the testing requirements of SFAS No. 142, the Company expects to complete its
test of goodwill during the fourth quarter of 2008 but does not expect that the
completed test will result in any changes to the estimated impairment
charge. The difference between the goodwill balance recorded on the
acquisition date and the amount impaired during the three months ended September
30, 2008 is due to the currency translation adjustment of $5.6
million.
The
following sets forth the other intangible assets recorded as a result of the
Westwind acquisition (
dollar
amounts in thousands
):
|
|
Fair
Value January 2, 2008
|
|
|
Accumulated
Amortization September 30, 2008
|
|
|
Net
Book Value September 30, 2008
|
|
Useful
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
18,400
|
|
|
$
|
3,595
|
|
|
$
|
14,805
|
|
7.5
years
|
Non-compete
agreements
|
|
|
24,033
|
|
|
|
6,009
|
|
|
|
18,024
|
|
3.0
years
|
Investment
banking backlog
|
|
|
2,600
|
|
|
|
1,960
|
|
|
|
640
|
|
1.0
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets
|
|
$
|
45,033
|
|
|
$
|
11,564
|
|
|
$
|
33,469
|
|
|
The
difference between the net book value of the other intangible assets presented
above and the amount presented within the consolidated statements of financial
condition is due to a currency translation adjustment of $2.3
million.
In
performing the purchase price allocation, the Company considered, among other
factors, its intention for future use of the acquired assets, analyses of
historical financial performance and estimates of future performance of
Westwind’s operations. The fair value of other intangible assets was
based on the income approach.
The
following sets forth the amortization of the other intangible assets based on
accelerated and straight-line methods of amortization over the respective useful
lives as of September 30, 2008 (
in thousands
):
Remainder
of 2008
|
|
$
|
3,833
|
|
2009
|
|
|
11,732
|
|
2010
|
|
|
10,889
|
|
2011
|
|
|
2,200
|
|
2012
|
|
|
1,720
|
|
Thereafter
|
|
|
3,095
|
|
|
|
|
|
|
Total
amortization
|
|
$
|
33,469
|
|
Unaudited
Pro Forma Financial Information
The
following unaudited pro forma financial information for the three and nine
months ended September 30, 2007 give effect to the Company’s acquisition of
Westwind as if the acquisition had occurred as of January 1, 2007. The unaudited
pro forma financial information is based on historical financial statements of
the Company and Westwind.
The
unaudited pro forma financial information was prepared using the purchase method
of accounting under SFAS No. 141 with the Company treated as the accounting
acquiror. The unaudited pro forma financial information does not purport to be
indicative of the results that would have actually been achieved had such
transactions been completed as of the assumed date and for the period presented,
or which may be achieved in the future.
The
following sets forth the unaudited pro forma financial information for the three
and nine months ended September 30, 2007 (
in thousands, except per share
data
):
|
|
Three
Months Ended
September
30, 2007
|
|
|
Nine
Months Ended
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net revenues
|
|
$
|
80,953
|
|
|
$
|
271,224
|
|
Pro
forma income (loss) before taxes
|
|
$
|
(4,234
|
)
|
|
$
|
15,845
|
|
Pro
forma net income (loss)
|
|
$
|
(2,392
|
)
|
|
$
|
9,815
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss) per share:
|
|
|
|
|
|
|
|
|
Pro
forma basic net income (loss) per share
|
|
$
|
(0.07
|
)
|
|
$
|
0.30
|
|
Pro
forma diluted net income (loss) per share
|
|
$
|
(0.07
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
Pro
forma weighted average shares used in the computation of per share
data:
|
|
|
|
|
|
|
|
|
Pro
forma basic weighted average shares outstanding
|
|
|
33,205
|
|
|
|
33,197
|
|
Pro
forma diluted weighted average shares outstanding
|
|
|
33,205
|
|
|
|
33,548
|
|
NOTE 3
— RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting
Standards No. 157 – “Fair Value Measurements” (“SFAS No. 157”)
. In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, which defines fair value, establishes a framework for measuring fair
value in GAAP and expands disclosures about fair value measurements. The primary
focus of SFAS No. 157 is to increase consistency and comparability in fair value
measurements, as well as provide better information about the extent to which
fair value is used to measure recognized assets and liabilities, the inputs used
to develop the measurements and the effect fair value measurements have on
earnings for the period, if any. The Company adopted SFAS No. 157 as of January
1, 2008. Adoption of SFAS No. 157 did not have a material impact on
the Company’s condensed consolidated statements of financial condition,
operations and cash flows. Under provisions set forth in FSP 157-2,
Effective Date of FASB Statement No.
157
, the Company has elected to defer adoption of SFAS No. 157 until
January 1, 2009 for nonfinancial assets and nonfinancial liabilities that are
not recognized or disclosed at fair value in the financial statements on a
recurring basis, for which, the Company does not expect the adoption of SFAS No.
157 to have a material impact on its condensed consolidated statements of
financial condition, results of operations or cash flows in future
periods.
The
Company’s financial assets and liabilities measured and reported at fair value
are classified and disclosed in one of the following categories:
|
·
|
Level
1 – Quoted prices are available in active markets for identical
investments as of the reporting date. The type of investments included in
Level 1 include listed equities. As required by SFAS No. 157, the Company
does not adjust the quoted price for these investments, even in situations
where it holds a large position and a sale could reasonably be expected to
affect the quoted price.
|
|
·
|
Level
2 – Pricing inputs are other than quoted prices in active markets, which
are either directly or indirectly observable as of the reporting date, and
fair value is determined through the use of models or other valuation
methodologies. Investments which are generally included in this category
are convertible bonds and other debt
securities.
|
|
·
|
Level
3 – Pricing inputs are unobservable for the investment and include
situations where there is little, if any, market activity for the
investment. The inputs into the determination of fair value require
significant management judgment or estimation. Investments that are
included in this category generally are general partnership interests in
private investment funds, warrants and convertible bonds that cannot be
publicly offered or sold unless registration has been affected under the
Securities Act of 1933.
|
In certain cases, the
inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, the financial asset or liability’s level within
the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment and it considers factors specific to the financial asset or
liability.
The
Company has valued its investments, in the absence of observable market prices,
using the valuation methodologies described above applied on a consistent basis.
Where little market activity exists for a financial asset or liability,
management’s determination of fair value is based on the best information
available in the circumstances and may incorporate management’s own assumptions
and involves a significant degree of management’s judgment.
Investments
for which market prices are not observable include private investments in the
equity of operating companies or investments in funds managed by others. Fair
values of private investments are determined by reference to public market or
private transactions or valuations for comparable companies or assets in the
relevant asset class when such amounts are available. Generally these valuations
are derived by multiplying a key performance metric of the investee company or
asset by the relevant valuation multiple observed for comparable companies or
transactions, adjusted by management for differences between the investment and
the referenced comparable. Private investments may also be valued at cost for a
period of time after an acquisition as the best indicator of fair
value.
The
determination of fair value using these Level 3 methodologies takes into
consideration a range of factors, including but not limited to the price at
which the investment was acquired, the nature of the investment, local market
conditions, trading values on public exchanges for comparable securities,
current and projected operating performance and financing transactions
subsequent to the acquisition of the investment. These valuation methodologies
involve a significant degree of management judgment.
Statement of Financial Accounting
Standards No. 159 – “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”)
. In February 2007, the FASB issued SFAS No.
159, which permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value and establishes presentation and disclosure requirements designed
to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. The Company adopted SFAS
No. 159 as of January 1, 2008. The Company has elected not to apply
the provisions of SFAS No. 159 to fair value its assets and liabilities and
instead will continue to fair value its assets and liabilities according to
preexisting fair value policies for specified types of eligible
items.
Statement of Financial Accounting
Standards No. 141R – “Business Combinations” (“SFAS No. 141R”).
In
December 2007, the FASB
issued SFAS No. 141R, which improves the relevance, representational
faithfulness and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
SFAS No. 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Early adoption of
SFAS No. 141R is not permitted. The Company plans to adopt SFAS No. 141R on
January 1, 2009, and adoption is not expected to have an impact on the Company’s
condensed consolidated statements of financial condition, operations and cash
flows.
Statement of Financial Accounting
Standards No. 160 – “
Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51” (“SFAS No.
160”).
In
December 2007, the FASB
issued SFAS No. 160, which improves the relevance, comparability and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. Early adoption of SFAS No. 160 is not permitted. The Company is currently
evaluating the impact, if any, that the adoption of SFAS No. 160 will have on
its condensed consolidated statements of financial condition, operations and
cash flows.
Statement of Financial Accounting
Standards No. 161 – “
Disclosures about Derivative
Instruments and Hedging Activities – an Amendment of FASB Statement No. 133”
(“SFAS No. 161”).
In
March 2008, the FASB
issued SFAS No. 161, which enhances disclosures about an entity’s derivative
instruments and hedging activities and thereby improves the transparency of
financial reporting. SFAS No. 161 is effective for financial statements issued
for fiscal years, and interim periods within those fiscal years, beginning after
November 15, 2008. Early adoption of SFAS No. 161 is encouraged. SFAS No. 161
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption. The Company plans to adopt SFAS No. 161 on January 1, 2009 and
adoption is not expected to have an impact on the Company’s condensed
consolidated statements of financial condition, operations and cash
flows.
Statement of Financial Accounting
Standards No. 162 – “The Hierarchy of Generally Accepted Accounting
Principles
” (“SFAS No.
162”).
In
May 2008, the FASB
issued SFAS No. 162, which identifies the sources of accounting principles and
the framework for selecting the principles used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
GAAP. SFAS No. 162 is effective as of November 15, 2008. As adoption of SFAS No.
162 is not expected to result in a change in current practice, the Company’s
adoption of SFAS No. 162 will not have an impact on its condensed consolidated
statements of financial condition, operations and cash flows.
NOTE 4
— SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
PURCHASED
Securities
owned and securities sold, but not yet purchased were as follows (
in thousands
):
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
Sold,
But
|
|
|
|
|
|
|
Sold,
But
|
|
|
|
|
|
|
|
Not
Yet
|
|
|
|
|
|
|
Not
Yet
|
|
|
|
Owned
|
|
|
Purchased
|
|
|
Owned
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
$
|
21,300
|
|
|
$
|
23,514
|
|
|
$
|
30,957
|
|
|
$
|
130,252
|
|
Convertible
bonds
|
|
|
25,360
|
|
|
|
—
|
|
|
|
189,483
|
|
|
|
18,351
|
|
Warrants
|
|
|
1,558
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
U.S.
Treasury securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities owned and securities sold, but not yet
purchased
|
|
$
|
48,218
|
|
|
$
|
23,514
|
|
|
$
|
220,440
|
|
|
$
|
163,933
|
|
At
September 30, 2008 and December 31, 2007, securities sold, but not yet
purchased were collateralized by securities owned that are held at the clearing
brokers.
Convertible
bonds include certain securities that cannot be publicly offered or sold unless
registration has been affected under the Securities Act of 1933. At September
30, 2008 the Company did not hold any of these securities and at December 31,
2007 the estimated fair value of these securities included in the convertible
bonds owned was $15.9 million.
Warrants
are received from time to time as partial payment for investment banking
services.
The
warrants provide the Company with the right to purchase common shares in both
public and private companies. All warrants were non-transferable as
of September 30, 2008 and certain of them have restricted periods during which
the warrant may not be exercised.
NOTE 5
— INVESTMENTS IN PARTNERSHIPS AND OTHER
SECURITIES
Investments
in partnerships and other securities primarily consist of investments in private
equity partnerships and direct investments in private companies. Included in
private equity partnerships are general partner interests in investment
partnerships and the adjustments recorded to reflect these investments at fair
value. The Company waived certain management fees with respect to certain of
these partnerships through March 31, 2007. These waived fees constitute deemed
contributions to the investment partnerships that serve to satisfy the Company’s
general partner commitment, as provided in the underlying investment
partnerships’ partnership agreements. The Company may be allocated a special
profits interest in respect of previously waived management fees based on the
subsequent investment performance of the respective partnerships.
The
investment partnerships in which the Company is a general partner may allocate
carried interest and make carried interest distributions to the general partner
if the partnerships’ investment performance reaches a threshold as defined in
the respective partnership agreements. The Company recognizes the
allocated carried interest if and when this threshold is met.
Other
investments consist of investments with maturities greater than three months
from the date of purchase and were recorded at fair value as follows (
in thousands
):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Auction
rate securities
|
|
$
|
9,456
|
|
|
$
|
46,150
|
|
Municipal
debt securities
|
|
|
—
|
|
|
|
4,016
|
|
Other
|
|
|
1,336
|
|
|
|
1,018
|
|
|
|
|
|
|
|
|
|
|
Total
other investments
|
|
$
|
10,792
|
|
|
$
|
51,184
|
|
As of
September 30, 2008, the Company held auction rate securities (“ARS”) with a par
value of $9.7 million and carrying value of $9.5 million. The ARS are
variable rate debt instruments, having long-term maturity dates (approximately
26 to 31 years), but whose interest rates are reset through an auction process,
most commonly at intervals of 7, 28 and 35 days. The interest earned on these
investments is exempt from Federal income tax. All of the Company’s ARS are
backed by pools of student loans and are rated Aaa/Aa3 and AAA/Aaa at September
30, 2008 and December 31, 2007, respectively. During the three months ended
September 30, 2008 the Company had an auction rate security redeemed at par in
the amount of $0.7 million. The Company continues to receive interest
when due on its ARS and expects to continue to receive interest when due in the
future. The weighted-average Federal tax exempt interest rate was
5.4% for September 2008.
In January 2008, the
Company sold a substantial portion of its ARS holdings at par and used the
proceeds to partially fund its acquisition of Westwind. Subsequent to
January 2008
, auction failures increased significantly. While it was not
unusual for supply to outweigh demand, banks running the auctions had
historically absorbed the excess supply in order to ensure a successful auction
and a liquid market. This process came to a halt as the result of the
dislocation in the credit markets during 2008.
The
principal balance of the Company’s ARS 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 the contractual
maturities. As a result of the auction failures, the Company
evaluates the credit risk and compares the yields on its ARS to similarly rated
municipal issues. The Company’s valuation of its ARS assesses the
credit and liquidity risks associated with the securities and determines the
fair values based on a discounted cash flow analysis. Key assumptions
of the discounted cash flow analysis included the following:
Coupon Rate
– In determining
fair value the Company uses an average near term historical interest rate for
these issues rather than a rate at a specific point in time which may over or
underestimate expected future interest payments. It is the Company’s
experience that average near term historical rates are a better predictor of
future interest payments due to the significant period to period fluctuations in
rates and the lack of transparency in how these rates are
determined. The average near term historical rates ranged from 3.7%
to 6.4%.
Discount Rate
– The Company’s
discount rate was based on a spread over the AAA Municipal General Revenue yield
curve and consisted of a spread of 475 bps over this yield curve which the
Company adjusted down to 65 bps over periods of time ranging from eight to
sixteen quarters. This spread is included in the discount rate to
reflect the current and expected illiquidity, which the Company expects to trend
toward the mean, in the ARS market. The average spread between
the Company’s ARS and the AAA Municipal General Revenue yield curve between
August 2004 and August 2007, a period in which auctions were not likely to fail,
averaged less than 10 basis points.
Timing of Liquidation
– The
Company’s cash flow projections consisted of various scenarios for each security
wherein it valued the ARS to points in time where it was in the interest of the
issuer, based on the fail rate, to redeem the securities. The
Company’s concluded values for each security were based on the average valuation
of these various scenarios. For the securities analyzed, the shortest
average time to liquidation was assumed to be 16.5 months.
Based on
the results of the discounted cash flow analysis, the Company determined that
its ARS had a fair value decline of $0.2 million during the nine months ended
September 30, 2008 which is recorded in asset management revenues on the
condensed consolidated statements of operations.
NOTE 7
— RELATED PARTY TRANSACTIONS
Receivables
from related parties consisted of the following (
in thousands
):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Co-Investment
Fund loans to employees and former employees
|
|
$
|
3,947
|
|
|
$
|
3,973
|
|
Employee
loans and other related party receivables
|
|
|
684
|
|
|
|
1,066
|
|
Less
– Allowance for doubtful loans
|
|
|
(1,880
|
)
|
|
|
(1,849
|
)
|
|
|
|
|
|
|
|
|
|
Total
receivables from related parties
|
|
$
|
2,751
|
|
|
$
|
3,190
|
|
Related
Party Loans
Employee Loans —
The Company
from time to time prior to its initial public offering made unsecured loans to
its employees. These loans were not part of a Company program, but were made as
a matter of course. The Company previously established a reserve for the face
value of these loans. In June 2007, two employees entered into
agreements with the Company that provide for repayment of the loans by December
31, 2008, if they have not already been repaid, from funds generated through
repurchase by the Company of shares of the Company’s common stock held by the
employees.
As a
result of these agreements, the Company reversed a previously established
reserve of $0.8 million in June 2007.
In
September 2008, the two employees collectively repaid $0.2 million of their
outstanding loan balances through the repurchase by the Company of shares of the
Company’s common stock held by the employees. The shares repurchased
by the Company as a result of this transaction are included in treasury stock at
September 30, 2008. In addition, in September 2008, the two employees
and the Company amended the agreements described above to extend the repayment
date of the loans to February 2011. As of September 30, 2008, the
fair market value of the Company’s common stock held by each of the employees
was greater than the outstanding amount of their loans.
Other
Related Party Transactions
The
Company provides personal office services to Mr. Weisel, its Chairman and
Chief Executive Officer. In accordance with an agreement he has with the
Company, Mr. Weisel reimburses the Company for out-of-pocket expenses the
Company incurs for these services. Amounts incurred by the Company for these
services for the three months ended September 30, 2008 and 2007 were
approximately $73,000 and $87,000, respectively. Amounts incurred for the nine
months ended September 30, 2008 and 2007 were approximately $264,000 and
$249,000, respectively. The receivable from Mr. Weisel at September 30, 2008 and
December 31, 2007 was approximately $73,000 and $160,000,
respectively.
In
addition, Mr. Weisel and certain other employees of the Company from time
to time use an airplane owned by Ross Investments Inc. (“Ross”), an entity
wholly-owned by Mr. Weisel, for business travel. The Company and Ross have
adopted a time-sharing agreement in accordance with Federal Aviation
Regulation 91.501 to govern the Company’s use of the Ross aircraft,
pursuant to which the Company reimburses Ross for the travel expenses in an
amount generally comparable to the expenses the Company would have incurred for
business travel on commercial airlines for similar trips. For the three months
ended September 30, 2008 and 2007, the Company paid approximately $15,000 and
$57,000, respectively, and for the nine months ended September 30, 2008 and
2007, the Company paid approximately $47,000 and $131,000, respectively, to Ross
on account of such expenses. These amounts are included in marketing and
promotion expense within the condensed consolidated statements of operations. As
of September 30, 2008 and December 31, 2007, the Company did not have any
amounts payable to Ross.
Notes
payable consisted of the following (
in thousands
):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
Principal
Amount
|
|
|
Carrying
Amount
|
|
|
Principal
Amount
|
|
|
Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Note, floating mid-term AFR
(4)
+ 2.25%
(1)
|
|
$
|
13,000
|
|
|
$
|
12,434
|
|
|
$
|
13,000
|
|
|
$
|
12,267
|
|
Senior
Note, floating mid-term AFR
(4)
+ 2.25%
(1)
|
|
|
10,000
|
|
|
|
9,565
|
|
|
|
10,000
|
|
|
|
9,436
|
|
Contingent
Payment Senior Note, non interest bearing
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,384
|
|
|
|
1,948
|
|
Secured
Note, floating at LIBOR + 2.85%
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,734
|
|
|
|
3,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable
|
|
$
|
23,000
|
|
|
$
|
21,999
|
|
|
$
|
29,118
|
|
|
$
|
27,385
|
|
(1)
|
The
Company has recorded the debt principal at a discount to reflect the
below-market stated interest rate of these notes at inception. The Company
amortizes the discount to interest expense so that the interest expense
approximates the Company’s incremental borrowing rate. The
effective interest rates at September 30, 2008 and December 31, 2007 were
5.22% and 6.65%, respectively.
|
(2)
|
The
Contingent Payment Senior Note has a variable due date based upon
distributions received from certain private equity funds. The Company
recorded the debt principal at a discount and amortized the discount to
interest expense so that the interest expense on this non-interest bearing
note approximated the Company’s incremental borrowing rate. During the
three and nine months ended September 30, 2008, the Company received
$1.9 million and $2.9 million, respectively, in distributions that were
used to repay principal on this note. During the three and nine months
ended September 30, 2007, the Company received $0.6 million and $2.0
million, respectively, in distributions that were used to repay principal
on this note. The effective interest rate at December 31, 2007
was 6.98%. The note was paid in full in September
2008.
|
(3)
|
The
note was paid in full in May 2008.
|
(4)
|
Applicable
Federal Rate.
|
As of
September 30, 2008 and December 31, 2007, the fair value for each of the notes
payable presented above approximates the carrying value as of September 30, 2008
and December 31, 2007, respectively.
In April
2008, TWP entered into a $25.0 million revolving note and subordinated loan
agreement with its primary clearing broker. This facility has not been drawn on
since it was entered into.
The
weighted-average interest rate for notes payable was 5.38% and 6.96% at
September 30, 2008 and December 31, 2007, respectively.
The
principal balances for the notes payable as of September 30, 2008 are due in
February 2011.
Covenants
The
Senior Notes include financial covenants including restrictions on additional
indebtedness and requirements that the notes are repaid should the Company enter
into a transaction to liquidate or dispose of all or substantially all of its
property, business or assets. The Company was in compliance with all covenants
at September 30, 2008.
NOTE 9
– FINANCIAL INSTRUMENTS
The
following is a summary of the fair value of the major categories of financial
instruments held by the Company (
in thousands
):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Securities
owned
|
|
$
|
48,218
|
|
|
$
|
220,440
|
|
Investments
in partnerships and other securities
|
|
|
49,369
|
|
|
|
60,502
|
|
Other
investments
|
|
|
10,792
|
|
|
|
51,184
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
108,379
|
|
|
$
|
332,126
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Securities
sold, but not yet purchased
|
|
$
|
23,514
|
|
|
$
|
163,933
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
23,514
|
|
|
$
|
163,933
|
|
The
following is a summary of the Company’s financial assets and liabilities as of
September 30, 2008 that are accounted for at fair value on a recurring basis by
level in accordance with the fair value hierarchy described in Note 3 – Recent
Accounting Pronouncements (
in
thousands
):
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
$
|
16,959
|
|
|
$
|
4,341
|
|
|
$
|
—
|
|
|
$
|
21,300
|
|
Convertible
bonds
|
|
|
—
|
|
|
|
25,360
|
|
|
|
—
|
|
|
|
25,360
|
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
1,558
|
|
|
|
1,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in partnerships and other securities
|
|
|
—
|
|
|
|
—
|
|
|
|
49,369
|
|
|
|
49,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
9,456
|
|
|
|
9,456
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
1,336
|
|
|
|
1,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
16,959
|
|
|
$
|
29,701
|
|
|
$
|
61,719
|
|
|
$
|
108,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold, but not yet purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
$
|
23,514
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
23,514
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,514
|
|
The
following is a summary of changes in fair value of the Company’s financial
assets that have been classified as Level 3 for the three months ended September
30, 2008 (
in
thousands
):
|
|
Convertible
Bonds Owned
|
|
|
Warrants
|
|
|
Investments
in Partnerships and Other Securities
|
|
|
Auction
Rate Securities
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
—
June 30,
2008
|
|
$
|
3,330
|
|
|
$
|
4,539
|
|
|
$
|
54,171
|
|
|
$
|
10,114
|
|
|
$
|
1,386
|
|
|
$
|
73,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
and unrealized gains (losses
)—
net
|
|
|
58
|
|
|
|
(2,771
|
)
|
|
|
(4,175
|
)
|
|
|
42
|
|
|
|
(50
|
)
|
|
|
(6,896
|
)
|
Purchases,
sales, issuances and settlements
—
net
|
|
|
(3,388
|
)
|
|
|
13
|
(1)
|
|
|
(627
|
)
(2)
|
|
|
(700
|
)
|
|
|
—
|
|
|
|
(4,702
|
)
|
Cumulative
translation adjustment
|
|
|
—
|
|
|
|
(223
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(223
|
)
|
Transfers
in (out)
—
net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
—
September 30,
2008
|
|
$
|
—
|
|
|
$
|
1,558
|
|
|
$
|
49,369
|
|
|
$
|
9,456
|
|
|
$
|
1,336
|
|
|
$
|
61,719
|
|
(1)
|
Warrants
are received from time to time as partial payment for investment banking
services. During the three months ended September 30, 2008, the
Company did not exercise any warrants that it
held.
|
(2)
|
Represents
the net of contributions to and distributions from investments in
partnerships and other securities.
|
The
following is a summary of changes in fair value of the Company’s financial
assets that have been classified as Level 3 for the nine months ended September
30, 2008 (
in
thousands
):
|
|
Convertible
Bonds Owned
|
|
|
Warrants
|
|
|
Investments
in Partnerships and Other Securities
|
|
|
Auction
Rate Securities
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
—
December 31,
2007
|
|
$
|
15,941
|
|
|
$
|
—
|
|
|
$
|
60,502
|
|
|
$
|
—
|
|
|
$
|
1,018
|
|
|
$
|
77,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
and unrealized gains (losses)
—
net
|
|
|
(1,830
|
)
|
|
|
(5,246
|
)
|
|
|
(8,124
|
)
|
|
|
(194
|
)
|
|
|
(83
|
)
|
|
|
(15,477
|
)
|
Purchases,
sales, issuances and settlements
—
net
|
|
|
(7,054
|
)
|
|
|
7,139
|
(1)
|
|
|
(3,009
|
)
(2)
|
|
|
1,100
|
|
|
|
401
|
|
|
|
(1,423
|
)
|
Cumulative
translation adjustment
|
|
|
—
|
|
|
|
(335
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(335
|
)
|
Transfers
in (out)
—
net
|
|
|
(7,057
|
)
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
8,550
|
|
|
|
—
|
|
|
|
1,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
—
September 30,
2008
|
|
$
|
—
|
|
|
$
|
1,558
|
|
|
$
|
49,369
|
|
|
$
|
9,456
|
|
|
$
|
1,336
|
|
|
$
|
61,719
|
|
(1)
|
On
January 2, 2008, the Company acquired $7.7 million of warrants as a result
of the Westwind acquisition. Other warrants are received from
time to time as partial payment for investment banking
services. During the nine months ended September 30, 2008, the
Company exercised $0.8 million of
warrants.
|
(2)
|
Represents
the net of contributions to and distributions from investments in
partnerships and other securities.
|
(3)
|
Represents
convertible bonds that were registered under the Securities Act of 1933
during the nine months ended September 30, 2008 that previously could not
be publicly offered or sold as registration had not yet been affected
under the Securities Act of 1933.
|
During
the three months ended March 31, 2008, ARS for which the auctions failed and
where no secondary market has developed were moved to Level 3, as the assets
were subject to valuation using unobservable inputs. These ARS
continued to be classified in Level 3 through September 30, 2008.
The total
net unrealized losses during the three and nine months ended September 30, 2008
of $7.0 million and $13.6 million, respectively, relates to financial assets
held by the Company as of September 30, 2008.
Realized
and unrealized gains and losses from other investments, investments in
partnerships and other securities, and warrants are included in asset management
revenues on the condensed consolidated statements of
operations. Realized and unrealized gains and losses from securities
owned and securities sold, but not yet purchased, except those related to
warrants, are included in brokerage revenues on the condensed consolidated
statements of operations.
NOTE 10
— NET INCOME (LOSS) PER SHARE
The
following table is a reconciliation of basic and diluted net income (loss) per
share (
in thousands, except
per share data
):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
2007
|
Net
income (loss)
|
|
$
|
(109,179
|
)
|
|
$
|
(800
|
)
|
|
$
|
(137,111
|
)
|
|
$
|
11,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
31,992
|
|
|
|
26,196
|
|
|
|
32,498
|
|
|
|
26,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
287
|
|
Weighted
average stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted
average warrant
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
31,992
|
|
|
|
26,196
|
|
|
|
32,498
|
|
|
|
26,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$
|
(3.41
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(4.22
|
)
|
|
$
|
0.43
|
|
Diluted
net income (loss) per share
|
|
$
|
(3.41
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(4.22
|
)
|
|
$
|
0.42
|
|
Potential
dilutive shares consist of the incremental common stock issuable for outstanding
restricted stock units, stock options and a warrant (both vested and non-vested)
using the treasury stock method. Potential dilutive shares are excluded from the
computation of net income (loss) per share if their effect is anti-dilutive. The
anti-dilutive stock options totaled 85,216 for the three and nine months ended
September 30, 2008 and 2007. The anti-dilutive warrant totaled
486,486 shares for the three and nine months ended September 30, 2008 and
2007.
NOTE 11
— COMPREHENSIVE INCOME (LOSS)
The
following table is a reconciliation of net income (loss) reported in our
condensed consolidated statements of operations to comprehensive income (loss)
(
in
thousands
):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(109,179
|
)
|
|
$
|
(800
|
)
|
|
$
|
(137,111
|
)
|
|
$
|
11,203
|
|
Currency
translation adjustment
|
|
|
(6,762
|
)
|
|
|
—
|
|
|
|
(9,566
|
)
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(115,941
|
)
|
|
$
|
(800
|
)
|
|
$
|
(146,677
|
)
|
|
$
|
11,298
|
|
The
Thomas Weisel Partners Group, Inc. Second Amended and Restated Equity Incentive
Plan (the “Equity Incentive Plan”) provides for awards of non-qualified and
incentive stock options, restricted stock and restricted stock units and other
share-based awards to officers, directors, employees, consultants and advisors
of the Company. At the Company’s Annual Meeting of Shareholders on May 19, 2008,
the Company’s shareholders approved an amendment to the Equity Incentive Plan
to, among other things, increase the maximum number of shares that may be issued
thereunder by 5,000,000 shares. At September 30, 2008 the total number of shares
issuable under the Equity Incentive Plan was 11,150,000
shares. Awards of stock options and restricted stock units reduce the
number of shares available for future issuance. The number of shares
available for future issuance under the Equity Incentive Plan at September 30,
2008 was approximately 2,290,000 shares.
The
Company accounts for share-based compensation at fair value, in accordance with
provisions under SFAS No. 123(R),
Share-Based
Payment
.
Stock
Options
The
Equity Incentive Plan provides for the grant of non-qualified or incentive stock
options (“options”) to officers, directors, employees, consultants and advisors
for the purchase of newly issued shares of the Company’s common stock at a price
determined by the Compensation Committee (the “Committee”) of the Board at the
date the option is granted. Generally, options vest and are exercisable ratably
over a three or four-year period from the date the option is granted (although,
in accordance with the terms of the Company’s Equity Incentive Plan, options
granted to non-employee directors as regular director’s compensation have no
minimum vesting period) and expire within ten years from the date of grant. The
exercise prices, as determined by the Committee, cannot be less than the fair
market value of the shares on the grant date. These options provide for
accelerated vesting upon a change in control, as determined by the
Committee.
The fair
value of each option award is estimated on the date of grant using a
Black-Scholes Merton option pricing model with the following weighted-average
assumptions for the nine months ended September 30, 2008 and 2007:
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Expected
volatility
|
|
|
54.60
|
%
|
|
|
47.46
|
%
|
Expected
term (in years)
|
|
|
5.00
|
|
|
|
5.00
|
|
Risk-free
interest rate
|
|
|
3.09
|
%
|
|
|
4.71
|
%
|
Dividend
yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Weighted-average
grant date fair value
|
|
$
|
3.00
|
|
|
$
|
8.59
|
|
The
Company elected to calculate the expected term of the option awards using the
“simplified method” as prescribed under Staff Accounting Bulletin No.
110. This election was made as the Company does not have sufficient
historical exercise data to provide a reasonable basis upon which to estimate
expected term due to the limited period of time its equity shares have been
publicly traded.
A summary
of option activity under the Equity Incentive Plan for the nine months ended
September 30, 2008 is presented below:
|
|
|
|
|
|
Weighted
|
|
|
Weighted
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise
Price
|
|
|
Contractual
Life
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
(
in
years
)
|
|
|
(
in
thousands
)
|
|
Outstanding
—
December 31,
2007
|
|
|
85,216
|
|
|
$
|
19.87
|
|
|
|
8.94
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
183,333
|
|
|
|
6.00
|
|
|
|
10.00
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
—
September 30,
2008
|
|
|
268,549
|
|
|
$
|
10.40
|
|
|
|
9.18
|
|
|
$
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
—
September 30,
2008
|
|
|
256,235
|
|
|
$
|
9.81
|
|
|
|
9.26
|
|
|
$
|
445
|
|
As of
September 30, 2008, there were 256,235 options vested. The Company
has assumed that there will be no forfeitures of the non-vested options
outstanding as of September 30, 2008 and therefore expects the total amount to
vest over their remaining vesting period.
As of
September 30, 2008, the total unrecognized compensation expense related to
non-vested options was approximately $0.1 million. This cost is expected to be
recognized over a weighted-average period of 1.5 years.
The
Company will issue new shares of common stock upon exercise of stock
options.
Restricted
Stock Units
A summary
of non-vested restricted stock unit activity for the nine months ended September
30, 2008 is presented below:
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
Grant
Date
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
Non-vested
—
December 31,
2007
|
|
|
2,341,570
|
|
|
$
|
16.71
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
6,785,319
|
|
|
|
7.33
|
|
Vested
|
|
|
(759,846
|
)
|
|
|
16.25
|
|
Cancelled
|
|
|
(1,043,885
|
)
|
|
|
12.74
|
|
|
|
|
|
|
|
|
|
|
Non-vested
—
September 30,
2008
|
|
|
7,323,158
|
|
|
$
|
8.63
|
|
The fair
value of the shares vested during the three and nine months ended September 30,
2008 was $0.4 million and $7.9 million, respectively. The fair value for the
shares vested during the three and nine months ended September 30, 2007 was $0.6
million and $11.0 million, respectively.
As of
September 30, 2008, there was $45.3 million of total unrecognized
compensation expense related to non-vested restricted stock unit awards. This
cost is expected to be recognized over a weighted-average period of
2.8 years.
The
Company recorded $5.0 million and $13.0 million in non-cash compensation
expense with respect to grants of restricted stock units during the three and
nine months ended September 30, 2008, respectively. The Company recorded $3.3
million and $9.2 million in non-cash compensation expense with respect to grants
of restricted stock units during the three and nine months ended September 30,
2007, respectively.
The
Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
(“SFAS No. 109”), which requires the recognition of deferred tax assets and
liabilities based upon temporary differences between the financial reporting and
tax bases of its 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.
On
January 1, 2007, the Company adopted the provisions of FIN No. 48,
Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109
(“FIN No. 48”), which
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, and
prescribes a recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken, or expected to be
taken in a tax return. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company is subject to Federal and state
tax authority examination on the 2007 and 2006 tax years. The
adoption of FIN 48 did not have a material impact on the Company’s condensed
consolidated statements of financial condition, operations and cash
flows. During the nine months ended September 30, 2008, there have
been no changes in uncertain tax positions that have had a material impact to
the Company’s tax positions.
The
Company’s effective tax rate for the three and nine months ended September 30,
2008 was 8.6% and 15.8%, respectively. The effective tax rate for the three and
nine months ended September 30, 2007 was 62.2% and 34.9%,
respectively.
NOTE 14
— COMMITMENTS, GUARANTEES AND CONTINGENCIES
Commitments
Lease
Commitments
The
Company leases office space and computer equipment under noncancelable operating
leases which extend to 2016 and which may be extended as prescribed under
renewal options in the lease agreements. The Company has entered into several
noncancelable sub-lease agreements for certain facilities or floors of
facilities which are co-terminus with the Company’s lease for the respective
facilities or floors of facilities. Facility and computer equipment
lease expenses charged to operations for the three months ended September 30,
2008 and 2007 was $4.0 million and $4.2 million,
respectively. Facility and computer equipment lease expenses charged
to operations for the nine months ended September 30, 2008 and 2007 was $12.2
million and $11.1 million, respectively.
During
the three months ended September 30, 2008, the Company accrued an additional
$2.4 million lease loss liability related to office space that it vacated in
September 2008. The lease loss liability was estimated as the net
present value of the difference between lease payments and receipts under
expected sublease agreements.
Fund
Capital Commitments
At
September 30, 2008, the Company’s Asset Management Subsidiaries had commitments
to invest an additional $1.6 million into affiliated investment
partnerships. Such commitments may be satisfied by direct investments and are
generally required to be made as investment opportunities are identified by the
underlying partnerships. The Company’s Asset Management Subsidiaries’
commitments at September 30, 2008 were as follows (
in thousands
):
Global
Growth Partners I
|
|
$
|
414
|
|
Global
Growth Partners II
|
|
|
412
|
|
Global
Growth Partners IV (S)
|
|
|
323
|
|
Thomas
Weisel Healthcare Venture Partners
|
|
|
404
|
|
Thomas
Weisel India Opportunity Fund
|
|
|
308
|
|
Thomas
Weisel Venture Partners
|
|
|
20
|
|
|
|
|
|
|
Total
Fund Capital Commitments
|
|
$
|
1,881
|
|
In
addition to the commitments within the table above, the Company has committed
$33.9 million to investments in unaffiliated funds. Through September 30, 2008,
the Company has funded $7.0 million of these commitments and the remaining
unfunded portion as of September 30, 2008 was $26.9 million. The Company
currently anticipates transferring these investments and the related commitments
to funds sponsored by the Company. These commitments may be called in full at
any time.
Guarantees
Broker-Dealer
Guarantees and Indemnification
The
Company’s customers’ transactions are introduced to the clearing brokers for
execution, clearance and settlement. Customers are required to complete their
transactions on settlement date, generally three business days after the trade
date. If customers do not fulfill their contractual obligations to the clearing
brokers, the Company may be required to reimburse the clearing brokers for
losses on these obligations. The Company has established procedures to reduce
this risk by monitoring trading within accounts and requiring deposits in excess
of regulatory requirements.
The
Company is a member of various securities exchanges. Under the standard
membership agreements, members are required to guarantee the performance of
other members and, accordingly, if another member becomes unable to satisfy its
obligations to the exchange, all other members would be required to meet the
shortfall. The Company’s liability under these arrangements is not quantifiable
and could exceed the cash and securities it has posted as collateral. However,
management believes that the potential for the Company to be required to make
payments under these arrangements is remote. The Company has not recorded any
loss contingency for this indemnification.
Guaranteed
Compensation
Consistent
with practice in prior years, guaranteed compensation agreements were entered
into during the nine months ended September 30, 2008. These obligations are
being accrued ratably over the service period of the agreements. Total unaccrued
obligations at September 30, 2008 for services to be provided subsequent to
September 30, 2008 were $5.6 million.
Director
and Officer Indemnification
The
Company has entered into agreements that provide indemnification to its
directors, officers and other persons requested or authorized by the Board to
take actions on behalf of the Company for all losses, damages, costs and
expenses incurred by the indemnified person arising out of such person’s service
in such capacity, subject to the limitations imposed by Delaware law. The
Company has not recorded any loss contingency for this
indemnification.
Tax
Indemnification Agreement
In
connection with its initial public offering, the Company entered into a tax
indemnification agreement to indemnify the members of Thomas Weisel Partners
Group LLC against the full amount of certain increases in taxes that relate to
activities of Thomas Weisel Partners Group LLC and its affiliates prior to the
Company’s initial public offering. The tax indemnification agreement included
provisions that permit the Company to control any tax proceeding or contest
which might result in it being required to make a payment under the tax
indemnification agreement. The Company has not recorded any loss contingency for
this indemnification.
Contingencies
Loss
Contingencies
The
Company is involved in a number of judicial, regulatory and arbitration matters
arising in connection with its business. The outcome of matters the Company is
involved in cannot be determined at this time and the results cannot be
predicted with certainty. There can be no assurance that these matters will not
have a material adverse effect on the Company’s results of operations in any
future period, and a significant judgment could have a material adverse impact
on the Company’s condensed consolidated statements of financial condition,
operations and cash flows. The Company may in the future become involved in
additional litigation in the ordinary course of its business, including
litigation that could be material to the Company’s business.
In
accordance with SFAS No. 5,
Accounting for Contingencies,
the Company reviews the need for any loss contingency reserves and establishes
reserves when, in the opinion of management, it is probable that a matter would
result in liability, and the amount of loss, if any, can be reasonably
estimated. Generally, with respect to matters the Company is involved in, in
view of the inherent difficulty of predicting the outcome of these matters,
particularly in cases in which claimants seek substantial or indeterminate
damages, it is not possible to determine whether a liability has been incurred
or to reasonably estimate the ultimate or minimum amount of that liability until
the case is close to resolution, in which case no reserve is established until
that time.
The
following discussion describes significant developments with respect to the
Company’s litigation matters that have occurred subsequent to December 31,
2007.
Auction Rate Securities
Inquiry
–
Based
upon press reports, approximately forty firms, including the Company, have
received inquiries from the Enforcement Department of the Financial Industry
Regulatory Authority, or FINRA, regarding retail customer purchases through
those firms of auction rate securities. The Company is cooperating
with this inquiry.
In re GT Solar International,
Inc.
–
The
Company has been named as a defendant in a purported class action litigation
brought in connection with an initial public offering of GT Solar International,
Inc. in July 2008 where it acted as a co-manager. The complaint, filed in the
United States District Court for the District of New Hampshire on August 1,
2008, alleges violations of Federal securities laws against GT Solar and certain
of its directors and officers as well as GT Solar’s underwriters, including the
Company, based on alleged misstatements and omissions in the registration
statement. The Company believes it has meritorious defenses to the action and
intends to vigorously defend such action as it applies to the
Company.
In re Noah Educational Holdings,
Ltd
.
–
The
Company has been named, but not yet served, as a defendant in a purported class
action litigation brought in connection with an initial public offering of Noah
Educational Holdings, Ltd. in October 2007 where it acted as a co-manager. The
complaint, apparently filed in the United States District Court for the Southern
District of New York, alleges violations of Federal securities laws against Noah
Educational and the underwriters, including the Company, based on alleged
misstatements and omissions in the registration statement. The Company believes
it has meritorious defenses to the action and intends to vigorously defend such
action as it applies to the Company.
Stetson Oil & Gas, Ltd. and
Thomas Weisel Partners Canada Inc
.
–
The Company has been named
as a defendant in a Statement of Claim. The claim, filed in the Ontario Superior
Court of Justice, arises out of a July 2008 contemplated transaction in which
Thomas Weisel Partners Canada was allegedly engaged to act as underwriter for
Stetson Oil & Gas, Ltd., an Alberta, Canada corporation. The
Company believes it has meritorious defenses to the action and intends to
vigorously defend such action as it applies to the Company.
Wage and Hours
Claims
–
The Company has been named a defendant in a purported class action
lawsuit filed in July 2008 with respect to the alleged misclassification of
certain employees as exempt from provisions of California state law requiring
the payment of overtime wages. The complaint was filed in the
California Superior Court for the County of San Francisco. The
Company believes it has meritorious defenses to these actions and intends to
vigorously defend such actions as they apply to the Company.
Updated
Matters
In re Initial Public Offering
Securities Litigation –
The Company is a defendant in several purported
class actions brought against numerous underwriters in connection with certain
initial public offerings in 1999 and 2000. These cases have been consolidated in
the United States District Court for the Southern District of New York and
generally allege that underwriters accepted undisclosed compensation in
connection with the offerings, entered into arrangements designed to influence
the price at which the shares traded in the aftermarket and improperly allocated
shares in these offerings. The actions allege violations of Federal securities
laws and seek unspecified damages. Of the 310 issuers named in these cases, the
Company acted as a co-lead manager in one offering, a co-manager in 32
offerings, and as a syndicate member in 10 offerings. The Company has denied
liability in connection with these matters. On June 10, 2004, plaintiffs
entered into a definitive settlement agreement with respect to their claims
against the issuer defendants and the issuers’ present or former officers and
directors named in the lawsuits, however, approval of the proposed settlement
remains on hold pending the resolution of the class certification issue
described below. By a decision dated October 13, 2004, the Federal district
court granted plaintiffs’ motion for class certification, however, the
underwriter defendants petitioned the U.S. Court of Appeals for the Second
Circuit to review that certification decision. On December 5, 2006 the
Second Circuit vacated the district court’s class certification decision and the
plaintiffs subsequently petitioned the Second Circuit for a rehearing. On
April 6, 2007, the Second Circuit denied the rehearing
request. In May 2007, the plaintiffs filed a motion for class
certification on a new basis and subsequently scheduled
discovery. The parties have participated in a formal mediation over
several sessions and are in the process of documenting a potential settlement
(which is subject to, among other things, agreement on definitive documentation
and approval by the Court) that the Company believes will result in the
resolution of this matter for an amount that will be covered by its relevant
insurance policies.
In re Leadis Technology, Inc.
Securities Litigation –
The Company has been a defendant in a purported
class action litigation brought in connection with Leadis Technology, Inc.’s
initial public offering in June 2004 in which the Company served as a
co-manager for Leadis. The consolidated complaint, filed in the United States
District Court for the Northern District of California on August 8, 2005,
alleged violations of Federal securities laws against Leadis and certain of its
directors and officers as well as the Company’s underwriters, including the
Company, based on alleged misstatements and omissions in the registration
statement. On March 1, 2006 the complaint against the Company in this
matter was dismissed by the court with prejudice. Subsequently, on
March 28, 2006, the plaintiffs in this matter appealed the dismissal and
the dismissal has now been overturned by the appellate court. The Company
believes it has meritorious defenses to these actions and intends to vigorously
defend such actions as they apply to the Company.
In re Merix Securities Litigation –
The Company has been a defendant in a purported class action suit brought
in connection with an offering in January 2004 involving Merix Corporation
in which it served as co-lead manager for Merix. On September 15, 2005, the
United States District Court for the District of Oregon entered an order
dismissing all claims against the underwriter defendants, including the Company,
and the Merix defendants. A portion of the claim under Section 12(a)(2) of
the Securities Exchange Act of 1934 was dismissed with prejudice, and the
remainder of that claim and the Section 11 claim were dismissed with leave
to re-file. Plaintiffs subsequently filed an amended complaint and on
September 28, 2006 the Court dismissed the remaining claims with prejudice.
Following the September 28, 2006 dismissal, plaintiffs filed a notice of
appeal to the United States Court of Appeals for the Ninth Circuit and the
dismissal has now been overturned by the appellate court. The Company believes
it has meritorious defenses to these actions and intends to vigorously defend
such actions as they apply to the Company.
In re AirGate PCS, Inc. Securities
Litigation
–
The Company had been a defendant in a purported class action litigation
brought in connection with a secondary offering of AirGate PCS, Inc. in December
2001 where the Company acted as a co-manager. The complaint, filed in the United
States District Court for the Northern District of Georgia on May 17, 2002,
alleges violations of Federal securities laws against AirGate and certain of its
directors and officers as well as AirGate’s underwriters, including the Company,
based on alleged misstatements and omissions in the registration statement.
During the second quarter of 2008 a settlement was reached that did not result
in a liability for the Company.
In re First Horizon Pharmaceutical
Corporation Securities Litigation –
The Company has been a defendant in a
purported class action litigation brought in connection with a secondary
offering of First Horizon Pharmaceutical Corporation in April 2002 where
the Company acted as a co-manager. The consolidated amended complaint, was filed
in the United States District Court for the Northern District of Georgia on
September 2, 2003, and alleged violations of Federal securities laws
against First Horizon and certain of its directors and officers as well as First
Horizon’s underwriters, including the Company, based on alleged false and
misleading statements in the registration statement and other
documents. A settlement has now been reached that did not result in a
liability for the Company.
In re Friedman’s Inc. Securities
Litigation –
The Company has been a defendant in a purported class action
litigation brought in connection with a secondary offering of Friedman’s in
September 2003 where the Company acted as a co-manager. The
complaint, filed in the United States District Court for the Northern District
of Georgia, alleged that the registration statement for the offering and a
previous registration statement dated February 2, 2002 were fraudulent and
materially misleading. A settlement has now been reached for an
amount that will be covered by the Company’s relevant reserves.
In re Intermix Media,
Inc
.
–
The
Company had been a defendant in a purported class action lawsuit filed in August
2006 arising out of the sale of Intermix to News Corporation in September 2005.
The complaint was filed in the United States District Court for the Central
District of California and alleged various misrepresentations and/or omissions
of material information that would have demonstrated that the sale was not fair
from a financial point of view to the shareholders of Intermix. The Company
acted as a financial advisor to Intermix in connection with the sale and
rendered a fairness opinion with respect to the sale. In July 2008 the court
dismissed, with prejudice, claims against the Company.
In re SeraCare Life Sciences, Inc.
Securities Litigation
–
The Company has been a defendant in a purported class action litigation
brought in connection with the SeraCare May 2005 secondary offering and various
financial filings from 2003 to 2006. In March 2006, SeraCare delisted
from the NASDAQ and filed for bankruptcy. The complaint was filed in
the United States District Court for the Southern District of California and was
amended in June 2006 to include underwriter defendants. The complaint
alleged violations of federal securities laws relating to the secondary offering
and financials as referenced above. The Company acted as a co-manager
on the secondary offering. A settlement has now been reached that the
Company believes will result in the resolution of this matter for an amount that
will be covered by its relevant reserves. At this time the Company is
waiting for court approval of the settlement papers.
In re U.S. Auto Parts Network, Inc.
Securities Litigation
–
The Company has been a defendant in a purported class action lawsuit
filed in March 2007 with respect to the initial public offering of U.S.
Auto Parts Network, Inc. on February 8, 2007 and subsequent public
disclosures by U.S. Auto Parts. The Company was an underwriter and a co-book
manager of the U.S. Auto Parts initial public offering. The complaint, which was
filed in the United States District Court, Central District of California,
Western Division, alleges violations of various Federal securities laws against
U.S. Auto Parts and certain of its directors and officers as well as U.S. Auto
Parts’ underwriters, including the Company, based on, among other things,
alleged false and misleading statements. A settlement has now been
reached that did not result in a liability for the Company.
NOTE 15
— FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK,
CREDIT RISK OR MARKET RISK
The
majority of the Company’s transactions, and consequently the concentration of
its credit exposure, is with its clearing brokers. The clearing brokers are also
the primary source of short-term financing for both securities purchased and
securities sold, not yet purchased by the Company. The Company’s securities
owned may be pledged by the clearing brokers. The amount receivable from or
payable to the clearing brokers in the Company’s condensed consolidated
statements of financial condition represents amounts receivable or payable in
connection with the trading of proprietary positions and the clearance of
customer securities transactions. As of September 30, 2008 and December 31,
2007, the Company’s cash on deposit with the clearing brokers was not
collateralizing any liabilities to the clearing brokers.
In
addition to the clearing brokers, the Company is exposed to credit risk from
other brokers, dealers and financial institutions with which it transacts
business. In the event counterparties do not fulfill their obligations, the
Company may be exposed to credit risk. The Company seeks to control credit risk
by following an established credit approval process and monitoring credit limits
with counterparties.
The
Company’s trading activities include providing brokerage services to
institutional and retail clients. To facilitate these customer transactions, the
Company purchases proprietary securities positions (“long positions”) in equity
securities, convertible and other fixed income securities. The Company also
enters into transactions to sell securities not yet purchased (“short
positions”), which are recorded as liabilities on the condensed consolidated
statements of financial condition. The Company is exposed to market risk on
these long and short securities positions as a result of decreases in market
value of long positions and increases in market value of short positions. Short
positions create a liability to purchase the security in the market at
prevailing prices. Such transactions result in off-balance sheet market risk as
the Company’s ultimate obligation to satisfy the sale of securities sold, not
yet purchased may exceed the amount recorded in the condensed consolidated
statements of financial condition. To mitigate the risk of losses, these
securities positions are marked to market daily and are monitored by management
to ensure compliance with limits established by the Company. The associated
interest rate risk of these securities is not deemed material to the
Company.
The
Company is also exposed to market risk through its investments in partnerships
and through certain loans to employees collateralized by such investments. In
addition, as part of the Company’s investment banking and asset management
activities the Company from time to time takes long and short positions in
publicly traded equities and related options and other derivative instruments
and makes private equity investments, all of which expose the Company to market
risk. These activities are subject, as applicable, to risk guidelines and
procedures designed to manage and monitor market risk.
NOTE 16
— REGULATED BROKER-DEALER SUBSIDIARIES
TWP and
TWP USA are registered U.S. broker-dealers that are subject to the Uniform Net
Capital Rule (the “Net Capital Rule”) under the Securities Exchange Act of 1934
administered by the SEC and FINRA, which requires the maintenance of minimum net
capital. TWP and TWP USA have elected to use the alternative method to compute
net capital as permitted by the Net Capital Rule, which requires that TWP and
TWP USA maintain minimum net capital, as defined, of $1.0 million and
$100,000, respectively. These rules also require TWP and TWP USA to notify and
sometimes obtain approval from the SEC and FINRA for significant withdrawals of
capital or loans to affiliates.
Under the
alternative method, a broker-dealer may not repay subordinated borrowings, pay
cash dividends or make any unsecured advances or loans to its parent or
employees if such payment would result in net capital of less than 5% of
aggregate debit balances or less than 120% of its minimum dollar amount
requirement.
TWPC is a
registered investment dealer in Canada and is subject to the capital
requirements of the Investment Industry Regulatory Organization of
Canada. In addition, TWPIL is a registered U.K. broker-dealer and is
subject to the capital requirements of the Financial Securities Authority.
The table
below summarizes the minimum capital requirements for the Company’s
broker-dealer subsidiaries (
in
thousands
):
|
|
September
30, 2008
|
|
|
|
Required
Net Capital
|
|
|
Net
Capital
|
|
|
Excess
Net Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TWP
|
|
$
|
1,000
|
|
|
$
|
53,602
|
|
|
$
|
52,602
|
|
TWPC
|
|
|
235
|
|
|
|
17,029
|
|
|
|
16,794
|
|
TWPIL
|
|
|
1,839
|
|
|
|
4,388
|
|
|
|
2,549
|
|
TWP
USA
|
|
|
100
|
|
|
|
1,234
|
|
|
|
1,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,174
|
|
|
$
|
76,253
|
|
|
$
|
73,079
|
|
The
following table represents net revenues by geographic area (
in thousands
):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
41,056
|
|
|
$
|
63,712
|
|
|
$
|
133,721
|
|
|
$
|
212,137
|
|
Other
countries
|
|
|
7,990
|
|
|
|
—
|
|
|
|
24,263
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net revenue
|
|
$
|
49,046
|
|
|
$
|
63,712
|
|
|
$
|
157,984
|
|
|
$
|
212,140
|
|
No single
customer accounted for 10% or more of the Company’s net revenues during the
three and nine months ended September 30, 2008 or during the three and
nine months ended September 30, 2007.
Net
revenues from countries other than the United States during the three and nine
months ended September 30, 2008 consists primarily of net revenues from Canada,
which accounted for 67% and 78%, respectively, of net revenues from other
countries.
The
following table represents long lived assets by geographic area based on the
physical location of the assets (
in thousands
):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
18,224
|
|
|
$
|
20,908
|
|
Other
countries
|
|
|
2,549
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
Total
long lived assets
—
net
|
|
$
|
20,773
|
|
|
$
|
21,317
|
|
Item 2
. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
following discussion should be read in conjunction with our unaudited condensed
consolidated financial statements and the related notes that appear elsewhere in
this Quarterly Report on Form 10-Q. This discussion contains forward-looking
statements reflecting our current expectations that involve risks and
uncertainties. Actual results and the timing of events may differ significantly
from those projected in forward-looking statements due to a number of factors,
including those set forth in Part I, Item 1A – “Risk Factors” of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2007 and in Part
II, Item 1A – “Risk Factors” of this Quarterly Report on Form
10-Q. See “Where You Can Find More Information” in Part I,
Item 1 – “Business” of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2007.
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q in Item 2 – “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and in other sections
includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. 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 our Annual Report on
Form 10-K for the fiscal year ended December 31, 2007 and in Part II, Item
1A – “Risk Factors” of this Quarterly Report on Form 10-Q.
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 forward-looking
statements to actual results or revised expectations, except as required by
Federal securities law.
Forward-looking
statements include, but are not limited to, the following:
·
|
Our
statement in Part I, Item 1 – “Unaudited Condensed Consolidated Financial
Statements” and in Part I, Item 2 – “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” that, with respect to an
aggregate of $26.9 million of remaining commitments we have made to
unaffiliated funds, we currently anticipate transferring these commitments
to funds sponsored by us.
|
·
|
Our
statement in Part I, Item 1 – “Unaudited Condensed Consolidated Financial
Statements” that as of September 30, 2008 there was $45.3 million of total
unrecognized compensation expense related to non-vested restricted stock
unit awards that is expected to be recognized over a weighted-average
period of 2.8 years, and our statement in Part I, Item 2 –
“Management’s Discussion and Analysis of Financial Condition and Results
of Operations” that as of September 30, 2008, there was (i) $2.3 million
of unrecognized compensation expense related to non-vested restricted
stock unit awards made in connection with our initial public offering and
that this cost is expected to be recognized over a weighted-average period
of 0.3 years, and (ii) $43.0 million of unrecognized compensation expense
related to non-vested restricted stock unit awards made subsequent to our
initial public offering and that this cost is expected to be recognized
over a weighted-average period of 2.9 years, in each case because these
statements depend on estimates of employee attrition in the
future.
|
·
|
Our
statement in Part I, Item 1 – “Unaudited Condensed Consolidated Financial
Statements” that our lease loss liability was estimated as the net present
value of the difference between lease payments and receipts under expected
sublease agreements.
|
●
|
Our
statements in Part I, Item 2 – “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” that
–
|
|
o
|
one
of our strategies is to expand our trading in Canadian securities as our
energy and mining analysts begin to make a greater impact on our U.S. and
European accounts, and we currently plan to hire U.S. based energy bankers
and analysts to capitalize on our capabilities in these
sectors;
|
|
o
|
we
currently plan to continue to selectively upgrade our talent pool,
particularly in revenue generating
areas;
|
|
o
|
we
may carry out repurchases of our common stock from time to time in the
future and our Board of Directors may authorize additional repurchases in
the future, in each case for the purpose of settling obligations to
deliver common stock to employees who have received Restricted Stock Units
under our Equity Incentive
Plan;
|
|
o
|
we
expect the electronic trading program to increase our market share of the
expanding volume of shares traded by institutional clients through
alternative trading platforms;
and
|
|
o
|
we
believe that our current level of equity capital, current cash balances,
funds anticipated to be provided by operating activities and funds
available to be drawn under temporary loan agreements, will be adequate to
meet our liquidity and regulatory capital requirements for the next 12
months.
|
Overview
We are an
investment bank focused principally on growth companies and growth investors.
Our business is managed as a single operating segment, and we generate revenues
by providing financial services that include investment banking, brokerage,
research and asset management. We take a comprehensive approach in providing
these services to growth companies.
We are
exposed to volatility and trends in the general securities market and the
economy, and we are currently facing difficult market and economic
conditions. Due to the recent downturn in the market and the
likelihood of an economic recession, 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 third
quarter of 2008 was a very challenging environment for the capital markets given
the unprecedented events on Wall Street that led to increased uncertainty and
turmoil in the U.S. economy and global financial markets. We are
focused on making the necessary adjustments to our business and adapting to the
current environment. We are planning for the remainder of 2008 and
all of 2009 to be a continuation of the current year and are focused on the
following items:
|
·
|
Preserving
capital and retaining key people in order to emerge as a strong player
once market stability returns,
|
|
·
|
Reducing
compensation and non-compensation expenses in order to operate break-even
on a cash basis or better, and
|
|
·
|
Enhancing
the value of our franchise with opportunistic hires, particularly in the
advisory business, to be ready to build market share when stability
returns to the capital markets.
|
Specifically,
during the fourth quarter of 2008, we will reduce our total headcount by
approximately 60 employees which will bring our 2008 total headcount reduction
to approximately 200 employees, or 27%, compared to our headcount on January 2,
2008. The reductions are primarily in underperforming areas of our
business as well as non-revenue producing departments. As of
September 30, 2008 we had approximately 610 employees and we expect to have
approximately 550 employees at the beginning of 2009. We will
continue to selectively hire to upgrade our talent pool, particularly in revenue
generating areas, and make additional key hires as appropriate.
In
addition to the headcount reductions noted above, we will reduce base salaries
for employees with titles of Vice President and above by 10% as of January 1,
2009.
During
the nine months ended September 30, 2008, we executed on the following
initiatives:
|
·
|
Acquisition and Integration of
Westwind
– On January 2, 2008, we completed our acquisition of
Westwind. Integrating Westwind has been a primary focus during
2008 and will continue to be a focus during the remainder of the
year. One of our strategies has been to expand our trading in
Canadian securities as our energy and mining analysts begin to make a
greater impact on our U.S. and European accounts, and we currently plan to
hire U.S. based energy bankers and analysts to capitalize on Westwind’s
capabilities in Canada. In Europe, where we integrated our
offices in early 2008, we have combined our sales forces and are marketing
the combined companies’ products and
expertise.
|
In
September 2008, our two U.K. broker-dealer subsidiaries, Thomas Weisel Partners
International Limited and Thomas Weisel Partners (UK) Limited, successfully
merged into one entity. The combined entity will retain the name
Thomas Weisel Partners International Limited.
In
October 2008, we also completed an internal reorganization of our U.S.
broker-dealer subsidiaries to eliminate redundancies and unnecessary
expense. As a result of this reorganization, the business of Thomas
Weisel Partners (USA), Inc. was consolidated with that of Thomas Weisel Partners
LLC.
|
·
|
Repurchase of Common
Stock
– During the nine months ended September 30, 2008, we
repurchased a total of 1,517,247 shares of our common
stock. The shares were classified as treasury stock upon
repurchase, and we intend to use these shares to settle obligations to
deliver common stock in the future to employees who have received
Restricted Stock Units under our Equity Incentive Plan. These repurchases
were executed pursuant to an authorization by our Board of Directors to
repurchase up to 2,000,000 shares of common stock for the purpose of
settling obligations to deliver common stock to employees who have
received Restricted Stock Units under our Equity Incentive
Plan. Additional repurchases pursuant to this authority may be
carried out and our Board of Directors may authorize additional
repurchases in the future.
|
|
·
|
Key Producer Restricted Stock
Unit Plan
– As part of a special retention and incentive program,
we granted restricted stock unit equity awards to senior employees of the
Company as a means of incentivizing and retaining our key
producers. An aggregate of 2,970,000 restricted stock units
were granted to employees in August 2008 and vest after the end of a
three-year period. In addition, we granted 550,000
performance-based awards to certain members of the Executive Committee
that vest upon the attainment of the Company’s long-term performance
goals.
|
Consolidated
Results of Operations
Our
results of operations depend on a number of market factors, including market
conditions and valuations for growth companies and growth investors, as well as
general securities market conditions. Trends in the securities markets are also
affected by general economic trends, including fluctuations in interest rates,
flows of funds into and out of the markets and other conditions. In addition to
these market factors, our revenues from period to period are substantially
affected by the timing of investment banking transactions in which we are
involved. Fees for many of the services we provide are earned only upon the
completion of a transaction. Accordingly, our results of operations in any
individual year or quarter may be affected significantly by whether and when
significant transactions are completed.
Notwithstanding
this exposure to volatility and trends, in order to provide value to our
clients, we have made a long-term commitment to maintaining a substantial,
full-service integrated business platform. As a result of this commitment, if
business conditions result in decreases to our revenues, we may not experience
corresponding decreases in the expense of operating our business.
The
following table provides a summary of our results of operations (
dollar amounts
in
thousands
):
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
49,046
|
|
|
$
|
63,712
|
|
|
|
(23.0
|
)%
|
|
$
|
157,984
|
|
|
$
|
212,140
|
|
|
|
(25.5
|
)%
|
Income
(loss) before taxes
|
|
|
(119,479
|
)
|
|
|
(2,114
|
)
|
|
|
nm
|
(1)
|
|
|
(162,817
|
)
|
|
|
17,197
|
|
|
|
nm
|
|
Net
income (loss)
|
|
|
(109,179
|
)
|
|
|
(800
|
)
|
|
|
nm
|
|
|
|
(137,111
|
)
|
|
|
11,203
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$
|
(3.41
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
$
|
(4.22
|
)
|
|
$
|
0.43
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$
|
(3.41
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
$
|
(4.22
|
)
|
|
$
|
0.42
|
|
|
|
|
|
The
following table sets forth our revenues, both in dollar amounts and as a
percentage of net revenues (
dollar amounts
in thousands
):
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
banking
|
|
$
|
17,531
|
|
|
$
|
25,542
|
|
|
|
(31.4
|
)%
|
|
$
|
51,966
|
|
|
$
|
94,439
|
|
|
|
(45.0
|
)%
|
Brokerage
|
|
|
33,652
|
|
|
|
30,344
|
|
|
|
10.9
|
|
|
|
104,646
|
|
|
|
85,426
|
|
|
|
22.5
|
|
Asset
management
|
|
|
(2,329
|
)
|
|
|
6,714
|
|
|
|
(134.7
|
)
|
|
|
(115
|
)
|
|
|
26,711
|
|
|
|
(100.4
|
)
|
Interest
income
|
|
|
1,828
|
|
|
|
3,799
|
|
|
|
(51.9
|
)
|
|
|
6,701
|
|
|
|
12,686
|
|
|
|
(47.2
|
)
|
Other
revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
nm
|
|
|
|
—
|
|
|
|
920
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
50,682
|
|
|
|
66,399
|
|
|
|
(23.7
|
)
|
|
|
163,198
|
|
|
|
220,182
|
|
|
|
(25.9
|
)
|
Interest
expense
|
|
|
(1,636
|
)
|
|
|
(2,687
|
)
|
|
|
(39.1
|
)
|
|
|
(5,214
|
)
|
|
|
(8,042
|
)
|
|
|
(35.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
49,046
|
|
|
$
|
63,712
|
|
|
|
(23.0
|
)%
|
|
$
|
157,984
|
|
|
$
|
212,140
|
|
|
|
(25.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
banking
|
|
|
35.7
|
%
|
|
|
40.1
|
%
|
|
|
|
|
|
|
32.9
|
%
|
|
|
44.5
|
%
|
|
|
|
|
Brokerage
|
|
|
68.6
|
|
|
|
47.6
|
|
|
|
|
|
|
|
66.2
|
|
|
|
40.3
|
|
|
|
|
|
Asset
management
|
|
|
(4.7
|
)
|
|
|
10.5
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
12.6
|
|
|
|
|
|
Interest
income
|
|
|
3.7
|
|
|
|
6.0
|
|
|
|
|
|
|
|
4.3
|
|
|
|
6.0
|
|
|
|
|
|
Other
revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
103.3
|
|
|
|
104.2
|
|
|
|
|
|
|
|
103.3
|
|
|
|
103.8
|
|
|
|
|
|
Interest
expense
|
|
|
(3.3
|
)
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
(3.3
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
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, (ii) fees earned as strategic advisor in
mergers and acquisitions and similar transactions and (iii) the value of
warrants received as partial payment for investment banking services. 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.
With the
significant decline in market conditions and capital raising activity during the
three months ended September 30, 2008, we focused our efforts towards our
strategic advisory businesses which resulted in strategic advisory revenues
representing 77% and 51% of investment banking revenues during the three and
nine months ended September 30, 2008 as compared to 60% and 46% of investment
banking revenues during the three and nine months ended September 30,
2007.
The
following table sets forth our investment banking revenues and the number of
investment banking transactions (
dollar amounts
in thousands
):
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
banking revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
raising
|
|
$
|
3,962
|
|
|
$
|
10,103
|
|
|
|
(60.8
|
)%
|
|
$
|
25,204
|
|
|
$
|
51,194
|
|
|
|
(50.8
|
)%
|
Strategic
advisory
|
|
|
13,569
|
|
|
|
15,439
|
|
|
|
(12.1
|
)
|
|
|
26,762
|
|
|
|
43,245
|
|
|
|
(38.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment banking revenue
|
|
$
|
17,531
|
|
|
$
|
25,542
|
|
|
|
(31.4
|
)%
|
|
$
|
51,966
|
|
|
$
|
94,439
|
|
|
|
(45.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
banking transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
raising
|
|
|
8
|
|
|
|
10
|
|
|
|
|
|
|
|
53
|
|
|
|
42
|
|
|
|
|
|
Strategic
advisory
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
15
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment banking transactions
|
|
|
13
|
|
|
|
15
|
|
|
|
|
|
|
|
68
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
revenue per transaction
(1)
|
|
$
|
1,349
|
|
|
$
|
1,702
|
|
|
|
|
|
|
$
|
764
|
|
|
$
|
1,717
|
|
|
|
|
|
(1)
|
Revenue
per investment banking transaction is generally higher in the U.S. than in
Canada.
|
Three Months Ended September 30,
2008 versus 2007
—
Investment banking revenue decreased $8.0 million in the three months
ended September 30, 2008 from 2007. Our average revenue per
transaction decreased to $1.3 million during the three months ended
September 30, 2008 from $1.7 million in 2007. As noted above, revenue per
investment banking transaction is generally higher in the U.S. than in
Canada. During the three months ended September 30, 2008 and 2007 we
closed 13 and 15 investment banking transactions, respectively. The change in
our average number of transactions and revenue per transaction is primarily due
to the decline in capital raising activity, as well as our acquisition of
Westwind which, historically, has completed a larger number of smaller sized
transactions. During the three months ended September 30, 2008 and 2007,
approximately 71.5% and 49.4%, respectively, of our investment banking revenue
was earned from the five largest transactions during the respective
periods.
Capital
raising revenue accounted for approximately 23% and 40% of our investment
banking revenue in the three months ended September 30, 2008 and 2007,
respectively. Capital raising revenue decreased $6.1 million to $4.0 million in
the three months ended September 30, 2008. Our average revenue per capital
raising transaction decreased to $0.5 million during the three months ended
September 30, 2008 from $1.0 million in 2007. During the three months ended
September 30, 2008 and 2007 we closed eight and ten capital raising
transactions, respectively
Strategic
advisory revenue accounted for approximately 77% and 60% of our investment
banking revenue in the three months ended September 30, 2008 and 2007,
respectively. Strategic advisory revenue decreased $1.9 million to
$13.6 million in the three months ended September 30, 2008. Our average
revenue per strategic advisory transaction decreased to $2.7 million during the
three months ended September 30, 2008 from $3.1 million in 2007. We closed five
strategic advisory transactions during both the three months ended September 30,
2008 and 2007.
Nine Months Ended September 30, 2008
versus 2007
—
Investment banking revenue decreased $42.5 million in the nine months
ended September 30, 2008 from 2007. Our average revenue per transaction
decreased to $0.8 million during the nine months ended September 30, 2008
from $1.7 million in 2007. As noted above, revenue per investment banking
transaction is generally higher in the U.S. than in Canada. During
the nine months ended September 30, 2008 and 2007 we closed 68 and 55 investment
banking transactions, respectively. The change in our average number of
transactions and revenue per transaction is primarily due to our acquisition of
Westwind which, historically, has completed a larger number of smaller sized
transactions. In addition, during the nine months ended September 30, 2007 our
investment banking revenue included $13.4 million in revenue generated from a
single strategic advisory transaction. During the nine months ended September
30, 2008 and 2007, approximately 27.8% and 28.1%, respectively, of our
investment banking revenue was earned from the five largest transactions during
the respective periods.
Capital
raising revenue accounted for approximately 49% and 54% of our investment
banking revenue in the nine months ended September 30, 2008 and 2007,
respectively. Capital raising revenue decreased $26.0 million to $25.2 million
in the nine months ended September 30, 2008. Our average revenue per capital
raising transaction decreased to $0.5 million during the nine months ended
September 30, 2008 from $1.2 million in 2007. During the nine months ended
September 30, 2008 and 2007 we closed 53 and 42 capital raising transactions,
respectively.
Strategic
advisory revenue accounted for approximately 51% and 46% of our investment
banking revenue in the nine months ended September 30, 2008 and 2007,
respectively. Strategic advisory revenue decreased $16.5 million to
$26.8 million in the nine months ended September 30, 2008. Our average
revenue per strategic advisory transaction decreased to $1.8 million during the
nine months ended September 30, 2008 from $3.3 million in 2007. The
decrease 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 the nine months ended September 30, 2007. During
the nine months ended September 30, 2008 and 2007, we closed 15 and 13 strategic
advisory transactions, respectively.
Brokerage
Revenue
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.
Three and Nine Months Ended
September
30, 2008
versus 2007
—
Brokerage revenue increased by $3.3 million and $19.2 million in the
three and nine months ended September 30, 2008 from 2007. This increase is
primarily due to our acquisition of Westwind in January
2008. Brokerage revenues during the three and nine months ended
September 30, 2008 of $1.9 million and $11.6 million, respectively, were
generated from former Westwind clients. The remaining fluctuation in brokerage
revenues is due to increases in our institutional trading business, partially
offset by decreases in trading volumes in our convertible debt trading
business.
The
combined average daily volume on the New York Stock Exchange, Nasdaq and the
Toronto Stock Exchange was approximately 3.6 billion and 4.3 billion shares
during the three and nine months ended September 30, 2008, a decrease of 9.9%
and an increase of 7.7%, respectively, from the comparable periods in 2007. Our
combined average daily customer trading volume increased 49.7% and 41.7% for the
three and nine months ended September 30, 2008, respectively, from 2007
primarily due to our acquisition of Westwind.
In
addition to our acquisition of Westwind, we believe the steps we have taken over
the past year, including (i) broadening our geographic coverage and developing
our product offerings within electronic trading in order to attract and (ii)
retain trading volume from customers who are shifting away from utilizing
full-service brokerage services and increasing their use of alternative trading
systems, have resulted in our increased trading volume from institutional
customers.
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, (iv) other
asset management-related realized and unrealized gains and losses on investments
not associated with investment partnerships and (v) realized and unrealized
gains and losses on warrants received as partial payment for investment banking
services.
The
following table sets forth our asset management revenues (
dollar amounts
in thousands
):
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
management revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
fees
|
|
$
|
3,754
|
|
|
$
|
3,928
|
|
|
|
(4.4
|
)%
|
|
$
|
10,883
|
|
|
$
|
11,990
|
|
|
|
(9.2
|
)%
|
Investments
in partnerships realized and unrealized gains and losses
—
net
|
|
|
(2,375
|
)
|
|
|
2,976
|
|
|
|
(179.8
|
)
|
|
|
(4,133
|
)
|
|
|
14,233
|
|
|
|
(129.0
|
)
|
Other
securities realized and unrealized gains and losses
—
net
|
|
|
(3,708
|
)
|
|
|
(190
|
)
|
|
|
nm
|
|
|
|
(6,865
|
)
|
|
|
488
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
asset management revenues
|
|
$
|
(2,329
|
)
|
|
$
|
6,714
|
|
|
|
(134.7
|
)%
|
|
$
|
(115
|
)
|
|
$
|
26,711
|
|
|
|
(100.4
|
)%
|
Three Months Ended September 30,
2008 versus 2007
—
Investments in partnerships realized and unrealized gains and losses were
as follows (
dollar amounts in
thousands
):
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in partnerships realized and unrealized gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
Weisel Healthcare Venture Partners
|
|
$
|
(1,079
|
)
|
|
$
|
2,122
|
|
|
|
(150.8
|
)%
|
Thomas
Weisel Venture Partners
|
|
|
(785
|
)
|
|
|
(94
|
)
|
|
|
(735.1
|
)
|
Thomas
Weisel Global Growth Partners
|
|
|
272
|
|
|
|
1,260
|
|
|
|
(78.4
|
)
|
Thomas
Weisel Capital Partners
|
|
|
(245
|
)
|
|
|
(353
|
)
|
|
|
(30.6
|
)
|
Other
|
|
|
(538
|
)
|
|
|
41
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments in partnerships realized and unrealized gains and
losses
|
|
$
|
(2,375
|
)
|
|
$
|
2,976
|
|
|
|
(179.8
|
)%
|
The
unrealized and realized investment loss from Thomas Weisel Healthcare Venture
Partners during the three months ended September 30, 2008 was due to fair value
adjustments of two public portfolio companies within this fund. In
addition, Thomas Weisel Venture Partners recorded fair value write-downs of its
investments during the three months ended September 30, 2008 due to a decline in
market conditions.
We
recorded investment losses in other securities of $3.7 million in the three
months ended September 30, 2008 compared to investment losses of $0.2 million in
2007. The investment losses in 2008 were primarily due to net
realized and unrealized losses on warrants of $2.8 million which were acquired
through the Westwind acquisition. In addition, the loss was partially
due to a decline in the value of equity securities held by our small and mid-cap
growth funds.
Nine Months Ended September 30, 2008
versus 2007
—
Investments in partnerships realized and unrealized gains and losses were
as follows (
dollar amounts in
thousands
):
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in partnerships realized and unrealized gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
Weisel Healthcare Venture Partners
|
|
$
|
(2,220
|
)
|
|
$
|
2,829
|
|
|
|
(178.5
|
)%
|
Thomas
Weisel Venture Partners
|
|
|
(1,062
|
)
|
|
|
8,800
|
|
|
|
(112.1
|
)
|
Thomas
Weisel Global Growth Partners
|
|
|
183
|
|
|
|
2,636
|
|
|
|
(93.1
|
)
|
Thomas
Weisel Capital Partners
|
|
|
(736
|
)
|
|
|
(379
|
)
|
|
|
94.2
|
|
Other
|
|
|
(298
|
)
|
|
|
347
|
|
|
|
(185.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments in partnerships realized and unrealized gains and
losses
|
|
$
|
(4,133
|
)
|
|
$
|
14,233
|
|
|
|
(129.0
|
)
|
This
unrealized and realized investment loss from Thomas Weisel Healthcare Venture
Partners during the nine months ended September 30, 2008 was primarily due to
fair value adjustments of two public portfolio companies within this
fund. In addition, Thomas Weisel Venture Partners recorded fair value
adjustments of its investments during the nine months ended September 30, 2008
due to a decline in market conditions. During the nine months ended
September 30, 2007, we recorded net realized gains allocated to us in respect to
our previously waived management fees, increased in gains from investment funds
allocated to use with respect to our carried interest and an overall increase in
gains within our investment funds.
We
recorded investment losses in other securities of $6.9 million in the nine
months ended September 30, 2008 compared to investment gains of $0.5 million in
2007. The investment losses in 2008 were primarily due to net
realized and unrealized losses on warrants of $5.2 million which were acquired
through the Westwind acquisition. In addition, the loss was partially
due to a decline in the value of equity securities held by our small mid-cap
growth funds.
Other
Revenue
Nine Months Ended September 30, 2007
—
Other revenue of
$0.9 million recorded during the nine months ended September 30, 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.
Net
Revenues by Geographic Segment
The
following table sets forth our net revenues by geographic segment (
in thousands
):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
41,056
|
|
|
$
|
63,712
|
|
|
$
|
133,721
|
|
|
$
|
212,137
|
|
Other
countries
|
|
|
7,990
|
|
|
|
—
|
|
|
|
24,263
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net revenue
|
|
$
|
49,046
|
|
|
$
|
63,712
|
|
|
$
|
157,984
|
|
|
$
|
212,140
|
|
Net
revenues from countries other than the United States increased $8.0 million and
$24.3 million during the three and nine months ended September 30, 2008,
respectively, from 2007 as a result of our acquisition of Westwind in January
2008. During the three and nine months ended September 30, 2008, net revenues
from countries other than the United States consisted primarily of net revenues
from Canada, which accounted for approximately 67% and 78%, respectively, of net
revenues from other countries.
No single
customer accounted for 10% or more of net revenues during the three and nine
months ended September 30, 2008 or during the three and nine months ended
September 30, 2007.
Expenses
Excluding Interest
The
following table sets forth information relating to our expenses excluding
interest, both in dollar amounts and as a percentage of net revenues (
dollar amounts
in thousands
):
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
excluding interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits expense
|
|
$
|
36,869
|
|
|
$
|
38,304
|
|
|
|
(3.7
|
)%
|
|
$
|
119,046
|
|
|
$
|
119,689
|
|
|
|
(0.5
|
)%
|
Non-compensation
expense
|
|
|
131,656
|
|
|
|
27,522
|
|
|
|
378.4
|
|
|
|
201,755
|
|
|
|
75,254
|
|
|
|
168.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses excluding interest
|
|
$
|
168,525
|
|
|
$
|
65,826
|
|
|
|
156.0
|
%
|
|
$
|
320,801
|
|
|
$
|
194,943
|
|
|
|
64.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits expense
|
|
|
75.2
|
%
|
|
|
60.1
|
%
|
|
|
|
|
|
|
75.4
|
%
|
|
|
56.4
|
%
|
|
|
|
|
Non-compensation
expense
|
|
|
268.4
|
|
|
|
43.2
|
|
|
|
|
|
|
|
127.7
|
|
|
|
35.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
343.6
|
%
|
|
|
103.3
|
%
|
|
|
|
|
|
|
203.1
|
%
|
|
|
91.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of employees
|
|
|
622
|
|
|
|
659
|
|
|
|
|
|
|
|
660
|
|
|
|
623
|
|
|
|
|
|
Compensation
and Benefits Expense
Compensation
and benefits expense to secure the services of our employees has 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 pay
discretionary bonuses based on a combination of company 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 related service periods. These bonuses make up a significant portion of our
compensation and benefits expense, particularly for our senior
professionals.
As part
of a special retention and incentive program, on August 6, 2008 we granted
2,970,000 restricted stock unit equity awards to senior employees of the Company
as a means of incentivizing and retaining our key producers. The
restricted stock units vest after the end of a three-year period. In
addition, we granted 550,000 performance-based restricted stock unit equity
awards to certain members of the Executive Committee that will vest upon the
attainment of the Company’s long-term performance goals. The total
grant date fair value of these restricted stock unit equity awards was $21.0
million. The expense associated with these grants will be recognized
ratably over the vesting period.
Share-based
awards constitute a portion of our compensation expense, and as a general
matter, vest over a three or four-year service 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. As of September 30, 2008, there was (i)
$2.3 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
0.3 years and (ii) an additional $43.0 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 2.9 years.
Three Months Ended September 30,
2008 versus 2007
—
Compensation and benefits expense decreased $1.4 million in the three
months ended September 30, 2008 from 2007. Included in this decrease are
expenses of $2.6 million due to the acquisition of
Westwind. Excluding the impact from the Westwind acquisition,
compensation and benefits expense would have decreased $4.0 million during the
three months ended September 30, 2008. This fluctuation was the
result of a decrease in salary and related taxes and benefits expense of $3.1
million and $0.5 million, respectively, due to our reduction in headcount during
2008. In addition, bonus expense decreased $2.3 million during the
same period. This decrease is partially offset by an increase in
share-based compensation expense of $1.6 million as a result of additional
grants of restricted stock units made during 2008 and an increase in commission
expense of $0.2 million which is directly related to the increase in brokerage
revenues during the same period.
Nine Months Ended September 30, 2008
versus 2007
—
Compensation and benefits expense decreased $0.6 million in the nine
months ended September 30, 2008 from 2007. Included in this decrease are
expenses of $14.9 million related to the acquisition of
Westwind. Excluding the impact from the Westwind acquisition,
compensation and benefits expense would have decreased $15.6 million during the
nine months ended September 30, 2008. This fluctuation was the result
of a decrease in bonus expense of $18.2 million. In addition, salary
expense decreased $3.6 million during the same period due to our reduction in
headcount during 2008. This decrease is partially offset by an
increase in share-based compensation expense of $3.8 million as a result of
additional grants of restricted stock units made during 2008 and an increase in
commission expense of $1.5 million which is directly related to the increase in
brokerage revenues during the same period.
Non-Compensation
Expenses
Our
non-compensation expenses include brokerage execution, clearance and account
administration, communications and data processing, depreciation and
amortization of property and equipment, amortization of other intangible assets,
goodwill impairment, marketing and promotion, occupancy and equipment and other
expenses.
Three Months Ended September 30,
2008 versus 2007
—
Non-compensation expense increased $104.1 million in the three months ended
September 30, 2008 from 2007. This fluctuation is primarily due to the goodwill
impairment of $92.6 million during the three months ended September 30, 2008, as
well as the amortization of identifiable intangible assets acquired as a result
of the Westwind acquisition in January 2008 of $3.8
million. Occupancy and equipment expense increased $2.5 million
during the three months ended September 30, 2008 from 2007 primarily as a result
of our exiting certain office space in September 2008 for which we recorded a
$2.4 million lease loss charge. Other expense increased $2.4 million
primarily due to increased professional services of $2.0 million, $1.7 million
of which was due to the integration of Westwind, and an increase in recruiting
and relocation of $0.4 million due to the key hires we made during the three
months ended September 30, 2008. Brokerage execution, clearance and
account administration expense increased by $2.2 million during the three months
ended September 30, 2008 from 2007 as a result of increased brokerage activity
during the period as well as the acquisition of Westwind which accounted for
$0.5 million of the increase.
Nine Months Ended September 30, 2008
versus 2007
—
Non-compensation expense increased $126.5 million in the nine months ended
September 30, 2008 from 2007. This fluctuation is primarily due to the goodwill
impairment of $92.6 million during the nine months ended September 30, 2008, as
well as the amortization of identifiable intangible assets acquired as a result
of the Westwind acquisition in January 2008 of $11.6 million. Other
expense increased $7.7 million primarily due to increased professional services
of $4.2 million, $2.2 million of which was due to the integration of Westwind
and an increase in recruiting and relocation of $1.1 million due to the key
hires we made during the nine months ended September 30,
2008. Brokerage execution, clearance and account administration
increased by $5.4 million during the nine months ended September 30, 2008 from
2007 as a result of increased brokerage activity during the period as well as
the acquisition of Westwind in January 2008 which accounted for $1.3 million of
the increase. Occupancy and equipment expense increased $4.4 million
during the nine months ended September 30, 2008 from 2007 primarily due to our
exiting certain office space in September 2008 for which we recorded a $2.4
million lease loss charge. During the nine months ended September 30,
2008, we incurred $1.0 million of occupancy and equipment expense as a result of
our acquisition of Westwind. Communication and data processing
expense increased by $3.3 million due to increased costs associated with our
expansion into Canada, Europe and the midwest, which includes an additional $1.6
million of expenses incurred as the result of our acquisition of
Westwind.
Provision
for 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.
Our
effective tax rate for the three months ended September 30, 2008 and 2007 was
8.6% and 62.2%, respectively. Our effective tax rate for the nine
months ended September 30, 2008 and 2007 was 15.8% and 34.9%, respectively. The
decrease in the effective tax rate is primarily the result of the impairment
charge to goodwill acquired in the Westwind transaction of $92.6 million, which
did not provide a tax benefit and resulted in a reduction of our effective tax
rate of 29.7% and 20.8% during the three and nine month periods,
respectively. In addition, in 2007, we eliminated a $1.4 million
valuation allowance, which was established upon conversion to a corporation in
connection with the establishment of our deferred tax asset balances. The
valuation allowance was recorded in 2006 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. During the three and nine months ended September 30,
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 our valuation allowance by $0.3 million and $1.0
million, respectively. This resulted in a tax benefit which increased our
effective tax rate by 16.3% for the three month period and decreased our
effective tax rate by 6.0% for the nine month period. As the
valuation allowance described above was reduced to zero as of December 31, 2007,
we did not experience a similar benefit in our effective tax rate during
2008.
Liquidity
and Capital Resources
We
believe that our current level of equity capital, current cash balances, funds
anticipated to be provided by operating activities and funds available to be
drawn under temporary loan agreements, will be adequate to meet our liquidity
and regulatory capital requirements for the next 12 months.
Cash
Flows
Cash and
cash equivalents were $110.4 million at September 30, 2008, a decrease of $46.6
million from $157.0 million at December 31, 2007.
Operating
activities used $53.5 million of cash and cash equivalents during the nine
months ended September 30, 2008. Our net loss excluding non-cash
items contributed $19.9 million to the decrease in cash. Additionally, in
February 2008, we made aggregate cash bonus payments to our employees of $25.6
million, as well as an aggregate cash payment of $24.8 million to our employees
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. During the nine months ended September 30,
2008 we had a decrease in accrued expenses and other liabilities of $19.8
million which is due to the fact that we have made cash payments to settle
accrued expenses that were recorded as of December 31, 2007. The overall
decrease in our cash and cash equivalents from operating activities is partially
offset by the partial liquidation of our convertible holdings as well as an
overall decrease in our net securities owned positions which provided $34.0
million of cash.
Investing
activities provided $25.6 million of cash and cash equivalents during the nine
months ended September 30, 2008. The net proceeds from sales of other
investments during the nine months ended September 30, 2008 were $40.9 million.
We used these proceeds to fund our $45.0 million cash payment for the
acquisition of Westwind in January 2008 and to fund bonus and severance payments
discussed in the operating activities discussion above. Cash received
as a result of our acquisition of Westwind was $36.9 million. In
addition, during the nine months ended September 30, 2008 we made contributions
of $3.9 million to our private equity partnerships and purchased property and
equipment of $3.5 million.
Financing
activities used $16.6 million of cash and cash equivalents during the nine
months ended September 30, 2008 primarily due to the repurchase of our common
stock from the open market for $9.4 million and the repayment of notes payable
of $6.1 million. In addition, we net settled $0.9 million of equity
awards that became deliverable to our employees during the nine months ended
September 30, 2008.
Auction
Rate Securities
As of
September 30, 2008, we held auction rate securities (“ARS”) with a par value of
$9.7 million and carrying value of $9.5 million. The ARS are variable
rate debt instruments, having long-term maturity dates (approximately 26 to 31
years), but whose interest rates are reset through an auction process, most
commonly at intervals of 7, 28 and 35 days. The interest earned on these
investments is exempt from Federal income tax. All of our ARS are backed by
pools of student loans and are rated Aaa/Aa3 and AAA/Aaa at September 30,
2008 and December 31, 2007, respectively. During the three
months ended September 30, 2008 we had an auction rate security redeemed at par
in the amount of $0.7 million. We continue to receive interest when
due on our ARS and expect to continue to receive interest when due in the
future. The weighted-average Federal tax exempt interest rate was
5.4% for September 2008.
In January 2008, we sold a
substantial portion of our ARS holdings at par and used the proceeds to
partially fund our acquisition of Westwind. Subsequent to January
2008
, auction failures increased significantly. While it was not unusual
for supply to outweigh demand, banks running the auctions had historically
absorbed the excess supply in order to ensure a successful auction and a liquid
market. This process came to a halt as the result of the dislocation in the
credit markets during 2008.
The
principal balance of our ARS 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 the contractual
maturities. As a result of the auction failures, we evaluate the
credit risk and compare the yields on our ARS to similarly rated municipal
issues. Our valuation of our ARS assesses the credit and liquidity
risks associated with the securities and determines the fair values based on a
discounted cash flow analysis. Key assumptions of the discounted cash
flow analysis included the following:
Coupon Rate
– In determining
fair value we use an average near term historical interest rate for these issues
rather than a rate at a specific point in time which may over or underestimate
expected future interest payments. It is our experience that average
near term historical rates are a better predictor of future interest payments
due to the significant period to period fluctuations in rates and the lack of
transparency in how these rates are determined. The average near term
historical rates ranged from 3.7% to 6.4%.
Discount Rate
– Our discount
rate was based on a spread over the AAA Municipal General Revenue yield curve
and consisted of a spread of 475 bps over this yield curve which we adjusted
down to 65 bps over periods of time ranging from eight to sixteen
quarters. This spread is included in the discount rate to reflect the
current and expected illiquidity, which we expect to trend toward the
mean, in the ARS market. The average spread between our ARS and
the AAA Municipal General Revenue yield curve between August 2004 and August
2007, a period in which auctions were not likely to fail, averaged less than 10
basis points.
Timing of Liquidation
– Our
cash flow projections consisted of various scenarios for each security wherein
we valued the ARS to points in time where it was in the interest of the issuer,
based on the fail rate, to redeem the securities. Our concluded
values for each security were based on the average valuation of these various
scenarios. For the securities analyzed, the shortest average time to
liquidation was assumed to be 16.5 months.
Based on
the results of the discounted cash flow analysis, we determined that our ARS had
a fair value decline of $0.2 million during the nine months ended September 30,
2008.
Debt
Financing
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 September 30, 2008, the outstanding
principal balance under these notes was $23.0 million and is due in January
2011.
In April
2008, Thomas Weisel Partners LLC, our primary U.S. broker-dealer subsidiary,
entered into a $25.0 million revolving note and subordinated loan
agreement. Thomas Weisel Partners LLC will need to satisfy certain
covenants in order to draw funds under this loan agreement, which have been
satisfied at September 30, 2008. These covenants include the
following: (i) maintaining a certain level of equity, (ii) meeting specific
financial ratios based upon regulatory financial statement filings, (iii)
continuing to employ Thomas W. Weisel as Chief Executive Officer, (iv)
continuing to operate Thomas Weisel Partners LLC’s investment banking and
brokerage operations and (v) demonstrating Thomas Weisel Partner LLC’s
investment banking and brokerage operations continue to generate a specified
percentage of total revenues. Through the date of this filing, no
amounts have been drawn under this loan agreement.
We
previously had a financing arrangement with General Electric Capital
Corporation, the balance of which was $2.8 million as of March 31,
2008. We paid all outstanding principal and interest to General
Electric Capital Corporation in May 2008.
Bonus
and Net Settlement of Restricted Stock Units
The
timing of bonus 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 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 primarily to our U.S. based employees that was
attributable to the acceleration of the payment of the 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.
In July
2008, we made aggregate cash bonus payments to our Canadian based employees of
approximately $8.7 million.
During
the nine months ended September 30, 2008, approximately 760,000 shares of freely
transferable common stock became deliverable to our employees in respect of
share-based awards previously granted. 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 employee statutory income tax withholding
requirements. During the nine months ended September 30, 2008, we
made payments of $0.9 million related to the net settlement of
shares. Our cash position and liquidity will be effected to the
extent we elect to continue to settle a portion of vesting shares through net
settlement in the future.
Regulatory
Net Capital and Other Amounts Required to be Maintained at Broker-Dealer
Subsidiary
We have
the following registered securities broker-dealers:
|
·
|
Thomas
Weisel Partners LLC (“TWP”)
|
|
·
|
Thomas
Weisel Partners (USA), Inc. (“TWP
USA”)
|
|
·
|
Thomas
Weisel Partners Canada Inc.
(“TWPC”)
|
|
·
|
Thomas
Weisel Partners International Limited
(“TWPIL”)
|
TWP and
TWP USA are registered U.S. broker-dealers that are subject to the Uniform Net
Capital Rule under the Securities Exchange Act of 1934 administered by the SEC
and FINRA, which requires the maintenance of minimum net capital. SEC and FINRA
regulations also provide that equity capital may not be withdrawn or cash
dividends paid if certain minimum net capital requirements are not
met.
TWPC is a
registered investment dealer in Canada and is subject to the capital
requirements of the Investment Industry Regulatory Organization of
Canada. TWPIL is a registered U.K. broker-dealer and is subject to
the capital requirements of the Financial Securities Authority.
The table
below summarizes the minimum capital requirements for our broker-dealer
subsidiaries (
in
thousands
):
|
|
September
30, 2008
|
|
|
|
Required
Net Capital
|
|
|
Net
Capital
|
|
|
Excess
Net Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TWP
|
|
$
|
1,000
|
|
|
$
|
53,602
|
|
|
$
|
52,602
|
|
TWPC
|
|
|
235
|
|
|
|
17,029
|
|
|
|
16,794
|
|
TWPIL
|
|
|
1,839
|
|
|
|
4,388
|
|
|
|
2,549
|
|
TWP
USA
|
|
|
100
|
|
|
|
1,234
|
|
|
|
1,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,174
|
|
|
$
|
76,253
|
|
|
$
|
73,079
|
|
Regulatory
net capital requirements change based on certain investment and underwriting
activities.
Our
clearing brokers are also the primary source of the short-term financing of our
securities inventory. In connection with the provision of the
short-term financing, we are required to maintain deposits with our clearing
brokers. These deposits are included in our net receivable from or
payable to clearing brokers.
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.
In April 2008, TWP entered
into a $25.0 million revolving note and subordinated loan
agreement. From time to time we may borrow funds under this
subordinated loan agreement or under similar liquidity facilities. Such funds
would constitute capital for purposes of calculating our net capital
position.
Acquisition
of Westwind
On
January 2, 2008, we completed our acquisition of Westwind and 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, total costs
related to our acquisition of Westwind were $3.1 million.
Off-Balance
Sheet Arrangements
As of
September 30, 2008, we do not have any off-balance sheet arrangements that have
an impact on our condensed consolidated statements of financial condition,
operations or cash flows.
Contractual
Obligations
The
following table provides a summary of our contractual obligations as of
September 30, 2008 (
in
thousands
):
|
|
Payment
Due by Period
|
|
|
|
|
|
|
Remainder
of 2008
|
|
|
2009-2010
|
|
|
2011-2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
(1)
|
|
$
|
260
|
|
|
$
|
2,079
|
|
|
$
|
23,104
|
|
|
$
|
—
|
|
|
$
|
25,443
|
|
Capital
leases
(2)
|
|
|
—
|
|
|
|
177
|
|
|
|
10
|
|
|
|
—
|
|
|
|
187
|
|
Operating
leases
(3)
|
|
|
4,483
|
|
|
|
35,640
|
|
|
|
24,350
|
|
|
|
27,821
|
|
|
|
92,294
|
|
General
partner commitment to invest in private equity funds
(4)
|
|
|
367
|
|
|
|
1,340
|
|
|
|
174
|
|
|
|
—
|
|
|
|
1,881
|
|
Guaranteed
compensation payments
|
|
|
—
|
|
|
|
5,525
|
|
|
|
125
|
|
|
|
—
|
|
|
|
5,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
$
|
5,110
|
|
|
$
|
44,761
|
|
|
$
|
47,763
|
|
|
$
|
27,821
|
|
|
$
|
125,455
|
|
(1)
|
Represents
remaining principal amount and related estimated interest payable for
notes issued in connection with our initial public
offering.
|
(2)
|
Includes
estimated interest payable related to capital lease
liability.
|
(3)
|
Operating
lease expense is presented net of sub-lease rental
income.
|
(4)
|
The
private equity fund commitments have no specific contribution dates. The
timing of these contributions is presented based upon estimated
contribution dates.
|
In
addition to the contractual obligations within the table above, we have
committed $33.9 million to investments in unaffiliated funds. Through September
30, 2008, we have funded $7.0 million of these commitments and the remaining
unfunded portion as of September 30, 2008 was $26.9 million. We currently
anticipate transferring these investments and the related commitments to funds
sponsored by us. These commitments may be called in full at any
time.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
about future events that affect the amounts reported in our condensed
consolidated financial statements and their notes. Actual results could differ
significantly from those estimates. The accounting policies that are most
important to the presentation of our financial condition and results of
operations and require management’s most difficult, subjective and complex
judgments include the following:
·
Fair
Value of Financial Instruments
·
Investment
in Partnerships and Other Securities
·
Liability
for Lease Losses
·
Legal
and Other Contingent Liabilities
·
Allowance
for Doubtful Accounts
·
Deferred
Tax Valuation Allowance
For
further discussion regarding these policies, refer to Part II, Item 7
– “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies and Estimates” of our Annual Report on
Form 10-K for the year ended December 31, 2007. In addition to
the above, as a result of our acquisition of Westwind in January 2008, we have
identified the following critical accounting policies.
Business
Combinations
In
accordance with business combination accounting
under Statement of
Financial Accounting Standards No. 141,
Business
Combinations
,
we allocate the
purchase price of acquired businesses to the tangible and intangible assets
acquired and liabilities assumed based on estimated fair values. Such
allocations require management to make significant estimates and assumptions,
especially with respect to intangible assets acquired.
Management’s
estimates of fair value are based upon assumptions believed to be
reasonable. These estimates are based on information obtained from
management of the acquired companies and are inherently
uncertain. Critical estimates in valuing certain of the intangible
assets include, but are not limited to, (i) future expected cash flows from
acquired businesses, (ii) future expected cash flows from employees subject to
non-compete agreements and (iii) the acquired company’s market
position.
Unanticipated
events and circumstances may occur which may affect the accuracy or validity of
such assumptions, estimates or actual results.
Goodwill
and Long-Lived Assets
In accordance with
Statement of Financial Accounting Standards No. 142,
Goodwill
and Other Intangible Assets
(“SFAS No. 142”), we are
required to annually evaluate goodwill to determine whether it is
impaired. Goodwill is also required to be tested between annual impairment
tests if an event occurs or circumstances change that would reduce the fair
value of a reporting unit below its carrying amount. We selected the
fourth quarter to perform our annual goodwill impairment
testing.
The provisions of SFAS No. 142 require that a
two-step impairment test be performed on goodwill. In the first step, we compare
the fair value of the reporting unit to its carrying value. If the fair value of
the reporting unit exceeds the carrying value of the net assets assigned to that
unit, goodwill is considered not impaired and we are not required to perform
further testing. If the carrying value of the net assets assigned to the
reporting unit exceeds the fair value of the reporting unit, then we must
perform the second step of the impairment test in order to determine the implied
fair value of the reporting unit’s goodwill. If the carrying value of a
reporting unit’s goodwill exceeds its implied fair value, then we would record
an impairment loss equal to the difference.
During
the nine months ended September 30, 2008, we experienced a significant decline
in our market capitalization which was affected by the uncertainty in the
financial markets. Further, the tightening of the credit markets
contributed to a sharp decline in our capital raising activities and a
significant decrease in revenues during this same period. Based on
the adverse change in business climate and our perception that the climate is
unlikely to change in the near term, we recorded an estimated full impairment
charge to the goodwill asset of $92.6 million. The estimated
impairment charge was determined based on our estimated fair value utilizing a
discounted cash flow analysis, reconciled to our market
capitalization. In accordance with the testing requirements of SFAS
No. 142, we expect to complete our test of goodwill during the fourth quarter of
2008 but do not expect that the completed test will result in any changes to the
estimated impairment charge.
We
account for the impairment and disposal of long-lived assets utilizing Statement
of Financial Accounting Standards No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
(“SFAS No. 144”). SFAS No. 144 requires
that long-lived assets, such as property and equipment, and purchased intangible
assets subject to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The recoverability of an asset is measured by a comparison of
the carrying amount of an asset to its estimated undiscounted future cash flows
expected to be generated. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. We
do not believe there were any events or circumstances which indicated that the
carrying value of an asset may not be recoverable.
While we
believe our estimates and judgments about future cash flows are reasonable,
future impairment charges may be required if the expected cash flow estimates,
as projected, do not occur or if events change requiring us to revise our
estimates, and thereby result in non-cash charges to our earnings in the period
in which we make the adjustment.
Item 3
. Quantitative and Qualitative Disclosures About
Market Risk
Our
business and financing activities directly expose us to various types of risks,
including (i) market risk relating to, among other things, the changes in the
market value of equity or debt instruments and (ii) interest rate risk relating
to the effect of changes in interest rates and the yield curve on the value of
debt instruments that we hold and our payment obligations in respect of notes
that we have issued. We are also exposed to other risks in the
conduct of our business such as credit risk and the effects of
inflation. Our exposure to these risks could be material to our
consolidated financial statements. Set forth below is a discussion of some of
these risks together with quantitative information regarding the aggregate
amount and value of financial instruments that we hold or in which we maintain a
position or that we have issued and that remain outstanding, in each case, as of
September 30, 2008 and December 31, 2007. Due to the nature of our business, in
particular our trading business, the amount or value of financial instruments
that we hold or maintain a position in will fluctuate on a daily and intra-day
basis and the year-end values and amounts presented below are not necessarily
indicative of the exposures to market risk, interest rate risk and other risks
we may experience at various times throughout any given year.
Market
risk represents the risk of loss that may result from the change in value of a
financial instrument due to fluctuations in its market price. Market risk may be
exacerbated in times of trading illiquidity when market participants refrain
from transacting in normal quantities and/or at normal bid-offer spreads. Our
exposure to market risk is directly related to our role as a financial
intermediary in customer trading and to our market-making, investment banking
and investment activities, which activities include committing from time to time
to purchase large blocks of stock from publicly-traded issuers or their
significant shareholders. We trade in equity and convertible debt securities as
an active participant in both listed and OTC equity and convertible debt markets
and typically maintain securities in inventory to facilitate our market-making
activities and customer order flow. Market risk is inherent in financial
instruments.
The
following tables categorize our market risk sensitive financial instruments by
type of security and, where applicable, by contractual maturity
date.
As of
September 30, 2008 (
in
thousands
):
|
|
Maturity
Date
|
|
|
|
|
|
|
Carrying
Value
as of
|
|
|
|
Remainder
of 2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
Principal
|
|
|
September
30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
bonds—long
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
7,050
|
|
|
$
|
3,000
|
|
|
$
|
23,003
|
|
|
$
|
34,053
|
|
|
$
|
25,360
|
|
Warrants—long
(1)
|
|
|
14
|
|
|
|
557
|
|
|
|
747
|
|
|
|
27
|
|
|
|
213
|
|
|
|
—
|
|
|
|
1,558
|
|
|
|
1,558
|
|
Equity
securities—long
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,300
|
|
Total—long
|
|
|
14
|
|
|
|
557
|
|
|
|
1,747
|
|
|
|
7,077
|
|
|
|
3,213
|
|
|
|
23,003
|
|
|
|
35,611
|
|
|
|
48,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities—short
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,650
|
(2)
|
|
|
9,650
|
|
|
|
9,456
|
|
(1)
|
Maturity
date is based on the warrant expiration date. An assumption of
expiration date was made when none was
available.
|
(2)
|
Represents
contractual maturity date. Please refer to further discussion regarding
auction rate securities included in the “Liquidity and Capital Resources”
section above.
|
As of
December 31, 2007 (
in
thousands
):
|
|
Maturity
Date
|
|
|
|
|
|
|
Carrying
Value
as of
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
Principal
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
bonds—long
|
|
$
|
9,305
|
|
|
$
|
4,063
|
|
|
$
|
1,005
|
|
|
$
|
5,348
|
|
|
$
|
21,949
|
|
|
$
|
120,050
|
|
|
$
|
161,720
|
|
|
$
|
189,483
|
|
Equity
securities—long
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,957
|
|
Total—long
|
|
|
9,305
|
|
|
|
4,063
|
|
|
|
1,005
|
|
|
|
5,348
|
|
|
|
21,949
|
|
|
|
120,050
|
|
|
|
161,720
|
|
|
|
220,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
bonds—short
|
|
|
—
|
|
|
|
—
|
|
|
|
2,705
|
|
|
|
—
|
|
|
|
1,000
|
|
|
|
12,031
|
|
|
|
15,736
|
|
|
|
18,351
|
|
U.S.
Treasury securities—short
|
|
|
—
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
15,000
|
|
|
|
15,330
|
|
Equity
securities—short
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,252
|
|
Total—short
|
|
|
—
|
|
|
|
5,000
|
|
|
|
2,705
|
|
|
|
—
|
|
|
|
11,000
|
|
|
|
12,031
|
|
|
|
30,736
|
|
|
|
163,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
rate securities
|
|
|
37,600
|
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,550
|
(2)
|
|
|
46,150
|
|
|
|
46,150
|
|
Municipal
debt securities
|
|
|
4,016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,016
|
|
|
|
4,016
|
|
(1)
|
Represents
earlier of contractual maturity or repricing date, which we believe
represents the market risk inherent in the underlying instrument. Please
refer to further discussion regarding auction rate securities included in
the “Liquidity and Capital Resources” section
above.
|
(2)
|
Represents
contractual maturity date. Please refer to further discussion regarding
auction rate securities included in the “Liquidity and Capital Resources”
section above.
|
In
connection with our asset management activities, we provide seed investment
funds for new asset management products to be invested in long and short
positions in publicly traded equities and related options and other derivative
instruments. These seed investments are included in the tables presented
above.
In
addition to the positions set forth in the table above, we maintain investments
in private equity, venture capital and other investment funds we manage or have
managed. These investments are carried at fair value in accordance
with industry guidance, and as of September 30, 2008 and December 31, 2007, the
carrying amount of these investments was $49.4 million and $60.5 million,
respectively.
From time
to time we may use a variety of risk management techniques and hedging
strategies in the ordinary course of our brokerage activities, including
establishing position limits by product type and industry sector, closely
monitoring inventory turnover, maintaining long and short positions in related
securities and using exchange-traded equity options and other derivative
instruments.
In
connection with our brokerage activities, management reviews reports appropriate
to the risk profile of specific trading activities. Typically, market conditions
are evaluated and transaction details and securities positions are reviewed.
These activities seek to ensure that trading strategies are within acceptable
risk tolerance parameters, particularly when we commit our own capital to
facilitate client trading. We believe that these procedures, which stress timely
communications between our traders, institutional brokerage management and
senior management, are important elements in evaluating and addressing market
risk.
Interest
rate risk represents the potential loss from adverse changes in market interest
rates. As we may hold U.S. Treasury securities and auction rate securities,
as well as convertible debt securities, and incur interest-sensitive liabilities
from time to time, we are exposed to interest rate risk arising from changes in
the level and volatility of interest rates and in the shape of the yield curve.
Certain of these interest rate risks may be managed through the use of short
positions in U.S. government and corporate debt securities and other
instruments. In addition, we issued floating rate notes to California
Public Employees’ Retirement System and Nomura America Investment, Inc. and are,
therefore, exposed to the risk of higher interest payments on those notes if
interest rates rise.
The
tables below provide information about our financial instruments that are
sensitive to changes in interest rates. For inventory positions, other
investments and notes payable the table presents principal cash flows with
contractual maturity dates.
As of
September
30, 2008
(
in
thousands
):
|
|
Maturity
Date
|
|
|
|
|
|
|
Carrying
Value
as of
|
|
|
|
Remainder
of
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
Principal
|
|
|
September
30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
bonds—long
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
7,050
|
|
|
$
|
3,000
|
|
|
$
|
23,003
|
|
|
$
|
34,053
|
|
|
$
|
25,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
rate securities
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,650
|
(3)
|
|
|
9,650
|
|
|
|
9,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Note, floating mid-term AFR + 2.25%
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,000
|
|
|
|
12,434
|
|
Senior
Note, floating mid-term AFR + 2.25%
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
9,565
|
|
(1)
|
The
weighted average interest rate was 5.39% at September 30,
2008.
|
(2)
|
We
have recorded the debt principal at a discount to reflect the below-market
stated interest rate of these notes. We amortize the discount to interest
expense so that the interest expense approximates our incremental
borrowing rate. The weighted average interest rate was 5.22% at September
30, 2008.
|
(3)
|
Represents
contractual maturity date. Please refer to further discussion regarding
auction rate securities included in the “Liquidity and Capital Resources”
section above.
|
As of
December 31, 2007 (
in
thousands
):
|
|
Maturity
Date
|
|
|
|
|
|
|
Carrying
Value
as of
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
Principal
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
bonds—long
|
|
$
|
9,305
|
|
|
$
|
4,063
|
|
|
$
|
1,005
|
|
|
$
|
5,348
|
|
|
$
|
21,949
|
|
|
$
|
120,050
|
|
|
$
|
161,720
|
|
|
$
|
189,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
bonds—short
|
|
|
—
|
|
|
|
—
|
|
|
|
2,705
|
|
|
|
—
|
|
|
|
1,000
|
|
|
|
12,031
|
|
|
|
15,736
|
|
|
|
18,351
|
|
U.S.
Treasury securities—short
|
|
|
—
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
15,000
|
|
|
|
15,330
|
|
Total—short
|
|
|
—
|
|
|
|
5,000
|
|
|
|
2,705
|
|
|
|
—
|
|
|
|
11,000
|
|
|
|
12,031
|
|
|
|
30,736
|
|
|
|
33,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
rate securities
(1)
|
|
|
37,600
|
(6)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,550
|
(7)
|
|
|
46,150
|
|
|
|
46,150
|
|
Municipal
debt securities
(2)
|
|
|
4,016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,016
|
|
|
|
4,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Note, floating mid-term AFR + 2.25%
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,000
|
|
|
|
12,267
|
|
Senior
Note, floating mid-term AFR + 2.25%
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
9,436
|
|
Contingent
Payment Senior Note
(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,384
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,384
|
|
|
|
1,948
|
|
Secured
Note, floating at LIBOR + 2.85%
(5)
|
|
|
3,734
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,734
|
|
|
|
3,734
|
|
(1)
|
The
weighted average interest rate was 5.42% at December 31,
2007.
|
(2)
|
The
weighted average interest rate was 3.80% at December 31,
2007.
|
(3)
|
We
have recorded the debt principal at a discount to reflect the below-market
stated interest rate of these notes at inception. We amortize the discount
to interest expense so that the interest expense approximates our
incremental borrowing rate. The weighted average interest rate was 6.65%
at December 31, 2007.
|
(4)
|
The
Contingent Payment Senior Note had a variable due date based upon
distributions received from certain private equity funds. We recorded the
debt principal at a discount and amortized the discount to interest
expense so that the interest expense on this non-interest bearing note
approximated our incremental borrowing rate. The weighted average interest
rate was 6.98% at December 31,
2007.
|
(5)
|
The
weighted average interest rate was 8.17% at December 31,
2007.
|
(6)
|
Represents
earlier of contractual maturity or repricing date, which we believe
represents the interest rate risk inherent in the underlying instrument.
Please refer to further discussion regarding auction rate securities
included in the “Liquidity and Capital Resources” section
above.
|
(7)
|
Represents
contractual maturity date. Please refer to further discussion regarding
auction rate securities included in the “Liquidity and Capital Resources”
section above.
|
Our broker-dealer subsidiaries place
and execute customer orders. The orders are then settled by unrelated clearing
organizations that maintain custody of customers’ securities and provide
financing to customers. The majority of our transactions, and consequently the
concentration of our credit exposure, is with our clearing brokers. The clearing
brokers are also the primary source of
our short-term financing (securities
sold, but not yet purchased), which is collateralized by cash and securities
owned by us and held by the clearing brokers. Our securities owned may be
pledged by the clearing brokers. The amount receivable from or payable to the
clearing brokers represents amounts receivable or payable in connection with the
proprietary and customer trading activities. As of September 30, 2008 and
December 31, 2007, our cash on deposit with the clearing brokers of $67.5
million and $135.9 million, respectively, was not collateralizing any
liabilities to the clearing brokers. In addition to the clearing brokers, we are
exposed to credit risk from other brokers, dealers and other financial
institutions with which we transact business.
Through
indemnification provisions in our agreement with our clearing organizations,
customer activities may expose us to off-balance sheet credit risk. We may be
required to purchase or sell financial instruments at prevailing market prices
in the event a customer fails to settle a trade on its original terms or in the
event cash and securities in customer margin accounts are not sufficient to
fully cover customer obligations. We seek to control the risks associated with
brokerage services for our customers through customer screening and selection
procedures as well as through requirements that customers maintain margin
collateral in compliance with governmental and self-regulatory organization
regulations and clearing organization policies.
Due to
the fact that our assets are generally liquid in nature, they are not
significantly affected by inflation. However, the rate of inflation affects our
expenses, such as employee compensation, office leasing costs and communications
charges, which may not be readily recoverable in the price of services offered
by us. To the extent inflation results in rising interest rates and has other
adverse effects upon the securities markets, it may adversely affect our
financial position and results of operations.
Item 4
. Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in our periodic reports filed or
submitted under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Our disclosure controls and procedures
are also designed to ensure that information required to be disclosed in the
reports we file or submit under the Exchange Act is accumulated and communicated
to our management, including our Chief Executive Officer and Chief
Financial Officer as appropriate, to allow timely decisions regarding required
disclosure.
During
the quarter ended September 30, 2008, we carried out an evaluation, under the
supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of September 30,
2008.
There
were no changes in our internal control over financial reporting in the three
months ended September 30, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
The
certifications required by Section 302 of the Sarbanes-Oxley Act of 2002
are filed as exhibits 31.1 and 31.2 to this Quarterly Report on Form
10-Q.
PART
II — OTHER INFORMATION
The
following describes significant developments with respect to our litigation
matters that occurred in the three months ended September 30, 2008, and through
the filing date, and should be read in conjunction with our discussion set forth
in Note 16 — Commitments, Guarantees and Contingencies in Part VI,
Item 15 of our Annual Report on Form 10-K for the year ended
December 31, 2007 and our discussions set forth in Part II, Item 1 of our
Quarterly Reports on Form 10-Q for the three months ended March 31, 2008 and
June 30, 2008.
Auction Rate Securities
Inquiry
–
Based
upon press reports, approximately forty firms, including us, have received
inquiries from the Enforcement Department of the Financial Industry Regulatory
Authority, or FINRA, regarding retail customer purchases through those firms of
auction rate securities. We are cooperating with this
inquiry.
In re Noah Educational Holdings,
Ltd
.
–
We have
been named, but not yet served, as a defendant in a purported class action
litigation brought in connection with an initial public offering of Noah
Educational Holdings, Ltd. in October 2007 where we acted as a co-manager. The
complaint, apparently filed in the United States District Court for the Southern
District of New York, alleges violations of Federal securities laws against Noah
Educational and the underwriters, including us, based on alleged misstatements
and omissions in the registration statement. We believe we have meritorious
defenses to the action and intend to vigorously defend such action as it applies
to us.
Stetson Oil & Gas, Ltd. and
Thomas Weisel Partners Canada Inc
.
–
We have been named as a
defendant in a Statement of Claim. The claim, filed in the Ontario Superior
Court of Justice, arises out of a July 2008 contemplated transaction in which
Thomas Weisel Partners Canada was allegedly engaged to act as underwriter for
Stetson Oil & Gas, Ltd., an Alberta, Canada corporation. We
believe we have meritorious defenses to the action and intend to vigorously
defend such action as it applies to us.
Updated
Matters
In re Initial Public Offering
Securities Litigation –
We are a defendant in several purported class
actions brought against numerous underwriters in connection with certain initial
public offerings in 1999 and 2000. These cases have been consolidated in the
United States District Court for the Southern District of New York and generally
allege that underwriters accepted undisclosed compensation in connection with
the offerings, entered into arrangements designed to influence the price at
which the shares traded in the aftermarket and improperly allocated shares in
these offerings. The actions allege violations of Federal securities laws and
seek unspecified damages. Of the 310 issuers named in these cases, we acted as a
co-lead manager in one offering, a co-manager in 32 offerings, and as a
syndicate member in 10 offerings. We have denied liability in connection with
these matters. On June 10, 2004, plaintiffs entered into a definitive
settlement agreement with respect to their claims against the issuer defendants
and the issuers’ present or former officers and directors named in the lawsuits,
however, approval of the proposed settlement remains on hold pending the
resolution of the class certification issue described below. By a decision dated
October 13, 2004, the Federal district court granted plaintiffs’ motion for
class certification, however, the underwriter defendants petitioned the U.S.
Court of Appeals for the Second Circuit to review that certification decision.
On December 5, 2006 the Second Circuit vacated the district court’s class
certification decision and the plaintiffs subsequently petitioned the Second
Circuit for a rehearing. On April 6, 2007, the Second Circuit denied the
rehearing request. In May 2007, the plaintiffs filed a motion for
class certification on a new basis and subsequently scheduled
discovery. The parties have participated in a formal mediation over
several sessions and are in the process of documenting a potential settlement
(which is subject to, among other things, agreement on definitive documentation
and approval by the Court) that we believe will result in the resolution of this
matter for an amount that will be covered by our relevant insurance
policies.
In re First Horizon Pharmaceutical
Corporation Securities Litigation –
We had been a defendant in a
purported class action litigation brought in connection with a secondary
offering of First Horizon Pharmaceutical Corporation in April 2002 where we
acted as a co-manager. The consolidated amended complaint, was filed in the
United States District Court for the Northern District of Georgia on
September 2, 2003, and alleged violations of Federal securities laws
against First Horizon and certain of its directors and officers as well as First
Horizon’s underwriters, including us, based on alleged false and misleading
statements in the registration statement and other documents. A
settlement has now been reached that did not result in a liability for
us.
In re SeraCare Life Sciences, Inc.
Securities Litigation
–
We have been a defendant in a purported class action litigation brought
in connection with the SeraCare May 2005 secondary offering and various
financial filings from 2003 to 2006. In March 2006, SeraCare delisted
from the NASDAQ and filed for bankruptcy. The complaint was filed in
the United States District Court for the Southern District of California and was
amended in June 2006 to include underwriter defendants. The complaint
alleged violations of federal securities laws relating to the secondary offering
and financials as referenced above. We acted as a co-manager on the
secondary offering. A settlement has now been reached that we believe
will result in the resolution of this matter for an amount that will be covered
by our relevant reserves. At this time we are waiting for court
approval of the settlement papers.
In re U.S. Auto Parts Network, Inc.
Securities Litigation
–
We had been a defendant in a purported class action lawsuit filed in
March 2007 with respect to the initial public offering of U.S. Auto Parts
Network, Inc. on February 8, 2007 and subsequent public disclosures by U.S.
Auto Parts. We acted as an underwriter and a co-book manager of the U.S. Auto
Parts initial public offering. The complaint, which was filed in the United
States District Court, Central District of California, Western Division, alleges
violations of various Federal securities laws against U.S. Auto Parts and
certain of its directors and officers as well as U.S. Auto Parts’ underwriters,
including us, based on, among other things, alleged false and misleading
statements. A settlement has now been reached that did not result in
a liability for us.
The
following discussion supplements the risk factors previously disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2007.
An
impairment in the carrying value of goodwill or other intangible assts could
negatively effect our consolidated statements of financial position, results of
operations and cash flows.
A
substantial portion of our assets arise from goodwill and other intangible
assets recorded as a result of our acquisition of Westwind. We are
required to perform a test for impairment of such goodwill and other intangible
assets, at least annually. If the test resulted in a write down of
goodwill and/or other intangible assets, we could incur a significant
loss.
As an
example, during the nine months ended September 30, 2008, we experienced a
significant decline in our market capitalization which was affected by the
uncertainty in the financial markets. Further, the tightening of the
credit markets contributed to a sharp decline in our capital raising activities
and a significant decrease in revenues during this same period. Based
on the adverse change in business climate and our perception that the climate is
unlikely to change in the near term, we recorded an estimated full impairment
charge to the goodwill asset of $92.6 million.
Item 2
. Unregistered Sales of Equity Securities and Use of
Proceeds
Repurchases
of Common Stock during the Three Months Ended September 30, 2008
During
the three months ended September 30, 2008, we repurchased the following shares
of our common stock:
Month
|
|
Number
of Shares
|
|
|
Average
Purchase Price per Share
|
|
|
|
|
|
|
|
|
July
|
|
|
|
|
|
|
Share
repurchases
(1)
|
|
|
348,376
|
|
|
$
|
4.96
|
|
Employee
transactions
(2)
|
|
|
5,880
|
|
|
|
4.67
|
|
August
|
|
|
|
|
|
|
|
|
Employee
transactions
(2)
|
|
|
3,276
|
|
|
|
6.52
|
|
September
|
|
|
|
|
|
|
|
|
Share
repurchases
(1)
|
|
|
33,095
|
|
|
|
7.61
|
|
Employee
transactions
(2)
|
|
|
8,288
|
|
|
|
6.45
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
398,915
|
|
|
$
|
5.22
|
|
(1)
|
These
repurchases were funded through cash and cash equivalents. The shares were
classified as treasury stock upon repurchase and we intend to use these
shares to settle obligations to deliver common stock in the future to
employees who have received Restricted Stock Units under our Equity
Incentive Plan.
|
(2)
|
Includes
shares of common stock that were otherwise scheduled to be delivered to
employees in respect of vesting Restricted Stock Units. These
shares were withheld from delivery (under the terms of grants under the
Equity Incentive Plan) to offset tax withholding obligations of the
employee recipients that occur upon the vesting of Restricted Stock
Units. In lieu of delivering these shares to the employee
recipients, we satisfied a portion of their tax withholding obligations
with cash in an amount equivalent to the value of such shares on the
scheduled delivery date.
|
The
repurchases referred to in the table above as “Share repurchases” were executed
pursuant to an authorization by our Board of Directors to repurchase up to
2,000,000 shares of common stock for the purpose of settling obligations to
deliver common stock in the future to employees who have received Restricted
Stock Units under our Equity Incentive Plan. Additional repurchases
pursuant to this authority may be carried out from time to time in the
future. Furthermore, our Board of Directors may authorize additional
repurchases for the purpose of settling obligations to deliver common stock in
the future to employees who have received Restricted Stock Units under our
Equity Incentive Plan.
Item 3
. Defaults Upon Senior Securities
None.
Item 4.
Submission of Matters to a Vote of Security
Holders
There
were no matters submitted to a vote of security holders during the three months
ended September 30, 2008.
Not
applicable.
Refer to
the Exhibit Index for a list of the exhibits being filed or furnished with
or incorporated by reference into this Quarterly Report on Form
10-Q.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
THOMAS
WEISEL PARTNERS GROUP, INC.
|
|
|
|
Date:
November 7, 2008
|
By:
|
/s/
Thomas W. Weisel
|
|
|
Name: Thomas
W. Weisel
|
|
|
Title: Chairman
and Chief Executive Officer
|
|
|
|
Date:
November 7, 2008
|
By:
|
/s/
Shaugn S. Stanley
|
|
|
Name: Shaugn
S. Stanley
|
|
|
Title: Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
Incorporated
by Reference
|
|
Exhibit
|
|
|
|
File
|
Date
of
|
|
Exhibit
|
Filed
|
Number
|
|
Exhibit
Description
|
Form
|
Number
|
First
Filing
|
|
Number
|
Herewith
|
|
2.1
|
|
Plan
of Reorganization and Merger Agreement, dated as of October 14, 2005,
by and among Thomas Weisel Partners Group LLC, Thomas Weisel Partners
Group, Inc. and TWPG Merger Sub LLC
|
S-1/A
|
333-129108
|
12/13/2005
|
|
|
2.1
|
|
|
|
2.2
|
|
Agreement
and Plan of Merger between Thomas Weisel Partners Group, Inc. and Thomas
Weisel Partners Group LLC
|
10-K
|
000-51730
|
3/29/2006
|
|
|
2.2
|
|
|
|
2.3
|
|
Arrangement
Agreement dated as of September 30, 2007 by and among Thomas Weisel
Partners Group, Inc., TWP Acquisition Company (Canada), Inc., Westwind
Capital Corporation, and Lionel Conacher, as Shareholders’
Representative
|
8-K
|
000-51730
|
10/1/2007
|
|
|
2.1
|
|
|
|
3.1
|
|
Certificate
of Incorporation
|
S-1
|
333-129108
|
10/19/2005
|
|
|
3.1
|
|
|
|
3.2
|
|
By-Laws
|
S-1
|
333-129108
|
10/19/2005
|
|
|
3.2
|
|
|
|
3.3
|
|
Certificate
of Designations, Preferences and Rights of the Special Voting Preferred
Stock of Thomas Weisel Partners Group, Inc.
|
8-K
|
000-51730
|
1/1/2008
|
|
|
3.3
|
|
|
|
4.1
|
|
Form
of Common Stock Certificate
|
10-K
|
000-51730
|
3/29/2006
|
|
|
4.1
|
|
|
|
4.2
|
|
Registration
Rights Agreement
|
10-K
|
000-51730
|
3/29/2006
|
|
|
4.2
|
|
|
|
4.3
|
|
Warrant
|
10-K
|
000-51730
|
3/29/2006
|
|
|
4.3
|
|
|
|
10.1
|
|
Second
Amended and Restated
Thomas
Weisel Partners Group, Inc. Equity Incentive Plan
|
10-Q
|
000-51730
|
8/8/2008
|
|
|
10.1
|
|
|
|
10.2
|
|
Form
of Thomas Weisel Partners Group, Inc. Equity Incentive Plan and Bonus Plan
Performance Award Agreement
|
8-K
|
000-51730
|
6/5/2008
|
|
|
99.1
|
|
|
|
10.3
|
|
Form
of Equity Incentive Plan Performance Award Agreement (Performance Based,
August 2008)
|
8-K
|
000-51730
|
8/1/2008
|
|
|
99.2
|
|
|
|
10.4
|
|
Form
of Restricted Stock Unit Award Agreement (Time Based, August
2008)
|
8-K
|
000-51730
|
8/1/2008
|
|
|
99.3
|
|
|
|
10.5
|
|
Form
of Restricted Stock Unit Award Agreement
|
8-K
|
000-51730
|
8/1/2008
|
|
|
99.4
|
|
|
|
31.1
|
|
Rule 13a-14(a)
Certification of Chief Executive Officer
|
—
|
—
|
—
|
|
|
—
|
|
X
|
|
31.2
|
|
Rule 13a-14(a)
Certification of Chief Financial Officer
|
—
|
—
|
—
|
|
|
—
|
|
X
|
|
32.1
|
|
Section 1350
Certification of Chief Executive Officer
|
—
|
—
|
—
|
|
|
—
|
|
X
|
|
32.2
|
|
Section 1350
Certification of Chief Financial Officer
|
—
|
—
|
—
|
|
|
—
|
|
X
|
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