One Firm, One Focus

Mesirow Financial
2012 Annual Report
Mesirow Financial is
celebrating 75 years of doing
what’s best for our clients.
To Our Valued Partners
Richard S. Price, Chairman and Chief Executive Officer
This year marks Mesirow Financial’s 75th anniversary.
To us, this milestone is not just a cause for celebration,
but also an opportunity to reflect on the past, and
carefully plan for our future.
globe. Through it all, we have remained one firm, with
one focus. We are united by a single goal of doing
what’s right for our clients.
In the past year, our Management Committee began
a strategic planning process to provide a framework
for Mesirow Financial’s future growth. We instituted a
more inclusive leadership model, and formalized our
governance and risk management practices. Going
forward, we will build on the tenets that have served
our clients well for 75 years. Our independence allows
us to focus on clients and provide them with superior
solutions. Our entrepreneurial environment fosters
innovation and creativity, and strengthens our ability
to meet client needs. And a shared commitment to
Mesirow Financial was founded on the principle of
always putting clients first. By anticipating and
meeting their needs, we become trusted advisors and
build long-term relationships. That mission has guided
our evolution over the years. We’ve grown, added
talented people, and expanded our range of products
and services. As the financial world and our clients’
needs have changed, we’ve explored new directions,
enhancing core capabilities and narrowing our focus
in others. We’ve also expanded our reach across the
1
community, both in the places where we live and work,
and within the firm itself, creates a team of people
who feel good about coming to work each day.
our focus on community involvement and added more
training and development offerings for our employees.
We also launched new affinity programs tailored to the
needs of emerging professionals, young producers,
leaders, women professionals and others.
These characteristics differentiate Mesirow Financial in
the marketplace and fuel our strategy of delivering
products and services to our clients in a personalized
way. We have distinct expertise in Investment
Management, Global Markets, Insurance
Services and Consulting. These Divisions
operate with autonomy, yet they work together
to create even more valuable solutions for
our clients. We have seen firsthand that
collaboration, particularly among professionals
who serve similar types of clients, leads to
product innovation and operational excellence.
We have a strong financial foundation from which to
execute our strategy. We ended the year with
revenues of $491 million, down slightly from
$510 million last year, yet our profitability
increased. We have a solid balance sheet,
modest debt and increased capital that positions us well for growth.
Because we are a diverse organization, with
a range of expertise, our story may seem
complicated. Yet, it is quite simple. As one firm, with one
focus, we are driven to serve our clients well. That goal
truly unites our organization and ignites our passion.
Our philosophy is to evaluate opportunities and
pursue acquisitions that enhance our ability to serve
clients. We also will continue to expand our global
presence, as international clients and markets have
become increasingly important to our organization.
I would like to thank our clients and employees – many
of whom have worked with our firm for decades – for
their enduring support and confidence in our organization.
Having worked at Mesirow Financial for 40 years, I feel
fortunate to be invigorated, committed and more
optimistic than ever about the opportunities ahead.
We are committed to continuing to nurture and protect
our culture, which we believe is one of our greatest
attributes. It is our responsibility to create an environment
where our employees can excel. This year, we increased
Sincerely,
Richard S. Price
Chairman and Chief Executive Officer
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One firm. one focus.
Mesirow Financial can
be defined by countless
statistics, but our single most
important measurement is
our clients’ success.
75 years of superior client service | 4 CEOs since 1937 | 46 strategic additions since 1
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Client Focus
Global Markets professionals
e 1964 | 67% of assets from abroad | 0 conflicts of interest | 82 municipal debt underwritings annually | 18 years of releasing financial data
As an independent firm, Mesirow
Financial is not subject to analyst
expectations or the demands of
external shareholders. Instead, we
are beholden only to our clients and
to ourselves. Doing what’s best for
clients is our highest priority.
Institutions rely on us for expert
investment management and
brokerage services. We help
businesses grow with our insurance,
investment banking, retirement
plan advisory and consulting
capabilities. For individuals, we are
a trusted advisor for investment
management and life insurance
and help protect personal assets.
In determining the right solutions,
we are not restricted by proprietary
product quotas or conflicts of
interest. As a result, clients receive
customized products and services
that help them meet their objectives.
As an example, understanding our
clients’ need for incremental yield
in a low interest rate environment,
this year our Institutional Sales and
Trading business strengthened its
high-yield team to provide specialized expertise in this sector. At the
same time, we added key professionals with strong relationships in
the Midwest, Northeast and
Southwest, expanding our reach
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to serve a growing marketplace
looking for innovative financial
structures. We also expanded our
Public Finance business and
served as an underwriter on deals
totaling more than $3.4 billion par
value in bonds, including a large
bond issue for the City of Chicago.
Without competing
priorities, we embrace our
clients’ goals and make
them our own.
We empower talented professionals and give them the resources
they need to provide clients with
innovative ideas, thoughtful advice
and targeted solutions. Equally
important, our professionals can
take decisive action on their clients’
behalf without confronting layers
of bureaucracy.
This environment has helped us
attract high-quality professionals
who are interested in serving
their clients and in controlling
their own destinies. It has proven
to breed innovation and motivate
top performers.
As new regulations governing
retirement plans are fueling
demand for outsourced fiduciary
services, this year our Investment
Strategies unit launched a
service to help retirement plan
sponsors comply with a growing
burden of accountability for
investment options offered
to plan participants. With this
additional capability, we now
have $16 billion in institutional
assets under advisement.
Our entrepreneurial
environment gives our
professionals the ability
to devise customized
solutions tailored to
client needs.
to the public | 93 custom-built proprietary systems | 180 infrastructure employees supporting client-facing professionals | 4 “Best Places
Investment Management professionals
ENTREPRENEURIAL ENVIRONMENT
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Employee ownership is one of the
defining elements of our culture and
a key driver of our growth, instilling
a common goal in professionals who
are passionate about their work.
The majority of our senior
professionals hold a financial
stake in the firm’s future and a
vested interest in its success.
This structure provides natural
incentives to pull in the same
direction and find synergies that
benefit all businesses.
Over the past 20 years, we’ve
responded to investors’ interest in
diversification and non-correlated
returns by developing a broad
platform of alternative investment
management capabilities. As a
result, Mesirow Financial has
become one of the top five independent alternative investment
managers in the world with both
direct and multi-manager products
and strategies.
Our Currency Management
business, for example, grew 20%
last year as global institutions
continued to focus on the
importance of currency in their
portfolios and seek out specialist
management. Stellar performance
in our Private Equity business has
resulted in revenue growth as well
as expanded relationships with
many of the premier partners in
the industry. Capitalizing on strong
investor interest in depressed real
estate values, we closed our first
Direct Real Estate fund in June
2012, with $379 million in assets.
And a high level of specialization,
combined with an institutional
infrastructure, helped our Agriculture
Management team to establish
one of the top track records in the
world for providing access to
investment opportunities in farmland.
We work hard for clients
because we succeed when
they succeed.
s to Work” awards | 25% of employees are shareholders | 92% employee owned | 8,200,000 miles traveled annually to see clients | 45 currencies
Alternative Investment Management professionals
Collaboration
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Global Reach
Alternative Investment Management professionals
traded | clients in 38 countries around the world | 18 locations across the U.S. and globally | 3rd-ranked hedge fund manager for pensions
Headquartered in Chicago, we
are a diversified financial services
organization with offices across
the United States and globally.
Although we have served clients
outside the United States since
the ’70s, our firm is increasingly
global today, with more than 60%
of assets under management
sourced from abroad.
This year we expanded our global
footprint by opening an office in
Hong Kong. This new office allows
us to strengthen relationships with
our existing clients in Asia, who
currently represent approximately
30% of our fund of hedge fund
assets under management. In
addition, the location affords
greater opportunities to deepen
our market knowledge within the
region and broaden our access to
a wider universe of Asian hedge
fund managers.
With our office in London and
a joint venture in Abu Dhabi,
we seek to develop greater
knowledge of a wide range
of investing landscapes and
relationships with key global
partners.
7
We offer a wide range of
global expertise for clients
doing business at home
and around the world.
Enduring Relationships
Insurance Services professionals
s worldwide | 70-year relationships with client families | 29% of employees with 10+ years tenure | 14% annual equity growth since 1987
Since 1937, we’ve focused on
building long-term relationships.
We understand that if we treat
people well, and engender trust,
success will follow. Especially in
times of uncertainty, reliability
is crucial.
We consider all relationships
important, including those with
consultants, vendors and
partners. By collaborating with
other industry professionals and
organizations, we can build
powerful alliances that strengthen
our ability to serve clients well.
This year, our Employee Benefits
practice began offering integrated
human resource solutions for
employers under the brand
FIRSTHR. Launched in October
2011, FIRSTHR incorporates
our existing benefits brokerage
capabilities into a suite of
employee lifecycle management
solutions that span pre-hire to
retirement, including benefits
portfolio management,
e-technology, administration
and compliance solutions.
In addition, our strong
relationships with insurance
carriers help ensure we provide
clients with comprehensive
cost-effective coverage.
8
Our relationships are built
on trust, and fortified by
high-quality service and
consistent performance.
By sharing our knowledge with
clients and one another, we
leverage expertise, promote
creativity and solve client problems.
We offer professional guidance to
help clients sort through information
and navigate the economic
environment to effectively manage
risk and seize opportunities.
With an established reputation in
the market, our firm is sought for
the most challenging assignments.
In a soft restructuring market,
Mesirow Financial Consulting has
continued to win prominent roles
as financial advisors in the largest
and most complex restructurings
in history, including advising the
Unsecured Creditors’ Committee of
American Airlines parent company
AMR Corporation. Throughout the
year, we continued to enhance our
core financial advisory product
offerings, such as litigation support,
investigations, valuation services
and restructurings.
Transparency and sharing
information is one of the
best ways to ensure we
earn our clients’ trust.
In all our transactions, we encourage
a high level of transparency and
two-way communication, not only
with designated client service
professionals, but also with seniorlevel managers and experts
throughout the firm.
| 15,000 appearances annually in the media | 29 educational events annually to share our insight with clients | 14 business units represented
Consulting professionals
Expertise
9
We consider being a good
corporate citizen an integral
part of our firm’s mission and
provide direct support to many
civic, charitable, educational and
environmental organizations. A
large majority of our employees
are involved in charitable efforts
at some level, whether serving
on boards, mentoring youth,
volunteering or providing financial
assistance to organizations that
further worthwhile causes.
A community relations manager
was hired after the close of fiscal
2012 to solidify and coordinate
our longtime giving efforts. A
newly created role, the manager
is responsible for developing and
executing the firm’s community
involvement strategy, as well as
serving as the firm’s liaison to
nonprofit organizations.
We invest our time and
money to support our
communities.
In addition, our corporate headquarters building was designed to
have a minimal impact on the
environment and received goldlevel certification from the U.S.
Green Building Council under the
LEED rating system. With energyefficient lighting and climate
control systems, and low-VOC
emissions, our interior space also
received LEED Gold certification.
d on our company softball teams | 350 charitable organizations supported each year | 2,500 kilowatt hours saved annually from efficient lighting
Office of the Chairman professionals
COMMITMENT TO COMMUNITY
10
Diversified Services
Traditional Investment Management professionals
| 23 employee wellness initiatives | 27 distinct businesses | 35 years as a member of Chicago’s Better Business Bureau | 101 employees wit
Our firm consists of 27 distinct
businesses that offer a wide range
of products and services for
institutions, public sector entities,
corporations and private clients.
Our many businesses not only
allow us to meet a broad range
of client needs, but also help to
buffer our firm from the effects of
difficult environments, such as
a weak domestic economy and
continued uncertainty in Europe.
Yet, despite our diverse
capabilities, our mission remains
simple. Across our businesses,
we share a single focus. In
everything we do, we strive to
add value for our clients.
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A full range of
complementary services
allows us to provide
comprehensive and
integrated solutions for
our clients.
mesirow financial at-a-glance
Investment Management
Global Markets
Alternatives – Multi-Manager
Institutional Sales and Trading
Distribution and proprietary trading of:
n Asset-backed securities
n Convertible bonds
n Collateralized mortgage obligations
n Corporate bonds
n Credit tenant lease loans
n High-yield securities
n Mortgage-backed securities
n Municipal bonds
n U.S. government and agency securities
n Preferred stocks
Advanced Strategies
n Hedge fund of funds management
n Hedge
Private Equity
n Partnership investment programs
n Separately
fund of funds advisory
managed accounts
Real Estate
n Diversified portfolios of real estate fund managers
Alternatives – Direct
Currency
n Risk management overlays
n Currency alpha programs
n e-view
Currency Advisor®
Public Finance
n Public underwriting
n Financial advisory services
Commodities
n Absolute return strategies
Credit Tenant Lease Finance
n Long-term financing solutions
Private Equity
n Direct investment programs
Investment Banking
n Merger and acquisition advisory
n Capital markets
n Restructuring and special situations
n Fairness and solvency opinions
n Board of directors advisory
n Special committee representation
Real Estate
n Direct investment programs in real estate assets
Agriculture
n Direct investment programs
n Separately
managed accounts
Traditional
U.S. Value Equity
n Micro cap value
n Mid cap value
n Small
cap value
n Large cap value
Fixed Income
n Core total return
n Government/credit
n Intermediate government/credit
n SMid
cap value
n Short
term
Sale-Leaseback Capital
n Sale-leaseback and other single-tenant transactions
n Capital for companies with real estate holdings
n Long-term passive real estate investments
Options Strategies
n Strategies for controlling risk/reward potential
Advisory
Investment Advisory
n Discretionary investment management services
Retirement Plan Advisory
Retirement plan consulting services
n
Investment Strategies
Fiduciary partnership services
n Custom target-maturity portfolios
n
n
Risk-based asset allocation models
income solutions
n Retirement
12
Insurance Services
Consulting
Property and Casualty
n Program design, negotiation and implementation
n Claims, loss control, statistical analysis and risk management services
n Focused practice groups in:
– Condominium
– Construction
– Education
– Health care
– Management liability
– Nonprofit
– Public administration
– Surety
– Transaction consulting
Financial Advisory
n Corporate recovery
n Litigation, investigative and intelligence services
n Valuation
n Interim management
n Distressed M&A and capital raising
n Due diligence
n Insurance advisory services
n Technology advisory services
Real Estate
n Real estate management strategies
Compensation and Executive Benefit Strategies
n Plan design
n Plan financing
n Actuarial consulting services
Employee Benefits/Mesirow Financial FIRSTHR
n I ntegrated human resource solutions to support the complete
employee lifecycle
– Benefits portfolio management
– e-Technology solutions
– Compliance solutions
– Administration solutions
n Program design, negotiation and implementation
n Benefit design, cost and employee contribution benchmarking
n Claim experience review, analysis and modeling
Life and Disability
n Review and analysis of existing life insurance portfolios
nP
lanning for estate/wealth preservation, business succession,
supplemental executive benefits, Medicare and Medicare supplements
n Disability income replacement and protection
n General liquidity and tax-deferral plan designs
Private Client Insurance
nC
ustom insurance programs for individuals with sizeable assets and
liability exposures
Structured Settlements
n Creative solutions for settling claims and litigation
13
2012 Accomplishments
Mesirow Financial reached record profitability in fiscal 2012. While some of our businesses were negatively
impacted by persistently low interest rates, many others performed exceptionally well.
Highlights of the year include:
■■ Revenues,
prior to the consolidation of limited
partnerships for fiscal 2012, were $491 million, a
decrease of 4% from fiscal 2011 revenues of $510
expanded our focus on enterprise risk manage-
define and continuously monitor key metrics across
disposition of certain businesses.
the organization to improve our understanding and
held primarily by more than
tracking of risk and performance.
300 employees, increased 17% this fiscal year to
■■ We
$352 million at March 31, 2012, compared with
established internal business leader forums
this year to identify targeted solutions and potential
$302 million at the beginning of the year.
synergies for specific client segments.
under management increased 16% to
■■ On
$61.7 billion, from $53.4 billion a year ago, with
a lighter note, the Mesirow Financial house
band, comprising employees in various depart-
an 85% concentration in alternative investments.
■■ We
■■ We
our four main Divisions. The committees worked to
a recovery of asset values and benefits from the
■■ Assets
number of employees remained stable at 1,200.
ment by creating dedicated committees for each of
million. Yet, profitability increased, due largely to
■■ Stockholders’ equity,
■■ Our
ments, competed in the Fortune Battle of the
strengthened our syndicate of banking
Corporate Bands. The group advanced to the final
relationships to ensure liquidity and position the
round, held at the Rock and Roll Hall of Fame in
firm for future growth.
October 2012.
■■ After
a careful evaluation of the scale and
operating cost structure of several units, we made
the strategic decision to exit the correspondent
Clearing Services and International Equity
businesses. Both operations represented a
modest amount of the firm’s revenues.
14
$400–
$526
$492
$467
$70–
$60– $352
$510
$491
$300–
$61.7
$53.4
$299 $302
$50–
$246 $250
$40–
$38.9
$200–
$30–
$31.2
$28.2
$20–
$100–
Traditional
$8.2
Alternatives
$53.5*
$10–
$0–
2008 2009 2010 2011 2012
$0–
2008 2009 2010 2011 2012
2008 2009 2010 2011 2012
Unconsolidated Revenue
(millions)
Stockholders’ Equity
(millions)
Assets Under Management
(billions)
* $35.6 in Currency and Commodities
2012 Financial Highlights
15
MESIROW FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition, March 31, 2012 and 2011
2012
2011
$149,147,000
42,950,000
44,376,000
$163,735,000
77,660,000
52,059,000
70,934,000
23,879,000
54,788,000
7,066,000
204,132,000
7,751,000
5,893,099,000
76,811,000
33,064,000
58,134,000
5,305,000
242,991,000
24,475,000
5,416,826,000
69,984,000
7,265,000
56,836,000
55,864,000
70,323,000
8,372,000
56,259,000
67,960,000
Total assets
$6,688,071,000
$6,353,974,000
Liabilities and Equity
Liabilities:
Payables to:
Customers
Brokers, dealers and clearing organizations
Bank loans and overdrafts
Securities sold, not yet purchased, at fair value
Liabilities of limited partnerships
Accounts payable, accrued expenses and other liabilities
Notes and loans payable
Mandatorily redeemable stock
$92,579,000
24,556,000
101,953,000
47,350,000
654,739,000
149,259,000
21,272,000
—
$129,605,000
30,625,000
143,870,000
65,945,000
492,384,000
159,403,000
40,428,000
48,240,000
March 31,
Assets
Cash and cash equivalents
Cash and securities segregated in compliance with federal and other regulations
Securities borrowed
Receivables from:
Customers
Brokers, dealers and clearing organizations
Others
Deposits with clearing organizations
Securities owned, at fair value
Other investments
Investments of limited partnerships
Property, equipment and leasehold improvements, at cost less accumulated depreciation and amortization
of $63,955,000 and $55,603,000
Intangible assets, at cost less accumulated amortization of $25,948,000 and $24,841,000
Goodwill
Other assets
Total liabilities
Equity:
Mesirow Financial Holdings, Inc. stockholders’ equity
Non-controlling interests
1,091,708,000
1,110,500,000
352,198,000
5,244,165,000
301,853,000
4,941,621,000
Total equity
5,596,363,000
5,243,474,000
Total liabilities and equity
$6,668,071,000
$6,353,974,000
The accompanying notes are an integral part of these Consolidated Statements of Financial Condition.
16
Notes to the Consolidated Statements of Financial Condition
March 31, 2012 and 2011
NOTE 1. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all money market accounts and highly liquid
debt instruments with an original maturity of three months or less to
be cash equivalents.
A summary of the significant accounting policies that have been
followed in preparing the accompanying Consolidated Statements
of Financial Condition of Mesirow Financial Holdings, Inc. and
Subsidiaries (the “Company”) is set forth below.
Cash and Securities Segregated in Compliance with Federal and
Other Regulations
Cash and securities segregated in compliance with federal and other
regulations consist of premiums collected for remittance to insurance
companies and amounts segregated under Securities and Exchange
Commission regulations.
Nature of Business
The Company is a diversified financial services firm headquartered
in Chicago, Illinois. The Company provides financial services to
individuals, corporations, public sector entities, institutions and
broker/dealers in the following areas:
■■
■■
■■
■■
Other Investments
Other investments include investments in and advances to affiliates
including limited partnerships which are accounted for by the equity
method, which is cost adjusted by the Company’s share of earnings
or losses since acquisition date. Also included are exchange traded
equity securities which are carried at fair value.
Investment Management
Global Markets
Insurance Services
Consulting Services
The Company clears trades for unaffiliated correspondent broker/
dealers and charges fees for our services. In November 2011,
Mesirow Financial, Inc., a wholly-owned subsidiary of the Company,
entered into an agreement to refer all of its correspondent broker/
dealer accounts to another brokerage firm. In addition to the initial
consideration received, there is an additional payment to be received
based upon the aggregate future revenues of the business that was
transferred as defined in the agreement, which will be recognized by
the Company when the amount is determinable.
Limited Partnerships
The assets, liabilities and results of operations of a Variable Interest
Entity (“VIE”) are consolidated into the Consolidated Statements of
Financial Condition of the Company when the Company is considered
to have controlling financial interest in it. A framework is used to
determine whether an entity should be evaluated for consolidation
based on voting interests or significant financial support provided to
the entity (variable interest). The Company considers all investments
in limited partnerships as similar entities to determine whether the
entity is a VIE and, if so, whether the Company’s involvement with
the entity results in a variable interest in the entity. If the Company
is determined to have a variable interest in the entity, an analysis
is performed to determine whether the Company is the primary
beneficiary and therefore requires consolidation of the VIE into the
Consolidated Statements of Financial Condition.
Principles of Consolidation
The Consolidated Statements of Financial Condition include the
accounts of Mesirow Financial Holdings, Inc., its wholly-owned
subsidiaries, and certain limited partnerships and limited liability
companies as described below. All intercompany transactions and
balances have been eliminated.
Management Estimates
The preparation of the Consolidated Statements of Financial Condition
in conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosures of contingent assets and liabilities
at the date of the Consolidated Statements of Financial Condition.
The most significant estimates relate to fair value measurements,
the accounting for goodwill and identifiable intangible assets and the
valuation of securities owned and securities sold, not yet purchased.
Actual results could differ from those estimates.
For non-VIE limited partnership investments, the Company
consolidates partnerships for which it is the general partner if there
are no provisions in the partnership agreement that would allow the
limited partners to remove the general partner through the approval
by a simple majority of the limited partners.
Investments of limited partnerships include investments in private
investment funds and partnerships, related invested cash, and real
estate and other assets. Investments in private investment funds and
partnerships consist principally of hedge fund of funds and private
equity investments. Investments in private investment funds and
partnerships are valued at fair value, as determined by management
and described below. Investments in real estate limited partnerships
are recorded at cost, which primarily comprise land, building and
construction in progress costs. Certain funds and partnerships are
consolidated with up to a three month lag.
Securities Transactions
Proprietary transactions are reflected in the Consolidated Statements
of Financial Condition on a trade date basis. Customer transactions
are recorded on a settlement date basis. Securities owned and
securities sold, not yet purchased are carried at fair value. Fair value
is generally based on quoted market prices. If quoted market prices
are not available, fair value is determined based on other relevant
factors, including dealer price quotations or prices for equivalent
instruments.
In determining fair value for hedge fund of funds and private equity
fund of funds, the Company generally utilizes the valuations of
the underlying private investment funds. The underlying private
investment funds value securities and other financial instruments at
fair value. The estimated fair values of certain types of investments
of the underlying private investment funds, which may include
private placements and other investments for which prices are not
readily available, are determined by the manager or sponsor of the
respective private investment funds and may not reflect amounts
that ultimately may be realized. Accordingly, the estimated fair
Securities borrowed and securities loaned transactions are recorded
on the Consolidated Statements of Financial Condition at the
amount of cash collateral advanced or received. Securities borrowed
transactions require the Company to provide the counterparty with
collateral in the form of cash. The Company receives collateral in the
form of cash for securities loaned transactions.
17
Notes to the Consolidated Statements of Financial Condition
March 31, 2012 and 2011
of assets and liabilities that are categorized by the Company as
Level 3 generally include certain high yield corporate debt, certain
investments in hedge fund of funds, private equity investments and
securities with inactive markets.
values may differ significantly from the values that would have been
used had a ready market existed for these investments. Net asset
valuations are provided to the Company monthly or quarterly by
these investment funds and are net of management and incentive
allocations/fees. The hedge fund of funds have the ability to
liquidate their direct and indirect investments periodically, ranging
from quarterly to tri-annually, depending on the provisions of the
respective offering documents.
The following outlines the valuation methodologies for the Company’s
material categories of assets and liabilities:
U.S. government and agency securities U.S. treasury securities
are valued using quoted market prices and are generally classified
as Level 1 in the fair value hierarchy. The fair value of agency issued
debt securities is derived using market prices and recent trade activity
gathered from independent dealer pricing services or brokers. TBA’s
are generally valued using quoted market prices. Agency issued debt
securities and TBA’s are generally classified as Level 2 in the fair
value hierarchy.
Private equity direct investments, primarily consisting of securities,
real estate and other financial instruments, are carried at fair value. In
the absence of readily available market values, fair value is estimated
by management and is the amount that can be reasonably expected
to be received upon the current sale of the investments although
there is not necessarily any intention to sell the investments at the
date of valuation. These estimated values may differ from actual
values when realized and the difference could be material. The private
equity investments are structured with specific termination dates, but
the investments allow for specified extension periods to provide for
orderly liquidation of remaining assets.
Equities Exchange-traded equity securities are generally valued
based on quoted prices from the exchange. To the extent these
securities are actively traded, they are classified as Level 1 in the fair
value hierarchy, otherwise they are classified as Level 2 or 3.
Liabilities of limited partnerships consist of funds awaiting investment,
debt secured by real estate investments, debt secured by direct
investments and payables. Debt secured by direct investment funds is
carried at fair value.
Corporate bonds Corporate bonds are valued based on either the
most recent observable trade and/or external quotes, depending on
availability. Corporate bonds are generally classified as Level 2 or
Level 3 in the fair value hierarchy.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability (i.e., the exit price) in an orderly
transaction between market participants at the measurement date.
Municipal bonds The fair value of municipal bonds is derived using
recent trade activity, market price quotations and new issuance levels.
In the absence of this information, fair value is calculated using
comparable bond credit spreads. Current interest rates, credit events,
and individual bond characteristics such as coupon, call features,
maturity, and revenue purpose are considered in the valuation
process. These bonds are generally classified as Level 2 in the fair
value hierarchy.
In determining fair value, the Company establishes a fair value
hierarchy for inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used when
available. Observable inputs are those that market participants
would use in pricing the asset or liability based on market data
obtained from sources independent of the Company. Unobservable
inputs reflect the Company’s assumption about the inputs market
participants would use in pricing the asset or liability developed based
on the best information available in the circumstances. The hierarchy
is categorized into three levels based on the inputs as follows:
Mortgage and asset backed securities Mortgage and asset backed
securities are valued based on observable price or credit spreads
for the particular security, or when price or credit spreads are not
observable, the valuation is based on prices of comparable bonds or
the present value of expected future cash flows. When estimating the
fair value based upon the present value of expected future cash flows,
the Company uses its best estimate of the key assumptions, including
forecasted credit losses, prepayment rates, forward yield curves
and discount rates commensurate with the risks involved, while also
taking into account performance of the underlying collateral.
Level 1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities. The types of assets and liabilities that are
categorized by the Company as Level 1 generally include exchange
traded equities and obligations of U.S. government securities.
Mortgage and asset backed securities are classified as Level 3
in the fair value hierarchy if external prices or credit spreads are
unobservable or if comparable trades/assets involve significant
subjectivity related to property type differences, cash flows,
performance and other inputs; otherwise, they are classified as Level
2 in the fair value hierarchy.
Level 2 inputs include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the asset or
liability either directly or indirectly for substantially the full term of
the instrument, but do not qualify as Level 1 inputs. The types of
assets and liabilities that are categorized by the Company as Level
2 generally include corporate debt, municipal debt, mortgage and
asset backed securities, mortgage-backed to-be-announced securities
(TBAs), certain equities that are traded over the counter and certain
hedge fund of funds in which the Company has the ability to redeem
its investment at net asset value at, or within three months of, the
reporting date.
Private investment funds and partnerships Private investment funds
and partnerships include hedge fund of funds and private equity
funds that are valued at fair value. Private investment funds and
partnerships are generally classified as Level 2, unless market inputs
require significant subjectivity in which they are then classified as
Level 3.
The Company calculates the fair value of its investments in affiliated
and private investment funds through the use of the net asset value
(the Fund’s pro-rata interest) reported to the Fund by the affiliated
Level 3 inputs are unobservable inputs for the asset or liability and
typically reflect the Company’s assumptions that it believes market
participants would use in pricing the asset or liability. The types
18
Notes to the Consolidated Statements of Financial Condition
March 31, 2012 and 2011
lists over their estimated useful lives, which vary from one to fifteen
years from the date of acquisition.
and private investment funds. Fund investments which the Company
has the ability to redeem its investment at net asset value at, or
within three months of, the reporting date are classified as Level 2
investments. Furthermore, the Fund’s investments in side-pockets are
classified as Level 3 investments.
Goodwill and intangible assets with indefinite lives are not amortized
but are subject to analysis for impairment at least annually. No
impairment charge was recorded during the years ended March 31,
2012 and 2011. During the years ended March 31, 2012 and 2011,
all additions in the carrying amount of the Company’s goodwill were
the result of contingent payments on business acquisitions occurring
prior to 2009.
The availability of valuation techniques and observable inputs can
vary from security to security and is affected by a wide variety of
factors, including the type of security, whether the security is new
and not yet established in the marketplace, and other characteristics
particular to the transaction. To the extent that valuation is based
on models or inputs that are less observable or unobservable in
the market, the determination of fair value requires more judgment.
Those estimated values do not necessarily represent the amounts
that may be ultimately realized due to the occurrence of future
circumstances that cannot be reasonably determined. Because of
the inherent uncertainty of valuation, those estimated values may be
materially higher or lower than the values that would have been used
had a ready market for the securities existed. Accordingly, the degree
of judgment exercised by the Company in determining fair value is
greatest for securities categorized in Level 3. In certain cases, the
inputs used to measure fair value may fall into different levels of the
fair value hierarchy. In such cases, for disclosure purposes, the level
in the fair value hierarchy within which the fair value measurement
falls in its entirety is determined by the lowest level input that is
significant to the fair value measurement.
Income Taxes
The Company files a consolidated income tax return that includes
all of its domestic wholly-owned subsidiaries. Income taxes are
determined using the asset and liability approach for financial
accounting and reporting, which requires that deferred taxes be
adjusted to reflect the tax rates that will be in effect when the deferred
items are expected to be realized.
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”)
issued guidance that amended previous disclosure guidance related
to fair value measurements. The amendments require disclosures
about transfers into and out of Levels 1 and 2 and separate
disclosures about purchases, sales, issuances and settlements
relating to Level 3 measurements. The amendments also clarified
existing fair value disclosures about the level of disaggregation as
well as inputs and valuation techniques used to measure fair value.
The Company adopted the amendments on April 1, 2010, with the
exception of the requirement to provide disclosure of the Level 3
activity of purchases, sales, issuances and settlements on a gross
basis, which the Company adopted on April 1, 2011. The new
accounting guidance does not change the classification hierarchy
for fair value accounting. Further, it has no impact on the Company’s
Consolidated Statements of Financial Condition.
Fair value is a market-based measure considered from the
perspective of a market participant rather than an entity-specific
measure. Therefore, even when market assumptions are not readily
available, the Company’s own assumptions are set to reflect those
that market participants would use in pricing the asset or liability at
the measurement date. The Company uses prices and inputs that
are current as of the measurement date, including during periods of
market dislocation. In periods of market dislocation, the observability
of prices and inputs may be reduced for many securities. This
condition could cause a security to be reclassified to a lower level
within the fair value hierarchy.
In July 2010, the FASB issued new disclosure guidance on financing
receivables and the allowance for credit losses. The new guidance
requires further disaggregation of existing disclosures of loans and
the allowance for credit losses by portfolio segment and class, and
also requires new disclosures about credit quality, impaired loans,
and past due and nonaccrual loans. The additional disclosures
include more information, by type of receivable, on credit quality
indicators, including aging and significant purchases and sales. The
Company adopted the new disclosure guidance on April 1, 2011. The
adoption of this guidance did not have an impact on the Company’s
Consolidated Statements of Financial Condition.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are carried at
cost, net of accumulated depreciation and amortization. Depreciation
and amortization are recognized using primarily the straight-line
method over the useful lives of the assets, which range from three to
seven years, or, for leasehold improvements, over the shorter of the
estimated useful life or terms of the related leases, which range from
one to seventeen years.
In May 2011, the FASB issued accounting updates to fair value
measurements. The amendments converge the fair value framework
between U.S. GAAP and International Financial Reporting Standards,
which provide clarifying guidance on how to measure fair value
and additional disclosure requirements. The amendments prohibit
the use of blockage factors at all levels of the fair value hierarchy
and provide guidance on measuring financial instruments that
are managed on a net portfolio basis. Additional disclosure
requirements include transfers between Levels 1 and 2; for Level 3
fair value measurements, a description of our valuation processes
and additional information about unobservable inputs impacting
Level 3 measurements. The updates are effective April 1, 2012 and
will be applied prospectively. Other than the enhanced disclosure
requirements, the Company does not anticipate that the adoption
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. An impairment loss is
recognized when the sum of the undiscounted future net cash flows
expected to result from the use of the asset and its eventual disposal
is less than its carrying amount. No impairment charges were
recorded during the years ended March 31, 2012 and 2011.
Goodwill and Intangible Assets
Intangible assets with finite lives are amortized over the expected
period of benefit. As of March 31, 2012 and 2011, the carrying
value of these assets, primarily customer lists, was $7,265,000 and
$8,372,000, respectively. The Company is amortizing these customer
19
Notes to the Consolidated Statements of Financial Condition
March 31, 2012 and 2011
basis for determining if further testing of goodwill for impairment
is necessary. The amended guidance will be effective April 1,
2012, for the Company. The adoption of the amended accounting
guidance is not expected to have a material impact on the Company’s
Consolidated Statements of Financial Condition.
of the new guidance will have a material effect on the Company’s
Consolidated Statements of Financial Condition.
In September 2011, the FASB amended the guidance on testing
goodwill for impairment. The amended guidance provides an option
to perform a qualitative assessment to determine whether it is more
likely than not that the fair value of a reporting unit is impaired as a
NOTE 2. Fair Value of Financial Instruments
At March 31, 2012 and 2011, the Company’s assets and liabilities measured at fair value consist of the following:
At March 31, 2012
Assets
Level 1
Level 2
Level 3
Total
Equities
$4,300,000
$1,774,000
$225,000
$6,299,000
U.S. government and agency securities
—
15,683,000
—
15,683,000
Corporate bonds
—
28,429,000
829,000
29,258,000
Municipal bonds
—
133,164,000
—
133,164,000
Mortgage and asset-backed securities
—
18,772,000
540,000
19,312,000
Other
413,000
3,000
—
416,000
4,713,000
197,825,000
1,594,000
204,132,000
Securities owned
Other Investments
7,206,000
­—
—
7,206,000
Investments of limited partnerships
Hedge fund of funds
—
3,051,668,000
183,386,000
3,235,054,000
Private equity
8,321,000
—
478,524,000
486,845,000
Direct investments
Fund of funds
Other
Total private investment funds and partnerships
Total assets
—
—
1,490,828,000
1,490,828,000
12,927,000
4,359,000
—
17,286,000
21,248,000
3,056,027,000
2,152,738,000
5,230,013,000
$33,167,000
$3,253,852,000
$2,154,332,000
$5,441,351,000
Liabilities
Equities
$728,000
$—
$—
$728,000
U.S. government and agency securities
29,949,000
8,011,000
—
37,960,000
Corporate bonds
—
2,648,000
—
2,648,000
Municipal bonds
—
2,204,000
—
2,204,000
Mortgage-backed to-be-announced securities
—
3,360,000
—
3,360,000
Other
450,000
—
—
450,000
Securities sold, not yet purchased
31,127,000
16,223,000
—
47,350,000
Liabilities of limited partnerships
—
—
148,784,000
148,784,000
Total liabilities
$31,127,000
$16,223,000
$148,784,000
$196,134,000
Transfers between Level 1 and Level 2 assets and liabilities were not significant for the year ended March 31, 2012.
20
Notes to the Consolidated Statements of Financial Condition
March 31, 2012 and 2011
At March 31, 2011
Level 1
Level 2
Level 3
Total
Assets
Equities
$6,600,000
$5,187,000
$629,000
$12,416,000
U.S. government and agency securities
253,000
52,535,000
—
52,788,000
Corporate bonds
—
23,416,000
969,000
24,385,000
Municipal bonds
—
118,147,000
—
118,147,000
Mortgage and asset-backed securities
—
34,544,000
—
34,544,000
Other
536,000
175,000
—
711,000
7,389,000
234,004,000
1,598,000
242,991,000
Securities owned
Other Investments
16,342,000
—
—
16,342,000
Private investment funds and partnerships
Hedge fund of funds
—
3,199,756,000
241,647,000
3,441,403,000
Private equity
Direct investments
8,614,000
—
147,471,000
156,085,000
Fund of funds
—
—
1,148,461,000
1,148,461,000
17,756,000
—
—
17,756,000
26,370,000
3,199,756,000
1,537,579,000
4,763,705,000
$50,101,000
$3,433,760,000
$1,539,177,000
$5,023,038,000
Other
Total private investment funds and partnerships
Total assets
Liabilities
Equities
$5,819,000
$—
$—
$5,819,000
U.S. government and agency securities
37,615,000
7,682,000
—
45,297,000
Corporate bonds
—
1,370,000
—
1,370,000
Municipal bonds
—
1,739,000
—
1,739,000
Mortgage-backed to-be-announced securities
—
11,720,000
—
11,720,000
Securities sold, not yet purchased
43,434,000
22,511,000
—
65,945,000
Total liabilities
$43,434,000
$22,511,000
$—
$65,945,000
organizations and customers, and bank loans and overdrafts)
except for notes and loans payable, approximates the carrying
value due to the short-term nature of the financial instruments and
characteristics of the financial instrument. The fair value of the
Company’s notes and loans payable, including debt secured by real
estate investments included in liabilities of limited partnerships, was
approximately $266,086,000 and $262,794,000 as of March 31,
2012 and 2011, respectively.
Transfers between Level 1 and Level 2 assets and liabilities were not
significant for the year ended March 31, 2011.
At March 31, 2012 and 2011, no impairment charges were recorded
related to assets that are measured at fair value on a nonrecurring basis.
The fair value of all other financial instruments reflected in the
Consolidated Statements of Financial Condition (consisting primarily
of receivables from and payables to broker/dealers, clearing
21
Notes to the Consolidated Statements of Financial Condition
March 31, 2012 and 2011
NOTE 3. Receivables from and Payables to Brokers, Dealers
and Clearing Organizations
2012
Amounts receivable from and payable to brokers, dealers and clearing
organizations consist of the following at March 31:
2012
2011
Securities failed to deliver
$14,566,000
$14,892,000
Amounts receivable from clearing
organizations for settled securities
8,515,000
12,341,000
Amounts receivable from
correspondent broker/dealers
798,000
5,831,000
$23,879,000
$33,064,000
Total receivables
2012
Securities failed to receive
$14,149,000
$17,432,000
Amounts payable to clearing
organizations for settled securities
101,000
470,000
Private investment funds and
partnerships
$5,230,013,000
$4,763,705,000
Invested cash
250,874,000
166,203,000
Real estate and other assets
412,212,000
486,918,000
5,893,099,000
5,416,826,000
Funds awaiting investment
71,712,000
64,188,000
Debt secured by real estate
investments
244,814,000
222,366,000
Debt secured by direct investment
funds
148,784,000
—
Payables
189,429,000
205,830,000
$654,739,000
$492,384,000
Total investments of limited
partnerships
2011
2011
Total liabilities of limited
partnerships
2,081,000
2,180,000
Amounts payable for unsettled trades 7,762,000
8,869,000
Affiliated Partnerships
Included in Other investments are investments in and advances to
affiliates of $545,000 and $8,133,000 at March 31, 2012 and 2011,
respectively, which represent the Company’s interest in those affiliates.
Commissions payable to
correspondent broker/dealers
463,000
1,674,000
NOTE 6. Bank Loans and Overdrafts
$24,556,000
$30,625,000
Bank loans and overdrafts include demand notes, which bear
interest at fluctuating rates based upon the broker call rate (2.00%
at March 31, 2012 and 2011), and overdrafts. Demand notes of
$101,900,000 and $143,800,000 are collateralized by securities
owned of approximately $172,223,000 and $175,856,000 at March
31, 2012 and 2011, respectively. In pledging securities owned,
the Company has not surrendered control. As of March 31, 2012
and 2011 subject to bank approval, and dependent upon collateral
and credit requirements, the Company has available approximately
$248,100,000 and $196,200,000, respectively in unused credit at
various banks.
Amounts held as margin and
escrow deposits for correspondent
broker/dealers
Total payables
NOTE 4. Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consist of the
following at March 31:
2012
2011
Furniture and fixtures
$22,539,000
$21,283,000
Equipment
34,277,000
31,946,000
Software
9,379,000
8,019,000
Leasehold improvements
67,669,000
64,611,000
Construction in-progress
75,000
67,000
133,939,000
125,926,000
63,955,000
55,603,000
$69,984,000
$70,323,000
Less accumulated depreciation and
amortization
Total
NOTE 7. Credit Facilities and Notes and Loans Payable
Pursuant to an Amended Credit Agreement dated November 30,
2010, the Company has a revolving credit facility for an aggregate
of $75,000,000 (Revolving Loan) and a term loan of $35,000,000
(Syndicated Term Loan). The Revolving Loan bears interest at the
lower of the prime rate (3.25% as of March 31, 2012) or a LIBOR
option as defined per the terms of the loan agreement. The Revolving
Loan includes letters of credit totaling $1,499,000 as of March 31,
2012. The Revolving Loan and Syndicated Term Loan mature on
March 26, 2013. As of March 31, 2012 and 2011, the Syndicated
Term Loan outstanding balance was $21,000,000 and $28,000,000,
respectively. No amounts were outstanding on the Revolving Loan
as of March 31, 2012 and 2011. The scheduled principal payment on
the Syndicated Term Loan is $21,000,000 for the fiscal year ending
March 31, 2013.
NOTE 5. Limited Partnerships
The Company, through certain of its subsidiaries, serves as general
partner in various private investment funds and private equity and
real estate partnerships. These partnerships invest primarily in other
private investment funds and partnerships, debt and equity securities
of privately held businesses, office buildings, commercial and
residential land developments and apartments.
The investments and liabilities of limited partnerships as of March 31
were as follows:
Pursuant to an Amended Credit Agreement dated June 4, 2010, the
Company had two term loans (collectively “Term Loans”) aggregating
$25,000,000, one of which required monthly principal payments and
matured on March 26, 2013 and another that matured on May 20,
22
Notes to the Consolidated Statements of Financial Condition
March 31, 2012 and 2011
September 1, 2012, and is renewable annually. As of March 31, 2012
this facility was not utilized.
2015. Both term loans required monthly interest payments at either
a prime rate option or LIBOR option as defined per the terms of the
loan agreement. As of March 31, 2011, $12,500,000 was outstanding
as one note was fully repaid. There is no balance outstanding as of
March 31, 2012 as the second note was fully repaid in August 2011.
The Company, as a member of securities clearinghouses, provides
certain financial guarantees. Under the standard membership
agreements, members are required to guarantee the performance
of members who become unable to satisfy their obligations. The
Company’s liability under these agreements could exceed the
amounts it has posted as collateral. However, since the event is
remote and not quantifiable, no contingent liability is carried on the
Consolidated Statements of Financial Condition.
The Amended Credit Agreement and Term Loans contain affirmative
and negative covenants relating to the business and financial condition
of the Company and its subsidiaries, including the maintenance of a
ratio of net income to principal payments on indebtedness and tangible
net worth levels. At March 31, 2012, all covenant requirements were
met. The Company has pledged all the outstanding capital stock
of certain of its wholly-owned subsidiaries under the terms of the
Syndicated Credit Facility and securities and cash under the Term
Loans as of March 31, 2012.
NOTE 10. Financial Instruments with Market Risk and
Concentration of Credit Risk
In the normal course of business, the Company enters into
transactions in financial instruments with varying degrees of offbalance-sheet risk. These financial instruments include mortgagebacked to-be-announced securities (“TBAs”). The trading of these
financial instruments is conducted with other registered broker/
dealers located in the United States. These financial instruments
involve elements of off-balance sheet market risk in excess of the
amounts recognized in the Consolidated Statements of Financial
Condition. Market risk is the potential change in value of the financial
instrument caused by unfavorable changes in interest rates or the fair
values of the securities underlying the instruments. The Company
monitors its exposure to market risk through a variety of control
procedures, including daily review of trading positions.
In addition, notes and loans payable at March 31, 2012 and 2011,
include $578,000 and $539,000 of notes with varying maturities
resulting from acquisitions. The principal amount of these
indebtedness are subject to adjustment based upon the future
revenues of the acquired entities, as defined by the respective
acquisition agreements. The ultimate principal amounts that may be
due are limited by the revenue earned by the acquired entities over a
specified time frame. The total amount recorded as indebtedness in
connection with these acquisitions represents current estimates of
amounts that will be paid.
NOTE 8. Commitments
The Company leases office space and equipment under leases
expiring at various dates through 2026. The approximate minimum
lease payments under non-cancelable operating leases as of March
31, 2012, are as follows:
Years Ending March 31
Minimum Lease Payments
2013
$ 6,569,000
2014
6,087,000
2015
5,576,000
2016
3,895,000
2017
3,288,000
Thereafter
Total
The Company seeks to control the risks associated with its
customers’ activities by requiring customers to maintain margin
collateral in compliance with various regulatory and internal
guidelines. The Company monitors required margin levels and,
pursuant to such guidelines, may require customers to deposit
additional cash or collateral, or to reduce positions, when deemed
necessary. The Company also establishes credit limits for customers
engaged in futures activities and monitors credit compliance.
Additionally, with respect to the Company’s correspondent clearing
activities, introducing correspondent firms generally guarantee the
contractual obligations of their customers. Further, the Company
seeks to reduce credit risk by entering into netting agreements
with customers, which permit receivables and payables with such
customers to be offset in the event of a customer default.
10,382,000
TBAs provide for the delayed delivery of the underlying instrument.
$35,797,000
The Company may hedge a portion of its fixed income trading
inventories with options, exchange traded financial futures
contracts, and TBAs. The contractual amount of these instruments
reflects the extent of the Company’s involvement in the related
financial instrument and does not represent the risk of loss due
to counterparty nonperformance. The extent of utilization of these
financial instruments is insignificant to the Company’s Consolidated
Statements of Financial Condition.
The Company is also obligated for additional rentals based upon
increases in operating expenses for certain office premises.
NOTE 9. Contingencies
In the normal course of business activities, the Company has been
named as a defendant in various legal actions, including actions
against underwriting groups of which a subsidiary of the Company
was a syndicate member. In view of the inherent difficulty of
predicting the outcome of litigation and other claims, the Company
cannot state with certainty the outcome of pending litigation or other
claims. In the opinion of management, these actions will not result
in any material effect on the Consolidated Statements of Financial
Condition of the Company.
The Company may be exposed to off-balance sheet risk from the
potential inability of customers or other counterparties to meet
the terms of their contracts in connection with the clearance and
settlement of securities and securities lending transactions. With
respect to these activities the Company may be obligated to purchase
the identical securities in the open market at prevailing prices in the
event of non-performance by the customer or counterparty. At both
March 31, 2012 and 2011, the fair value of securities failed to receive
The Company is contingently liable for a letter of credit to satisfy
clearing organization requirements. The letter of credit expires on
23
Notes to the Consolidated Statements of Financial Condition
March 31, 2012 and 2011
FASB ASC Topic 740 defines the threshold for recognizing the
benefits of tax-return positions in the financial statements as “morelikely-than-not” to be sustained by the taxing authority and requires
measurement of a tax position meeting the more-likely-than-not
criterion, based on the largest benefit that is more than 50 percent
likely to be realized. The Company has determined that no material
uncertain tax positions exist as of March 31, 2012. The Company’s
open tax years for federal income purposes are fiscal 2009 through
2011 and state income purposes are fiscal 2007 through 2011. It is
the policy of the Company to recognize accrued interest and penalties
related to uncertain tax positions in income tax expense.
approximated the amounts owed in the Consolidated Statements of
Financial Condition.
Securities sold, not yet purchased represent obligations of the
Company to deliver specified securities at the contracted price, and
thereby create a liability to purchase the securities in the market at
prevailing prices. These transactions may result in off-balance sheet
risk as the Company’s ultimate liability to satisfy its obligation for
securities sold, not yet purchased may exceed the amount recognized
in the Consolidated Statements of Financial Condition.
The Company’s securities transactions include securities borrowing
arrangements, which are generally collateralized by cash or
securities and are executed with other broker/dealers. In the event
counterparties to transactions do not fulfill their obligations,
the Company could be exposed to credit risk to the extent such
obligations are not collateralized.
NOTE 12. Employee Benefit Plans
The Company has a 401(k) savings plan (the “Plan”) for the benefit
of all eligible employees. Contributions to the Plan by employees
are voluntary and will be matched by the Company at a rate of
50% of the first 6% of compensation up to a maximum of $3,000.
Prior to January 1, 2012, contributions to the Plan by employees
were matched by the Company at a rate of 50% of the first 4% of
compensation up to a maximum of $3,000.
In the normal course of business, the Company may deliver securities
as collateral in support of various collateralized financing sources
such as bank loans, securities loaned and securities sold under
agreements to repurchase. In the event the counterparty is unable
to meet its contractual obligation to return securities delivered as
collateral, and the Company is obligated to replace or deliver such
securities, the Company may incur a loss up to the amount by which
the fair value of those securities exceeds the value of the loan or other
collateral received or in the possession or control of the Company.
The Company has non-qualified deferred compensation plans for
certain employees, which allow voluntary employee contributions
and require employer contributions if an individual participant’s
production exceeds a prescribed level.
As of March 31, 2012 and 2011, customer margin securities of
approximately $63,560,000 and $78,835,000, respectively, were
available to the Company to utilize as collateral on various borrowings
or for other purposes. The Company had repledged approximately
$7,527,000 and $23,103,000, respectively, of that collateral as of
March 31, 2012 and 2011, to satisfy clearing obligation requirements.
NOTE 13. Stockholders’ Equity and Net Capital Requirements
The Company’s Amended and Restated Stockholders’ Agreement
dated April 28, 2011 (the “Agreement”), allows certain employees and
certain other investors to purchase shares of the Company’s voting or
nonvoting common stock. The Agreement restricts the transferability
of the stock, provides for the repurchase of the stock upon the
occurrence of certain events, such as death, disability, retirement
or termination of employment, and provides certain rights and
obligations in the event of a sale of the Company. Shares of voting
and nonvoting common stock have identical rights and privileges,
other than voting and conversion rights.
To minimize the potential impact of counterparty nonperformance
and market exposure in connection with its transactions in financial
instruments, the Company monitors the credit standing of each
counterparty with whom it does business. It also marks to fair value
all customer and proprietary positions on a daily basis and monitors
margin collateral levels for compliance with regulatory and internal
guidelines, requesting and obtaining additional cash margin or other
collateral when deemed appropriate.
At March 31, 2012 and 2011, the Company had preferred stock,
$1 par value, 100,000 shares authorized, no shares issued or
outstanding. The Company has voting and non-voting common stock,
$1 par value, 250,000 shares authorized.
NOTE 11. Income Taxes
Voting and non-voting common stock activities consist of the
following for the years ended March 31, 2012 and 2011:
Deferred income taxes are attributable to temporary differences
relating primarily to provisions for asset impairment, deferred
compensation, investments in partnerships, amortization of
intangibles, depreciation of property, equipment and leasehold
improvements, prepaid expenses, unrealized gains (losses) on certain
investments, unearned revenue and bad debt allowances.
Balance, April 1, 2010
Issued
Net deferred tax assets included in other assets on the Consolidated
Statements of Financial Condition at March 31, 2012 and 2011, were
$11,629,000 and $20,588,000, respectively. At March 31, 2012, the
net deferred tax asset comprised $31,197,000 of deferred tax assets
partially offset by $19,568,000 of deferred tax liabilities. At March 31,
2011, the net deferred tax asset comprised $35,142,000 of deferred
tax assets partially offset by $14,554,000 of deferred tax liabilities.
Converted
Transferred to liabilities
Balance, March 31, 2011
No valuation allowance has been recorded to reduce the carrying
amounts of deferred tax assets because, in the opinion of management,
it is more likely than not that such assets will be realized.
24
Voting Common
Stock, shares
Non-Voting Common
Stock, shares
96,054
67,831
2,036
3,585
(27,980)
27,980
—
(23,355)
70,110
76,041
Issued
2,973
—
Retired
—
(243)
Converted
14,380
(14,380)
Balance, March 31, 2012
87,463
61,418
Notes to the Consolidated Statements of Financial Condition
March 31, 2012 and 2011
For the year ended March 31, 2012, 4,555 non-voting common
shares were transferred to Accounts Payable, Accrued Expenses and
Other Liabilities on the Consolidated Statements of Financial
Condition as conditions were probable the shares would be redeemable
at the March 31, 2012 redemption value. For the year ended March
31, 2011, 23,355 non-voting common shares were transferred to
Mandatorily Redeemable Stock on the Consolidated Statements of
Financial Condition as the shares became mandatorily redeemable.
These shares were reflected at their redemption value at March 31,
2011. The share redemption was completed on June 13, 2011.
Independent Auditors’ Report
To the Board of Directors and Stockholders of
Mesirow Financial Holdings, Inc.
Chicago, Illinois
We have audited the accompanying consolidated statements
of financial condition of Mesirow Financial Holdings, Inc.
and subsidiaries (the “Company”) as of March 31, 2012 and
2011. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these statements based on our audits. We did not
audit the financial statements of certain limited partnerships
as of and for the years ended December 31, 2011 and
2010 (included in the Company’s March 31, 2012 and 2011
consolidated statements of financial condition, respectively)
which statements reflect total assets. The total assets of these
limited partnerships constituted approximately 22 percent
and 18 percent, respectively, of the consolidated total assets
as of March 31, 2012 and 2011. Those statements were
audited by other auditors whose reports have been furnished
to us, and our opinion, insofar as it relates to the amounts
included for these limited partnerships, are based solely on
the reports of the other auditors.
Certain of the Company’s subsidiaries are subject to the capital
requirements of various regulatory agencies. At March 31, 2012
and 2011, all such subsidiaries were in compliance with these
requirements. One of the Company’s subsidiaries is subject to the
Securities and Exchange Commission’s Uniform Net Capital Rule
and has elected to operate under the “alternative method”, whereby
the subsidiary is required to maintain “net capital” equivalent to
$1,500,000 or 2% of “aggregate debit items”, whichever is greater,
as these terms are defined. At March 31, 2012, the subsidiary had net
capital and a net capital requirement of $79,750,000 and $1,500,000,
respectively. At March 31, 2011, the subsidiary had net capital and a
net capital requirement of $60,106,000 and $1,500,000, respectively.
NOTE 14. Related Party Transactions
We conducted our audits in accordance with auditing
standards generally accepted in the United States of
America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An
audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the
reports of the other auditors provide a reasonable basis for
our opinion.
As of March 31, 2012 and 2011, the Company owned shares of
common stock in PrivateBancorp, Inc. (“PrivateBancorp”) with
a carrying value of $15,132,000 and $24,331,000, respectively.
PrivateBancorp was considered a related party due to a former officer
of the Company serving as a board member on PrivateBancorp’s
Board of Directors during 2011. Certain shares in PrivateBancorp are
included in other investments and investments of limited partnerships
on the Company’s Consolidated Statements of Financial Condition as
follows:
Other Investments
Investments in limited partnerships
2012
2011
$7,206,000
$16,342,000
7,926,000
7,989,000
PrivateBancorp is a party to a bank loan with a line of credit totaling
$55,000,000 included in Note 6 and to the Syndicated Credit Facility
disclosed in Note 7. As of March 31, 2012 and 2011, no amounts
were outstanding.
In our opinion, based on our audits and the reports of the
other auditors, such consolidated statements of financial
condition present fairly, in all material respects, the financial
position of Mesirow Financial Holdings, Inc. and subsidiaries
as of March 31, 2012 and 2011 in conformity with accounting
principles generally accepted in the United States of America.
Under various arrangements, the Company provides certain insurance
brokerage and compensation advisory services to PrivateBancorp.
NOTE 15. Subsequent Events
In accordance with the provisions set forth in FASB Accounting
Standards Codification (“ASC”) Topic 855, management has
evaluated subsequent events through June 29, 2012, the date the
Consolidated Statements of Financial Condition were available to be
issued. Management has determined that there are no material events
that would require adjustment to or disclosure in the Company’s
Consolidated Statements of Financial Condition.
Chicago, Illinois
June 29, 2012
25
Copy
Executive Officers
Board of Directors
Richard S. Price *
James C. Atkinson
Consulting
Joshua K. Daitch
Real Estate, Multi-Manager
Craig E. Goesel
Property and Casualty
Vice Chairmen
Nancy J. Ayers
Property and Casualty
Julie R. Dann
Property and Casualty
Lee M. Gordon
Investment Advisory
John A. Baccich
Institutional Sales and Trading
Scott R. Dann
Property and Casualty
John P. Harney
Insurance Services
Paul D. Baker
Institutional Sales and Trading
Stephen B. Darr
Consulting
Stephen D. Hoopes
Public Finance
George E. A. Barbar
Institutional Sales and Trading
Brian K. Diedrich
Employee Benefits
Daniel P. Howell
Private Equity
Erik D. Barefield
Advanced Strategies
Adriana Duenas
Employee Benefits
Thomas F. Hynes
Institutional Sales and Marketing
M. Douglas Barker
Sale-Leaseback Capital
Paul C. duVair
Consulting
Stephen D. Jacobson
Credit Tenant Lease Finance
Paul H. Blumberg
Investment Advisory
Howard A. Engel
Employee Benefits
Monty Kehl
Consulting
William D. Boockford
Property and Casualty
David R. Engle
Investment Advisory
Sheila D. Kelly
Property and Casualty
Carolyn M. Burke
Advanced Strategies
Curtis J. Erickson
Institutional Sales and Trading
Mark A. Kmety
Employee Benefits
Dennis B. Black†*
Robert Cartwright
Institutional Sales and Trading
Greg T. Fedorinchik
Advanced Strategies
Melissa S. Knoll
Consulting
Senior Managing Directors
Michael J. Clarke
Real Estate, Multi-Manager
James S. Feltman
Consulting
Kevin A. Krakora
Consulting
Garry W. Cohen
Sale-Leaseback Capital
Richard A. Freeman
Employee Benefits
Mark C. Kulpins
Advanced Strategies
Lawrence M. Cohen
Investment Advisory
Karl J. Frey
Advanced Strategies
Bert F. Lacativo
Consulting
Lester N. Coney
Office of the Chairman
Robert S. Gaddi
Institutional Sales and Trading
Brock C. LaMarca
Investment Advisory
Alasdair R.J. Cripps
Real Estate, Direct
Gregory P. Giles
Compensation and Executive
Benefit Strategies
Larry H. Lattig
Consulting
Chairman and CEO
†
Jeffrey A. Golman*
Richard S. Mesirow
Howard M. Rossman*
Bruce J. Young†*
Board of Directors
Thomas E. Galuhn
Martin B. Kaplan†
Gary C. Klopfenstein†
Gerald J. Levin
Dominick J. Mondi†
Kristie P. Paskvan†
Marc E. Sacks†
Ralph S. Tuliano†
Julie E. Vander Weele†
Stephen C. Vogt
General Counsel
Alan H. Abramson
Investment Advisory
Joseph P. Adler
Property and Casualty
Thomas J. Allison
Consulting
Michael E. Annin
Investment Strategies
Terry Athas
Office of the Chairman
Member, Management Committee
* Member, Board of Directors
†
26
Marc A. Leibson
Investment Advisory
Jordan B. Scher
Investment Advisory
Vincent A. Allegra
Investment Advisory
Timothy G. Ewing
U.S. Value Equity
Veda K. Levin
Investment Brokerage
Norman D. Schlismann
Investment Advisory
Blake E. Anderson
Institutional Sales and Trading
Donald G. Feeney
Currency Management
James S. Levy
Investment Brokerage
James F. Schuster
Employee Benefits
Michael J. Antioho
Institutional Sales and Trading
William R. Fisher
Property and Casualty
Jeffrey M. Lew
Institutional Sales and Trading
Brian J. Shevitz
Investment Advisory
R. Pat Ballis
Property and Casualty
Maureen E. Flood
Structured Settlements
Steven P. Luetger
Fixed Income Management
Eric D. Siegel
Advanced Strategies
Morton R. Bearman
Institutional Sales and Trading
Gregory J. Gallagher
Employee Benefits
Thomas Macina
Advanced Strategies
Chris G. Skryd
Employee Benefits
Eugene A. Bensinger
Institutional Sales and Trading
Walter J. Garbacik
Institutional Sales and Trading
Michael J. Mackey
Property and Casualty
Richard A. Stein
Office of the Chairman
Peter A. Bianchini
Institutional Sales and Trading
Jennifer F. Gavelek
Property and Casualty
Norman J. Malter
Insurance Services
Diane C. Swonk
Chief Economist
Harlan L. Brendel
Institutional Sales and Trading
William A. Maniscalco
Investment Advisory
Michael Szkatulski
Real Estate Consulting
Jon D. Brorson
Agriculture Management
Lynn S. Giles
Compensation and Executive
Benefit Strategies
Peter T. Manzi
Institutional Sales and Trading
Francois R. Teissonniere
Office of the Chairman
Joshua S. Burden
Institutional Sales and Trading
Dana M. Mikstay
Life and Disability
Christopher Trimarco
Institutional Sales and Trading
Anderson E. Bynam
Public Finance
Lester A. Morris
Investment Advisory
Stephen J. Ware
Property and Casualty
Andrew M. Carolus
Investment Banking
James E. Nugent
Consulting
Daniel E. Weil
Property and Casualty
Christopher O. Cassell
Institutional Sales and Trading
Paul E. Pliester
Institutional Sales and Trading
Jack F. Williams
Consulting
Guy Chiariello
Real Estate, Direct
Linda B. Price
Property and Casualty
James S. Wilson
Consulting
Joseph A. Cowherd
Investment Banking
Joscelyn Read
Institutional Sales and Trading
Kristin T. Winford
Consulting
Robert A. Crisafulli
Consulting
Joseph J. Riley
Institutional Sales and Trading
Randall C. Wolfe
Institutional Sales and Trading
Kathryn E. Criswell
Structured Settlements
Gregory J. Robbins
Advanced Strategies
Michael S. Zehfuss
Currency Management
Robert M. DeBolt
Private Equity
Jennifer E. Rosenblum
Investment Advisory
Managing Directors
Darren C. DeRisi
Institutional Sales and Trading
Marvin J. Rotstein
Property and Casualty
Dominic J. Adducci
Real Estate Consulting
Carlos F. Desmaras
Public Finance
Nicholas Saviano
Insurance Services
Sal F. Albanese
Institutional Sales and Marketing
Brian K. Dwyer
Institutional Sales and Trading
Joseph M. Scanlon
Investment Advisory
Mujtaba Syed Ali
Advanced Strategies
Glenn A. Edmonds
Institutional Sales and Trading
27
Adam S. Goldman
Investment Advisory
Daniel J. Goodmann
Structured Settlements
Mary A. Gould
Private Client Insurance
Michelle Gurgone
Insurance Services
Ali H. Haghighat
Institutional Sales and Trading
Paul M. Halloran
Property and Casualty
Scott B. Harris
Institutional Sales and Trading
Peter W. Hegel
Fixed Income Management
William J. Hornell
Investment Banking
David S. Israel
Investment Advisory
Thomas M. Jones
Consulting
Linda J. Jordan
Institutional Sales and Marketing
Fran L. Jurkovic
Insurance Services
Gregory M. Karczewski
Real Estate Consulting
Bryan K. McCoy
Institutional Sales and Trading
Christopher G. Reagan
Retirement Plan Advisory
David E. Wanger
Investment Advisory
John R. Kaufman
Investment Advisory
Leslie A. McLeod
Employee Benefits
Daniel Reilly
Institutional Sales and Trading
Diana L. Ware
Insurance Services
Dermot M. Keegan
Advanced Strategies
Steven N. Mesirow
Investment Advisory
Mario Remegi
Property and Casualty
Joseph A. Wark
Institutional Sales and Trading
Charles L. Kendrick
Real Estate, Direct
Matthew J. Miller
Investment Advisory
James D. Richard
Institutional Sales and Trading
Benjamin C. Wei
Consulting
James J. Kilbane
Institutional Sales and Marketing
Michael A. Miranda
Currency Management
Proctor H. Robison
Institutional Sales and Trading
Richard A. Weil
Investment Banking
Brian G. King
Public Finance
Louis W. Mitchell
Investment Banking
Joanne P. Rohn
Security Processing
Michael H. Willis
Institutional Sales and Trading
David W. King
Consulting
Daniel G. Montgomery
Consulting
Laurie B. Sandman
Employee Benefits
Thomas C. Willis
Commodities Management
Michael C. Klee
Property and Casualty
Patrick T. Muldowney
Compliance
Richard A. Schendel
Currency Management
Gary L. Wirt
Investment Advisory
Richard H. Korengold
Investment Advisory
Joshua Mulholland
Institutional Sales and Trading
Susan J. Schmidt
U.S. Value Equity
David R. Woodford
Consulting
Deborah S. Krieps
Marketing and Strategic Sales
Kevin A. Murnane
Institutional Sales and Trading
Susan H. Seabury
Consulting
Mark E. Zelich
Property and Casualty
Todd S. Krzyskowski
Public Finance
Patricia J. Murphy
Institutional Sales and Trading
Dominick P. Setari
Public Finance
Marisa J. Kurk
Currency Management
Peter W. Nagle
Information Technology
William A. Shahriari
Institutional Sales and Trading
Adolfo L. Laurenti
Economic Analysis
Mark E. Newlin
Fixed Income Management
Patrick J. Sheahan
Insurance Services
Charles B. Lawless
Investment Advisory
Jacquelyn M. Norstrom
Property and Casualty
Bruce P. Slayter
Property and Casualty
Brian K. Lazarz
Life and Disability
Howard R. Nusbaum
Life and Disability
Frederick B. Stambaugh
Currency Management
Jeffrey M. Levine
Compliance
Karen A. Nye
Economic Analysis
Matthew N. Steele
Consulting
Benita T. Levy
Institutional Sales and Trading
David H. Officer
Institutional Sales and Trading
James C. Styer
Insurance Services
Timothy J. Martin
Consulting
Christopher M. O’Neill
Investment Strategies
Ernest J. Talarico
Investment Advisory
Kenneth B. Mathieu
Consulting
Christopher J. Pohlman
Investment Advisory
Paul D. Teitelbaum
Investment Banking
Casey R. McCarthy
Structured Settlements
Rocky Pontikes
Investment Banking
Todd M. Traskos
Institutional Sales and Trading
Patrick A. McCarthy
Property and Casualty
Tryner L. Price
Employee Benefits
Luis Villarejo
Institutional Sales and Marketing
Kevin M. McColgan
Consulting
Arnold J. Pritsker
Property and Casualty
Todd E. Waldrop
Public Finance
28
HEADQUARTERS
Chicago, Illinois
312.595.6000
CALIFORNIA
Los Angeles
213.614.7020
NEW YORK
New York City
Institutional Sales and Trading
212.425.3200
San Francisco
415.623.7211
FLORIDA
Fort Lauderdale
954.356.0330
Miami
305.416.3333
Investment Banking
212.351.8181
Consulting
212.808.8330
NORTH CAROLINA
Charlotte
704.998.5550
Tampa
813.221.4424
GEORGIA
Atlanta
Institutional Sales and Marketing
404.881.2814
TEXAS
Dallas
214.954.1400
Houston
713.425.4965
Consulting
770.206.2400
International Locations
ILLINOIS
Highland Park
847.681.2300
UNITED KINGDOM
London
+44 (0)20 7851 1700
Oakbrook Terrace
630.705.2000
CHINA
Hong Kong
+852 3519 3000
Bannockburn
Compensation and Executive
Benefit Strategies
847.444.2655
Insurance Services
847.444.1060
MASSACHUSETTS
Boston
Consulting
617.235.1400
Institutional Sales and Trading
617.235.1439
Locations
29
United Arab Emirates
Abu Dhabi (joint venture)
+971 2 413 1330
Services Offered Through
Mesirow Advanced Strategies, Inc.
Mesirow Financial Agriculture Management, LLC
Mesirow Financial Alternative Investments, LLC
Mesirow Financial Commodities Management, LLC
Mesirow Financial Consulting, LLC
Mesirow Financial Hong Kong, Limited
Mesirow Financial Interim Management, LLC
Mesirow Financial International UK Limited
Mesirow Financial Investment Management, Inc.
Mesirow Financial Private Equity Advisors, Inc.
Mesirow Financial Private Equity, Inc.
Mesirow Financial Real Estate, Inc.
Mesirow Financial Real Estate Brokerage, Inc.
Mesirow Financial Real Estate Consulting, LLC
Mesirow Financial Services, Inc.
Mesirow Financial Structured Settlements, LLC
Mesirow Financial World Ventures, LLC
Mesirow Insurance Services, Inc.
Mesirow Real Estate Investments, Inc.
Mesirow Realty Sale-Leaseback, Inc.
Mesirow Realty Services, Inc.
Securities Offered Through
Mesirow Financial, Inc.
Member NYSE, SIPC, FINRA
The Mesirow Financial name and logo are registered
service marks of Mesirow Financial Holdings, Inc.,
© 2012. Mesirow Financial Holdings, Inc. All rights
reserved.
Nothing contained herein constitutes an offer to sell or a
solicitation of an offer to buy an interest in any financial
investment vehicle(s).
30
mesirowfinancial.com/AnnualReport2012