Statement of Financial Condition
September 30, 2005 (Unaudited)
Printable Version
See accompanying notes. 1. Organization Janney Montgomery Scott LLC (the “Company”) is a broker-dealer registered in fifty states, the District of Columbia and Puerto Rico, and a wholly owned subsidiary of Independence Square Properties LLC (the “Member”), which is a wholly owned subsidiary of The Penn Mutual Life Insurance Company (“Penn Mutual”).Grant Street Capital Management LLC (the “General Partner”) is the general partner of two partnerships, Grant Street Capital Partners LP and Grant Street Capital Partners (QP) LP (the “Partnerships”). The General Partner is a wholly owned subsidiary of the Company, and all of the managing directors of the General Partner are officers or other employees of the Company. The General Partner, has control of the Partnership. Therefore, the Partnerships are consolidated in these financial statements. At September 30, 2005, aggregate assets, liabilities and equity in the Partnerships was approximately $19,600,000, $3,300,000 and $16,300,000, respectively. The Company’s ownership interest in the Partnerships was approximately $600,000 at September 30, 2005. 2. Summary of Significant Accounting Policies Restricted Cash Restricted cash at
September 30, 2005 was $2,261,712, which represents cash in an escrow account
in connection with the acquisition of Parker/Hunter Inc. This cash is not available to the Company for
general corporate use.
Securities Transactions Proprietary and customer transactions in securities and listed options, including the related revenues and expenses, are recorded on a settlement-date basis, generally the next business day following the trade date for options and the third business day for securities. There would be no material effect on the financial statements if proprietary transactions and their revenues and expenses and commission revenue and expenses on customer transactions were recorded on a trade-date basis.Investment Banking
Securities Lending Activities Securities borrowed and securities loaned are generally reported as collateralized financings. Securities borrowed transactions require the Company to deposit cash, letters of credit, or other collateral with the lender. With respect to securities loaned, the Company receives collateral in the form of cash or other collateral. In both types of transactions, the collateral deposited or received is in an amount generally in excess of the market value of securities borrowed or loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained, deposited, or refunded as necessary. Financial Instruments Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires the Company to report the fair value of financial instruments, as defined. The fair value of the Company’s subordinated debt is not determinable, as it’s between related parties. Substantially all other of the Company’s assets and liabilities are carried at fair value or contracted amounts that approximate fair value. Goodwill The Company accounts for goodwill according to the requirements of Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets (“FAS 142”). Upon adoption of FAS 142, the Company ceased amortization of goodwill in accordance with FAS 142 and reevaluates the book value of goodwill at least annually for impairment. As of September 30, 2005 no impairment has been recorded. Prior to the adoption of FAS 142, the Company recorded accumulated amortization of goodwill in the amount of $15,891,236. Employee Loans and Advances The Company provides certain Financial Consultants with loans as part of the Company’s retention strategy of its key revenue producing employees. These loans are generally forgivable over a four to ten year period based upon continued employment with the Company. If the employee leaves before the term of the loan expires, the individual is required to repay the remaining balance. The Company is included in a consolidated federal income tax return filed by Penn Mutual. In accordance with the tax allocation policy of the consolidated group, the Company determines its federal income tax liability on a separate-return basis and makes the required tax payments to the Member. Promotional Advertising Investments in Subsidiaries, Partnerships and Affiliates The
Company’s other investments represent its investments in limited partnerships
and limited liability corporations which approximates fair value.
Furniture, Equipment, and Leasehold Improvements All furniture, equipment, and leasehold improvements are recorded at cost, net of accumulated depreciation and amortization. Amortization on leasehold improvements is provided on a straight-line basis over six years or the length of the lease, whichever is shorter. Furniture and equipment are depreciated using the modified accelerated cost recovery system generally over two to seven years. As of September 30, 2005 furniture & equipment, and leasehold improvements are $50,495,339 and $10,525,627 respectively. Accumulated depreciation on furniture & equipment and leasehold improvements are $44,457,573 and $6,618,906 respectively. Use of Estimates The preparation of financial statements in conformity with
accounting principles generally accepted in the
4. Securities Owned and Securities Sold, Not Yet Purchased Securities owned and securities sold, not yet purchased, consist of the following at September 30, 2005:
5. Short-term Bank Loans The Company borrows from two banks in connection with the securities settlement process and to finance margin loans made to customers. The Company is required to collateralize amounts borrowed in excess of $50,000,000 from one of these banks. At September 30, 2005, these two banks extended short-term bank loans in the amount of $74,500,000 which was collateralized by customer-owned securities valued at approximately $103,289,979. The bank loans are demand obligations and generally require interest based upon the Federal Funds rate. At September 30, 2005, the weighted-average interest rate on these borrowings was 3.98 All of the remaining bank loans, which consist of overdrafts of depository accounts of $41,463,471 are not collateralized. 6. Subordinated Note Payable The subordinated note payable (the “Note”) is subordinated to the claims of general creditors and consists of a note issued pursuant to a cash subordination agreement in the amount of $22,000,000, which is due to Penn Mutual on July 16, 2008. The Note was approved by the New York Stock Exchange, Inc. (the “NYSE”) and is available in computing net capital under the Securities and Exchange Commission’s (the “SEC”) Uniform Net Capital Rule (“Rule 15c3-1”). Interest is payable semi-annually on July 15 and January 15, at a floating rate which was 4.79% at September 30, 2005. The Note may only be repaid contingent upon the Company’s continued compliance with its minimum net capital requirements. Interest payable on the Note was $219,542 as of September 30, 2005 included in accounts payable and other liabilities. 7. Member’s Equity The Company entered into an operating agreement with the Member which sets forth the rights, obligations, and duties with respect to the Company. According to the operating agreement, the Member shall not be personally liable to creditors of the Company for debts, obligations, liabilities, or losses of the Company, except as required by law. The Member has the right, but is not required, to make capital contributions upon request of the Company. The Member may require the Company to make distributions of cash or property at such times and amounts as it determines, subject to regulatory limitations and approval. 8. Income Taxes Deferred income tax assets and liabilities arise from temporary differences between the tax basis of an asset or liability and its reported amount in the statement of financial condition. At September 30, accounts payable and accrued liabilities include $478,203 due to the Member for estimated taxes. In addition, the Company had a net deferred income tax asset of $11,066,272, consisting of $13,823,572 in deferred tax assets and $2,757,300 in deferred tax liabilities. The Company’s deferred tax asset, included in other assets, primarily reflects accrued expenses, which are not currently deductible for income tax purposes net of tax liabilities related to the acquisition of Parker/Hunter.9. Regulatory Requirements The Company is subject to Rule 15c3-1 of the SEC and the capital rules of the NYSE. The Company has elected to use the alternative method permitted by Rule 15c3-1 which requires that it maintain minimum net capital, as defined, equal to the greater of $1,000,000 or 2% of aggregate debit balances arising from customer transactions, as defined. The NYSE may prohibit a member firm from expanding its business or paying cash dividends/distributions if resulting net capital would be less than 5% of aggregate debit items, as defined, and may require a member firm to reduce its business if its net capital is less than 4% of aggregate debit items, as defined. At September 30, 2005, the Company’s net capital was $139,767,326 of which was $130,378,501 in excess of 2% of aggregate debit items, as defined, and the Company’s net capital percentage was 29.77%.As a clearing broker/dealer, the Company has elected to compute a reserve requirement for Proprietary Accounts of Introducing Broker/Dealers (the “PAIB”), as defined. The PAIB is completed to allow each correspondent firm that uses the Company as its clearing broker/dealer to classify its assets held by the Company as allowable assets in the correspondents’ net capital calculation. At September 30, 2005 the Company has no reserve requirement for PAIB. 10. Intangible Assets & Goodwill SFAS No. 142
provides that goodwill is not amortized and the value of an identifiable
intangible asset must be amortized over its useful life, unless the asset is
determined to have an indefinite useful life. Goodwill and indefinite-life intangible assets are analyzed at least
annually for impairment. Estimated
amortization expense on identifiable intangible assets for each of the next
five years is as follows:
11. Commitments and Contingencies At September 30, the Company’s future minimum rental commitments on the leases for its main office and 99 sales offices under noncancelable operating leases were as follows:
The Company, together with various other brokers, dealers, corporations, and individuals, has been named as a defendant in a number of actual and purported class-action lawsuits, many of which involve material or undeterminable amounts and alleged violations of federal and state securities laws. The Company is also a defendant in other lawsuits and regulatory matters incidental to its securities business. Management of the Company believes, after consultation with outside legal counsel, that the resolution of these various matters will not result in any material adverse impact on the financial position of the Company. However, the results of operations could be materially affected during any period if liabilities in that period differ from the Company’s prior estimates, and the Company’s cash flow could be materially affected during any period in which these matters are resolved. In accordance with SFAS No. 5 “Accounting for Contingencies,” the Company has established provisions for estimated losses from pending complaints, legal actions, investigations, and proceedings. The ultimate costs of litigation-related charges can vary significantly from period to period, depending on such factors as market conditions, the size and volume of customer complaints and claims, including class action suits and recoveries from indemnification, contribution or insurance reimbursements. At September 30, 2005 the Company’s liability for losses and contingencies was $4,226,647. The Company has investments in various partnerships to which it is required to commit a maximum amount of capital. As of September 30, 2005, the Company has contributed $8,391,344 as an investment and is committed to an additional $1,608,656. Under the terms of the partnership agreements, certain losses are allocated to the Company and the general partners before being allocated to the limited partners. The Company may in the future, under certain conditions, be required to contribute additional capital up to its maximum commitment with no resulting investment value. The Company has outstanding underwriting agreements and when-issued contracts which commit it to purchase securities at specified future dates and prices. The Company pre-sells such issues to manage risk exposure related to these off-balance-sheet commitments. Subsequent to September 30, 2005, such transactions settled with no material effect on the financial statements as of that date. 12. Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk In the normal course of business, the Company’s customer
activities involve the execution, settlement, and financing of various customer
securities transactions. These activities may expose the Company to off-balance-sheet
risk in the event the customer or other broker is unable to fulfill its
contracted obligations and the Company has to purchase or sell the financial
instrument underlying the contract at a loss.
13. Employee Benefit Plans The Company has a qualified defined contribution profit-sharing plan which covers all employees who meet certain eligibility requirements. Contributions to this plan are determined on a discretionary basis by the Board of Managers.
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December 31, 2006 
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