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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-32147
GREENHILL & CO., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0500737
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
300 PARK AVENUE, 23RD FLOOR 10022
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER (212) 389-1500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of April 22, 2005, there were 30,682,466 shares of the registrant's common
stock outstanding.
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TABLE OF CONTENTS
---------------------------------
ITEM NO. PAGE
- -------- ----
PART I. FINANCIAL INFORMATION
1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Financial Condition as of March 31, 2005
and December 31, 2004 4
Condensed Consolidated Statements of Income for the three months ended
March 31, 2005 and 2004 5
Condensed Consolidated Statements of Changes in Members' Equity and
Stockholders' Equity for the three months ended March 31, 2005 and year ended
December 31, 2004 6
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004 7
Notes to Condensed Consolidated Financial Statements 8
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
3. Quantitative and Qualitative Disclosures About Market Risk 26
4. Controls and Procedures 26
PART II. OTHER INFORMATION
1. Legal Proceedings 27
2. Unregistered Sales of Equity Securities and Use of Proceeds 27
3. Defaults Upon Senior Securities 27
4. Submission of Matters to a Vote of Security Holders 27
5. Other Information 27
6. Exhibits and Reports on Form 8-K 28
Signatures
2
AVAILABLE INFORMATION
Greenhill & Co., Inc. ("Company") files current, annual and quarterly
reports, proxy statements and other information required by the Securities
Exchange Act of 1934, as amended, with the Securities and Exchange Commission
("SEC"). You may read and copy any document the Company files at the SEC's
public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549,
U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. The Company's SEC filings are also available to the
public from the SEC's internet site at http://www.sec.gov. Copies of these
reports, proxy statements and other information can also be inspected at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005, U.S.A.
The Company's public internet site is http://www.greenhill-co.com. The
Company makes available free of charge through its internet site, via a link to
the SEC's internet site at http://www.sec.gov, its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements
and Forms 3, 4 and 5 filed on behalf of directors and executive officers and any
amendments to those reports filed or furnished pursuant to the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the SEC.
In addition, the Company makes available through
http://www.greenhill-co.com its most recent annual report on Form 10-K, its
quarterly reports on Form 10-Q for the current fiscal year and its most recent
proxy statement, although in some cases these documents are not available on
that site as soon as they are available on the SEC's internet site. Also posted
on the Company's website, and available in print upon request of any stockholder
to the Investor Relations Department, are charters for the Company's Audit
Committee, Compensation Committee and Nominating and Corporate Governance
Committee. Copies of the Corporate Governance Guidelines and the Code of
Business Conduct and Ethics governing our directors, officers and employees are
also posted on the Company's website within the "Corporate Governance" section.
You will need to have Adobe Acrobat Reader software installed on your computer
to view these documents, which are in the PDF format.
3
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
GREENHILL & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
AS OF
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
ASSETS
Cash and cash equivalents.................................................... $ 80,586,135 $ 60,806,951
Securities................................................................... 20,281,476 52,416,670
Financial advisory fees receivable, net of allowance for doubtful accounts
of $1.8 million and $0.8 million at March 31, 2005 and December 31, 2004,
respectively.............................................................. 26,878,391 25,185,937
Other receivables............................................................ 1,046,303 1,062,926
Property and equipment, net of accumulated depreciation and amortization of
$25.8 million at March 31, 2005 and $25.2 million at December 31, 2004.... 9,008,855 9,290,877
Investments.................................................................. 25,387,499 25,881,674
Due from affiliates.......................................................... 436,785 135,163
Other assets................................................................. 2,702,525 2,235,905
------------ ------------
Total assets.............................................................. $166,327,969 $177,016,103
============ ============
LIABILITIES, MEMBERS' EQUITY AND STOCKHOLDERS' EQUITY
Compensation payable......................................................... $ 13,581,901 $ 31,788,116
Accounts payable and accrued expenses........................................ 2,544,182 6,594,997
Taxes payable................................................................ 13,820,411 9,444,666
Due to affiliates............................................................ 1,445,044 1,445,044
------------ ------------
Total liabilities......................................................... 31,391,538 49,272,823
Minority interest in net assets of affiliate................................. 602,435 504,177
Common stock, par value $0.01 per share, 100,000,000 shares authorized,
30,750,000 shares issued and outstanding as of March 31, 2005 and
December 31, 2004......................................................... 307,500 307,500
Restricted stock units....................................................... 5,260,599 3,396,714
Additional paid-in capital................................................... 106,743,051 106,743,051
Retained earnings............................................................ 23,354,223 15,781,529
Accumulated other comprehensive income....................................... 796,555 1,222,235
Treasury stock, at cost, par value $0.01 per share; 67,534 and 9,346 shares
as of March 31, 2005 and December 31, 2004................................ (2,127,932) (211,926)
------------ ------------
Stockholders' equity......................................................... 134,333,996 127,239,103
------------ ------------
Total liabilities, minority interest, members' equity and stockholders'
equity.................................................................. $166,327,969 $177,016,103
============ ============
See accompanying notes to condensed consolidated financial statements.
4
GREENHILL & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2005 2004
----------- ----------
REVENUES
Financial advisory fees..................................... $39,470,715 $25,537,295
Merchant banking revenue.................................... 3,934,607 4,007,727
Interest income............................................. 522,185 20,503
----------- -----------
Total Revenues........................................... 43,927,507 29,565,525
EXPENSES
Employee compensation and benefits.......................... 19,920,393 9,236,200
Occupancy and equipment rental.............................. 1,332,206 1,354,352
Depreciation and amortization............................... 628,123 772,062
Information services........................................ 867,746 760,563
Professional fees........................................... 623,868 284,508
Travel related expenses..................................... 990,447 893,199
Other operating expenses.................................... 2,277,277 905,569
----------- -----------
Total Expenses........................................... 26,640,060 14,206,453
Income before Tax and Minority Interest.................. 17,287,447 15,359,072
Minority interest in net income of affiliates............... 98,258 4,394,697
----------- -----------
Income before Tax........................................ 17,189,189 10,964,375
Provision for taxes......................................... 6,437,452 484,302
----------- -----------
Net Income............................................... $10,751,737 $10,480,073
=========== ===========
Average common shares outstanding:
Basic................................................... 30,950,109 n/a
Diluted................................................. 31,042,113 n/a
Earnings per share
Basic................................................... $ 0.35 n/a
Diluted................................................. $ 0.35 n/a
Pro forma average shares outstanding (see notes 11):
Basic................................................... 30,950,109 25,000,000
Diluted................................................. 31,042,113 25,000,000
Pro forma earnings per share (see note 11):
Basic................................................... $ 0.35 $ 0.26
Diluted................................................. $ 0.35 $ 0.26
See accompanying notes to condensed consolidated financial statements.
5
GREENHILL & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
MEMBERS' EQUITY AND STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
2005 2004
--------------- ------------
MEMBERS' EQUITY, BEGINNING OF THE YEAR......................... $ - $ 32,257,252
Contributed capital......................................... - 27,500
Comprehensive income:
Net income prior to the Reorganization...................... - 13,430,671
Other comprehensive income:
Foreign currency translation adjustment.................. - (225,490)
------------ ------------
Comprehensive income........................................ - 13,205,181
Distributions............................................... - (31,223,511)
Exchange of members' interests for shares of common stock... - (17,784,148)
Transfer to other comprehensive income...................... - (564,013)
Transfer to retained earnings............................... - 4,081,739
------------ ------------
Members' equity, end of the period............................. - -
------------ ------------
COMMON STOCK, PAR VALUE $0.01
Common stock, beginning of the year......................... 307,500 -
Exchange of partnership interests for shares of common stock - 250,000
Common stock issued in initial public offering.............. - 57,500
------------ ------------
Common stock, end of the period................................ 307,500 307,500
------------ ------------
RESTRICTED STOCK UNITS
Restricted stock units, beginning of the year............... 3,396,714 -
Restricted stock units recognized........................... 1,863,885 3,396,714
------------ ------------
Restricted stock units, end of the period...................... 5,260,599 3,396,714
------------ ------------
ADDITIONAL PAID-IN CAPITAL
Additional paid-in capital, beginning of the year........... 106,743,051 -
Exchange of partnership interests for shares of common stock - 17,534,148
Initial public offering of common stock..................... - 89,208,903
------------ ------------
Additional paid-in capital, end of the period.................. 106,743,051 106,743,051
------------ ------------
RETAINED EARNINGS
Retained earnings, beginning of the year.................... 15,781,529 -
Transfer from members' equity............................... - (4,081,739)
Dividends................................................... (3,179,043) (5,021,888)
Net income subsequent to the Reorganization................. 10,751,737 24,885,156
------------ ------------
Retained earnings, end of the period........................... 23,354,223 15,781,529
------------ ------------
OTHER COMPREHENSIVE INCOME
Other comprehensive income, beginning of the year........... 1,222,235 -
Transfer from members' equity............................... - 564,013
Currency translation adjustment............................. (425,680) 658,222
------------ ------------
Other comprehensive income, end of the period.................. 796,555 1,222,235
------------ ------------
TREASURY STOCK, AT COST, PAR VALUE $0.01 PER SHARE
Treasury stock, beginning of the year....................... (211,926) -
Repurchased................................................. (1,916,006) (211,926)
------------ ------------
Treasury stock, end of the period........................... (2,127,932) (211,926)
------------ ------------
TOTAL MEMBERS' EQUITY AND STOCKHOLDERS' EQUITY................. $134,333,996 $127,239,103
============ ============
See accompanying notes to condensed consolidated financial statements.
6
GREENHILL & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------
2005 2004
------------ ------------
OPERATING ACTIVITIES:
Net income............................................................. $ 10,751,737 $ 10,480,073
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Non-cash items included in net income:
Depreciation and amortization....................................... 628,123 772,062
Unrealized (gains) losses on investments............................ (2,803,503) (2,880,158)
Restricted stock units recognized................................... 1,863,885 -
Changes in operating assets and liabilities:
Financial advisory fees receivable.................................. (1,692,454) 4,345,058
Due from affiliates................................................. (301,622) 160,931
Taxes receivable.................................................... - 435,687
Other receivables................................................... 16,623 (193,712)
Other assets........................................................ (479,953) 303,416
Compensation payable................................................ (18,206,215) (6,777,963)
Accounts payable and accrued expenses............................... (4,060,666) 105,604
Minority interest in net assets of affiliate........................ 98,258 (3,688,874)
Taxes payable....................................................... 4,375,745 561,745
------------ ------------
Net cash provided by (used in) operating activities............... (9,810,042) 3,623,869
INVESTING ACTIVITIES:
Purchase of investments................................................ - (2,253,127)
Distribution from investments.......................................... 3,297,678 1,847,103
Purchase of securities................................................. (17,181,476) -
Sale of securities..................................................... 49,316,670 -
Purchase of property and equipment..................................... (332,768) (1,036,562)
------------ ------------
Net cash provided by (used in) investing activities............... 35,100,104 (1,442,586)
FINANCING ACTIVITIES:
Proceeds of revolving bank debt........................................ - 14,500,000
Capital contributions.................................................. - 27,500
Dividends paid......................................................... (3,169,192) -
Purchase of treasury stock............................................. (1,916,006) -
Capital distributions.................................................. - (27,544,740)
------------ ------------
Cash used in financing activities................................. (5,085,198) (13,017,240)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents........... (425,680) (225,490)
------------ ------------
Net increase (decrease) in cash and cash equivalents................... 19,779,184 (11,061,447)
Cash and cash equivalents, beginning of period......................... 60,806,951 26,598,643
------------ ------------
Cash and cash equivalents, end of period............................... $ 80,586,135 $ 15,537,196
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ - $ 101,935
------------ ------------
Cash paid (received) for taxes, net of refunds $ 1,975,000 $ (397,934)
------------ ------------
See accompanying notes to condensed consolidated financial statements.
7
GREENHILL & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ORGANIZATION
Effective May 11, 2004 (the "Reorganization Date"), Greenhill & Co.
Holdings, LLC ("Holdings"), a New York limited liability company, merged with
Greenhill & Co., Inc., a Delaware corporation (the merger and the other related
transactions effected by Holdings and its affiliates in anticipation of the
initial public offering are referred to collectively as the "Reorganization").
The surviving corporation in the merger, Greenhill & Co., Inc., completed its
initial public offering on the same day. In the offering, Greenhill & Co., Inc,
issued 5,750,000 shares of common stock and received net proceeds of $89
million. Greenhill & Co., Inc. (formerly Holdings), together with its
subsidiaries (collectively, the "Company"), is an independent investment banking
firm. The Company has clients located throughout the world, with offices located
in New York, London, Frankfurt and Dallas.
The Company's activities as an investment banking firm constitute a single
business segment, with two principal sources of revenue:
o Financial advisory, which includes advice on mergers, acquisitions,
restructurings and similar corporate finance matters; and
o Merchant banking, which includes the management of outside capital
invested in the Company's merchant banking funds, Greenhill Capital
Partners ("GCP I") and Greenhill Capital Partners II ("GCP
II"),(collectively "GCP"), and the Company's principal investments in
such funds.
The Company's U.S. and international wholly-owned subsidiaries include
Greenhill & Co., LLC ("G&Co"), Greenhill Capital Partners, LLC ("GCPLLC")
(formerly Greenhill Fund Management Co., LLC), Greenhill Aviation Co., LLC
("GAC") and Greenhill & Co. Europe Limited ("GCE").
G&Co is a registered broker-dealer under the Securities Exchange Act of
1934, as amended, and is registered with the National Association of Securities
Dealers, Inc. G&Co is engaged in the investment banking business principally in
North America.
GCE is a U.K. based holding company. GCE controls Greenhill & Co.
International LLP ("GCI"), through its controlling membership interest. GCI is
engaged in investment banking activities, principally in Europe, and is subject
to regulation by the U.K. Financial Services Authority ("FSA").
GCPLLC is a registered investment adviser under the Investment Advisers Act
of 1940. GCPLLC provides investment advisory services to GCP, our private equity
funds that invest in a diversified portfolio of private equity and equity
related investments. The majority of the investors in GCP are third parties.
However, the Company and its employees have also made investments in GCP.
GAC owns and operates an aircraft, which is used for the exclusive benefit
of the Company's employees and their immediate family members.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL INFORMATION
These condensed consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States,
which require management to make estimates and assumptions regarding future
events that affect the amounts reported in our financial statements and these
footnotes, including investment valuations, compensation accruals and other
matters. Management believes that the estimates used in preparing its condensed
consolidated financial statements are reasonable and prudent. Actual results
could differ materially from those estimates.
The condensed consolidated financial statements of the Company include all
consolidated accounts of Greenhill & Co., Inc. (formerly Holdings) and all other
entities in which the Company has a controlling interest, including GCI, after
eliminations of all significant inter-company accounts and transactions. The
Company adopted the revised FASB Interpretation No. 46 ("FIN 46-R"),
"Consolidation of Variable
8
GREENHILL & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Interest Entities", in the first quarter of 2004. FIN 46R defines variable
interests and specifies the circumstances under which the consolidation of
entities will be required. The adoption of FIN 46-R did not have a material
impact on the Company's financial position or results of operations. The
adoption required the Company to consolidate GCP Managing Partner, LP, the
managing general partner of GCP I and GCP Managing Partner II, L.P., the
managing general partner of GCP II. GCP Managing Partner, LP is responsible for
managing GCP I's investments, subject to the approval of GCP, L.P., the other
general partner of GCP I, with respect to the sale or other disposition of GCP I
investments made prior to December 31, 2003. GCP Managing Partner II, LP is
responsible for managing GCP II's investments. The Company does not consolidate
the funds which comprise GCP I or GCP II since the Company, through its general
partner and limited partner interests, does not have a majority of the economic
interest in such funds. Also, GCP Managing Partner, L.P. and GCP Managing
Partner II, L.P. are subject to removal by a simple majority of unaffiliated
third-party investors of GCP I and GCP II, respectively.
These condensed consolidated financial statements are unaudited and should
be read in conjunction with the audited consolidated financial statements and
notes thereto for the year ended December 31, 2004 filed with the Securities and
Exchange Commission. The condensed consolidated financial information as of
December 31, 2004 has been derived from audited consolidated financial
statements not included herein. The results of operations for interim periods
are not necessarily indicative of results for the entire year.
MINORITY INTEREST
The interests in GCI held directly by the U.K. Managing Directors, prior to
the Reorganization, were represented as minority interests in the accompanying
consolidated financial statements.
The interests in GCP Managing Partner, L.P. and GCP Managing Partner II,
L.P. held directly by various Managing Directors of the Company are represented
as minority interests in the accompanying consolidated financial statements.
REVENUE RECOGNITION
Financial Advisory Fees
The Company recognizes advisory fee revenue when the services related to
the underlying transactions are completed in accordance with the terms of its
engagement letters. Retainer fees are recognized as advisory fee income over the
period in which the related service is rendered.
The Company's clients reimburse certain expenses incurred by the Company in
the conduct of financial advisory engagements. Expenses are reported net of such
client reimbursements. Client reimbursements totaled $0.4 million and $0.5
million for the three months ended March 31, 2005 and 2004, respectively.
Merchant Banking Revenues
Merchant banking revenue consists of (i) management fees on the Company's
merchant banking activities, (ii) gains (or losses) on investments in the
Company's investment in merchant banking funds and other principal investment
activities, and (iii) merchant banking profit overrides.
Management fees earned from the Company's merchant banking activities are
recognized over the period of related service.
The Company recognizes revenue on investments in its merchant banking funds
based on its allocable share of realized and unrealized gains (or losses)
reported by such investments.
The Company recognizes merchant banking overrides when certain financial
returns are achieved over the life of the fund. Overrides are calculated as a
percentage of the profits earned by each fund. Future losses (if any) in the
value of the fund's investments may require amounts previously recognized as
overrides to be adjusted downward. Accordingly, merchant banking overrides are
recognized as revenue
9
GREENHILL & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
only after material contingencies have been resolved. See "Note 3 - Investments"
for further discussion of the GCP revenues recognized.
INVESTMENTS
The Company's investments in merchant banking funds are recorded at
estimated fair value based upon the Company's proportionate share of the changes
in the fair value of the underlying merchant banking fund's net assets.
Investments primarily include investments in GCP I.
MEMBERS' EQUITY
Prior to the Reorganization, the Company operated as a limited liability
company, and payments made to its Members were distributions of Members' equity
rather than compensation expense. The Senior Executive Profit Sharing Agreement
("SEPA") dated as of January 1, 2002, as amended as of January 1, 2004,
specified the manner of allocation of global operating income and provided for
distributions to the Members (including the limited liability partnership
interests owned by the U.K. Managing Directors represented as minority
interests). The governance of the Company was set forth in the Operating
Agreement of Greenhill & Co. Holdings, LLC dated as of January 1, 2002. Both the
SEPA and the Operating Agreement terminated on the Reorganization Date.
Through the SEPA and other operating agreements, the U.S. and U.K. members
operated under common governance and economic participation. However, these
consolidated financial statements present the entity's legal form, and as such,
the interests held by the U.K. Members directly in GCI were recorded as minority
interest for the periods prior to the Reorganization.
Distributions related to the global operating income earned prior to the
Reorganization were principally made on or before the Reorganization Date.
RESTRICTED STOCK UNITS
In accordance with the fair value method prescribed by FASB Statement No,
123(R), "Share-Based Payment", which is a revison of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", restricted stock units with future
service requirements are recorded as compensation expense generally over a
five-year service period following the date of grant. As the Company expenses
the awards, the restricted stock units recognized are recorded within
stockholders' equity. The Company records dividend equivalents in stockholders'
equity on outstanding restricted stock units that are expected to vest. The
Company adopted FASB Statement 123(R) as of January 1, 2005, and it did not have
a material effect on the Company's accounting for awards of restricted stock
units in its financial statements.
EARNINGS PER SHARE
The Company calculates earnings per share ("EPS") in accordance with FASB
Statement No. 128, "Earnings per Share." Basic EPS is calculated by dividing net
income by the weighted average number of common shares outstanding for the
period. Common shares outstanding comprises (i) the 25,000,000 shares issued in
connection with the Reorganization as if such issuance had occurred on January
1, 2004, (ii) the 5,750,000 shares issued in conjunction with the initial public
offering and (iii) the restricted stock units for which no future service is
required as a condition to the delivery of the underlying common stock, less the
treasury stock purchased by the Company. Diluted EPS includes the determinants
of basic EPS plus the dilutive effect of the common stock deliverable pursuant
to restricted stock units for which future service is required as a condition to
the delivery of the underlying common stock.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation is computed principally by an accelerated method over
the life of the assets, which range from three to seven years. Amortization of
leasehold improvements is computed by the straight-line method over the lesser
of the life of the asset or the term of the lease.
10
GREENHILL & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PROVISION FOR TAXES
After the Reorganization, the Company accounts for taxes in accordance with
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes", which requires the recognition of tax benefits or expenses on the
temporary differences between the financial reporting and tax bases of its
assets and liabilities. The Company's deferred tax assets and liabilities are
presented as a component of other assets and taxes payable, respectively, on the
consolidated statements of financial condition.
Prior to the Reorganization, the Company was primarily subject to local
unincorporated business tax on business conducted in New York City, and income
tax on current income realized by certain foreign subsidiaries. After the
Reorganization, the Company is subject to U.S. federal, foreign, state and local
taxes as a C corporation at the applicable tax rates.
FOREIGN CURRENCY TRANSLATION
Foreign currency assets and liabilities have been translated at rates of
exchange prevailing at the end of the periods presented. Income and expenses
transacted in foreign currency have been translated at average monthly exchange
rates during the period. Translation gains and losses are included in the
foreign currency translation adjustment included as a component of other
comprehensive income in the consolidated statement of changes in members'
equity.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity date of
three months or less, when purchased, to be cash equivalents. At March 31, 2005
and December 31, 2004, the carrying value of the Company's financial instruments
approximated fair value.
SECURITIES
Securities represents municipal auction rate securities held by the Company
which are treated as available for sale securities under FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". Auction rate
securities have legal maturities in excess of 20 years when issued, but have
periodic interest rate resets, generally every seven, twenty-eight or
thirty-five days. The Company has a highly diversified portfolio of AAA-rated
variable rate securities which generally provide liquidity at par, as they can
be sold at regularly scheduled auctions on the interest reset dates. At March
31, 2005 and December 31, 2004, the carrying value of securities approximated
fair value and the coupon rates ranged from 2.00% to 2.06% and 1.72% to 1.96%,
respectively.
NOTE 3 - INVESTMENTS
GCP
The Company records its investments in GCP at estimated fair value as
determined by GCP. Investments are initially carried at cost as an approximation
of fair value. The carrying value of such investments is reevaluated, and if
necessary, adjusted at each reporting period. Public investments are valued
using quoted market prices discounted for any restrictions on sale. Privately
held investments are carried at estimated fair value as determined by the
general partner after giving consideration to the cost of the security, the
pricing of other private placements of the portfolio company, the price of
securities of other companies comparable to the portfolio company, purchase
multiples paid in other comparable third-party transactions, the original
purchase price multiple, market conditions, liquidity, operating results and
other financial data.
With respect to all investments made by GCP I after January 1, 2004, the
profit overrides earned by GCP Managing Partner, L.P., for such GCP I
investments, will be consolidated by the Company, and 50% of such overrides will
be allocated, at the Company's discretion, as compensation expense to the
individual employees of the Company involved in managing GCP I. The employees of
the Company, through their direct interest in GCP, L.P., have the right to
receive substantially all of the profit overrides for GCP I
11
GREENHILL & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
investments made prior to 2004. See "Note 2 - Summary of Significant Accounting
Policies" for the consolidation policy of GCP Managing Partner, LP.
On March 31, 2005, GCP Managing Partner, L.P. terminated the commitment
period for GCP I. As a result, the annual management fee payable by the limited
partners in GCP I was reduced to 1% of the invested capital from between 1.25%
to 1.5% (total invested capital was approximately $229 million as of March 31,
2005). Such management fee is payable only by the outside investors not employed
by or affiliated with the Company.
Summarized financial information for the combined GCP I funds, in their
entirety, is as follows:
AS OF AS OF
MARCH 31, DECEMBER 31,
2005 2004
--------- ------------
(IN THOUSANDS)
Portfolio Investments............................. $577,448 $552,948
Total Assets...................................... 584,255 556,082
Total Liabilities................................. 94,451 13,007
Partners' Capital................................. 489,804 543,075
THREE MONTHS
ENDED MARCH 31,
-------------------
2005 2004
------- -------
(IN THOUSANDS)
Net unrealized gain on investments................ $16,649 $80,132
Net realized gain on investments.................. 11,120 3,642
Investment income................................. 8,389 1,339
Expenses.......................................... 2,527 898
------- -------
Net income (loss)................................. 33,631 84,215
------- -------
In February 2005, a subsidiary of GCP I borrowed $70 million from a
financial institution pursuant to a credit agreement secured by substantially
all of the shares of Global Signal Inc. common stock owned by it and backed,
under limited circumstances, by a recourse agreement issued by GCPLLC.
The Company's Merchant Banking revenue, by source, is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------- -------
(IN THOUSANDS)
Management fees................................... $1,131 $1,128
Net realized and unrealized gains on investments.. 1,230 2,880
Merchant banking overrides........................ 1,500 --
Other unrealized investment income................ 74 -
------ ------
Merchant banking revenue.......................... $3,935 $4,008
------ ------
The carrying value of the Company's investments are as follows:
AS OF AS OF
MARCH 31, DECEMBER 31,
2005 2004
--------- ------------
(IN THOUSANDS)
Investment in GCP................................. $20,274 $20,669
Investment in GCP, L.P............................ 4,197 4,370
Other investments................................. 916 843
------- -------
Investments....................................... $25,387 $25,882
------- -------
12
GREENHILL & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At March 31, 2005 and December 31, 2004, included in investment in GCP is
$0.6 million and $0.5 million, respectively, related to the interests in GCP
Managing Partner, L.P. held directly by various Managing Directors. The
investment in GCP, L.P. represents the Company's equity interest in GCP, L.P.
along with the Company's share of the overrides on the investments made prior to
January 1, 2004. The remaining equity interest in GCP, L.P. is owned directly by
individual employees of the Company. In 2004, GCP LLC was granted stock options
as a transaction fee from a GCP I portfolio company. The options were exercised,
and the common stock received upon exercise is included above in other
investments at March 31, 2005 and December 31, 2004.
At March 31, 2005, the Company had unfunded commitments to GCP I of $16.4
million. In April 2005, the Company funded $3.5 million of its commitment to GCP
I. The remaining commitments will be funded as required through June 2007 for
follow-on investments.
In March 2005, the Company completed the initial closing of its second
private equity fund, Greenhill Capital Partners II (or GCP II). The total
committed capital for GCP II as of the initial closing was $558 million. The
Company committed $85 million of the capital raised, and the Company's managing
directors and other professionals have personally committed a further $135
million. The remainder of the committed capital was raised from a variety of
institutional investors, as well from wealthy families and corporate executives.
Committed capital is expected to be drawn down from time to time over an
investment period of up to 5 years to fund investments by GCP II. At March 31,
2005, all of the Company's $85 million commitment to GCP II remained unfunded.
GCP II's managing general partner, GCP Managing Partner II, L.P., which is
controlled by the Company, makes investment decisions for the fund and is
entitled to receive from GCP II an override of 20% of the profits earned by GCP
II over a specified threshold on the capital committed by outside investors to
GCP II ($338 million as of the initial closing of GCP II in March 2005) and an
override of 10% of the profits earned by GCP II over a specified threshold on
the capital committed by the Company's managing directors, senior advisors and
certain other employees to GCP II ($132 million as of the initial closing of GCP
II). The Company will recognize as revenue 100% of the profit override earned by
the managing general partner of GCP II on investments made by GCP II.
Approximately one-half of such profit override will be allocated, at the
Company's discretion, as compensation to managing directors and other employees
of the Company involved in the management of GCP II. All limited partners in GCP
II (including those who are managing directors or other employees of the
Company) have agreed to pay during the commitment period an annual management
fee to the managing general partner of GCP II equal to 1.5% of the capital
committed by such limited partners. The commitment period will terminate on
March 31, 2010 unless terminated earlier by the general partner. Upon
termination of the commitment period, the annual management fee will be reduced
to 1% of the invested capital. No management fee or profit override is payable
in respect of the capital committed by the Company.
NOTE 4 - RELATED PARTIES
At March 31, 2005 and December 31, 2004, the Company had a receivable of
$0.4 million and $0.1 million, respectively, due from GCP relating to expense
reimbursements, which is included in due from affiliates.
Barrow Street Capital, a real estate investment management company,
subleases office space from the Company, and reimburses the Company for the use
of other facilities and participation in the Company's health care plans. A firm
owned by an executive of the Company also subleases airplane and office space
from the Company.
Included in compensation and benefits for the three months ended March 31,
2005, is $0.4 million in expense related to the vesting of restricted stock
units granted to the controlling parties of Barrow Street Capital as part of the
Company's initial public offering.
13
GREENHILL & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Due to affiliates at March 31, 2005 and December 31, 2004 represents
undistributed earnings to the U.K. members of GCI from the period prior to the
Reorganization.
NOTE 5 - REVOLVING BANK LOAN FACILITY
On December 31, 2003, the Company obtained from a U.S. commercial bank an
unsecured $16,000,000 revolving loan facility to provide for working capital
needs, facilitate the funding of short-term investments and other general
corporate purposes. Interest on borrowings is based on LIBOR plus 2.50 percent
or, at the Company's option, the prime rate. Generally, interest is payable
monthly. The revolving bank loan facility matures on June 30, 2005. In addition,
at least annually, the Company must repay all loans borrowed under the facility,
and it may not borrow again under the facility for a 30-day period following
repayment. A loan fee for the revolving bank loan facility of $13,333 and
$26,667 is included in other assets at March 31, 2005 and December 31, 2004,
respectively. The loan fee is amortized ratably over the life of the facility.
There were no borrowings under the facility during the three months ended March
31, 2005.
NOTE 6 - MEMBERS' AND STOCKHOLDERS' EQUITY
On March 15, 2005, a dividend of $0.10 per share was paid to shareholders
of record on February 15, 2005. Dividend equivalents of $107,797 were recorded
on the restricted stock units that are expected to vest. Additionally, in April
2005, the Board of Directors of the Company declared a quarterly dividend of
$0.10 per share. The dividend will be payable on June 15, 2005 to the common
stockholders of record on May 19, 2005.
In the first quarter of 2005, the Company distributed dividend equivalents
of $97,946 on the restricted stock units.
During the three months ended March 31, 2005, the Company repurchased
58,188 shares of its common stock at an average price of $32.93. The Company's
Board of Directors has authorized the additional repurchase of up to $7.9
million of common stock.
Prior to the Reorganization Date, the members of Holdings were not
employees of the Company. Holdings, prior to the Reorganization Date,
distributed current profits, net of amounts retained for working capital,
investments and other corporate purposes, to its members on a regular basis.
On or before the Reorganization Date, the Company made cash distributions
to its members related to the global operating income earned prior to the
Reorganization. Upon the Reorganization, amounts paid to the former members of
Holdings and the U.K. Managing Directors are recorded as compensation expense.
NOTE 7 - EARNINGS PER SHARE
The computations of basic and diluted EPS are set forth below:
THREE MONTHS
ENDED
MARCH 31, 2005
----------------
(in thousands,
except per share
amounts)
Numerator for basic and diluted EPS
- Earnings available to common stockholders $ 10,752
========
Denominator for basic EPS - weighted
average number of common shares 30,950
Effect of dilutive securities
Restricted stock units 92
--------
Denominator for diluted EPS - weighted
average number of common shares and
dilutive potential common shares 31,042
========
Earnings per share:
Basic $ 0.35
Diluted $ 0.35
14
GREENHILL & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8 - INCOME TAXES
Prior to the Reorganization, the Company was not subject to U.S. federal or
state income taxes, and GCI, as a limited liability partnership, was generally
not subject to U.K. income taxes. However, the Company was subject to the 4.0%
New York City Unincorporated Business Tax on its U.S. earnings. In addition,
certain non-U.S. subsidiaries of the Company were subject to income taxes in
their local jurisdictions. After the Reorganization, the Company is no longer
subject to New York City Unincorporated Business Tax, but it is subject to
federal, foreign, state and local corporate income taxes.
The components of the provision for income taxes reflected on the condensed
consolidated statements of earnings are set forth below:
THREE MONTHS
ENDED
MARCH 31, 2005
----------------
(in thousands)
Income before tax:
U.S. $ 6,921
Non-U.S. 10,269
-------
Total income before tax 17,190
Current taxes:
U.S. federal 1,618
State and local 1,130
Non-U.S. 3,752
-------
Total current tax expense 6,500
Deferred taxes:
U.S. federal 422
State and local (195)
Non-U.S. (289)
-------
Total deferred tax expense (62)
-------
Total tax expense $ 6,438
=======
A reconciliation of the statutory U.S. federal income tax rate of 35% to
the Company's effective income tax rate is set forth below:
THREE MONTHS
ENDED
MARCH 31, 2005
----------------
U.S. statutory tax rate 35.0%
Increase related to state and local taxes, net of U.S.
income tax 3.5
Foreign taxes (1.0)
----
Effective income tax rate 37.5%
====
For the three months ended March 31, 2004, the Company's provision for
taxes related to local income taxes.
15
GREENHILL & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9 - REGULATORY REQUIREMENTS
Certain subsidiaries of the Company are subject to various regulatory
requirements in the United States and United Kingdom, which specify, among other
requirements, minimum net capital requirements for registered broker-dealers.
G&Co is subject to the Securities and Exchange Commission's Uniform Net
Capital requirements under Rule 15c3-1 (the "Rule"), which specifies, among
other requirements, minimum net capital requirements for registered
broker-dealers. The Rule requires G&Co to maintain a minimum net capital of the
greater of $5,000 or 1/15 of aggregate indebtedness, as defined in the Rule. As
of March 31, 2005, G&Co's net capital was $7.0 million, which exceeded its
requirement by $6.3 million. G&Co's aggregate indebtedness to net capital ratio
was 1.56 to 1 at March 31, 2005. Certain advances, distributions and other
capital withdrawals of G&Co are subject to certain notifications and restrictive
provisions of the Rule.
GCI is subject to capital requirements of the FSA. As of March 31, 2005,
GCI was in compliance with its local capital adequacy requirements.
NOTE 10 - BUSINESS INFORMATION
The Company's activities as an investment banking firm constitute a single
business segment, with two principal sources of revenue:
o Financial advisory, which includes advice on mergers, acquisitions,
restructuring and similar corporate finance matters; and
o Merchant banking, which includes the management of outside capital
invested in GCP and the Company's principal investments in such fund.
The Company has principally earned its revenues from advisory fees earned
from clients in large part upon the successful completion of the client's
transaction or restructuring. Financial advisory revenues represented
approximately 90% and 86%, of the Company's total revenues for the three months
ended March 31, 2005 and 2004, respectively.
The Company's financial advisory and merchant banking activities are
closely aligned and have similar economic characteristics. The same client and
other relationships upon which the Company relies for financial advisory
opportunities also generate merchant banking opportunities. Generally, the
Company's professionals and employees are treated as a common pool of available
resources and the related compensation and other Company costs are not directly
attributable to either particular revenue source. In reporting to management,
the Company distinguishes the sources of its investment banking revenues between
financial advisory and merchant banking. However, management does not evaluate
other financial data or operating results such as operating expenses, profit and
loss or assets by its financial advisory and merchant banking activities.
16
GREENHILL & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 11 - PRO FORMA FINANCIAL INFORMATION
The following is a condensed actual consolidated statement of income for
the three months ended March 31, 2005 and a condensed pro forma consolidated
statement of income for the three months ended March 31, 2004:
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2005 2004
-------- -----------
(a) (actual) (pro forma)
(in thousands, except per
share data)
Total Revenues $43,928 $29,566
Compensation and benefits (b) 19,920 13,305
Other expenses 6,720 4,970
------- -------
Total expenses 26,640 18,275
------- -------
Income before tax and minority interest 17,288 11,291
Minority interest in net income of affiliates (c) 98 -
------- -------
Income before tax 17,190 11,291
Tax expense (d) 6,438 4,742
------- -------
Net income $10,752 $ 6,549
======= =======
Actual and pro forma average common shares
outstanding: (e)
Basic 30,950 25,000
Diluted 31,042 25,000
Actual and pro forma earnings per share:
Basic $ 0.35 $ 0.26
Diluted $ 0.35 $ 0.26
(a) Prior to the initial public offering the Company was a limited liability
company and its historical earnings did not fully reflect the compensation
expense it pays its managing directors or taxes that it pays as a public
corporation. Additionally, a portion of the Company's earnings attributable
to its European operations was recorded as minority interest. The Company
believes that the pro forma results, which increase compensation expense
and tax expense to amounts it expects it would have paid as a corporation
and eliminate the minority interest of its European operations, more
accurately depict its results as a public company. During the three months
ended March 31, 2005, the Company operated as a public company for the
entire period, and the amounts presented above reflect actual results of
operations for that period. The amounts for the three months ended March
31, 2004 reflect pro forma results of operations as if the initial public
offering had occurred as of January 1, 2004.
(b) Because the Company had been a limited liability company prior to the
initial public offering, payments for services rendered by managing
directors generally had been accounted for as distributions of members'
capital rather than as compensation expense. As a corporation, the Company
includes all payments for services rendered by managing directors in
compensation and benefits expense.
17
GREENHILL & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Compensation and benefits expense, reflecting the Company's conversion to
corporate form, consists of cash compensation and non-cash compensation
related to the restricted stock units awarded to employees at the time of
the Company's initial public offering consummated on May 11, 2004, as well
as any additional restricted stock units awarded in the future. It is the
Company's policy that total compensation and benefits, including that
payable to the managing directors, will not exceed 50% of total revenues
each year (although the Company retains the ability to change this policy
in the future). An adjustment to increase compensation expense for the
three months ended March 31, 2004 of $4.1 million has been made to record
total compensation and benefits expense at 45% of total revenues, which is
consistent with the expense ratio used in the first quarter of 2005.
(c) For the three months ended March 31, 2004, historical income before tax has
been increased by $4.4 million to reflect the elimination on a pro forma
basis of minority interests held by the European managing directors in
Greenhill & Co. International.
(d) As a limited liability company, the Company was generally not subject to
income taxes except in foreign and local jurisdictions. For the three month
period ended March 31, 2005 the Company operated as a C Corporation and was
subject to federal, foreign, state and local income taxes and the actual
tax provision is presented above. For the three months ended March 31,
2004, the provision for taxes was increased by $4.3 million on a pro forma
basis to adjust the Company's effective tax rate to 42%, reflecting assumed
federal, foreign, state and local income taxes as if it was a corporation
on January 1, 2004.
(e) For the three months ended March 31, 2004, the pro forma numbers of common
shares outstanding give effect to the 25,000,000 shares issued in
connection with the reorganization of the Company in conjunction with the
initial public offering as if it occurred on January 1, 2004.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this Management's Discussion and Analysis of Financial Condition and Results
of Operations, "we", "our" and "us" refer to Greenhill & Co., Inc.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with our condensed
consolidated financial statements and the related notes that appear elsewhere in
this report. We have made statements in this discussion that are forward-looking
statements. In some cases, you can identify these statements by forward-looking
words such as "may", "might", "will", "should", "expect", "plan", "anticipate",
"believe", "estimate", "predict", "potential" or "continue", the negative of
these terms and other comparable terminology. These forward-looking statements,
which are subject to risks, uncertainties and assumptions about us, may include
projections of our future financial performance, based on our growth strategies
and anticipated trends in our business. These statements are only predictions
based on our current expectations and projections about future events. There are
important factors that could cause our actual results, level of activity,
performance or achievements to differ materially from the results, level of
activity, performance or achievements expressed or implied by the
forward-looking statements. These factors include, but are not limited to, those
discussed in our Registration Statement on Form S-1 (Commission file number
333-124082) under the caption "Risk Factors".
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, level of
activity, performance or achievements. You should not rely upon forward-looking
statements as predictions of future events. We are under no duty to update any
of these forward-looking statements after the date hereof.
OVERVIEW
Greenhill is an independent investment banking firm that (i) provides
financial advice on significant mergers, acquisitions, restructurings and
similar corporate finance matters and (ii) manages merchant banking funds and
commits capital to those funds. We act for clients located throughout the world
from offices in New York, London, Frankfurt and Dallas. Our activities
constitute a single business segment with two principal sources of revenue:
o Financial Advisory, which includes advice on mergers, acquisitions,
restructurings and similar corporate finance matters; and
o Merchant Banking Fund Management, which currently consists primarily
of management of Greenhill's private equity funds, Greenhill Capital
Partners, and principal investments by Greenhill in those funds.
The majority of our revenues are derived from our Financial Advisory
business and we expect it to remain so for the near to medium term. The main
driver of the Financial Advisory business is overall mergers and acquisitions,
or M&A, and restructuring volume, particularly in the industry sectors and
geographic markets in which we focus. In addition, new managing director hires
add incrementally to our revenue and income growth potential.
BUSINESS ENVIRONMENT
Economic and global financial market conditions can materially affect our
financial performance. See the "Risk Factors" in our Registration Statement on
Form S-1 (Commission file number 333-124082) filed with the Securities and
Exchange Commission. Net income and revenues in any period may not be indicative
of full-year results or the results of any other period and may vary
significantly from year to year and quarter to quarter.
In the first three months of 2005, global volume of completed M&A
transactions was $304 billion compared to $242 billion in the first three months
of 2004, a 26% increase(1). Restructuring activity as measured by the dollar
- ----------
(1) Source: Thomson Financial as of April 21, 2005.
19
amount of debt defaults declined as there were 5 defaults recorded globally
affecting $3.0 billion of debt in the first three months of 2005 compared to 13
defaults on $4.3 billion of debt in the first three months of 2004(2).
Although we may benefit from any sustained increase in M&A volume, we will
be constrained by the relatively small size of our firm and we may not grow as
rapidly as our principal competitors. In addition, some of the benefits we
expect to experience in connection with the recent increase in M&A volume will
be partially offset by the current decline in restructuring activity.
RESULTS OF OPERATIONS
SUMMARY
Our revenues for the first quarter of 2005 of $43.9 million compare with
revenues of $29.6 million for the first quarter of 2004, which represents an
increase of $14.3 million or 48%. The increase was primarily due to greater
financial advisory revenue in the first quarter of 2005 as compared to the same
period in the prior year.
The Firm's first quarter net income of $10.8 million compares with pro
forma net income of $6.5 million in the first quarter of 2004, which represented
an increase of $4.3 million or 66%. The increase was primarily due to greater
revenue as discussed above, offset in part by higher non-compensation expenses
(as described in more detail below). We had actual net income of $10.5 million
in the first quarter of 2004.
Prior to our initial public offering we operated as a limited liability
company and our earnings did not fully reflect either the compensation expense
we pay our managing directors or the taxes that we pay as a corporation. We
believe that the pro forma results for the quarter ended March 31, 2004, which
increase compensation expense and tax expense to amounts we pay as a public
corporation and eliminate minority interest attributable to our European
operations, more accurately depict our results as a public company and provide
the most meaningful basis for comparison among present, historical and future
periods. See "Note 11- Pro Forma Financial Information" for an explanation of
differences in pro forma amounts.
The Firm's quarterly revenues can fluctuate materially depending on the
number and size of completed transactions on which it advised, as well as other
factors. Accordingly, the revenues in any particular quarter may not be
indicative of future results.
REVENUES BY SOURCE
The following provides a breakdown of our aggregate revenues by source for
the three-month periods ended March 31, 2005 and 2004, respectively:
REVENUE BY PRINCIPAL SOURCE OF REVENUE
THREE MONTHS ENDED
MARCH 31, 2005 MARCH 31, 2004
-------------------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
(IN MILLIONS, UNAUDITED)
Financial Advisory ......................... $39.5 90% $25.6 86%
Merchant Banking Fund Management & Other ... 4.4 10% 4.0 14%
----- --- ----- ---
Total Revenues ............................. $43.9 100% $29.6 100%
- ----------
(2) Source: Standard & Poors. Default figures include rated entities as well as
entities that were not rated at the time of default.
20
FINANCIAL ADVISORY REVENUES
Financial Advisory Revenues consist of retainers and success fees earned in
connection with advising companies in merger, acquisition, restructuring or
similar transactions. We earned $39.5 million in Financial Advisory Revenue in
the first quarter of 2005 compared to $25.6 million in the first quarter of
2004, which represents an increase of 54%. During the first quarter of 2005, we
earned advisory fees from one transaction that exceeded 10% of total 2004
revenue.
Completed assignments in the first quarter of 2005 included:
o the sale of Aggregate Industries, plc to Holcim S.A.;
o the sale of LNR Property Corporation to Cerberus Capital Management
LP;
o the provision of a fairness opinion to MeadWestvaco Corporation on the
sale of its papers business; and
o the sale of Sea Pines Associates, Inc. to the Riverstone Group, LLC.
The Firm also announced during the first quarter of 2005 the recruitment of
three new managing directors:
o Kenneth Crews (Dallas-based former Global Head of Energy & Utilities
at UBS);
o Richard Lieb (New York-based former Head of Real Estate Investment
Banking at Goldman Sachs); and
o Peter Stott (London-based former Co-Head of UK Investment Banking at
Morgan Stanley).
MERCHANT BANKING FUND MANAGEMENT& OTHER REVENUES
Merchant banking fund management revenue reflects asset management fees,
net principal investments gains or losses and profit overrides.
We earned $4.4 million in Merchant Banking Fund Management & Other Revenues
in the first quarter of 2005 compared to $4.0 million in the first quarter of
2004, representing an increase of 10%. The increase was primarily due to an
increase in interest income. We earned $1.5 million in profit overrides in the
first three months of 2005 compared to no such overrides in the prior period,
but this increase is offset by a decline in net realized and unrealized gains on
investments of $1.7 million.
On March 31, 2005, the general partners of our first group of funds (which
we refer to as Greenhill Capital Partners I or "GCP I") terminated the
commitment period for GCP I. As a result, the annual management fee payable by
the limited partners in GCP I was reduced to 1% of the invested capital from
between 1.25% to 1.5% (total invested capital was approximately $229 million as
of March 31, 2005). Such management fee is payable only by the outside investors
not employed by or affiliated with us.
The Firm announced the initial closing on March 31, 2005 of Greenhill
Capital Partners II, L.P. ("GCP II"), our second merchant banking fund. GCP II
received commitments from investors of $558 million, including an $85 million
capital commitment from the Firm and a $135 million personal capital commitment
from managing directors and other professionals of the Firm. Commitments will be
drawn down from time to time to make investments over a period of up to five
years.
Like GCP I, GCP II expects to focus primarily on mid-market investments in
the energy, telecommunications and financial services sectors--industries in
which Greenhill has significant experience and expertise. Within these sectors,
GCP II intends to continue to pursue primarily a value-based, contrarian
investment strategy.
GCP II's managing general partner, which is controlled by Greenhill, makes
investment decisions for the fund and is entitled to receive from GCP II an
override of 20% of the profits earned by GCP II over a specified threshold on
the capital committed by outside investors to GCP II ($338 million as of the
initial closing of GCP II in March 2005) and an override of 10% of the profits
earned by GCP II over a specified threshold on the capital committed by
Greenhill's managing directors, senior advisors and certain other employees to
GCP II ($132 million as of the initial closing of GCP II). Greenhill recognizes
as revenue 100% of the profit override earned by the managing general partner of
GCP II on investments made by GCP II. Approximately one-half of such profit
override is allocated, at
21
Greenhill's discretion, as compensation to managing directors and other
employees of Greenhill involved in the management of GCP II. All limited
partners in GCP II (including those who are managing directors or other
employees of Greenhill) have agreed to pay during the commitment period an
annual management fee to the managing general partner of GCP II equal to 1.5% of
the capital committed by such limited partners. The commitment period will
terminate on March 31, 2010 unless terminated earlier by the general partner.
Upon termination of the commitment period, the annual management fee will be
reduced to 1% of the invested capital. No management fee or profit override is
payable in respect of the capital committed by Greenhill
In conjunction with the offering of GCP II, the Firm has retained a
placement agent. Any fee payable to the placement agent will be based on the
amount of capital committed to GCP II which is sourced by the placement agent.
It is expected that in the second or third quarters of 2005, the placement agent
will earn a fee ranging from $0.4 million to $1.5 million, which will be charged
to expense.
The investment gains or losses in our investment portfolio may fluctuate
significantly over time due to factors beyond our control, such as individual
portfolio company performance, equity market valuations and merger and
acquisition opportunities. Revenue recognized from gains recorded in the first
three months of 2005 and 2004 are not necessarily indicative of revenue that may
be realized in future periods.
OPERATING EXPENSES
We classify operating expenses as compensation and benefits expense and
non-compensation expenses.
The principal component of our operating expenses is compensation and
benefits expense. Because we were a limited liability company prior to our
initial public offering in May 2004, payments for services rendered by our
managing directors prior to our initial public offering were generally accounted
for as distributions of members' capital or minority interest expense rather
than as compensation expense. As a result, our pre-initial public offering
compensation and benefits expense did not reflect a large portion of payments
for services rendered by our managing directors and therefore understates our
operating costs as a public company. Our pro forma compensation and benefits
expense reflects a 45% ratio of such expenses to revenues, consistent with our
actual compensation and benefits expense following our initial public offering.
As a corporation, we now include all payments for services rendered by our
managing directors in compensation and benefits expense.
The following table sets forth information relating to our operating
expenses, which are reported net of reimbursements of certain expenses by our
clients and merchant banking portfolio companies:
OPERATING EXPENSES
THREE MONTHS
ENDED MARCH 31,
-------------------
2005 2004
------- -------
(in millions, unaudited)
Actual Compensation & Benefits Expense .......... $ 19.9 $ 9.2
% of Revenues................................. 45% 31%
Pro Forma Compensation & Benefits Expense(a) .... 19.9 13.3
% of Revenues ................................ 45% 45%
Non-Compensation Expense:
Other Operating Expenses ..................... 6.1 4.2
Depreciation & Amortization .................. 0.6 0.8
------- -------
Total Non-Compensation Expense .................. 6.7 5.0
% of Revenues ................................ 15% 17%
Total Actual Operating Expense .................. 26.6 14.2
% of Revenues ................................ 61% 48%
Total Pro Forma Operating Expense (a) ........... 26.6 18.3
% of Revenues ................................ 61% 62%
- ----------
(a) We have operated as a public company since our initial public offering in
May 2004, and the amounts for the three months ended March 31, 2005 reflect
actual expenses; the amounts for the three months ended March 31, 2004
reflect pro forma expenses.
22
COMPENSATION AND BENEFITS
Our Total Compensation and Benefits Expense in the first quarter of 2005
was $19.9 million, which reflects a 45% ratio of compensation to revenues. This
amount compares to pro forma Total Compensation and Benefits Expense of $13.3
million for the three months ended March 31, 2004, which reflected a 45% ratio
of compensation to revenues. Since the initial public offering, our compensation
to revenues ratio has been 45%. The increase of $6.6 million or 50% over the pro
forma amount for the first quarter of 2004 is due to the higher level of
revenues in the first quarter of 2005.
Our actual Total Compensation and Benefits Expense for the three months
ended March 31, 2004 was $9.2 million.
NON-COMPENSATION EXPENSE
Our non-compensation expense includes the costs for occupancy and rental,
communications, information services, professional fees, travel and
entertainment, insurance, depreciation and other operating expenses.
Reimbursable client expenses are netted against non-compensation expenses.
Our non-compensation expenses were $6.7 million in the first quarter of
2005, which compared to $5.0 million in the first quarter of 2004, representing
an increase of 34%. The increase is related principally to the write-off of
uncollectible accounts ($1.0 million), increased recruiting expenses ($0.1
million) and expenses associated with operating as a public entity ($0.6
million), offset in part by lower depreciation expense ($0.1 million). In
addition, non-US operating costs increased approximately $0.1 million due to the
decline in the value of the US dollar.
Non-compensation expense as a percentage of revenue in the three months
ended March 31, 2005 was 15%, compared to 17% for the three months ended March
31, 2004. The decrease in non-compensation expenses as a percentage of revenue
is principally related to the increase in revenue.
As a public company, our costs for such items as insurance, accounting and
legal advice have increased. We also incur costs that we have not previously
incurred for director fees, investor relations expenses and various other costs
of a public company. In the aggregate, we estimate that we will incur
incremental costs on an annualized basis in excess of $3.1 million as a result
of our conversion to a public company.
The Firm's non-compensation expense as a percentage of revenue can vary as
a result of a variety of factors including fluctuation in quarterly revenue
amounts, the amount of recruiting and business development activity, the amount
of reimbursement of engagement-related expenses by clients, currency movements
and other factors. Accordingly, the non-compensation expense as a percentage of
revenue in any particular quarter may not be indicative of the non-compensation
expense as a percentage of revenue in future periods.
PROVISION FOR INCOME TAXES
The Provision for Taxes in the first quarter of 2005 was $6.4 million,
which reflects an effective tax rate of approximately 38%. This compares to a
pro forma Provision for Taxes in the first quarter of 2004 of $4.7 million based
on an assumed tax rate of 42% for the period. Actual taxes for the first quarter
of 2004, which reflect local taxes that we were subject to as a limited
liability company prior to our initial public offering, were $0.5 million.
23
The decrease in the effective tax rate in the first quarter of 2005 as compared
to the pro forma effective tax rate for the same period in the prior year is
principally due to the fact that a greater proportion of our advisory earnings
during the first quarter of 2005 were derived from non-U.S. sources, which
benefit from relatively lower tax rates than U.S.-based advisory income.
Prior to our initial public offering, Greenhill was a limited liability
company and was not subject to U.S. federal or state income taxes and its U.K.
controlled affiliate Greenhill & Co. International LLP, as a limited liability
partnership, was generally not subject to U.K. income taxes. As of completion of
our initial public offering in May 2004, we are subject to federal, foreign and
state corporate income taxes.
The effective tax rate can fluctuate as a result of variations in the
relative amounts of advisory and merchant banking income earned in the tax
jurisdictions in which the Firm operates and invests. Accordingly, the effective
tax rate in any particular quarter may not be indicative of the effective tax
rate in future periods.
LIQUIDITY AND CAPITAL RESOURCES
As a result of our initial public offering in May 2004, we received
proceeds of approximately $89 million, net of the underwriters' discount and
offering expenses. Prior to the initial public offering, we had debt of $16.0
million as a result of borrowings under our revolving credit facility. Proceeds
from our initial public offering were used to repay this debt and the remaining
proceeds were invested in short term, highly-rated securities. In the third
quarter of 2004, we funded $8.0 million ($4.0 million net of refunded capital
calls) in commitments to Greenhill Capital Partners I. We expect that the
remaining proceeds from our initial public offering will be used for general
corporate purposes, including (i) the funding of our remaining $16.4 million in
commitments to Greenhill Capital Partners I, (ii) the funding of our $85 million
in commitments to Greenhill Capital Partners II, and (iii) the establishment of
new merchant banking funds in which we, as the general partner, expect to make
certain principal investments. Until the remaining proceeds of our initial
public offering are used for these purposes, we expect to continue to invest
them in highly-rated short-term debt securities and money market funds.
Our liquidity position is monitored by our Management Committee, which
generally meets monthly. The Management Committee monitors cash, other
significant working capital assets and liabilities, debt, principal investment
commitments and other matters relating to liquidity requirements.
As of March 31, 2005, we had total commitments (not reflected on our
balance sheet) relating to future principal investments in GCP I of $16.4
million. In April 2005, the Company funded $3.5 million of its Commitment to GCP
I. The commitment period for GCP I has terminated, but GCP I has the right to
call the remaining capital until June 2007 for follow-on investments. On March
31, 2005, we committed $85 million to GCP II. Capital calls may be made at any
time through March 31, 2010 (unless the commitment period for GCP II is
terminated earlier) and thereafter for a period of two years for follow-on
investments.
Our Board of Directors has authorized the repurchase of up to $10.0 million
of common stock to initiate our common stock repurchase program, with the
primary objective of repurchasing equity that is issued as part of compensation
pursuant to our equity compensation plan. As of March 31, 2005, the firm had
repurchased 67,534 shares of its common stock for $2.1 million at an average
price of $31.51.
CASH FLOWS
In the first quarter of 2005, our cash and cash equivalents increased by
$19.8 million from December 31, 2004. We generated $35.1 million in investing
activities, including $32.1 million from the net sale of securities and $3.3
million from distributions from our investments. We used $9.8 million in
operating activities, including a net decrease in working capital of $20.2
million (principally from the payment of bonus compensation), partially offset
by $10.4 from net income after giving effect to the non-cash items. We used $5.1
million for financing activities, including $3.2 million for the payment of
dividends and $1.9 million for the purchase of treasury stock.
In the first quarter of 2004, our cash and cash equivalents decreased by
$11.1 million from December 31, 2003. We generated $3.6 million from operating
activities. We used $14.5 million in financing and investing activities,
24
including $27.5 million in distributions to our members and a $2.3 million
investment in Greenhill Capital Partners, partially offset by increased
borrowings of $14.5 million.
CONTRACTUAL OBLIGATIONS
In March 2005, we committed $85 million to GCP II, which we expect will be
called over a five-year period. On February 16, 2005, GCP I transferred all of
the shares of common stock of Global Signal, Inc. owned by it to a new,
wholly-owned subsidiary, GCP SPV1, LLC (the "Borrower"). The Borrower entered
into a credit agreement, dated February 16, 2005, with Morgan Stanley Mortgage
Capital, Inc., as administrative agent, and certain other lenders named therein.
Under the terms of the credit agreement the Borrower borrowed $70 million,
secured by 8,383,234 of the 8,422,194 shares of Global Signal Inc. common stock
owned by it. Under the terms of a separate recourse agreement, the lenders will
have recourse to Greenhill Capital Partners, LLC in the event of fraud or
intentional or grossly negligent misrepresentations by the Borrower or the
institution of insolvency proceedings by or against the Borrower, Greenhill
Capital Partners LLC or GCP I. Proceeds from the loan were used to fund
distributions to GCP I's limited partners, which include executive officers of
Greenhill. The credit agreement matures in August 2006 and bears a floating rate
of interest based upon Libor or, at our option, a prime rate.
MARKET RISK
Due to the nature of our business and the manner in which we conduct our
operations, in particular our limitation of investment to short term cash
investments, we believe we do not face any material interest rate risk, foreign
currency exchange rate risk, equity price risk or other market risk. We have
principal investments in Greenhill Capital Partners and may make investments in
other merchant banking funds, and we face exposure to changes in the estimated
fair value of the companies in which these funds invest, which historically has
been volatile. For example, a significant portion of the increase in the
unrealized investment gains during 2004 and the first three months of 2005 was
attributable to an increase in the fair value of an investment by GCP I a
publicly traded security. However, we do not believe that normal changes in
public equity markets will have a material effect on revenues derived from such
investments. In addition, the reported amounts of our revenues may be affected
by movements in the rate of exchange between the euro and pound sterling (in
which 50% of our revenues for the three months ended March 31, 2005 were
denominated) and the dollar, in which our financial statements are denominated.
We do not currently hedge against movements in these exchange rates.
We have invested the remaining proceeds of our initial public offering in
short duration, highly rated investments including highly rated short-term debt
securities and money market funds. Changes in interest rates and other economic
and market conditions could affect these investments adversely; however, we do
not believe that any such changes will have a material effect on our results of
operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The condensed consolidated financial statements included in this report are
prepared in conformity with accounting principles generally accepted in the
United States, which require management to make estimates and assumptions
regarding investment valuations, compensation accruals and other matters that
affect the condensed consolidated financial statements and related footnote
disclosures. Management believes that the estimates used in preparing its
consolidated financial statements are reasonable and prudent. Actual results
could differ materially from those estimates. We believe that the following
discussion addresses Greenhill's most critical accounting policies, which are
those that are most important to the presentation of our financial condition and
results of operations and require management's most difficult, subjective and
complex judgments.
REVENUE RECOGNITION
Financial Advisory Fees
We recognize advisory fee revenue when the services related to the
underlying transactions are completed in accordance with the terms of the
respective engagement letters. Retainer fees are generally recognized as
advisory fee income over the period the services are rendered.
25
Our clients reimburse certain out-of-pocket expenses incurred by us in the
conduct of advisory engagements. Expenses are reported net of such client
reimbursements.
Merchant Banking Fund Management Revenues
Merchant Banking Fund Management revenue consists of (i) management fees on
our merchant banking activities, (ii) gains (or losses) on investments in our
merchant banking funds and other principal investment activities and (iii)
merchant banking profit overrides.
Fund management fees are recognized over the period of related service.
We recognize revenue on investments in merchant banking funds based on our
allocable share of realized and unrealized gains (or losses) reported by such
funds on a quarterly basis. Investments held by Greenhill Capital Partners are
recorded at estimated fair value. Investments are initially carried at cost as
an approximation of fair value. The carrying value of such investments is
reevaluated, and if necessary, adjusted at each period end. Public investments
are valued using quoted market prices discounted for any restrictions on sale.
Privately held investments are carried at estimated fair value as determined by
the general partner (our affiliate) after giving consideration to the cost of
the security, the pricing of other private placements of the portfolio company,
the price of securities of other companies comparable to the portfolio company,
purchase multiples paid in other comparable third-party transactions, the
original purchase price multiple, market conditions, liquidity, operating
results and other financial data.
We recognize merchant banking profit overrides when certain financial
returns are achieved over the life of the fund. Overrides are calculated as a
percentage of the profits over a specified threshold earned by such funds on
investments managed on behalf of outside investors. Future losses in the value
of the fund's investments may require amounts previously recognized as profit
overrides to be reversed to the fund in future periods. Accordingly, merchant
banking overrides are recognized as revenue only after material contingencies
have been resolved.
Restricted Stock Units
In accordance with the fair value method prescribed by FASB Statement No,
123(R), "Share-Based Payment", which is a revison of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", restricted stock units with future
service requirements are recorded as compensation expense generally over a
five-year service period following the date of grant. As the Firm expenses the
awards, the restricted stock units recognized are recorded within stockholders'
equity. The Firm records dividend equivalents in stockholders' equity on
outstanding restricted stock units that are expected to vest. The Firm adopted
Statement 123(R) as of January 1, 2005, and it did not have a material effect on
our accounting for restricted stock units in its financial statements.
Provision for Taxes
After the initial public offering, the firm accounts for taxes in
accordance with Financial Accounting Standards Board ("FASB") Statement No. 109,
"Accounting for Income Taxes", which requires the recognition of tax benefits or
expenses on the temporary differences between the financial reporting and tax
bases of its assets and liabilities.
Prior to the initial public offering, the firm was primarily subject to
local unincorporated business tax on business conducted in New York City, and
income tax on current income realized by certain foreign subsidiaries. After the
initial public offering, the company is subject to U.S. federal, foreign, state
and local taxes as a C corporation at the applicable tax rates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe we face any material interest rate risk, foreign currency
exchange risk, equity price risk or other market risk. See Item 2 -- "Market
Risk" above for a discussion of market risks.
26
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures as of the end of the period covered by
this quarterly report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were
effective as of the end of the period covered by this quarterly report. As
required by Rule 13a-15(d) under the Exchange Act, the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated the Company's internal control over financial reporting to determine
whether any changes occurred during the quarter covered by this quarterly report
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. Based on that evaluation, there
has been no such change during the quarter covered by this quarterly report.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales: None
Use of Proceeds: On May 11, 2004, we issued 5,000,000 shares of our Common
Stock in a registered public offering pursuant to a Registration Statement on
Form S-1, which was declared effective by the Securities and Exchange Commission
on May 5, 2004 (Commission file number 333-113526). On May 12, 2004, our
underwriters exercised their option to acquire an additional 750,000 shares of
our Common Stock and we issued that additional number of shares of Common Stock
on May 14, 2004. The offering has terminated, and all securities registered
pursuant to our Registration Statement have been sold. The managing underwriter
for the offering was Goldman, Sachs & Co. An aggregate of 5,750,000 shares of
Common Stock were registered pursuant to the Registration Statement at an
aggregate estimated offering price of $92,000,000 (based upon the estimated
maximum price of $16.00 per share that was estimated by us in accordance with
Rule 457(a) of the Securities Act of 1933, as amended, prior to the pricing of
the initial public offering). A total of 5,750,000 shares of Common Stock were
sold at an aggregate actual offering price of $100,625,000 (based upon the price
of $17.50 per share at which the shares actually sold). The amount of expenses
incurred by us in connection with the issuance and distribution of the Common
Stock (including underwriting discounts and commission, expenses paid to the
underwriters and certain other expenses) and related transactions was
approximately $11 million. The estimated net offering proceeds to us from the
offering after subtracting these expenses was approximately $89 million. We used
$16 million of the offering proceeds to repay debt outstanding under our senior
credit facility and $11.5 million of the offering proceeds to fund commitments
to GCP I. The remainder of the offering proceeds have been invested in highly
rated debt securities and money market funds. It is our expectation that the
remaining proceeds of the offering will be used by us to fund our commitments to
GCP I and GCP II and the establishment of new merchant banking funds in which
we, through our controlling interest in the general partner of the funds, expect
to make certain principal investments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
27
ITEM 6. EXHIBITS
Exhibits: Page
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 29
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 30
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 31
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 27, 2005
GREENHILL & CO., INC.
By: /s/ ROBERT F. GREENHILL
--------------------------------------
Name: Robert F. Greenhill
Title: Chairman and Chief Executive
Officer
By: /s/ JOHN D. LIU
--------------------------------------
Name: John D. Liu
Title: Chief Financial Officer
28