Piper Jaffray Companies Annual Report 2003

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FY2003 Annual Report · Piper Jaffray Companies

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annual
report
2003

What guides us

piper jaffray companies
2003 milestones

– Completed our spin-off from U.S. Bancorp,
becoming an independent, publicly held
securities ﬁrm.

– Earned net income of $26.0 million for the

year ended Dec. 31, 2003.

– Recorded net revenue of $786.7 million for
the year ended Dec. 31, 2003, a 7.9 percent
increase over 2002.

– Renewed our commitment to the

communities in which we live and work
by pledging 5 percent of pre-tax earnings
to charity in the form of employee time
and expertise, and ﬁnancial resources.

Piper Jaffray Companies (NYSE: PJC) is a focused securities ﬁrm and comprises two principal revenue segments:
Capital Markets and Private Client Services. Clients of both segments are supported by Investment Research.
The ﬁrm provides a full range of investment products and services to individuals, institutions and businesses.
The ﬁrm has more than 100 ofﬁces in 23 states across the country and has headquarters in Minneapolis.

Dear Shareholders,

I am proud to introduce you to the new Piper Jaffray—a company with a 109-year heritage,
more than 2,900 engaged employees and a sharp business focus.

There is much to share about our capabilities and the market opportunity, but I must start
at the beginning — with the culture that emerges strong and renewed as Piper Jaffray enters
2004 as a new public company. This annual report is dedicated to telling you who we are.

THE PIPER JAFFRAY CULTURE
To achieve enduring success in the ﬁnancial services industry, a company must build its
foundation on strong values. At Piper Jaffray, we have committed to a set of Guiding Principles,
a framework for daily decision making throughout the organization. Every employee
understands that we must place our clients’ interests ﬁrst. As advisors and agents we are
wholly committed to understanding client objectives and striving to help achieve them.

We also recognize that our company must have the best people providing the best solutions
to succeed in becoming the primary advisor for each of our clients. We have built our expertise
in speciﬁc areas that provide distinctive value for the clients we serve. The knowledge and
integrity of our employees have enabled Piper Jaffray to build strong national franchises in
the capital markets and a formidable regional franchise serving private clients.

Our success has not come without some shortcomings. In the past, there were some lapses
in adhering to our Guiding Principles. In those instances, we have taken appropriate action
to address any issues that have adversely impacted our clients and to provide a stronger
business model as we move forward.

We recognize that the value of the ﬁrm lies in the reputation we have built and the integrity
with which we conduct ourselves. They are the reason our great people want to remain at
Piper Jaffray. They are also the reason we are able to attract the highest quality talent.

THE MARKET OPPORTUNITY
As is often the case when industries consolidate, a number of companies achieve the beneﬁt
of scale. Equally as often, opportunity is created as some market sectors become underserved.

Our opportunity is to become the leading securities ﬁrm for the underserved middle market—
nationally for capital markets clients and regionally for the middle of the afﬂuent private
client segment. We will consistently concentrate our resources in these areas—using our
expertise and execution to capitalize on this opportunity. We believe a securities ﬁrm,
focused solely on raising and investing capital for its clients, will outperform aggregated
companies bent on cross-selling.

Our results in 2003 partly reﬂected this opportunity, as we transitioned from our merger
with U.S. Bancorp. Net revenues increased 7.9 percent in 2003 to $786.7 million, consistent
with the improved economy and better market performance during the last six months
of the year. The increase in revenue was due primarily to strong ﬁxed-income sales and
trading and increased equity underwriting activity. Net income increased to $26.0 million.
We are beginning to hit our stride, with productivity improvements in a number of areas.
We will continue to focus on improving margins and productivity as we grow.

EMPLOYEE OWNERS
As we return to the public market, we intend to grow employee ownership. As part of
a focused securities ﬁrm, our employees will see the direct impact of their efforts on the
valuation of the company. Our employees have a clear understanding of our strategy. They
are engaged in their roles and committed to the success of our company.

COMMUNITY PARTNERSHIPS
Finally, we proudly rejoin the Minnesota Keystone Program, which includes among its
members those companies who donate 5 percent of pre-tax earnings to charity through
direct contributions and employee volunteerism. Piper Jaffray has had a long-standing
commitment to sharing our resources and success with the communities in which we live
and work, and we are pleased to renew that commitment.

Indeed, a proud new chapter for our 109-year-old ﬁrm begins.

Sincerely,

Andrew S. Duff
Chairman and Chief Executive Ofﬁcer

On every journey, there
are important milestones:
landmark events, deﬁning
moments and historic
achievements.

For a company to reach a signiﬁcant milestone,
it takes skill and strategy. Energy and expertise.
Determination and drive.

But most of all, it requires a shared vision.
An understanding of the values that guide,
motivate and inspire the organization.

At Piper Jaffray, we’re driven by sound prin-
ciples and a strong sense of purpose. We’re
committed to helping our clients deﬁne and
achieve their objectives — and to delivering
value for our shareholders. We’re dedicated
to creating opportunities for our employees—
and to giving back to our communities.

Whether you’re a client, a shareholder,
an employee or a community member,
we share your goals. At Piper Jaffray,
what guides us is you.

piper jaffray annual report 2003

What guides us: our clients

Never losing sight of the reason
for the journey.

At Piper Jaffray, we’ve been guiding clients to
success for more than a century.

Creating innovative solutions. Discovering
new opportunities. Providing superior service.
All with our clients’ needs at the forefront.

By putting the client ﬁrst, all our stakeholders
beneﬁt. That’s a philosophy shared by everyone
in our company—from ﬁnancial advisors to
investment bankers to traders to support staff.

When we say we’re “client-focused,” it’s a
reminder of the reason we’re in business.
When our clients succeed, we all succeed.
At Piper Jaffray, that’s the bottom line.

piper jaffray annual report 2003

What guides us: our strategic focus

Keeping our focus on the
ultimate destination.

Staying focused. On any journey, it’s essential.
In any business, it’s critical.

piper jaffray annual report 2003

At Piper Jaffray, our focus is clear.
Our mission is distinct. And our
strategy is well-deﬁned.

piper jaffray annual report 2003

our strategic focus continued

We are a focused
securities ﬁrm.

piper jaffray annual report 2003

We have identiﬁed speciﬁc opportunities that
offer the greatest potential for our business,
and that’s where we focus our attention.

Our Capital Markets teams concentrate on
middle-market companies and debt issuers,
and the institutional clients that invest in them.
Similarly, our Private Client Services business
is specialized— targeting client segments and
geographic markets that represent signiﬁcant
growth opportunities for us.

We believe that the acquisitions of securities
ﬁrms by large ﬁnancial institutions over
the past several years—as well as the decision
by many competitors to focus on their
largest clients —have resulted in signiﬁcant
opportunities in the middle-market space.

As always, our focus is on providing levels
of expertise, execution, advice and service that
are superior to our competitors.

At Piper Jaffray, we never
take our eyes off the
ultimate destination: the
continued success of our
clients, our shareholders
and our company.

our strategic focus continued

Capital Markets

Our Capital Markets business assists clients in raising and
investing capital and provides ﬁnancial advisory services to
public and private corporations, public entities, non-proﬁt clients
and institutional investors.

capital markets
locations:

23 ofﬁces in the
United States and
London, England

Equities and Investment Banking

INVESTMENT BANKING
Investment Banking professionals provide ﬁnancial
advisory and capital-raising services predominantly
to middle-market clients. These typically consist
of companies with an enterprise value between
$100 million and $5 billion.

Investment Banking focuses its efforts primarily on
four speciﬁc industries— consumer, ﬁnancial insti-
tutions, health care and technology.

Accordingly, the area is organized by industry
coverage groups, enabling individual investment
bankers to develop speciﬁc expertise in particular
industries and markets.

In addition, we have built a dedicated middle-mar-
kets mergers and acquisitions group that provides
ﬁnancial advisory services primarily to private
equity groups and private companies.

SALES AND TRADING
This group provides sales coverage and trading
execution services for institutional investors. We also
provide distribution for our public equity and equity-
linked underwriting transactions. We serve more
than 500 institutional accounts in the United States
and Europe.

The group acts as a market maker for more than 500
common stocks traded on Nasdaq. We currently
act as a principal in the trading of approximately
250 listed stocks.

GROWTH INITIATIVES
– Convertible securities. We are working to grow

our convertible securities business, which
includes origination, restructuring, sales and
trading capabilities. In 2003 we completed
15 transactions, raising $2.8 billion in capital.

– Middle-market institutional sales coverage.

We are working to expand coverage through
dedicated salespersons focused on mid-sized
institutional accounts.

piper jaffray annual report 2003

our strategic focus continued

Fixed Income

PUBLIC FINANCE
Our Public Finance bankers underwrite debt issuance
and provide ﬁnancial advisory, risk management
and other related investment services to govern-
ment and non-proﬁt entities.

Government clients include cities and counties, school
and special districts, and states and state agencies.
Not-for-proﬁt clients include health care, higher
education and housing organizations.

In each of the last ﬁve years we have ranked in
the top ﬁve underwriters of tax-exempt issues
nationally, when ranked by number of senior-
managed issues. Based on revenue, government
clients represent the largest overall portion of our
public ﬁnance business.

DEBT CAPITAL MARKETS
Our Debt Capital Markets team advises corporate
clients on ﬁnancing strategies in raising debt capital,
including bonds, medium-term notes, project debt
and commercial paper. Primary clients include
medium to large corporations with a desire to
access the bond and/or commercial paper markets.

SALES AND TRADING
In Fixed Income Sales, we seek to differentiate
ourselves from competitors through a specialization
strategy. Each Fixed Income salesperson focuses on
a speciﬁc set of products (such as corporate
bonds, mortgage securities, municipal securities)
or speciﬁc types of clients (such as corporations,
ﬁnancial institutions, public entities).

Our Fixed Income Trading professionals underwrite
and trade debt or preferred securities for
corporations, municipalities, governments and
government agencies.

GROWTH INITIATIVES
– Mortgage securities. We are working to grow
our mortgage securities sales force and focus
on secondary trading of collateralized mortgage
obligations and speciﬁed mortgage pools.

– Derivatives. We are working to expand our
platform to act as a principal in derivatives
transactions, primarily involving municipal
hedging products.

capital markets
2003 milestones

– Raised approximately $8.3 billion for clients
through 60 equity ﬁnancing transactions.

– Completed 506 Public Finance ﬁxed-income
issues nationwide with a total par amount
of $5.9 billion.

– Ranked #1 in tax-exempt bond underwriting in
the upper Midwest four of the last ﬁve years.*

– Advised clients on 38 mergers and

acquisitions (M&A) transactions with
total transaction value of $5.1 billion.

– Expanded our convertible securities sales

and trading capabilities and our originating
and restructuring capabilities.

– Established a leading brand in the aircraft
sector of the corporate bond market.

* Source: Thomson Financial

piper jaffray annual report 2003

our strategic focus continued

Private Client Services

Our Private Client Services business has more than 800
registered ﬁnancial advisors in nearly 100 retail ofﬁces
in 18 Midwest, Mountain and West Coast states.

We provide ﬁnancial and investment advice
through a disciplined advisory process to offer
solutions customized to our clients’ unique needs.

Our ﬁnancial advisors use a suite of ﬁnancial plan-
ning, portfolio performance reporting and ﬁxed-
income portfolio management software — allowing
them to thoroughly evaluate their clients’
resources, needs and objectives.

We offer guidance in retirement and estate planning,
education funding, wealth management, investment
selection, asset allocation and insurance protection.

STRATEGY
Our goal is to become the primary ﬁnancial advisor
for our clients. We have identiﬁed ﬁve key strategies
that are critical to achieving this goal.

– Retain, attract and develop highly skilled ﬁnancial
advisors. The quality of our employees drives
the success of our business. We believe our ﬁrm’s
109-year history, partnership culture, competitive
product capabilities and employee value
proposition make Piper Jaffray a desirable
place to work.

– Further our commitment to client relationships.

Our talented people strive to build strong
multifaceted wealth management relationships
by gaining the clients’ trust and focusing on
their long-term goals.

piper jaffray annual report 2003

our strategic focus continued

– Provide a broad range of investment products.

Sufﬁcient and competitive products and an open
architecture approach allow us to meet the
diverse investment needs of our clients.

– Focus on client relationship planning. We

enhance client relationships through a disciplined
process of personalized annual account planning
and reviews.

– Build a distinctive brand image. We have launched
a new branding and marketing campaign high-
lighting our “Guides for the Journey” theme.

GROWTH INITIATIVES
– Increase our presence within our existing

geographic areas. We believe the regions in
which we already operate offer signiﬁcant
growth opportunities.

private client services
2003 milestones

– Launched Journey Plan,® a ﬁnancial planning
tool designed to help clients discuss their
resources, needs and objectives with their
ﬁnancial advisor.

– Introduced PASSPORT,SM a ﬁxed-income
portfolio management software tool that
helps clients better understand and make
decisions about their investments.

– Increase assets under management. We believe
we will achieve this objective by building deeper
relationships with existing clients and by
focusing on attracting new affluent clients.

– Implemented a revised ﬁnancial advisor
compensation plan better structured to
reward our people competitively and
appropriately.

– Leverage Capital Markets’ proprietary products.

We will expand the training of our ﬁnancial
advisors about these products and provide
enhanced access to both equity and debt new-
issue securities.

– Substantially reduced the number of small
and inactive accounts in our branch ofﬁces,
which will enable us to focus on becoming
a primary advisor to our target clients.

piper jaffray annual report 2003

our strategic focus continued

Investment Research

Independent, high-quality research is critical to serving the
needs of our clients. It also helps differentiate us in the market-
place. Using their deep expertise in the sectors they cover, our
investment research teams provide analysis and investment
ideas that beneﬁt both our institutional and individual clients.
Our Investment Research function reports directly to the CEO.

EQUITY RESEARCH
This team of more than 70 professionals produces
proprietary and fundamental equity research on
more than 470 public companies. We focus on
four speciﬁc sectors: consumer, ﬁnancial institu-
tions, health care and technology.

Our analysts have full autonomy in preparing their
research. They are encouraged to explore a wide range
of sources in developing their analysis framework.

FIXED INCOME RESEARCH
Our Fixed Income Research focuses on two areas —
structured products research and sector research.

Our structured products research provides deep
expertise in the enhanced equipment trust certiﬁcate
(eetc) market, the aircraft asset-backed securities
(abs) market as well as the real estate investment
trust (reit) market.

In our sector research, we currently cover electric
and gas utilities and airlines.

PRIVATE CLIENT RESEARCH
Private Client Research comprises professionals
who provide market commentary, equity and
ﬁxed-income strategies and asset allocation plans.

The information we provide is supported by ideas
and perspectives of our equity, ﬁxed-income,
fundamental and technical analysts as well as
those of our national research correspondents.

Piper Jaffray Ventures and Private Capital

Piper Jaffray Ventures manages four venture
capital funds that invest in emerging growth
companies in three segments of the health care
industry—medical technologies, biotechnology
and health care services.

Through our Private Capital business, we
manage two funds that invest in alternative asset
categories for institutional and high net-worth
investors. The company has an investment in
one of these funds: Discovery Equity Partners
(a broadly positioned buyout and growth fund).

piper jaffray annual report 2003

What guides us: our spirit of partnership

Working together to
travel farther.

piper jaffray annual report 2003

The spirit of partnership.

At Piper Jaffray, we work in partnership with
each other — and with our clients. That’s one
of our greatest competitive advantages.

We know our talent is our most valuable asset.
We work hard to recruit and retain exceptional
employees. And we believe employee ownership
has a direct client beneﬁt: consistency in
relationships and better overall client service.

Our full potential is realized
through our combined efforts.
By working together, we can
travel farther than ever.

piper jaffray annual report 2003

What guides us: our values

Following
the right path.

piper jaffray annual report 2003

How do we know we’re
headed in the right direction?

At Piper Jaffray, our Guiding Principles embody
our commitment to the highest standards
of ethics, integrity and client service. They
guide our actions and reflect our philosophy.
They influence our decisions and shape our
strategies. They are an assurance to our
clients and an inspiration to our employees.

our guiding principles

– We create and implement superior ﬁnancial
solutions for our clients. Serving clients
is our fundamental purpose.

– We earn our clients’ trust by delivering

the best guidance and service.

– Great people are our competitive advantage.

– As we serve, we are committed to

these core values:

- Always place our clients’ interests ﬁrst.

- Conduct ourselves with integrity and

treat others with respect.

- Work in partnership with our clients

and each other.

- Maintain a high-quality environment
that attracts, retains and develops the
best people.

- Contribute our talents and resources to
serve the communities in which we live
and work.

piper jaffray annual report 2003

What guides us: our commitment to community

Sharing the rewards of a
successful journey.

Corporate citizenship. It’s one of our company’s
greatest legacies. For the past 109 years,
Piper Jaffray has been integrally involved in
the communities it serves — offering our time,
talent and ﬁnancial resources.

We believe that strong businesses have
a responsibility to help build strong
communities. Having become an
independent, public company once again,
we are strengthening our commitment
to collaborative philanthropy.

We are dedicated to sharing the time and
expertise of our employees—in addition to
our ﬁnancial support —with non-proﬁt
organizations that can make a difference.

OUR FOCUS AREAS
– Building strong communities. We will partner
with community development and affordable
housing organizations to improve the lives
of people in our local communities.

– Building vibrant culture. We will support
organizations that provide access to the
arts, offer cultural enrichment and address
issues related to diversity for our youth.

– Building strong youth. We will join forces

with local schools and related organizations
to tear down barriers that stand between
children and education.

piper jaffray annual report 2003

2003 milestones

– Minnesota Keystone Program. Announced the
renewal of our commitment to this landmark
program. It was founded by 20 companies,
including Piper Jaffray, more than 25 years
ago to promote corporate support for
communities.

– National Teach Children to Save Day. Supported
a program that illustrated the power of saving
and investing to fourth and ﬁfth graders in
25 cities across 12 states.

– Savvy Girls. Taught girls and their mothers the
ﬁnancial skills they need to make their dreams
come true.

– Workplace Tutoring. Provided weekly sessions
for Minneapolis eighth graders to help them
prepare for standardized testing.

piper jaffray annual report 2003

What guides us: our leadership

Board of Directors

Top row

Andrew S. Duff
Chairman and
Chief Executive Ofﬁcer,
Piper Jaffray Companies

Addison L. (Tad) Piper
Vice Chairman,
Piper Jaffray Companies

Michael R. Francis 2, 3
Executive Vice President
of Marketing,
Target Corporation

B. Kristine Johnson 1, 3
President,
Afﬁnity Capital Management

1 Audit Committee

2 Compensation Committee

3 Nominating and

Governance Committee

Bottom row

Samuel L. Kaplan 3
Partner and
Founding Member,
Kaplan, Strangis and Kaplan, P.A.

Frank L. Sims 1, 2
Corporate Vice President,
Transportation and
Product Assurance,
Cargill, Inc.

Richard A. Zona 1, 2
Chairman and
Chief Executive Ofﬁcer,
Zona Financial LLC

piper jaffray annual report 2003

Executive Leadership

Andrew S. Duff
Chairman and
Chief Executive Ofﬁcer

Addison L. (Tad) Piper
Vice Chairman

James L. Chosy
General Counsel
and Secretary

Michael D. Duffy
Chief Information Ofﬁcer

Robert W. Peterson
Head of Investment Research

R. Todd Firebaugh
Head of Corporate Planning
and Communication

Thomas P. Schnettler
Head of Equities
and Investment Banking

Paul D. Grangaard
Head of
Private Client Services

Sandra G. Sponem
Chief Financial Ofﬁcer

Pamela L. Clayton
Head of Human Resources

Barry J. Nordstrand
Head of Fixed Income

piper jaffray annual report 2003

Piper Jaffray Locations

Equities and
Investment
Banking

Chicago
London
Menlo Park
Minneapolis
New York
San Francisco

Fixed Income

Chicago
Cleveland
Denver
Des Moines
Great Falls
Hermosa Beach
Houston
Kansas City
Las Vegas
Lincoln
Milwaukee
Minneapolis
New York
Phoenix
Portland
San Francisco
Seattle
Spokane
St. Louis

Kansas
Lawrence
Leawood
Topeka

Minnesota
Alexandria
Austin
Bloomington
Brainerd
Duluth
Edina
Fergus Falls
Mankato
Minneapolis
Rochester
St. Cloud
St. Paul
Stillwater
Walker
Wayzata

Missouri
Lee’s Summit

Montana
Billings
Bozeman
Butte
Great Falls
Missoula

Nebraska
Lincoln
Omaha

North Dakota
Bismarck
Fargo
Grand Forks

Private Client
Services

Arizona
Phoenix
Scottsdale
Sun City

California
Fresno
La Jolla
La Jolla Village
Marysville
Palo Alto
Sacramento
San Francisco
Sonoma
Walnut Creek

Colorado
Boulder
Denver
Durango
Evergreen
Glenwood Springs
Park Meadows
Pueblo

Idaho
Boise
Idaho Falls
Pocatello

Illinois
Chicago

Iowa
Ames
Davenport
Des Moines
Mason City
Sioux City
Storm Lake
Waterloo
West Des Moines

Oregon
Eugene
Lake Oswego
Medford
Portland
Salem
The Dalles

South Dakota
Mitchell
Pierre
Rapid City
Sioux Falls

Utah
Salt Lake City

Washington
Aberdeen
Bellevue
Bellingham
Everett
Lynden
Poulsbo
Seattle
Spokane
Tacoma
Tri Cities
Walla Walla
Wenatchee

Wisconsin
Appleton
Eau Claire
Delaﬁeld
Green Bay
La Crosse
Madison
Milwaukee
Sheboygan
Wausau

Wyoming
Casper
Sheridan

piper jaffray annual report 2003

Financials

Piper Jaffray Companies

management’s discussion and analysis
and financial statements

For the period ended December 31, 2003

piper jaffray annual report 2003

P I P E R J A F F R AY C O M P A N I E S

S E L E C T E D F I N A N C I A L D ATA

The following table presents our selected consoli-
dated ﬁnancial data for the periods and dates indi-
cated. The information set forth below should be
read in conjunction with ‘‘Management’s Discus-

sion and Analysis of Financial Condition and Re-
sults of Operations’’ and our consolidated ﬁnancial
statements and notes thereto.

YEAR ENDED DECEMBER 31
(Dollars and Shares in Thousands, Except Per Share Data)

2003

2002

2001

2000

1999

Revenues

Commissions and fees

Principal transactions

Investment banking

Interest

Other income

Total revenues

Interest expense

Net revenues

Non-interest expenses

Compensation and beneﬁts

Cash award program

Regulatory settlement

Amortization of acquisition-related compensation and

goodwill

Merger and restructuring

Royalty fee

$ 256,747 $ 275,682 $ 302,289 $ 374,611 $ 337,171

215,191

229,945

45,276

59,082

806,241

19,511

171,957

208,740

59,685

47,303

763,367

34,315

181,469

247,929

95,436

52,865

232,426

342,104

144,308

53,006

879,988

1,146,455

79,216

128,177

183,942

224,778

71,369

43,993

861,253

61,129

786,730

729,052

800,772

1,018,278

800,124

482,397

24,000

–

3,911

449,329

513,623

662,592

516,431

–

32,500

–

7,976

7,482

–

17,641

65,697

55,753

30,108

8,889

47,750

33,554

8,316

–

Other non-compensation and beneﬁts

234,588

225,804

220,863

228,663

185,666

Total non-interest expenses

744,896

723,091

873,577

978,002

743,967

Income (loss) before income tax expense (beneﬁt)

Income tax expense (beneﬁt)

41,834

15,835

5,961

5,855

(72,805)

(22,754)

40,276

19,568

56,157

24,981

Net income (loss)

25,999 $

106 $ (50,051) $

20,708 $

31,176

Earnings per common share

Basic

Diluted

Weighted average number of common shares

Basic

Diluted

Other data

Total assets

Long-term debt

Shareholders’ equity

Total employees

Total Private Client Services ofﬁces

1.35 $

0.01 $

(2.60) $

1.09 $

1.63

19,237

19,160

19,279

19,060

19,078

$ 2,380,647 $2,041,945 $2,734,370 $2,735,918 $2,606,482

$ 180,000 $ 215,000 $ 475,000 $ 475,000 $ 375,000

$ 669,795 $ 609,857 $ 378,724 $ 362,331 $ 352,023

2,991

3,227

103

3,255

107

3,845

112

3,443

107

2 2

P I P E R J A F F R AY A N N U A L R E P O R T 2003

P I P E R J A F F R AY C O M P A N I E S

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L

C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S

OUR SEPARATION FROM U.S. BANCORP

agreements listed above, we have a $180 million un-
secured subordinated debt agreement maturing in
2008 with a subsidiary of U.S. Bancorp.

Pursuant to the separation and distribution agree-
ment, U.S. Bancorp was generally responsible for all
expenses directly incurred in connection with the
distribution.

The following information should be read in con-
junction with the accompanying consolidated ﬁnan-
cial statements and related notes included elsewhere
in this report. This information includes forward-
looking statements. Forward-looking statements in-
clude all statements that are not historical facts.
These statements involve risks, uncertainties and as-
sumptions, including the risk factors described in
In connection with the distribution, we imple-
Exhibit 99.1 to our Form 10-K, as ﬁled with the
Securities and Exchange Commission, which you mented a cash award program consisting of cash
payments to a broad-based group of our employees.
should carefully review. As a result of these risks,
The award program is intended to aid in retention
uncertainties and assumptions, our actual results
of employees and to compensate for the value of
may differ materially from those expressed in, or
implied by, forward-looking statements. Accord- U.S. Bancorp stock options and restricted stock lost
ingly, we caution you not to rely on any of these
by our employees as a result of our spin off from
forward-looking statements, which speak only as of U.S. Bancorp. The cash award program has an ag-
gregate value of approximately $47.0 million. We
the date made. We do not have any intention or
incurred a $24.0 million charge at the time of the
obligation to update forward-looking statements af-
spin off from U.S. Bancorp. The remaining
ter the date of this report.
$23.0 million will be paid out over the next four
years, which will result in an annual charge of ap-
proximately $5.9 million over the next three years
and $5.3 million in the fourth year.

On February 19, 2003, U.S. Bancorp announced its
intention to organize its capital markets business
unit into a new company and to effect a tax-free As an independent company focused solely on our
business, we believe that we have enhanced strategic
distribution of its shares in that company to
and operational flexibility and, as a result, are better
U.S. Bancorp’s shareholders. On April 28, 2003,
positioned to serve our clients and grow our business.
Piper Jaffray Companies was incorporated in Dela-
The distribution has presented a focused investment
ware as a subsidiary of U.S. Bancorp for the pur-
opportunity in Piper Jaffray for investors whose objec-
pose of effecting the proposed distribution.
tives align more closely with our business than with
other businesses operated by U.S. Bancorp. Finally,
our incentive compensation will be more closely tied
to our performance, since stock-based awards will be
based on our common stock rather than U.S. Bancorp
common stock, and we believe that this more direct
link with our performance will enhance the value of
these incentives to our employees and consequently to
our shareholders.

On December 31, 2003, after receiving regulatory
approval, U.S. Bancorp distributed to its sharehold-
ers all of its interest in our new company. On that
date, 19,334,261 shares of Piper Jaffray Companies
common stock were issued to U.S. Bancorp share-
holders based on a distribution ratio of one share of
Piper Jaffray Companies common stock for every
100 shares of U.S. Bancorp common stock owned.
In lieu of receiving fractional shares of Piper Jaffray
Companies common stock, shareholders received
cash from U.S. Bancorp for their fractional interest. Business Environment

As part of the separation from U.S. Bancorp, we
entered
into a variety of agreements with
U.S. Bancorp to govern each of our responsibilities
related to the distribution. Included in the agreements
we entered into were a separation and distribution
agreement, a tax sharing agreement, an employee ben-
efits agreement, an insurance matters agreement and a
business alliance agreement. In addition to those

IMPACT OF ECONOMIC AND MARKET CONDITIONS

Performance in the financial services industry in
which we operate is highly correlated to the overall
strength of economic conditions and market activity.
Our profitability is sensitive to a variety of factors,
including the volume and value of trading in securi-
ties, the volatility of the equity and fixed income

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the volume and value of trading transactions.

caused signiﬁcant declines in equity returns for in-
markets, the level and shape of various yield curves
and the demand for investment banking services as
vestors and a substantially lower number of invest-
reﬂected by the number and size of public offerings ment banking transactions as well as a decline in
and merger and acquisition transactions, particularly
in our focus industries and sectors. For example, our
investment banking revenue, in the form of under-
writing discounts and ﬁnancial advisory fees, is di-
rectly related to the volume and value of the
transactions in which we are involved. Uncertain or
unfavorable market or economic conditions ad-
versely affect our business. In such environments, the
volume and size of capital-raising transactions and
acquisitions and divestitures of corporations typi-
cally decrease, thereby reducing the demand for our
investment banking services and increasing price
competition among ﬁnancial services companies
seeking such engagements. In addition, a downturn
in the ﬁnancial markets may result in a decline in the
volume and value of trading transactions and, there-
fore, may lead to a decline in the revenue we receive
from commissions on the execution of trading trans-
actions and, in respect of our market-making activi- While the improvement in the equity markets in the
second half of 2003 has had a positive impact on
ties, in a reduction in the value of our trading
the broker dealer industry, the recent performance
positions and commissions and spreads.
is not necessarily indicative of continued strong per-
formance. Concerns remain about the U.S. econ-
omy with growing budget and trade deﬁcits and the
decline in the value of the dollar relative to other
major foreign currencies.

As 2003 began, the U.S. economy continued to
struggle due in part to lower consumer conﬁdence,
higher unemployment, reduced spending in the bus-
iness sector and economic uncertainty created by
the pending war in Iraq. However, these conditions
began to improve during the second quarter of
2003 and into the second half of 2003. The eco-
nomic stimulus provided by low interest rates and
tax cuts, combined with the initial military success
in Iraq, has eased some of the uncertainties in the
U.S. and global economies. Capital expenditures
began to increase and the major indices, fueled
partly by a sharp rise in corporate proﬁts, increased
signiﬁcantly. In 2003, the Dow Jones Industrial Av-
erage increased 25 percent, while the Nasdaq Com-
posite Index increased 50 percent.

Additionally, overall market conditions have been
and may continue to be impacted by political
events, legislative and regulatory developments and
investor sentiments most recently caused by uncer-
tainties about terrorist acts, geo-political events and
corporate accounting restatements. Because many
of these factors are unpredictable and beyond our Results of Operations
control, our earnings may ﬂuctuate signiﬁcantly
from period to period.

BASIS OF PRESENTATION

RECENT TRENDS

Challenging investment and economic conditions
prevailed during 2001, 2002 and the ﬁrst part of
2003, which negatively impacted the ﬁnancial mar-
kets. The Federal Reserve Board moved aggressively
to improve economic conditions with multiple in-
terest rate reductions throughout the past three
years, decreasing the Federal Funds target rate from
6.50 percent at December 31, 2000 to 1.75 percent,
1.25 percent and 1.00 percent by December 31,
2001, 2002 and 2003, respectively. Despite these
interest rate reductions, the economy continued to
show signs of weakness and recession through 2002
and into early 2003, driven by softness in corporate
earnings, uncertainty caused by world political
events and reduced conﬁdence in the integrity of
reported ﬁnancial information by several high-pro-
ﬁle corporations. The impact of these economic Generally, the consolidated results include revenues
generated and expenses incurred based on customer
conditions from 2001 through the ﬁrst part of 2003

Our consolidated ﬁnancial statements are prepared
in conformity with accounting principles generally
accepted in the United States of America and in-
clude the adjustments necessary to reﬂect our oper-
ations as if the organizational changes resulting
from our spin off had been consummated prior to
the distribution. The consolidated ﬁnancial state-
ments have been derived from the ﬁnancial state-
ments and accounting records of U.S. Bancorp
using the historical results of operations and histori-
cal basis of the assets and liabilities of our business.
However, the consolidated ﬁnancial statements
included herein may not necessarily be indicative of
our results of operations, ﬁnancial position and
cash ﬂows in the future or what our results of oper-
ations, ﬁnancial position and cash ﬂows would have
been had we operated as a stand-alone company
during the periods presented.

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relationships and related business activities. In cer- markets and securities business, results of any indi-
vidual period should not be considered indicative of
tain situations, afﬁliated entities of U.S. Bancorp
future results. In addition, we provide services to
may have provided services to us. These services
certain focus industries and sectors, the perform-
primarily relate to providing employee-related ser-
ance of which may not correlate to the overall mar-
vices and beneﬁts, technology and data processing
ket. Our Capital Markets business focuses primarily
services, and corporate functions including audit,
on the consumer, ﬁnancial institutions, health care
tax and real estate management services. Costs in-
and technology industries within the corporate sec-
cluded in the consolidated ﬁnancial statements for
tor and health care, higher education, housing, and
shared services were determined based on actual
state and local government entities within the gov-
costs to U.S. Bancorp and allocated to us based on
ernment/non-proﬁt sector. Such industries may ex-
our proportionate usage of those services. Propor-
perience growth or downturns independently of
tionate usage was determined based on the number
general economic and market conditions, or may
of our employees, actual hours used, square footage
face market conditions that are disproportionately
of ofﬁce space or other similar methodologies. Our
better or worse than those impacting the economy
management believes the assumptions underlying the
and markets generally, which may affect our busi-
consolidated ﬁnancial statements are reasonable.
ness differently than overall market trends. More-
over, our Private Client Services business primarily
operates in the Midwest, Mountain and West Coast
states. An economic growth spurt or downturn that
disproportionately impacts one or all of these regions
may disproportionately affect our business com-
pared with companies operating in other regions or
more nationally or globally. This may make our
results differ from the overall trends and conditions
of the ﬁnancial markets.

In the consolidated ﬁnancial statements, income
taxes were determined on a separate return basis as
if we had not been eligible to be included in the
consolidated income tax return of U.S. Bancorp and
its afﬁliates. However, U.S. Bancorp was managing
its tax position for the beneﬁt of its entire portfolio
of businesses, and its tax strategies are not necessa-
rily reﬂective of the tax strategies that we would
have followed or will follow as a stand-alone entity.

FINANCIAL SUMMARY

The overall trends and conditions of the ﬁnancial
markets, particularly within the United States, can
materially affect our results of operations and ﬁnan-
cial position. Given the variability of the capital

The following tables provide a summary of market
data, the results of our operations and the results of
our operations as a percentage of net revenues for
the periods indicated.

MARKET DATA

YEAR ENDED DECEMBER 31

2003

2002

2001

2003
v 2002

2002
v 2001

Dow Jones Industrials (a)
NASDAQ (a)
NYSE Average Daily Value Traded ($ BILLIONS)

NASDAQ Average Daily Value Traded ($ BILLIONS)
Mergers and Acquisitions (NUMBER OF TRANSACTIONS) (b)
Public Equity Offerings (NUMBER OF TRANSACTIONS) (c) (d)
Initial Public Offerings (NUMBER OF TRANSACTIONS) (c)
Managed Municipal Underwritings (NUMBER OF TRANSACTIONS) (e)
10-Year Treasuries Average Rate (a)

(a) Data provided is at period end.
(b) Source: Securities Data Corporation.
(c) Source: Dealogic (offerings with market reported value greater than $10 million).
(d) Number of transactions includes convertible offerings.
(e) Source: Thomson Financial.

10,454

2,003

$ 38.5

$ 28.0

7,091

831

8,342

1,336

$ 40.9

$ 28.8

6,451

608

10,022

1,950

$ 42.3

$ 44.1

6,998

764

14,695

14,056

13,346

25.3% (16.8)%

49.9

(5.9)

(2.8)

9.9

36.7

2.7

4.5

(31.5)

(3.3)

(34.7)

(7.8)

(20.4)

(9.6)

5.3

(8.2)

4.02%

4.61%

5.02% (12.8)

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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31
(Dollars in Thousands)

Revenues

Commissions and fees

Principal transactions

Investment banking

Interest

Other income

Total revenues

Interest expense

Net revenues

Non-interest expenses

2003

2002

2001

2003
v 2002

2002
v 2001

AS A PERCENTAGE OF
NET REVENUES
2003

2002

2001

$256,747 $275,682 $302,289

(6.9)% (8.8)% 32.6%

37.8%

37.7%

215,191

229,945

45,276

59,082

171,957

181,469

208,740

247,929

59,685

47,303

95,436

52,865

25.1

10.2

(5.2)

(15.8)

(24.1)

(37.5)

24.9

(10.5)

27.4

29.2

5.8

7.5

806,241

763,367

879,988

5.6

(13.3)

102.5

19,511

34,315

79,216

(43.1)

(56.7)

2.5

23.6

28.6

8.2

6.5

104.7

4.7

22.7

31.0

11.9

6.6

109.9

9.9

786,730

729,052

800,772

7.9

(9.0)

100.0

Compensation and beneﬁts

482,397

449,329

513,623

Occupancy and equipment

Communications

Floor brokerage and clearance

Marketing and business

development

Outside services

Cash award program

Regulatory settlement

Amortization of acquisition-related

compensation and goodwill

Merger and restructuring

Royalty fee

Other operating expenses

58,025

37,599

22,755

39,030

34,219

24,000

–

3,911

42,960

55,549

36,316

26,040

44,115

32,717

–

32,500

–

7,976

7,482

31,067

60,121

41,082

22,092

49,706

22,285

7.4

4.5

3.5

(12.5)

(7.6)

(11.6)

(12.6)

17.9

(11.5)

(11.2)

4.6

46.8

–

100.0

–

(100.0)

100.0

17,641

65,697

55,753

25,577

–

(100.0)

(87.9)

(47.7)

(86.6)

38.3

21.5

61.3

61.6

64.1

7.4

4.8

2.9

5.0

4.3

3.1

–

5.5

7.6

5.0

3.6

6.0

4.5

–

4.5

–

1.1

1.0

4.3

7.5

5.1

2.8

6.2

2.8

–

2.2

8.2

7.0

3.2

Total non-interest expenses

744,896

723,091

873,577

3.0

(17.2)

94.7

99.2

109.1

Income (loss) before taxes

Income tax expense (beneﬁt)

41,834

15,835

5,961

5,855

(72,805)

(22,754)

601.8

108.2

170.5

(125.7)

5.3

2.0

(9.1)

(2.8)

Net income (loss)

$ 25,999 $

106 $ (50,051)

NM 100.2%

3.3%

0.0%

(6.3)%

NM – Not Meaningful

for the year, largely due to strong ﬁxed income sales
Net income increased to $26.0 million in 2003 up
and trading. Fixed income products continued to be
from $0.1 million in 2002 reﬂecting the improved
a key driver of our revenue throughout the year,
economy and market performance during the last
particularly corporates and mortgages, two growth
six months of 2003. Net revenues increased to
focuses of ours. Investment banking revenue in-
$786.7 million in 2003, up 7.9 percent over prior
creased 10.2 percent for the year, primarily due to
year net revenues of $729.1 million. The largest
component of our revenue stream was commissions
improved equity underwriting activity. This in-
and fees at $256.7 million, down 6.9 percent from crease was aided by the ﬁrst full year results of the
the prior year. Commissions and fees declined due
convertibles team that joined us at the end of 2002.
to lower transaction volumes in equities and equity- Other income grew 24.9 percent, primarily due to
related products such as mutual funds in the ﬁrst
our new agreement with U.S. Bancorp Asset
half of 2003. In addition, commission revenues Management for the provision of cash sweep prod-
ucts to our clients. Non-interest expenses increased
were impacted from continued attrition of financial
to $744.9 million in 2003 from $723.1 million for
advisors in our Private Client Services business.
the prior year. Contributing to the increase in
Proﬁts on principal transactions grew 25.1 percent

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to no

increased

longer participate

non-interest expenses for 2003 were higher incen-
revenues in each year, respectively. The decrease in
tive compensation resulting from improved ﬁnan-
compensation is primarily attributable to lower va-
cial performance,
litigation-related
riable compensation as a result of reduced revenue.
expenses and additions to employee loan loss
In addition, reductions in headcount and the impact
reserves for transition to our new Private Client
of restructuring certain administrative and support
Services compensation plan. In addition, 2003 non-
functions in 2001 to improve our operating efﬁcien-
interest expenses include the $24.0 million charge
cies resulted in a decrease in compensation expense
related to the cash award program. Non-interest
of approximately $18.7 million in 2002. The other
expenses in 2002 included a $32.5 million charge
signiﬁcant contributor to the decline included our
the
resulting from the settlement we entered into in
decision
connection with the regulatory investigation of eq- U.S. Bancorp pension plan effective January 1,
2002. An employer discretionary proﬁt sharing
uity research and its relationship to investment
banking. For more details regarding the regulatory
plan replaced the U.S. Bancorp pension plan to
‘‘consolidated non-interest ex- more closely align retirement beneﬁts for our em-
settlement, see
ployees with performance of the business. In 2002,
penses — regulatory settlement’’ below.
no contribution was made to the proﬁt sharing
plan, based on our operating results. In 2001, the
expense related to the U.S. Bancorp pension plan
was $21.0 million.

Net revenues declined to $729.1 million in 2002,
down 9.0 percent from $800.8 million in 2001,
reﬂecting poor equity market conditions. Non-in-
terest expenses declined to $723.1 million in 2002
from $873.6 million in the prior year, or down Occupancy and Equipment – Occupancy and equip-
17.2 percent, driven by lower variable compensa- ment expenses were $58.0 million in 2003 com-
pared with $55.5 million for the prior year. This
tion associated with declining net revenues, the ef-
increase was due primarily to a $4.1 million write-
fect of adopting a new accounting principle which
eliminated the amortization of goodwill, lower roy-
off of internally developed software in conjunction
alty fees paid to U.S. Bancorp for the use of with the implementation of a new ﬁxed income
trading system, offset partially by reduced deprecia-
tradenames and lower restructuring charges relative
to 2001. These declines were offset in part by the
tion on furniture and equipment.
$32.5 million settlement charge in connection with
an industry-wide regulatory investigation of equity
research and its relationship to investment banking.

Occupancy and
expenses were
equipment
$55.5 million in 2002 compared with $60.1 million
in 2001. The 7.6 percent decline in 2002 resulted
from savings from restructuring our distribution
network and closing and consolidating sales ofﬁces
in 2001.

Communications – Communication expenses include
costs for telecommunication and data communica-
tion, primarily from third-party market information
providers. Communication expenses were $37.6 mil-
lion in 2003 compared with $36.3 million for the
prior year. This increase was due primarily to higher
market data services expenses as a result of increased
business activity.

Compensation and Benefits – Compensation and ben-
eﬁts increased to $482.4 million in 2003 from
$449.3 million for the prior year, or up 7.4 percent.
A substantial portion of compensation expense rep-
resents variable incentive arrangements and com-
in
missions, the amounts of which ﬂuctuate
proportion to the level of business activity. Other
compensation costs, primarily base salaries and
beneﬁts, are more ﬁxed in nature. The increase in
compensation and beneﬁts expense is due primarily
to increases in the variable portion of our compen- Communication expenses were $36.3 million in
2002 compared with $41.1 million in 2001. Restruc-
sation as a result of increased revenue and operat-
turing activities in 2001 as well as cost containment
ing proﬁts. In addition, $9.5 million was allocated
efforts drove the 11.6 percent decline in 2002.
in 2003 to our employer discretionary proﬁt shar-
ing plan based on our 2003 proﬁtability. In 2002
we did not make an allocation to our employer
discretionary proﬁt sharing plan.

Floor Brokerage and Clearance – Floor brokerage and
clearance expenses were $22.8 million in 2003
compared with $26.0 million for the prior year.
This decrease is due to our efforts to reduce fees for
accessing electronic communication networks. As a
result of our efforts, ﬂoor brokerage and clearance

and beneﬁts decreased

to
Compensation
$449.3 million in 2002 from $513.6 million in
2001 and was 61.6 percent and 64.1 percent of net

CONSOLIDATED NON-INTEREST EXPENSES

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expense as a percentage of net revenues was re-
duced to 2.9 percent in 2003 from 3.6 percent in
the prior year.

Floor brokerage and clearance expenses increased
to $26.0 million in 2002 compared with $22.1 mil-
lion in 2001. As a percentage of net revenues, ﬂoor
brokerage and clearance expenses were 3.6 percent
and 2.8 percent in 2002 and 2001, respectively. The
increase in these costs primarily reﬂects increased
usage of electronic communication networks to ob-
tain trade execution.

Marketing and Business Development – Marketing and
business development expenses include travel and en-
tertainment, postage, supplies and promotional and
advertising costs. Marketing and business develop-
ment expenses were $39.0 million for 2003 compared
with $44.1 million for the prior year, a decline of
11.5 percent. The decrease in these costs is primarily
attributable to our continued efforts to reduce discre-
tionary spending on travel and advertising. Despite
increased net revenues, travel, advertising and supplies
expenses decreased by $0.2 million, $1.3 million, and
$2.4 million, respectively.

Marketing and business development expenses were
$44.1 million in 2002 compared with $49.7 million
in 2001, a decline of 11.2 percent. The decrease in
these costs is primarily attributable to our efforts to
reduce discretionary spending on travel and adver-
tising as business activity declined. As a result,
travel expenses declined by $3.1 million and adver-
tising expenses declined by $0.6 million.

outsourced securities processing charges include a
fixed component plus a variable component based on
trade volumes. As a percentage of net revenues, the
cost of outside services increased from 2.8 percent in
2001 to 4.5 percent in 2002 due, in part, to the fixed
nature of a portion of these costs.

for

employees

Cash Award Program – A broad group of employees
have been granted cash awards pursuant to a pro-
gram that we established in connection with our
spin off from U.S. Bancorp. The award program is
intended to aid in retention of employees and to
compensate
the value of
U.S. Bancorp stock options and restricted stock lost
as a result of our spin off from U.S. Bancorp. The
cash award program has an aggregate value of ap-
proximately $47.0 million. We
incurred a
$24.0 million charge in connection with this pro-
gram at the time of the spin off from U.S. Bancorp,
which is included in our 2003 results of operations.
The remaining $23.0 million will be paid out over
the next four years, which will result in an annual
charge of approximately $5.9 million over the next
three years and $5.3 million in the fourth year.

Regulatory Settlement – In connection with an indus-
try-wide investigation of equity research and its re-
lationship to investment banking, we recognized a
$32.5 million settlement charge in 2002. The
charge was predicated on a settlement with certain
federal, state and industry regulatory agencies of
$12.5 million for ﬁnes and penalties, $12.5 million
for a distribution fund primarily representing the
disgorgement of proﬁts and $7.5 million for fund-
ing independent research to be provided to inves-
tors. The terms of this settlement were ﬁnalized
effective April 28, 2003.

Outside Services – Outside services expenses include
securities processing expenses, outsourced technol-
ogy functions and other professional fees. Outside
services expenses increased to $34.2 million in 2003
compared with $32.7 million for the prior year, or
up 4.6 percent. This increase primarily reﬂects the
costs for outsourcing our mainframe and network
processing to a third-party vendor and increased
outside legal fees. These increases were partially off-
set by lower computer consulting expenses incurred
during 2003 due to the completion in early 2002 of
our project to outsource certain securities process-
ing activities.

In connection with the research settlement, we have
made a number of changes to our business designed
to redeﬁne the role of equity research and its rela-
tionship to investment banking and to separate our
research group from our investment banking group.
We have combined our equity, ﬁxed income and
private client research groups into a single Invest-
ment Research group and have hired additional
staff who will be dedicated to oversight of this
group. The determination of the budget for our
Investment Research group, as well as compensa-
Outside services expenses increased to $32.7 million
tion of our research analysts, will be made without
in 2002 compared with $22.3 million in 2001. The
regard to speciﬁc Investment Banking revenues or
46.8 percent increase in outside services in 2002 is
primarily due to investments in and changes to tech-
results and without input from Investment Banking.
nology we made during 2001 to support future Moreover, with respect to research analyst compen-
sation, we have developed and implemented a per-
growth in the business, which included outsourcing
formance matrix to evaluate and compensate
certain securities back office processing activities. The

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Investment Banking and

The ongoing costs associated with the other
changes we are making to our business in connec-
tion with the regulatory settlement will be reﬂected
in our results of operations in future periods and
are not currently determinable.

associated with the termination of employees and
research analysts. We have formed a research over-
$0.5 million for asset write-downs and lease termi-
sight committee, which will provide oversight and
nations for branch closings. In addition, we in-
ratiﬁcation for all fundamental research coverage
curred $2.2 million of charges related to integrating
initiations and discontinuances, as well as funda-
the ﬁxed income division of U.S. Bancorp Invest-
mental research opinion changes. We have signiﬁ-
cantly revised our policies and procedures to ments, Inc. into our business in connection with the
require a compliance group chaperone for other-
integration plan associated with the 2001 merger of
wise permissible meetings or communications be- U.S. Bancorp and Firstar Corporation.
tween
Investment
Research. We also have signiﬁcantly revised our
policies and procedures to ensure generally the in-
dependence of our research analysts. Finally, we
have implemented appropriate ﬁrewalls to block
communications (e.g., e-mail) and shared network
directory access between Investment Research and
Investment Banking.

In 2001, merger and restructuring-related charges
included costs associated with the restructuring of
our business of $50.8 million and costs associated
with the U.S. Bancorp and Firstar Corporation
merger of $14.9 million. In response to signiﬁcant
changes in the securities markets, including in-
creased volatility, declines in equity valuations,
lower sales volumes and an increasingly competitive
environment, we implemented a restructuring plan
to realign our distribution network and improve
business processes. The business restructuring
charges included $29.3 million in severance, other
beneﬁts and outplacement costs associated with the
termination of approximately 300 employees. Ap-
proximately $12.4 million of charges were taken
for asset write-downs and lease terminations related
to redundant ofﬁce space and branches that were
vacated as part of the restructuring plan. The re-
maining $9.1 million of business restructuring
charges in 2001 was primarily from the write-down
of intangibles related to the 1999 acquisition of the
investment banking division of The John Nuveen
On January 1, 2002, we adopted Statement of Fi-
nancial Accounting Standards No. 142 (SFAS 142), Company that were impaired as a direct result of
decisions to terminate certain employees and close
entitled ‘‘Goodwill and Other Intangible Assets.’’
ofﬁces in connection with the overall restructuring
SFAS 142 addresses the accounting for goodwill
plan. Costs associated with the U.S. Bancorp and
and intangibles subsequent to their acquisition. The
Firstar Corporation merger included approximately
most signiﬁcant changes made by SFAS 142 are that
$14.0 million in accelerated vesting of restricted
goodwill and indeﬁnite-lived assets are no longer
amortized and are tested for impairment at least
stock that occurred at the time of that merger.
annually. As of January 1, 2002, we discontinued
the amortization of goodwill. Prior to the adoption
of SFAS 142, goodwill amortization was $14.4 mil-
lion in 2001. The remaining $3.2 million of expense
included in amortization in 2001 relates to deferred
compensation costs established at the time of the
acquisition in 1998 of Piper Jaffray Companies Inc.
and its subsidiaries by U.S. Bancorp. These deferred
compensation costs were fully vested and amortized
by May of 2001.

Amortization of Acquisition-related Compensation and
Goodwill – Amortization of acquisition-related com-
pensation and goodwill expenses in 2001 consisted
of deferred compensation for certain employees and
goodwill directly related to the 1998 acquisition of
Piper Jaffray Companies Inc. and its subsidiaries by
U.S. Bancorp.

Royalty Fee – In connection with the 1998 acquisi-
tion of Piper Jaffray Companies Inc. and its subsidi-
aries by U.S. Bancorp, tradenames and trademarks
were established for use by us. The amount of the
royalty fees was established as a percentage of net
revenues and determined based on analysis of com-
parable royalty fee arrangements of other compa-
nies. In 2000, we began making royalty payments
to U.S. Bancorp. The royalty rate was adjusted peri-
odically to reﬂect changes in the expected beneﬁts
from the use of the tradenames and trademarks.
The U.S. Bancorp Piper Jaffray tradename and
trademark will no longer be used and, accordingly,
these charges were discontinued at the time of the
spin off from U.S. Bancorp.

Merger and Restructuring – Merger and restructuring
related charges were $8.0 million in 2002 compared
with $65.7 million in 2001. In 2002, restructuring
charges were taken in response to continued weak-
ness in the equity market and included $5.3 million
for severance, other beneﬁts and outplacement costs

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ded December 31, 2002 and 2001, respectively. The
non-deductibility of the regulatory ﬁne in 2002
associated with the equity research practices de-
scribed above was the primary factor in the increase
in the effective tax rate in 2002, offset somewhat by
the impact of new accounting principles for the
amortization of goodwill. For further information
on income taxes, see Note 21 to the consolidated
ﬁnancial statements.

SEGMENT PERFORMANCE

Other Operating Expenses – Other operating expenses
include reserves for employee loan losses, litigation-
related costs, license and registration fees, service
charges from U.S. Bancorp and its afﬁliates for cor-
porate support, and other miscellaneous expenses.
Other operating expenses increased to $43.0 mil-
lion in 2003, compared with $31.1 million for the
prior year. This increase relates primarily to a
$7.4 million increase in our loan loss allowance
related to loans made to certain revenue-producing
employees. These loans are typically made in con-
nection with recruitment and are forgivable based
on continued employment. We amortize the loans
using the straight-line method over the terms of the
loans, which generally range from three to ﬁve
years. Loan recipients who leave us prior to full
forgiveness of their loan balance are obligated to
repay remaining balances. However, historical col-
lection efforts have been difﬁcult. Given these facts,
an employee loan loss reserve is established when
employees with remaining balances terminate and it
is probable that the loans are not collectible. During
the ﬁrst and second quarters of 2003, we communi-
cated to employees certain changes to our produc-
tion-based compensation plans that were effective
in the third quarter of 2003. These compensation
changes reﬂect a shift from a product-based payout
to a production-based payout. This change more
closely aligns our new compensation plan to the
compensation plans of our competitors. Subsequent
to these communications, we have experienced at-
trition with respect to impacted revenue-producing
employees. We expect this trend to continue and,
based on historical collection efforts, to result in
employee loan losses. Accordingly, we increased
our allowance for our exposure to employee loan
losses. Also contributing to the increase in other
operating expenses is an increase in litigation-re-
lated expenses incurred in 2003 as compared with
2002. Litigation-related expenses were $16.1 million
for 2003 as compared with $10.9 million in 2002.

We measure ﬁnancial performance by business seg-
ment, including Capital Markets, Private Client Ser-
vices, and Corporate Support and Other. The
business segments are determined based upon fac-
tors such as the type of customers, the nature of
products and services provided and the distribution
channels used to provide those products and ser-
vices. Segment pre-tax operating income or loss and
segment operating margin is used to evaluate and
measure segment performance by our management
team in deciding how to allocate resources and in
assessing performance in relation to our competi-
tors. Segment pre-tax operating income or loss is
derived from our business unit proﬁtability report-
ing systems by speciﬁcally attributing customer rela-
tionships and their related revenues and expenses.
Expenses directly managed by the business unit are
accounted for within each segment’s pre-tax operat-
ing income or loss. Investment research, operations,
technology and compliance related costs are allo-
cated based on each segment’s use of these func-
tions to support
its business. General and
administrative expenses incurred by centrally man-
aged corporate support functions are included
within Corporate Support and Other. To enhance
the comparability of business segment results, good-
will amortization for periods prior to the adoption
of SFAS 142 is not included in segment pre-tax
operating income or loss. Also, merger and restruc-
turing-related charges, royalty fees assessed by
Other operating expenses were $31.1 million in U.S. Bancorp, retention cash awards granted to em-
2002 compared with $25.6 million in 2001. The
ployees in connection with our separation from
increase of $5.5 million, or 21.5 percent, in 2002 U.S. Bancorp, and certain infrequent regulatory set-
tlement costs are not included in segment pre-tax
compared with 2001 relates primarily to allocated
operating income or loss. Designations, assignments
costs from U.S. Bancorp for technology-related sup-
and allocations may change from time to time as
port and from litigation-related expenses.
ﬁnancial reporting systems are enhanced and meth-
ods of evaluating performance change or business
segments are realigned to better serve our customer
base. The presentation reﬂects our current manage-
ment structure and, accordingly, all periods are
presented on a comparable basis.

Income Taxes – The provision for income taxes was
$15.8 million, an effective tax rate of 37.9 percent,
for the year ended December 31, 2003 compared
with $5.9 million, an effective tax rate of 98.2 per-
cent, and an income tax beneﬁt of $22.8 million, an
effective tax rate of 31.3 percent, for the years en-

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In addition, Capital Markets has a higher propor-
Our primary revenue-producing segments, Capital
tion of variable non-compensation expenses than
Markets and Private Client Services, have different
does Private Client Services. These differences in
compensation plans and non-compensation cost
structures that impact the operating margins of the
compensation plans and cost structures result in a
two segments differently during periods of increas- more stable operating margin for Capital Markets
and greater variability in operating margin for Pri-
ing or decreasing business activity and revenue.
Compensation expense for Capital Markets is
vate Client Services.
driven primarily by pre-tax operating proﬁt of the
segment, whereas compensation expense for Private
Client Services is driven primarily by net revenues.

The following table provides our segment perform-
ance for the periods presented:

SEGMENT PERFORMANCE
YEAR ENDED DECEMBER 31
(Dollars in Thousands)

Net revenues

Capital Markets

Private Client Services

Corporate Support and Other

2003

2002

2001

2003
v 2002

2002
v 2001

$ 430,355

$376,074

$422,235

14.4% (10.9)%

352,113

4,262

357,155

392,447

(1.4)

(4,177)

(13,910)

202.0

(9.0)

70.0

(9.0)

Total

$ 786,730

$729,052

$800,772

7.9

Pre-tax operating income (loss) before unallocated charges (a)

Capital Markets

Private Client Services

Corporate Support and Other

$ 77,946

$ 65,655

$ 76,534

18.7% (14.2)%

28,482

(36,683)

29,902

39,013

(41,638)

(49,261)

(4.7)

11.9

(23.4)

15.5

Total

$ 69,745

$ 53,919

$ 66,286

29.4

(18.7)

Pre-tax operating margin before unallocated charges

Capital Markets

Private Client Services

Total

18.1%

8.1%

8.9%

17.5%

8.4%

7.4%

18.1%

9.9%

8.3%

(a) See Reconciliation to pre-tax operating income (loss) including unallocated charges for detail on expenses excluded from segment performance.

Reconciliation to pre-tax operating income (loss) including

unallocated charges

Pre-tax operating income (loss) before unallocated

charges

Cash award plan

Regulatory settlement

Amortization of acquisition-related compensation and

goodwill

Merger and restructuring

Royalty fee

$ 69,745

$ 53,919

$ 66,286

24,000

–

3,911

–

32,500

–

7,976

7,482

–

17,641

65,697

55,753

Consolidated income (loss) before income tax expense

(beneﬁt)

$ 41,834

$ 5,961

$ (72,805)

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CAPITAL MARKETS
YEAR ENDED DECEMBER 31
(Dollars in Thousands)

Net revenues

2003

2002

2001

2003
v 2002

2002
v 2001

Commissions and principal transactions

$ 208,741

$170,362

$177,689

22.5%

(4.1)%

Investment banking

Net interest

Other income

Total net revenues

198,221

181,529

19,668

3,725

20,827

3,356

220,390

23,392

764

9.2

(5.6)

11.0

(17.6)

(11.0)

339.3

$ 430,355

$376,074

$422,235

14.4

(10.9)

Pre-tax operating income before unallocated charges

$ 77,946

$ 65,655

$ 76,534

18.7% (14.2)%

Pre-tax operating margin

18.1%

17.5%

18.1%

uity institutional business, offset partially by higher
Capital Markets net revenues increased 14.4 per-
equity institutional trading volumes. Investment
cent to $430.4 million in 2003 from $376.1 million
banking revenue decreased to $181.5 million in
for the prior year. Commissions and trading reve-
2002 from $220.4 million in 2001 due primarily to
nue increased 22.5 percent to $208.7 million in
reduced equity underwritings and merger and ac-
2003 compared with $170.4 million for the prior
year, primarily due to higher institutional trading
quisition advisory fees, offset partially by increased
volumes, particularly in ﬁxed income products. In municipal bond underwriting revenue as issuers
took advantage of the declining interest rate envi-
addition, equity institutional revenue grew despite
ronment. Net interest revenue declined due to
lower trading volumes as we reduced trading losses
incurred from facilitating customer transactions. In-
changes in interest rates and inventory levels.
vestment banking revenue increased to $198.2 mil-
lion for 2003 compared with $181.5 million for the
prior year, due primarily to increased equity under-
writing activity, aided by the ﬁrst full year results of
the convertibles team that joined our ﬁrm at the end
of 2002.

Segment pre-tax operating margin for Capital Mar-
kets decreased to 17.5 percent in 2002 from
18.1 percent in 2001. This decline is primarily at-
tributable to increases in outside services related to
the outsourcing of securities processing activities
and higher litigation-related expenses. Also contrib-
uting to the decline was increased ﬂoor brokerage
and clearance expense due to increased use of elec-
tronic communication networks to obtain trade ex-
these additional
ecution. Partially offsetting
expenses was the reduction in certain costs resulting
from the restructuring activities taken in 2001 and
our decision to no longer participate in the
U.S. Bancorp Cash Balance Pension Plan during
2002. An employer discretionary proﬁt sharing
plan replaced participation in the U.S. Bancorp plan
to more closely align retirement beneﬁts for our
employees with performance of the business. In
2002, no contribution was made to the proﬁt shar-
ing plan, based on our operating results.

Segment pre-tax operating margin for Capital Mar-
kets increased to 18.1 percent for 2003 compared
with 17.5 percent for the prior year. The increase in
pre-tax operating margin is due primarily to the
increase in net revenues and the leveraging of ﬁxed
expenses such as marketing and business develop-
ment, occupancy and salary costs.

Capital Markets net revenues decreased
to
$376.1 million in 2002 from $422.2 million in
2001 primarily due to weak equity market condi-
tions. Commissions and trading revenue decreased
to $170.4 million in 2002 from $177.7 million in
2001 due primarily to higher trading losses incurred
from facilitating customer transactions in our eq-

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PRIVATE CLIENT SERVICES
YEAR ENDED DECEMBER 31
(Dollars in Thousands)

Net revenues

Commissions and fees

Net interest

Total net revenues

2003

2002

2001

2003
v 2002

2002
v 2001

$340,001

$344,643

$378,925

(1.3)%

(9.0)%

12,112

12,512

13,522

$352,113

$357,155

$392,447

(3.2)

(1.4)

(7.5)

(9.0)

Pre-tax operating income before unallocated charges

$ 28,482

$ 29,902

$ 39,013

(4.7)% (23.4)%

Pre-tax operating margin

Number of ﬁnancial advisors (period end)

8.1%

830

8.4%

975

9.9%

1,061

(14.9)%

(8.1)%

customer margin balances declined, offset in part by
competitive pricing changes. Contributing to the
lower revenues were planned reductions in under-
performing ﬁnancial advisors in connection with
our restructuring activities, as well as unplanned
attrition of ﬁnancial advisors. The number of ﬁnan-
cial advisors decreased 8.1 percent between Decem-
ber 31, 2001 and December 31, 2002.

Private Client Services net revenues decreased to
$352.1 million in 2003 compared with $357.2 mil-
lion for the prior year, due primarily to reduced
mutual fund commissions of $8.8 million, lower
account fees of $3.9 million and reduced investment
management account fees of $3.8 million. These
reductions were offset partially by increased reve-
nue of $8.5 million related to our new agreement
with U.S. Bancorp Asset Management for the provi-
sion of cash sweep products to our clients. We im-
plemented a new compensation plan in mid-2003,
which contributed signiﬁcantly to attrition among
lower-end producers. Changes to the new compen-
sation plan reﬂected a shift from a product-based
payout to a production-based payout, and more
closely aligns our compensation plan to those of
our competitors at all levels of production.

Segment pre-tax operating margin for Private Client
Services decreased to 8.4 percent in 2002 from
9.9 percent in 2001. This decline is primarily attrib-
utable to Private Client Services’ ﬁxed costs, such as
occupancy and communication, which negatively
impacted pre-tax operating margin as net revenues
declined due to market conditions. The impact of
these ﬁxed costs on pre-tax operating margin in
2002 was mitigated somewhat by our restructuring
activities taken in 2001 and cost control initiatives
Segment pre-tax operating margin for Private Client
undertaken related to discretionary expenses. Also
Services decreased to 8.1 percent in 2003 compared
with 8.4 percent for 2002. This decline is primarily
contributing to the decline in pre-tax operating
attributable to increased employee loan losses re- margin was the increase in outside services related
to outsourcing certain securities processing activi-
lated to forgivable loans made to our ﬁnancial advi-
ties and litigation-related expenses. Although a sig-
sors. Also contributing to this decline in operating
niﬁcant portion of compensation is variable, certain
margin were increased litigation-related expenses in
components are relatively ﬁxed, such as salaries and
2003 as compared with 2002 reﬂecting an increase
beneﬁts, which have a negative impact on our pre-
in the number of complaints, legal actions, investi-
tax operating margin during periods of declining
gations and regulatory proceedings. Mostly offset-
revenue. Partially offsetting these ﬁxed components
ting these additional expenses were reductions in
of compensation was the reduction of other costs
ﬁxed and variable compensation expense for 2003
resulting from the restructuring activities taken in
due to our previous restructuring efforts.
2001 and our decision to no longer participate in
the U.S. Bancorp pension plan effective January 1,
2002. An employer discretionary proﬁt sharing
plan replaced participation in the U.S. Bancorp plan
to more closely align retirement beneﬁts for our
employees with performance of the business. In
2002, no contribution was made to the proﬁt shar-
ing plan, based on our operating results.

Net revenues for Private Client Services decreased
to $357.2 million in 2002 from $392.4 million in
2001, primarily due to reduced equity commissions
of $22.0 million, reduced mutual fund commissions
of $3.7 million and reduced annuity commissions of
$5.7 million, offset partially by increased ﬁxed in-
come commissions of $3.4 million due to higher
trading volumes. Net interest revenue decreased as

P I P E R J A F F R AY A N N U A L R E P O R T 2003

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A N D R E S U LT S O F O P E R AT I O N S

Corporate Support and Other – Corporate Support and
Other includes certain revenues not attributable to
the Capital Markets or Private Client Services busi-
ness segments. These revenues are primarily attribu-
table to our venture capital subsidiary and our
investments in limited partnerships that invest in
venture capital funds. The Corporate Support and
Other segment also includes interest expense on
subordinated debt, which is recorded in net reve-
nues. Net revenues increased to $4.3 million in
2003 compared with a loss of $4.2 million for the
prior year. This change was due primarily to a re-
duction in interest expense on our subordinated
debt and increased management fees from our ven-
ture capital subsidiary.

Net revenues improved to a loss of $4.2 million in
2002 from a loss of $13.9 million in 2001. This
change was due primarily to a reduction in interest
expense on subordinated debt due to U.S. Bancorp
recapitalizing Piper Jaffray in July of 2002, by con-
tributing capital and reducing subordinated debt
borrowings.

Outlook

We believe that the following are some of the key
items that will impact our future operations:

) We will no longer incur expenses related to roy-

approximately $5.3 million in 2007 related to the
employee cash award program established in con-
nection with our spin off from U.S. Bancorp. We
expect to fund these cash awards using cash ﬂow
from operations.

) We joined the Minnesota Keystone Program, a
voluntary program, co-founded by Piper Jaffray
25 years ago, for corporations that commit a por-
tion of their pre-tax earnings to non-profit organi-
zations. We plan on participating at the 5 percent
giving level, meaning that we will contribute up to
5 percent of our pre-tax earnings. Contributions
may consist of a combination of cash, in-kind ser-
vices and employee volunteer hours.

) We do not intend to pay cash dividends on our
common stock for the foreseeable future. We ex-
pect to retain all available funds and any future
earnings for use in the operation and expansion
of our business.

) On February 12, 2004 the Company granted
approximately 500,000 shares of Piper Jaffray
Companies restricted stock and approximately
290,000 options on Piper Jaffray Companies
common stock to employees, executive ofﬁcers
and directors. These awards will vest 100 percent
on February 12, 2007.

alty fees paid to U.S. Bancorp for the use of trade Recent Accounting Developments
names. In 2003 these fees were approximately
$3.9 million.

Recent accounting pronouncements are set forth in
Note 3 to the consolidated ﬁnancial statements and
are incorporated herein by reference.

) Based on current market conditions, increased
claims activity for insurance carriers and our de-
creased purchasing power resulting from our spin Critical Accounting Policies
off from U.S. Bancorp, we expect insurance pre-
miums are likely to continue to increase.

) In connection with the market downturn that be-
gan in 2000, the number of complaints, legal ac-
tions, investigations and regulatory proceedings
has increased in recent years. We expect that this
trend may continue, and we may continue to see
increased litigation-related expenses.

Our accounting and reporting policies comply with
accounting principles generally accepted in the
United States of America and conform to practices
within the securities industry. The preparation of fi-
nancial statements requires management to make es-
timates and assumptions that could materially affect
reported amounts in the consolidated financial state-
ments. Critical accounting policies are those policies
) Based on current estimates, we expect to incur
that management believes are the most important to
approximately $5.2 million of expense on an an-
the portrayal of our financial condition and results of
operations, and require management to make esti-
nual basis as a result of being a public company,
including audit and tax services, investor rela- mates that are difficult, subjective or complex. Most
tions, compliance with SEC and NYSE rules,
accounting policies are not considered by manage-
board of directors costs and directors and ofﬁcers ment to be critical accounting policies. Several fac-
tors are considered in determining whether or not a
insurance costs.
policy is critical, including, among others, whether
the estimates are significant to the consolidated

) We expect to incur an annual pre-tax charge of
approximately $5.9 million through 2006 and

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independent source, certain assumptions may be re-
ﬁnancial statements taken as a whole, the nature of
quired to determine the security’s fair value. For
the estimates, the ability to readily validate the
instance, we generally assume that the size of posi-
estimates with other information including third par-
tions in securities that we hold would not be large
ties or independent pricing sources, the sensitivity of
enough to affect the quoted price of the securities if
the estimates to changes in economic conditions and
whether alternative accounting methods may be used we sell them, and that any such sale would happen
in an orderly manner. The actual value realized
under accounting principles generally accepted in the
upon disposition could be different from the cur-
United States of America.
rently estimated fair value.

Signiﬁcant accounting policies are discussed in
Note 2 to the consolidated ﬁnancial statements. We
believe that of our signiﬁcant policies, the following
are our critical accounting policies.

GOODWILL

VALUATION OF FINANCIAL INSTRUMENTS

We record all assets and liabilities acquired in
purchase acquisitions, including goodwill, at fair
value as required by Statement of Financial Account-
ing Standards No. 141, entitled ‘‘Business Combina-
tions.’’ At December 31, 2003, we had goodwill of
$305.6 million as a result of the 1998 acquisition of
Piper Jaffray Companies Inc. and its subsidiaries by
U.S. Bancorp. We had no recorded indefinite-lived
assets or other intangibles as of that date.

Substantially all of our ﬁnancial instruments are
recorded at fair value or contract amounts which
approximate fair value. Financial instruments car-
ried at contract amounts which approximate fair
value, either have short-term maturities (one year or
less), are repriced frequently, or bear market inter-
The initial recognition of goodwill and other intan-
est rates and, accordingly, are carried at amounts
gible assets and subsequent impairment analysis
approximating fair value. Financial instruments
require management to make subjective judgments
carried at contract amount on the consolidated
concerning estimates of how the acquired assets or
statements of ﬁnancial condition include receivables
businesses will perform in the future using valuation
from and payables to brokers, dealers and clearing
organizations, securities purchased under agree- methods including discounted cash flow analysis. Ad-
ditionally, estimated cash flows may extend beyond
ments to resell, securities sold under agreements to
repurchase, receivables from and payables to cus-
ten years and, by their nature, are difficult to deter-
tomers, short-term ﬁnancing and subordinated mine over an extended timeframe. Events and factors
that may significantly affect the estimates include,
debt. Unrealized gains and losses related to these
among others, competitive forces, changes in revenue
ﬁnancial instruments are reﬂected in the consoli-
growth trends, cost structures and technology,
dated statements of operations. Where available, we
changes in discount rates and market conditions. In
use prices from independent sources such as listed
determining the reasonableness of cash flow estimates,
market prices or dealer price quotations.
management reviews historical performance of the un-
derlying assets or similar assets in an effort to assess
and validate assumptions used in its estimates.

For investments in illiquid or privately held securi-
ties that do not have readily determinable fair val-
ues, the determination of fair value requires
In assessing the fair value of our operating segments,
management to estimate the value of the securities
the volatile nature of the securities markets and our
using the best information available. Among the
industry requires our management to consider the
factors considered by management in determining
business and market cycle and assess the stage of the
the fair value of ﬁnancial instruments are the cost,
cycle in estimating the timing and extent of future
terms and liquidity of the investment, the ﬁnancial
cash flows. In addition to estimating the fair value of
condition and operating results of the issuer, the
quoted market price of publicly traded securities
an operating segment based on discounted cash flows,
with similar quality and yield and other factors gen- management considers other information to validate
the reasonableness of its valuations including public
erally pertinent to the valuation of investments. In
instances where a security is subject to transfer re- market comparables, multiples of recent mergers and
acquisitions of similar businesses and third-party as-
strictions, the value of the security is based prima-
sessments. Valuation multiples may be based on reve-
rily on the quoted price of a similar security without
nues, price-to-earnings and tangible capital ratios of
restriction but may be reduced by an amount esti-
comparable public companies and business segments.
mated to reﬂect such restrictions. In addition, even
These multiples may be adjusted to consider
where the value of a security is derived from an

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competitive differences including size, operating lever-
age, and other factors. We determine the carrying
amount of an operating segment based on the capital
required to support the segment’s activities including
its tangible and intangible assets. The determination of
a segment’s capital allocation requires management
judgment and considers many factors, including the
regulatory capital requirements and tangible capital
ratios of comparable public companies in relevant in-
dustry sectors. In certain circumstances, management
may engage a third party to validate independently its
assessment of the fair value of its operating segments.
If during any future period it is determined that an
impairment exists, the results of operations in that
period could be materially affected.

STOCK-BASED COMPENSATION

options, including vesting provisions and trading
limitations that impact their liquidity. Therefore,
the existing option-pricing models, including Black-
Scholes, do not necessarily provide a reliable mea-
sure of the fair value of employee stock options.

Effective January 1, 2004, we elected to account on a
prospective basis for stock-based employee compensa-
tion under the fair value method, as prescribed by
Statement of Financial Accounting Standards
No. 123, ‘‘Accounting and Disclosure of Stock-Based
Compensation’’ as amended by Statement of Financial
Accounting Standards No. 148, ‘‘Accounting for Stock-
Based Compensation – Transition and Disclosure.’’

CONTINGENCIES

We are involved in various pending and potential
complaints, arbitrations, legal actions, investigations
and proceedings related to our business. Some of
these matters involve claims for substantial amounts,
including claims for punitive and other special dam-
ages. The number of these complaints, legal actions,
investigations and regulatory proceedings has been
increasing in recent years. We have, after consulta-
tion with outside counsel and consideration of facts
currently known by management, recorded esti-
mated losses in accordance with Statement of Finan-
cial Accounting Standards No. 5, ‘‘Accounting for
Contingencies,’’ to the extent that claims are proba-
ble of loss and the amount of the loss can be reason-
ably estimated. The determination of these reserve
amounts requires significant judgment on the part of
management. In making these determinations, man-
agement considers many factors, including, but not
limited to, the loss and damages sought by the plain-
tiff or claimant, the basis and validity of the claim,
the likelihood of successful defense against the claim,
and the potential for, and magnitude of, damages or
settlements from such pending and potential com-
plaints, legal actions, arbitrations, investigations and
proceedings, and fines and penalties or orders from
regulatory agencies.

As part of our compensation of employees, we may
use stock-based compensation, including stock op-
tions, restricted stock and other stock-based
awards. These awards may be for key employees or
in connection with sales and production-based in-
centives. Compensation related to restricted stock is
amortized over the vesting period of the award,
which is generally three to ﬁve years, and is in-
cluded in our results of operations as compensation.
Accounting principles generally accepted in the
United States allow alternative methods of account-
ing for stock options, including an ‘‘intrinsic value’’
method and a ‘‘fair value’’ method. The intrinsic
value method is intended to reﬂect the impact of
stock options on stockholders based on the appreci-
ation in the stock option over time, generally driven
by ﬁnancial performance. The fair value method
requires an estimate of the value of stock options to
be recognized as compensation over the vesting pe-
riod of the awards. Historically, we have used the
intrinsic value method and did not recognize the
impact of these awards as compensation expense.
Accordingly, we provided disclosure of the impact
of the estimated fair value of stock options on our
compensation and reported income in the notes to
the consolidated ﬁnancial statements. In determin- Under the terms of our separation and distribution
ing the estimated fair value of stock options, we
agreement with U.S. Bancorp and ancillary agree-
used the Black-Scholes option-pricing model, which ments, we will generally be responsible for all liabil-
ities relating to our business, including those
requires judgment regarding certain assumptions,
liabilities relating to our business while it was oper-
including the expected life of the options granted,
ated as a segment of U.S. Bancorp under the super-
dividend yields and stock volatility. Certain of these
vision of its management and board of directors
assumptions were based on the stock performance
of U.S. Bancorp and may not reﬂect assumptions
and while our employees were employees of
that would be used by us as a stand-alone entity. U.S. Bancorp servicing our business. Similarly,
Also, employee stock options have characteristics U.S. Bancorp will generally be responsible for all
liabilities relating to the businesses U.S. Bancorp
that are signiﬁcantly different from those of traded

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retained. However, in addition to our established
reserves, U.S. Bancorp has agreed to indemnify us in
an amount of up to $17.5 million for losses that
result from third-party claims relating to research
analyst independence, regulatory investigations re-
garding the allocation of IPO shares to directors
and ofﬁcers of investment banking clients, and reg-
ulatory investigations into our mutual fund prac-
tices. U.S. Bancorp has the right to terminate this
indemniﬁcation obligation in the event of a change
in control of our company.

Subject to the foregoing, we believe, based on cur-
rent knowledge, after consultation with counsel and
after taking into account our established reserves
and the U.S. Bancorp indemnity agreement, that
pending legal actions, investigations and proceed-
ings will be resolved with no material adverse effect
on our ﬁnancial condition. However, if, during any
period, a potential adverse contingency should be-
come probable or resolved for an amount in excess
of the established reserves and indemniﬁcation, the
results of operations in that period could be materi-
ally affected.

Liquidity and Capital Resources

short-term borrowings of $91.0 million and subor-
dinated debt of $35.0 million, net of $33.9 million
in capital contributions from U.S. Bancorp.

CASH FLOWS FOR THE YEAR ENDED
DECEMBER 2002

Cash and cash equivalents increased $4.9 million in
2002 to $32.6 million at December 31, 2002. Oper-
ating activities provided cash of $297.3 million.
Cash of $5.8 million was used for investing activi-
ties. Cash of $286.6 million was used for ﬁnancing
activities, including the reduction of short-term bor-
rowings of $257.6 million and subordinated debt of
$260.0 million, net of $231.0 million in capital
contributions from U.S. Bancorp.

CASH FLOWS FOR THE YEAR ENDED
DECEMBER 2001

Cash and cash equivalents decreased $50.0 million
to $27.7 million at December 31, 2001. Operating
activities provided cash of $11.6 million. Cash of
$41.0 million was used for investing activities. Cash
of $20.6 million was used for ﬁnancing activities,
including the reduction of short-term borrowings of
$87.1 million and a capital distribution of $8.5 mil-
lion to U.S. Bancorp, offset partially by a $75.0 mil-
lion capital contribution from U.S. Bancorp to
ensure adequate levels of capital through signiﬁcant
system conversions.

FUNDING SOURCES

We have a liquid balance sheet. Most of our assets
consist of cash and assets readily convertible into
cash. Securities inventories are stated at fair value
and are generally readily marketable. Customers’
margin loans are collateralized by securities and
have ﬂoating interest rates. Other receivables and
payables with customers and other brokers and As of December 31, 2003, we had uncommitted
credit agreements with banks totaling $550 million,
dealers usually settle within a few days. Our assets
comprising $450 million in discretionary secured
are ﬁnanced by our equity capital, bank lines of
lines and $100 million in discretionary unsecured
credit, subordinated debt, proceeds from securities
lending and securities sold under agreements to re-
lines. In addition, we have established an arrange-
purchase, in addition to non-interest bearing liabili- ment to obtain ﬁnancing using our securities held
by our clearing bank at the end of each day as
ties, such as checks and drafts payable, payables to
customers and employee compensation payable.
collateral. In addition, we will use repurchase agree-
The ﬂuctuations in cash ﬂows from ﬁnancing activi- ments and securities lending as additional sources
ties are directly related to daily operating activities
from our various businesses.

of funding.

CASH FLOWS FOR THE YEAR ENDED
DECEMBER 2003

Cash and cash equivalents increased $51.8 million
in 2003 to $84.4 million at December 31, 2003.
Operating activities provided cash of $159.0 mil-
lion. Cash of $15.1 million was used for investing
activities. Cash of $92.1 million was used for ﬁ-
nancing activities, including the net reduction of

In addition to the $550 million of ﬁnancing com-
mitments described above, our broker dealer sub-
sidiary is party to a $180 million subordinated debt
facility with an afﬁliate of U.S. Bancorp, which has
been approved by the NYSE for regulatory net
capital purposes as allowable in our broker dealer
subsidiary’s net capital computation. The interest
on the subordinated debt facility is based on the
three-month London Interbank Offer Rate and the
entire amount outstanding matures in 2008.

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CASH REQUIREMENTS

The following table provides a summary of our con-
tractual obligations as of December 31, 2003:

(Dollars in Millions)

Long-term borrowings

Operating leases
Venture fund commitments (a)
Technology contracts

Cash award program

2005
Through
2006

–

43.8

–

15.7

11.8

2007
Through
2008

$180.0

36.2

–

12.5

11.2

2009
and
Thereafter

–

84.2

–

Total

$180.0

192.5

1.7

38.1

47.0

2004

–

28.3

–

9.9

24.0

Total

$62.2

$71.3

$239.9

$84.2

$459.3

(a) The venture fund commitments have no speciﬁed call dates. The timing of capital calls is based on market conditions and investment opportunities.

dealer subsidiary, is subject to the capital require-

As of December 31, 2003, our long-term borrow-
ings were $180.0 million, all due in 2008. Our min- ments of the U.K. Financial Services Authority.
imum lease commitments for noncancelable ofﬁce
space and equipment leases were $192.5 million. Off-balance Sheet Arrangements
Certain leases have renewal options and clauses for
escalation and operating cost adjustments. We have Our off-balance sheet arrangements are described in
commitments to invest an additional $1.7 million in Note 19 to the consolidated ﬁnancial statements
venture capital funds and commitments for technol-
ogy contracts of $38.1 million.

and are incorporated herein by reference.

CAPITAL REQUIREMENTS

Enterprise Risk Management

Risk is an inherent part of our business. Market
risk, credit risk, operational risk and legal, regula-
tory and compliance risk are the principal risks in
our business activities, and we seek to identify, as-
sess and monitor each risk in accordance with de-
ﬁned policies and procedures. The extent to which
we properly and effectively manage each of the vari-
ous types of risk involved in our activities is critical
to our ﬁnancial condition and proﬁtability.

As a registered broker dealer and member ﬁrm of
the NYSE, our broker dealer subsidiary is subject to
the uniform net capital rule of the SEC and the net
capital rule of the NYSE. We have elected to use the
alternative method permitted by the uniform net
capital rule, which requires that we maintain mini-
mum net capital of the greater of $1.0 million or
2 percent of aggregate debit balances arising from
customer transactions, as this is deﬁned in the rule.
The NYSE may prohibit a member ﬁrm from ex- With respect to market risk and credit risk, the
cornerstone of our risk management process is daily
panding its business or paying dividends if resulting
net capital would be less than 5 percent of aggre-
communication between traders, trading depart-
gate debit balances. Advances to afﬁliates, repay- ment management and senior management con-
cerning our inventory positions and overall market
ment of subordinated liabilities, dividend payments
risk proﬁle. Our enterprise risk management de-
and other equity withdrawals are subject to certain
partment supplements this communication process
notiﬁcation and other provisions of the uniform net
capital rule and the net capital rule of the NYSE.
by providing its independent perspective on our
We expect these provisions will not impact our abil- market and credit risk proﬁle on a daily basis
through a series of reports. The broader goals of
ity to meet current and future obligations. In addi-
our enterprise risk management department are to
tion, we are subject to certain notiﬁcation
understand the market risk proﬁle of each trading
requirements related to withdrawals of excess net
area, to consolidate risk monitoring company-wide,
capital from our broker dealer subsidiary. Our bro-
to articulate large trading or position risks to senior
ker dealer subsidiary is also registered with the
Commodity Futures Trading Commission and management, to provide traders with perspectives
therefore is subject to CFTC regulations. Piper Jaf-
on their positions and to ensure accurate mark-to-
fray Ltd., our registered United Kingdom broker market pricing.

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In addition to supporting daily risk management
processes on the trading desks, our enterprise risk
management department supports the market risk
and institutional credit risk committees. The
committees oversee risk management practices,
including deﬁning acceptable risk tolerances and
approving risk management policies.

The following discussion of our risk management
procedures for our principal risks and the estimated
amounts of our market risk exposure generated by
our statistical analyses contains forward-looking
statements. The analyses used to assess such risks
are not predictions of future events, and actual re-
sults may vary signiﬁcantly from such analyses due
to events in the markets in which we operate and
certain other factors as described herein.

MARKET RISK

tions generate proﬁt or loss on a daily basis is cru-
cial to managing risk.

INTEREST RATE RISK

Interest rate risk represents the potential loss from
adverse changes in market interest rates. We are
exposed to interest rate risk arising from changes in
the level and volatility of interest rates, changes in
the shape of the yield curve, changes in credit
spreads, and the rate of mortgage prepayment. In-
terest rate risk is managed through the use of short
positions in U.S. government and corporate debt
securities, interest rate swaps, options, futures and
forward contracts. We utilize interest rate swap
contracts to hedge a portion of our ﬁxed income
inventory and to hedge residual cash ﬂows from our
tender option bond program. These interest rate
swap contracts are recorded at fair value with the
changes in fair value recognized in earnings.

EQUITY PRICE RISK

Market risk represents the risk of ﬁnancial loss that
may result from the change in value of a ﬁnancial
instrument due to ﬂuctuations in its market price.
Market risk can be exacerbated in times of trading
Equity price risk represents the potential loss in value
illiquidity when market participants refrain from due to adverse changes in the level or volatility of
equity prices. We are exposed to equity price risk
transacting in normal quantities and/or at normal
through our trading activities in both listed and over-
bid-offer spreads. Our exposure to market risk is
the-counter equity markets. We attempt to reduce
directly related to our role as a ﬁnancial intermedi-
the risk of loss inherent in our inventory of equity
ary in customer trading and to our market-making
securities by establishing position limits and manag-
activities. Market risk is inherent to both cash and
ing net position levels with those limits, monitoring
derivative ﬁnancial instruments. The scope of our
inventory turnover and entering into hedge transac-
market risk management policies and procedures
tions designed to mitigate our market risk profile.
includes all market-sensitive ﬁnancial instruments.

VALUE-AT-RISK

We use a variety of risk management techniques
and hedging strategies, including establishing posi-
tion limits by product type and industry sector, Value-at-risk is the maximum expected loss, for a
given level of conﬁdence, which could occur over a
closely monitoring inventory turnover, maintaining
speciﬁed time period for a portfolio of securities.
long and short positions in related securities, and
For our value-at-risk calculations, we use a 99 per-
using interest rate swaps, exchange-traded interest
cent conﬁdence level over a 10-day holding period,
rate futures and options, exchange-traded equity
options and other derivative instruments for hedg-
adjusted for liquidity considerations but excluding
ing. However, we do not use derivatives for specu- most diversiﬁcation beneﬁts. Interest rate and credit
spread risk are modeled by mapping positions to
lative purposes.
their 10-year equivalent values and then applying a
2.326 standard deviation (that is, a 99 percent con-
ﬁdence level) ‘‘shock’’ to the curve.

Trading desk management, senior management and
risk management also review the age and composi-
tion of inventory accounts and review risk reports
appropriate to the risk proﬁle of each trading activ- We perform a daily value-at-risk analysis of substan-
tially all our trading positions, including fixed in-
ity. Typically, market conditions are evaluated, cer-
come, equities, convertible bonds and all associated
tain transactions are reviewed and quantitative
hedges. We use a value-at-risk model because it pro-
methods, such as value-at-risk are employed. These
vides a common metric for assessing market risk. We
activities seek to ensure that trading strategies are
regularly evaluate our value-at-risk model in an ef-
within acceptable risk tolerance parameters. We
fort to more accurately measure the risk of loss.
also believe that an understanding of how our posi-

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assurance that actual losses occurring over any
The modeling of the risk characteristics of our trad-
10-day period arising from changes in market condi-
ing positions involves a number of assumptions and
tions will not exceed the value-at-risk amounts
approximations. While we believe that these assump-
shown below or that such losses will not occur more
tions and approximations are reasonable, there is no
than once in one hundred 10-day periods. However,
uniform industry methodology for estimating value-
at-risk, and different assumptions and approxima- we believe value-at-risk models are an appropriate
tions could produce different value-at-risk estimates. methodology for comparing risk profiles across dif-
ferent risk types, different business lines, and differ-
ent companies in the financial services industry.

Value-at-risk has inherent limitations, including reli-
ance on historical data, which may not accurately
predict future market risk, and the quantitative risk
information generated is limited by the parameters
established in creating the models. There can be no

The following table provides a quantiﬁcation of the
estimated value-at-risk for each component of mar-
ket risk for the periods presented:

2003

2002

2001

$ 3,705 $2,961 $3,580

796

880

853

$ 4,501 $3,841 $4,433

AT DECEMBER 31
(Dollars in Thousands)

Interest Rate Risk

Equity Price Risk

Aggregate Value-at-Risk

The table below illustrates the high, low and aver-
age value-at-risk calculated on a daily basis for each
component of market risk during calendar years
2003, 2002 and 2001. The increase in average eq-

uity price risk from 2002 to 2003 is the result of
our addition of a convertible business in November
2002:

FOR THE YEAR ENDED DECEMBER 31, 2003
(Dollars in Thousands)

Interest Rate Risk

Equity Price Risk

Aggregate Value-at-Risk

FOR THE YEAR ENDED DECEMBER 31, 2002

Interest Rate Risk

Equity Price Risk

Aggregate Value-at-Risk

FOR THE YEAR ENDED DECEMBER 31, 2001

Interest Rate Risk

Equity Price Risk

Aggregate Value-at-Risk

CREDIT RISK

High

Low Average

$5,336 $2,433 $3,892

3,810

7,903

561

3,733

1,617

5,509

High

Low Average

$5,088 $1,848 $3,857

1,092

5,961

564

781

2,466

4,638

High

Low Average

$4,643 $2,049 $3,077

1,891

5,262

181

641

2,422

3,718

Credit risk in our Capital Markets business arises
from potential non-performance by counterparties,
customers, borrowers or debt security issuers. We are
exposed to credit risk in our role as a trading
counterparty to dealers and customers, as a holder of
securities and as a member of exchanges and clearing ment through depositories and clearing banks.
organizations. Our client activities involve the execu-

tion, settlement and financing of various transac-
tions. Client activities are transacted on a cash,
delivery versus payment or margin basis. Our credit
exposure to institutional client business is mitigated
by the use of industry standard delivery versus pay-

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believe will cover critical systems on a company-
Credit exposure associated with our Private Client
Services business consists primarily of customer wide basis, and redundancies are built into the sys-
tems as we have deemed appropriate. We also use
margin accounts, which are monitored daily and
periodic self-assessments and internal audit reviews
are collateralized. The treasury and credit services
as a further check on operational risk.
department, in conjunction with our credit commit-
tee, establishes and reviews appropriate credit limits
for our Private Client Services customers.

Our institutional credit committee reviews risk as-
institutional counterparties with
sociated with
whom we hold repurchase and resale agreement
facilities, stock borrow or loan facilities and other
documented institutional counterparty agreements
that may give rise to credit exposure. Counterparty
levels are established relative to the level of
counterparty capital and ratings.

We are subject to credit concentration risk if we
hold large individual securities positions, execute
large transactions with individual counterparties or
groups of related counterparties, extend large loans
to individual borrowers or make substantial under-
writing commitments. Concentration risk can occur
by industry, geographic area or type of client. Cli-
ent receivables and payables and stock borrowing
and lending activities are conducted with a large
number of clients and counterparties. Potential
credit concentration risk is carefully monitored and
is managed through the use of policies and limits.

We are also exposed to the risk of loss related to
changes in the credit spreads of debt instruments.
Credit spread risk arises from potential changes in
an issuer’s credit rating or the market’s perception
of the issuer’s credit worthiness. Credit spread risk
is managed through offsetting long or short posi-
tions in various related securities.

OPERATIONAL RISK

In order to mitigate and control operational risk,
we have developed and continue to enhance speciﬁc
policies and procedures that are designed to iden-
tify, measure, control and manage operational risk
at levels we believe are appropriate throughout the
organization and within such departments as ac-
counting, operations, technology, legal and compli-
ance. These control mechanisms attempt to ensure
that operations policies and procedures are being
followed and that our various businesses are oper-
ating within established corporate policies and
limits.

LEGAL, REGULATORY AND COMPLIANCE RISK

Legal, regulatory and compliance risk includes the
risk of non-compliance with applicable legal and
regulatory requirements and the risk that a
counterparty’s performance obligations will be un-
enforceable. We are generally subject to extensive
regulation in the various jurisdictions in which we
conduct our business. We have established proce-
dures that are designed to ensure compliance with
applicable statutory and regulatory requirements,
including those relating to, among others, regula-
tory net capital requirements, sales and trading
practices, use and safekeeping of customer funds
and securities, credit extension, money-laundering,
privacy and record-keeping. We have established
internal policies relating to business conduct, ethics
and compliance with applicable requirements, as
well as procedures designed to ensure that these
policies are followed.

Operational risk refers to the risk of direct or indi-
rect loss resulting from inadequate or failed internal Effects of Inflation
processes, people and systems or from external
Because our assets are liquid in nature, they are not
events. We rely on the ability of our employees, our
signiﬁcantly affected by inﬂation. However, the rate
internal systems and processes and systems at com-
of inﬂation affects our expenses, such as employee
puter centers operated by third parties to process a
large number of transactions. These transactions
compensation, ofﬁce space leasing costs and com-
may cross multiple markets. In the event of a break- munications charges, which may not be readily re-
coverable in the price of services offered by us. To
down or improper operation of our systems or
the extent inﬂation results in rising interest rates
processes or improper action by our employees or
third-party vendors, we could suffer ﬁnancial loss,
and has other adverse effects upon the securities
regulatory sanctions and damage to our reputation. markets, it may adversely affect our ﬁnancial posi-
We have disaster recovery plans in place that we

tion and results of operations.

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P I P E R J A F F R AY C O M P A N I E S

I N D E X T O A U D I T E D C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

Report of Independent Auditors

Report of Independent Accountants

Consolidated Financial Statements

Consolidated Statements of Financial Condition

Consolidated Statements of Operations

Consolidated Statements of Changes in Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Page

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R E S P O N S I B I L I T Y F O R F I N A N C I A L S TAT E M E N T S

O F P I P E R J A F F R A Y C O M P A N I E S

Responsibility for ﬁnancial statements and other information presented throughout the Annual Report
rests with the management of Piper Jaffray Companies (the ‘‘Company’’). The Company believes that the
consolidated ﬁnancial statements have been prepared in conformity with accounting principles generally
accepted in the United States and present fairly the substance of transactions based on the circumstances
and management’s best estimates and judgment. All ﬁnancial information throughout the Annual Report is
consistent with that in the ﬁnancial statements.

In meeting its responsibilities for the reliability of the ﬁnancial statements, the Company depends on its
system of internal controls. The system is designed to provide reasonable assurance that assets are safe-
guarded and transactions are executed in accordance with the appropriate corporate authorization and
recorded properly to permit the preparation of the ﬁnancial statements. To test compliance, the Company
carries out an extensive audit program. This program includes a review for compliance with written
policies and procedures and a comprehensive review of the adequacy and effectiveness of the internal
control systems. Although control procedures are designed and tested, it must be recognized that there are
limits inherent in all systems of internal accounting control and, as such, errors and irregularities may
nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and
expected beneﬁts of the controls. The Company believes that its system of internal controls provides
reasonable assurance that errors or irregularities that could be material to the ﬁnancial statements are
prevented or would be detected within a timely period by employees in the normal course of performing
their assigned functions.

The Board of Directors of the Company has an Audit Committee composed of directors who are not
ofﬁcers or employees of Piper Jaffray Companies. The committee meets periodically with management, the
internal auditors and the independent accountants to consider audit results to discuss internal accounting
control, auditing and ﬁnancial reporting matters.

The Company’s independent accountants, Ernst & Young LLP, have been engaged to render an indepen-
dent professional opinion on the ﬁnancial statements. Their opinion on the ﬁnancial statements is based on
procedures conducted in accordance with auditing standards generally accepted in the United States and
forms the basis for their report as to the fair presentation, in the ﬁnancial statements, of the Company’s
ﬁnancial condition and results of operations.

Andrew S. Duff
Chairman and Chief Executive Ofﬁcer

Sandra G. Sponem
Chief Financial Ofﬁcer

P I P E R J A F F R AY A N N U A L R E P O R T 2003

R E P O R T O F I N D E P E N D E N T A U D I T O R S

To the Board of Directors and Shareholders
of Piper Jaffray Companies:

We have audited the accompanying consolidated statement of ﬁnancial condition of Piper Jaffray Compa-
nies (the ‘‘Company’’) as of December 31, 2003, and the related consolidated statements of operations,
changes in shareholders’ equity, and cash ﬂows for the year then ended. These ﬁnancial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these ﬁnancial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes
assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluat-
ing the overall ﬁnancial statement presentation. We believe that our audit provides a reasonable basis for
our opinion.

In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the
consolidated ﬁnancial position of Piper Jaffray Companies at December 31, 2003, and the consolidated
results of their operations and their cash ﬂows for the year then ended in conformity with accounting
principles generally accepted in the United States.

Minneapolis, Minnesota
January 27, 2004,
except for Note 17, as to which the date is
February 12, 2004

P I P E R J A F F R AY A N N U A L R E P O R T 2003

R E P O R T O F I N D E P E N D E N T A C C O U N TA N T S

To the Board of Directors and Shareholders
of Piper Jaffray Companies:

In our opinion, the accompanying consolidated statement of ﬁnancial condition as of December 31, 2002
and the related consolidated statements of operations, changes in shareholders’ equity, and cash ﬂows for
each of the two years in the period ended December 31, 2002 present fairly, in all material respects, the
ﬁnancial position of Piper Jaffray Companies and its subsidiaries (the ‘‘Company’’) at December 31, 2002,
and the results of their operations and their cash ﬂows for each of the two years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted in the United States of
America. These ﬁnancial statements are the responsibility of the Company’s management; our responsibil-
ity is to express an opinion on these ﬁnancial statements based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance about whether the
ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the ﬁnancial statements, assessing the accounting
principles used and signiﬁcant estimates made by management, and evaluating the overall ﬁnancial state-
ment presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 of the notes to the consolidated ﬁnancial statements, in 2002, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 142, ‘‘Goodwill and Other Intangible
Assets.’’

Minneapolis, Minnesota
April 30, 2003

P I P E R J A F F R AY A N N U A L R E P O R T 2003

P I P E R J A F F R AY C O M P A N I E S

C O N S O L I D AT E D S TAT E M E N T S O F F I N A N C I A L C O N D I T I O N

AT DECEMBER 31
(Amounts in thousands, except share data)

Assets

Cash and cash equivalents

Cash and cash equivalents segregated for regulatory purposes

Receivables:

Customers (net of allowance of $1,993 and $1,593, respectively)

Brokers, dealers and clearing organizations

Deposits with clearing organizations

Securities purchased under agreements to resell

Trading securities owned

Trading securities owned and pledged as collateral

Total trading securities owned

Fixed assets (net of accumulated depreciation and amortization of

$103,573 and $88,969, respectively)

Goodwill

Other receivables

Other assets

Total assets

Liabilities and Shareholders’ Equity

Short-term ﬁnancing

Payables:

Customers

Checks and drafts

Brokers, dealers and clearing organizations

Securities sold under agreements to repurchase

Trading securities sold, but not yet purchased

Accrued compensation

Other liabilities and accrued expenses

Total liabilities

Subordinated debt

Shareholders’ equity:

Invested capital

Common stock, $0.01 par value; 100,000,000 shares authorized,

19,334,261 issued and outstanding

Additional paid-in capital

Total shareholders’ equity

2003

2002

84,436

32,615

66,000

–

463,557

238,393

66,570

306,987

342,994

314,618

474,002

217,457

46,075

240,014

80,129

393,555

657,612

473,684

60,757

305,635

38,553

92,147

69,059

305,635

72,012

111,392

$ 2,380,647

$2,041,945

$ 159,000

$ 250,040

226,163

64,438

224,208

178,716

386,281

194,583

97,463

143,580

57,919

216,675

115,791

171,999

140,972

120,112

1,530,852

180,000

1,217,088

215,000

–

609,857

193

669,602

–

669,795

609,857

Total liabilities and shareholders’ equity

$ 2,380,647

$2,041,945

See Notes to Consolidated Financial Statements

P I P E R J A F F R AY A N N U A L R E P O R T 2003

P I P E R J A F F R AY C O M P A N I E S

C O N S O L I D AT E D S TAT E M E N T S O F O P E R AT I O N S

YEAR ENDED DECEMBER 31
(Amounts in thousands, except per share data)

Revenues

Commissions and fees

Principal transactions

Investment banking

Interest

Other income

Total revenues

Interest expense

Net revenues

Non-interest expenses

Compensation and beneﬁts

Occupancy and equipment

Communications

Floor brokerage and clearance

Marketing and business development

Outside services

Cash award program

Regulatory settlement

Amortization of acquisition-related compensation and goodwill

Merger and restructuring

Royalty fee

Other operating expenses

2003

2002

2001

$ 256,747

$ 275,682

$ 302,289

215,191

229,945

45,276

59,082

806,241

19,511

171,957

208,740

59,685

47,303

763,367

34,315

181,469

247,929

95,436

52,865

879,988

79,216

786,730

729,052

800,772

482,397

449,329

513,623

58,025

37,599

22,755

39,030

34,219

24,000

–

3,911

42,960

55,549

36,316

26,040

44,115

32,717

–

32,500

–

7,976

7,482

31,067

60,121

41,082

22,092

49,706

22,285

–

17,641

65,697

55,753

25,577

Total non-interest expenses

744,896

723,091

873,577

Income (loss) before income tax expense (beneﬁt)

Income tax expense (beneﬁt)

Net income (loss)

Earnings per common share

Basic

Diluted

Weighted average number of common shares

Basic

Diluted

See Notes to Consolidated Financial Statements

41,834

15,835

$ 25,999

1.35

5,961

5,855

(72,805)

(22,754)

106

$ (50,051)

0.01

(2.60)

19,237

19,160

19,279

P I P E R J A F F R AY A N N U A L R E P O R T 2003

P I P E R J A F F R AY C O M P A N I E S

C O N S O L I D AT E D S TAT E M E N T S O F C H A N G E S I N S H A R E H O L D E R S ’ E Q U I T Y

(Amounts in thousands, except share data)

Balance at December 31, 2000

Capital contribution from U.S. Bancorp

Distribution to U.S. Bancorp

Net loss

Balance at December 31, 2001

Capital contribution from U.S. Bancorp

Distribution to U.S. Bancorp

Net income

Balance at December 31, 2002

Capital contribution from U.S. Bancorp

Distribution to U.S. Bancorp

Net income

Recapitalization upon spin off from

Common
Shares
Outstanding

Common
Stock

Additional
Paid-In
Capital

Invested
Capital

Total
Shareholders’
Equity

–

$ 362,331

75,000

(8,556)

(50,051)

$ 378,724

250,000

(18,973)

106

$ 609,857

37,500

(3,561)

25,999

–

U.S. Bancorp

19,334,261

193

669,602

(669,795)

669,795

Balance at December 31, 2003

19,334,261

193

$ 669,602

–

$ 669,795

See Notes to Consolidated Financial Statements

P I P E R J A F F R AY A N N U A L R E P O R T 2003

P I P E R J A F F R AY C O M P A N I E S

C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S

YEAR ENDED DECEMBER 31
(Dollars in thousands)

Operating Activities

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by

operating activities:

Depreciation and amortization

Deferred income taxes

Loss on disposal of ﬁxed assets

Restricted stock amortization

Goodwill amortization and impairment charges

Decrease (increase) in operating assets:

Cash and cash equivalents segregated for regulatory purposes

Receivables:

Customers

Brokers, dealers and clearing organizations

Deposits with clearing organizations

Securities purchased under agreements to resell

Net trading securities owned

Other receivables

Other assets

Increase (decrease) in operating liabilities:

Payables:

Customers

Checks and drafts

Brokers, dealers and clearing organizations

Securities sold under agreements to repurchase

Accrued compensation

Other liabilities and accrued expenses

2003

2002

2001

$ 25,999

106

$ (50,051)

19,031

(6,491)

4,380

3,859

–

(66,000)

10,445

(20,936)

(20,495)

(66,973)

30,354

33,459

21,877

82,583

6,519

7,533

62,925

53,611

(22,649)

20,787

(11,386)

3,861

–

187,350

223,017

(31,417)

132,123

31,043

34,986

99,253

(113,427)

(37,004)

(91,397)

(87,422)

(15,066)

(48,159)

20,428

783

116

14,903

23,542

–

256,393

(257,969)

46,277

(22,851)

35,514

(43,385)

(21,632)

53,621

(7,203)

33,277

(63,127)

(102,669)

95,645

Net cash provided by operating activities

159,031

297,331

11,612

Investing Activities

Purchases of ﬁxed assets, net

(15,109)

(5,800)

(40,963)

Net cash used in investing activities

(15,109)

(5,800)

(40,963)

Financing Activities

Decrease in short-term ﬁnancing, net

Capital contribution from U.S. Bancorp

Capital distribution to U.S. Bancorp

Net decrease in subordinated debt

(91,040)

(257,652)

37,500

(3,561)

250,000

(18,973)

(35,000)

(260,000)

(87,092)

75,000

(8,556)

–

Net cash used in ﬁnancing activities

(92,101)

(286,625)

(20,648)

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

51,821

32,615

4,906

27,709

(49,999)

77,708

Cash and cash equivalents at end of year

$ 84,436

$ 32,615

$ 27,709

Supplemental disclosure of cash ﬂow information –

Cash paid (received) during the year for:

Interest

Income taxes

See Notes to Consolidated Financial Statements

$ 19,427

$ 36,001

$ 82,977

$ (1,937)

1,311

$ (4,190)

P I P E R J A F F R AY A N N U A L R E P O R T 2003

P I P E R J A F F R AY C O M P A N I E S

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 1 Background and Basis of Presentation

BACKGROUND
Piper Jaffray Companies is the parent company of America and include the adjustments necessary to
reﬂect the Company’s operations as if its organiza-
Piper Jaffray & Co. (‘‘Piper Jaffray’’), a securities
broker dealer and investment banking firm; Piper
tional changes had been consummated prior to the
Jaffray Ventures Inc. (‘‘Piper Jaffray Ventures’’), Distribution. The consolidated ﬁnancial statements
prior to the Distribution have been derived from the
a private equity venture capital firm managing
ﬁnancial statements and accounting records of USB
investments in emerging growth companies; Piper
using the historical results of operations and histori-
Jaffray Ltd., a firm providing securities brokerage
cal basis of the assets and liabilities of the Com-
and investment banking services in Europe through
pany’s business. However,
an office located in London, England; and Piper Jaf-
the consolidated
ﬁnancial statements included herein may not neces-
fray Financial Products Inc. and Piper Jaffray Finan-
sarily be indicative of the Company’s results of op-
cial Products II Inc., two entities that facilitate Piper
erations, ﬁnancial position and cash ﬂows in the
Jaffray Companies customer derivative transactions.
future or what its results of operations, ﬁnancial
position and cash ﬂows would have been had the
Company been a stand-alone company during the
periods presented.

On April 28, 2003, Piper Jaffray Companies was
incorporated
in Delaware as a subsidiary of
U.S. Bancorp (‘‘USB’’) to effect the spin off of USB’s
capital markets business to its shareholders. On De-
cember 31, 2003, after receiving regulatory ap- Generally, the consolidated results include revenues
generated and expenses incurred based on customer
proval, USB distributed to its shareholders all of its
relationships and related business activities. In cer-
interest in Piper Jaffray Companies and its subsidi-
tain situations, afﬁliated entities of USB may have
aries (collectively, the ‘‘Company’’). On that date,
provided services to and thus charged expense to
19,334,261 shares of Piper Jaffray Companies com-
the Company. These expenses primarily relate to
mon stock were issued to USB shareholders (the
providing employee-related services and beneﬁts,
‘‘Distribution’’) based on a distribution ratio of one
technology and data processing services, and corpo-
share of Piper Jaffray Companies common stock for
every 100 shares of USB common stock owned (the
rate functions including audit, tax and real estate
‘‘Distribution Ratio’’). In lieu of receiving fractional management services. Costs included on the consol-
idated ﬁnancial statements for shared services were
shares of Piper Jaffray Companies common stock,
determined based on actual costs to USB and allo-
shareholders received cash from USB for their frac-
cated based on the Company’s proportionate usage
tional interest.
of those services. Proportionate usage was deter-
mined based on the number of employees, actual
hours used, square footage of ofﬁce space or other
similar methodologies. Management believes the as-
sumptions underlying the consolidated ﬁnancial
statements are reasonable.

The consolidated ﬁnancial statements include the
accounts and historical operations of the Company
as well as certain assets, liabilities, and related oper-
ations transferred to Piper Jaffray Companies (the
‘‘Contribution’’) from USB immediately prior to the
Distribution. Because prior to the Distribution no
direct ownership relationship existed among all the On the consolidated ﬁnancial statements, income
taxes were determined on a separate return basis as
various units comprising the Company, USB and its
if the Company had not been eligible to be included
subsidiaries’ interest in the Company is shown as
in the consolidated income tax return of USB and
invested capital in the consolidated ﬁnancial state-
its afﬁliates. However, USB was managing its tax
ments prior to the Distribution.
position for the beneﬁt of its entire portfolio of
businesses, and its tax strategies are not necessarily
BASIS OF PRESENTATION
The consolidated ﬁnancial statements of the Com-
reﬂective of the tax strategies that the Company
pany are prepared in conformity with accounting would have followed or will follow as a stand-alone
principles generally accepted in the United States of

entity.

5 0

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 2

Summary of Signiﬁcant Accounting Policies

PRINCIPLES OF CONSOLIDATION
The consolidated ﬁnancial statements include the
deposit cash with the Company. The Company
accounts of Piper Jaffray Companies and its subsid- monitors the market value of securities borrowed
and loaned on a daily basis, with additional collat-
iaries. All material intercompany accounts and
eral obtained or refunded as necessary. Interest is
transactions have been eliminated.
accrued on securities borrowed and loaned transac-
tions and is included in other assets and other liabil-
ities and accrued expenses on the Consolidated
Statements of Financial Condition and the respec-
tive interest balances on the Consolidated State-

USE OF ESTIMATES
The preparation of ﬁnancial statements and related
disclosures in conformity with accounting princi-
ples generally accepted in the United States of
America requires management to make estimates ments of Operations.
and assumptions that affect the reported amounts
of assets and liabilities at the date of the ﬁnancial
statements and the reported amounts of revenues Customer securities transactions are recorded on a
settlement date basis while the related commission
and expenses during the reporting period. Actual
revenues and expenses are recorded on a trade date
results could differ from those estimates.
basis. Customer receivables and payables include
amounts related to both cash and margin transac-
tions. Securities owned by customers, including
those that collateralize margin or other similar
transactions, are not reﬂected on the Consolidated
Statements of Financial Condition.

CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and
highly liquid investments with maturities of 90 days
or less at the date of purchase.

CUSTOMER TRANSACTIONS

In accordance with Rule 15c3-3 of the Securities
Exchange Act of 1934, Piper Jaffray, as a registered
broker dealer carrying customer accounts, is subject
to requirements related to maintaining cash or qual-
iﬁed securities in a segregated reserve account for
the exclusive beneﬁt of its customers.

COLLATERALIZED SECURITIES TRANSACTIONS
Securities purchased under agreements to resell and
securities sold under agreements to repurchase are car-
ried at the contractual amounts at which the securities
will be subsequently resold or repurchased, including
accrued interest. It is the Company’s policy to take
possession or control of securities purchased under
agreements to resell at the time these agreements are
entered into. Counterparties are principally primary
dealers of U.S. Government securities and major fi-
nancial institutions. Collateral is valued daily and ad-
ditional collateral is obtained from or refunded to
counterparties, when appropriate.

INVESTMENT BANKING
Investment banking revenues, which include un-
derwriting fees, management fees and advisory
fees, are recorded when services for the transac-
tions are substantially completed under the terms
of each engagement. Expenses associated with
such transactions are deferred until the related
revenue is recognized or the engagement is other-
wise concluded. Investment banking revenues are
presented net of related expenses.

ALLOWANCE FOR DOUBTFUL ACCOUNTS
Management estimates an allowance for doubtful ac-
counts to reserve for probable losses from unsecured
and partially secured customer accounts. Manage-
ment is continually evaluating its receivables from cus-
tomers for collectibility and possible write-off by
examining the facts and circumstances surrounding
each customer where a loss is deemed possible.

TRADING SECURITIES OWNED AND TRADING

Securities borrowed and loaned result from transac-
tions with other brokers and dealers or ﬁnancial
institutions and are recorded at the amount of cash
SECURITIES SOLD, BUT NOT YET PURCHASED
Trading securities owned and trading securities
collateral advanced or received. These amounts are
sold, but not yet purchased are recorded on a trade
included in receivable from and payable to brokers,
dealers and clearing organizations on the Consoli-
date basis and are stated at market or fair value.
dated Statements of Financial Condition. Securities Unrealized gains and losses related to these ﬁnancial
instruments are reﬂected in principal transactions
borrowed transactions require the Company to de-
posit cash or other collateral with the lender. Secu-
on the Consolidated Statements of Operations. The
rities loaned transactions require the borrower to Company’s valuation policy is to use quoted market

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

pact the Company’s results of operations.

or dealer prices from independent sources where would not be signiﬁcant, but could adversely im-
they are available and reliable. The fair value of
trading securities, for which a quoted market or
dealer price is not available, is based on manage- OTHER RECEIVABLES
ment’s estimate, using the best information availa-
Included in other receivables are loans made to
ble, of amounts that could be realized under current
investment executives and other revenue-produc-
market conditions. Among the factors considered
ing employees, typically in connection with their
by management in determining the fair value of
recruitment. These loans are forgiven based on
these securities are the cost, terms and liquidity of
continued employment and are amortized to
compensation and benefits using the straight-line
the investment, the ﬁnancial condition and operat-
ing results of the issuer, quoted market price of method over the terms of the loans, which gener-
securities with similar quality and yield that are
publicly traded, and other factors generally perti-
nent to the valuation of investments.

ally range from three to five years.

In conjunction with these loans, management esti-
mates an allowance for loan losses. This allowance
is established for recipients who leave the Company
prior to full forgiveness of their loan balance and
the Company is subsequently not able to recover
the remaining balances. The Company determines
adequacy of the allowance based upon the collec-
tibility of unforgiven balances of departed employ-
ees, evaluation of the
loan portfolio, recent
experience related to attrition of certain revenue-
producing employees and other pertinent factors.

FIXED ASSETS
Fixed assets include ofﬁce equipment, software and
leasehold improvements. Depreciation of ofﬁce
equipment and software is provided using the
straight-line method over estimated useful lives of
three to ten years. Leasehold improvements are am-
ortized over their estimated useful life or the life of
the lease, whichever is shorter. Additionally, certain
costs incurred in connection with internal-use
software projects are capitalized and amortized
over the expected useful life of the asset, generally
three to seven years.

GOODWILL
The Company adopted Statement of Financial Ac-
counting Standards No. 142 (‘‘SFAS 142’’), ‘‘Good-
will and Other Intangible Assets,’’ on January 1,
2002. SFAS 142 addresses the accounting for good-
will and intangible assets subsequent to their acqui-
sition. The most signiﬁcant changes made by SFAS
142 are that goodwill and indeﬁnite-lived intangible
assets are no longer amortized and are to be tested
for impairment at least annually. Prior to the adop-
tion of SFAS 142, the Company amortized goodwill
using the straight-line method over a maximum pe-
riod of 25 years.

OTHER ASSETS
Included in other assets are investments that the
Company makes to fund deferred compensation lia-
bilities for certain employees. The Company fully
funds its deferred compensation liabilities by invest-
ing in venture capital stage companies or by invest-
ing in partnerships which invest in venture capital
stage companies. Future payments, if any, to de-
ferred compensation plan participants are directly
linked to the performance of these investments.
Also included in other assets are investments the
Company has made in various other venture capital
investments. Investments are carried at estimated
fair value based on valuations received from state-
ments obtained from the underlying fund manager
or based on published market quotes, with the re-
sulting gains and losses recognized in other income
on the Consolidated Statements of Operations. In
The recoverability of goodwill is evaluated annu-
the event a security is thinly traded or the market
ally, at a minimum, or on an interim basis if events
or circumstances indicate a possible inability to re-
price is not readily available for an investment,
alize the carrying amount. The evaluation includes management estimates fair value using other valua-
tion methods depending on the type of security and
assessing the estimated fair value of the goodwill
related market.
based on market prices for similar assets, where
available, and the present value of the estimated
future cash ﬂows associated with the goodwill. Be-
cause 100 percent of goodwill is treated as a non-
allowable asset for regulatory purposes, the impact
of any impairment on Piper Jaffray net capital

Net deferred tax assets are also included in other
assets. Refer to Note 21 for additional information
related to income taxes.

5 2

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guidance in SFAS 140, the Company does not con-
FAIR VALUE OF FINANCIAL INSTRUMENTS
solidate such QSPEs. The Company accounts for its
Substantially all of the Company’s financial instru-
involvement with such QSPEs under a ﬁnancial
ments are recorded at fair value or contract amounts
components approach in which the Company rec-
on the Company’s Consolidated Statements of Fi-
ognizes only its retained residual interest in the
nancial Condition. Financial instruments recorded at
fair value include trading securities owned and trad- QSPE. The Company accounts for such retained
ing securities sold, but not yet purchased.

interests at fair value.

Financial instruments carried at contract amounts
which approximate fair value, either have short-
term maturities (one year or less), are repriced fre-
quently, or bear market interest rates and, accord-
ingly, are carried at amounts approximating fair
value. Financial instruments carried at contract
amounts on the Consolidated Statements of Finan-
cial Condition include receivables from and pay-
ables to brokers, dealers and clearing organizations,
securities purchased under agreements to resell, se-
curities sold under agreements to repurchase, re-
ceivables from and payables to customers, short-
term ﬁnancing and subordinated debt.

STOCK-BASED COMPENSATION
Prior to the Distribution, certain employees of the
Company were eligible to participate in USB em-
ployee incentive plans consisting of stock options,
restricted stock or other deferred compensation that
are described more fully in Note 17. The Company
accounted for these stock option grants under the
intrinsic value method in accordance with Account-
ing Principles Board Opinion No. 25 (‘‘APB 25’’),
‘‘Accounting for Stock Issued to Employees’’ and,
accordingly, recognized no compensation expense
for the stock option grants as all options granted
under those plans had an exercise price equal to the
The carrying amount of subordinated debt closely market value of the underlying common stock on
approximates fair value based upon market rates of
interest available to the Company at December 31,
2003.

the date of grant.

INCOME TAXES
Income tax expense (beneﬁt) is provided for using
the asset and liability method. Deferred tax assets
and liabilities are recognized for the expected future
tax consequences attributable to temporary differ-
ences between amounts reported for income tax
purposes and ﬁnancial statement purposes, using
current tax rates. A valuation allowance is recog-
nized if it is anticipated that some or all of a de-
ferred tax asset will not be realized.

CONSOLIDATION OF SPECIAL PURPOSE ENTITIES
Special purpose entities (‘‘SPEs’’) are trusts, partner-
ships or corporations established for a particular
limited purpose. The Company follows the account-
ing guidance in Statement of Financial Accounting
Standards No. 140 (‘‘SFAS 140’’), ‘‘Accounting for
Transfers and Servicing of Financial Assets and Ex-
tinguishment of Liabilities,’’ to determine whether
or not such SPEs are required to be consolidated.
The Company engages in transactions with SPEs to
securitize ﬁxed rate municipal bonds which meet
the SFAS 140 deﬁnition of a qualifying special pur-
pose entity (‘‘QSPE’’). A QSPE can generally be
described as an entity with signiﬁcantly limited
powers which are intended to limit it to passively
holding ﬁnancial assets and distributing cash ﬂows
based upon predetermined criteria. Based upon the

Effective January 1, 2004, the Company adopted
the fair value based method of accounting for future
grants of stock-based compensation, as prescribed
by Statement of Financial Accounting Standards
No. 123 (‘‘SFAS 123’’), ‘‘Accounting and Disclo-
sure of Stock-Based Compensation,’’ as amended
by Statement of Financial Accounting Standards
No. 148 (‘‘SFAS 148’’),‘‘Accounting for Stock-
Based Compensation -Transition and Disclosure.’’

EARNINGS PER SHARE
Basic earnings per common share is computed by
dividing net income (loss) by the weighted average
number of common shares outstanding for the year.
Since the Company’s common stock was not issued
until December 31, 2003, the date of Distribution,
the weighted average number of common shares
outstanding for each year presented was calculated
by applying the Distribution Ratio against the his-
torical USB weighted average number of common
shares outstanding for the same period presented.
Diluted earnings per common share are calculated
by adjusting weighted average outstanding shares,
assuming conversion of all potentially dilutive stock
options.

RECLASSIFICATIONS
Certain prior period amounts have been reclassiﬁed
to conform to the current year presentation.

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 3 Recent Accounting Pronouncements

ACCOUNTING FOR CERTAIN FINANCIAL

INSTRUMENTS WITH CHARACTERISTICS OF BOTH

statements. Prior to the issuance of FIN 46, consoli-
dation generally occurred when an enterprise con-
trolled another entity through voting interests.
LIABILITIES AND EQUITY
In May 2003, the Financial Accounting Standards Certain VIEs that are QSPEs subject to the report-
ing requirements of SFAS 140 are not required to be
Board issued Statement of Financial Accounting
Standards No. 150 (‘‘SFAS 150’’), ‘‘Accounting for
consolidated under the provisions of FIN 46.
Certain Financial Instruments with Characteristics
of Both Liabilities and Equity,’’ which establishes
standards for how an issuer classiﬁes and measures
certain ﬁnancial instruments with characteristics of
both liabilities and equities. SFAS 150 is effective
for ﬁnancial instruments entered into or modiﬁed
after May 31, 2003, and otherwise is effective at the
beginning of the ﬁrst interim period beginning after
June 15, 2003, except for mandatorily redeemable
ﬁnancial instruments of nonpublic entities. The
adoption of SFAS 150 did not have a material im-
pact on the Company’s ﬁnancial statements.

VIEs created after January 31, 2003, but prior to
January 1, 2004, may be accounted for based on
either the original interpretation or the revised
interpretations. VIEs created after January 1, 2004
must be accounted for under the revised interpreta-
tions. If the revised interpretations were applied,
transition rules allow the restatement of ﬁnancial
statements or prospective application with a cumu-
lative effect adjustment. In addition, FIN 46 ex-
pands the disclosure requirements for the primary
beneﬁciary of a signiﬁcant portion or a majority of
the variable interests to provide information regard-
ing the nature, purpose and ﬁnancial characteristics
of the entities.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the Financial Accounting Standards
The Company has investments in and advances to
Board issued Statement of Financial Accounting
approximately 30 limited partnerships established
Standards No. 149 (‘‘SFAS 149’’), ‘‘Amendment of
for the purpose of investing in emerging growth
Statement 133 on Derivative Instruments and Hedg-
companies. The Company has investments in or
ing Activities,’’ which amends and clarifies account-
acts as the managing general partner of these part-
ing and
for derivative
nerships. As managing general partner of or
instruments, including certain derivative instruments
through investments in the limited partnerships, the
embedded in other contracts and for hedging activi-
ties under Statement of Financial Accounting Stan- Company may have the ability to exercise control
over major operating and ﬁnancial policies. These
dards No. 133. In particular, SFAS 149 clarifies
partnerships are funded with capital contributed by
under what circumstances a contract with an initial
or ﬁnancing from related parties and third parties.
net investment meets the characteristic of a derivative
The Company accounts for these investments on
and clarifies when a derivative contains financing
the equity method of accounting or consolidates the
components. SFAS 149 is generally effective for con-
entire partnership based upon the Company’s abil-
tracts entered into or modified after June 30, 2003.
ity to exercise control over major operating and
The Company’s adoption of SFAS 149 did not have
ﬁnancial policies.
a material impact on its financial statements.

standards

reporting

CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Stan-
dards Board issued FASB Interpretation No. 46
(‘‘FIN 46’’), ‘‘Consolidation of Variable Interest En-
tities’’ (‘‘VIEs’’), an interpretation of Accounting Re-
search Bulletin No. 51, ‘‘Consolidated Financial
Statements,’’ to improve financial reporting of spe-
cial purpose and other entities. In accordance with
this interpretation, business enterprises that repre-
sent the primary beneﬁciary of another entity by
retaining a controlling ﬁnancial interest in that en-
tity’s assets, liabilities and results of operating activ-
ities must consolidate the entity in its ﬁnancial

investment

At December 31, 2003, the Company’s aggregate
net
in these partnerships totaled
$11.3 million and its remaining commitment to
these partnerships was $1.7 million. These amounts
represent the Company’s maximum exposure to
loss at December 31, 2003 as a result of its current
and future investment in these limited partnerships.
There has been no material impact to the Com-
pany’s ﬁnancial statements from potential VIEs en-
tered into after January 31, 2003 and there is no
expected impact from the adoption of the deferred
provisions in the ﬁrst quarter of ﬁscal year 2004.

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Also, the Company engages in transactions with
QSPEs to securitize ﬁxed rate municipal bonds. Note 19
These securitizations do not require consolidation

securitizations.

in the Company’s ﬁnancial statements. Refer to
information on

for additional

NOTE 4 Derivatives

ket or fair values related to the derivative contract
Derivative contracts are ﬁnancial instruments such
as forwards, futures, swaps or option contracts that
transactions are reported on the Consolidated State-
derive their value from underlying assets, reference ments of Financial Condition and any unrealized
rates, indices or a combination of these factors. A gain or loss is recognized on the Consolidated State-
derivative contract generally represents future com- ments of Operations. The Company uses derivatives
to facilitate customer transactions and as a means
mitments to purchase or sell ﬁnancial instruments
to manage the Company’s interest rate and market
at speciﬁed terms on a speciﬁed date or to exchange
value risk associated with its security positions. As
currency or interest payment streams based on the
of December 31, 2003 and 2002, the fair value of
contract or notional amount.
these open derivative contracts was not material.

Derivative contracts exclude certain cash instru-
ments, such as mortgage-backed securities, interest- As discussed in Note 19, the Company also enters
into interest rate swap agreements to minimize
only and principal-only obligations and indexed
interest rate risk associated with holding residual in-
debt instruments that derive their values or contrac-
terest securities from its tender option bond pro-
tually required cash ﬂows from the price of some
gram. The fair value of such contracts is included in
other security or index.
other liabilities and accrued expenses on the Con-
solidated Statements of Financial Condition and
was approximately $5.7 million and $3.7 million as
of December 31, 2003 and 2002, respectively.

Derivatives are often referred to as off-balance sheet
instruments since neither their notional amounts
nor the underlying instruments are reﬂected as as-
sets or liabilities of the Company. Instead, the mar-

NOTE 5 Receivables from and Payables to Brokers,

Dealers and Clearing Organizations

Amounts receivable from brokers, dealers and Amounts payable to brokers, dealers and clearing
clearing organizations at December 31 included:

organizations at December 31 included:

(Dollars in thousands)

2003

2002

(Dollars in thousands)

2003

2002

Receivable arising from unsettled

Deposits received for securities

securities transactions, net

$106,187

$160,662

loaned

Deposits paid for securities

Payable to clearing organizations

borrowed

72,751

16,588

Securities failed to receive

$181,166

$174,700

4,258

31,926

6,858

25,968

13,263

2,744

Receivable from clearing

organizations

Securities failed to deliver

Other

10,577

34,277

14,601

3,838

33,914

2,455

Total receivables

$238,393

$217,457

Other

Total payables

$224,208

$216,675

Securities failed to deliver and receive represent the
contract value of securities that have not been
delivered or received by the Company on settlement
date. Deposits paid for securities borrowed and
deposits received for securities loaned approximate
the market value of the related securities.

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 6 Receivables from and Payables to Customers

Securities owned by customers are held as collateral
for margin receivables. Such collateral is not re-
ﬂected on the consolidated ﬁnancial statements.
2002 Margin loan receivables earn interest at ﬂoating in-

terest rates based on broker call rates.

Payables to customers primarily consist of customer
funds pending completion of securities transactions
and customer funds on deposit. Except for cus-
tomer short sales, all amounts payable to customers
are subject to withdrawal upon customer request.

Amounts receivable from customers at December 31
included:

(Dollars in thousands)

Cash accounts

Margin accounts

2003

$ 81,853

$ 77,801

381,704

396,201

Total receivables

$463,557

$474,002

Amounts payable to customers at December 31
included:

(Dollars in thousands)

Cash accounts

Margin accounts

2003

2002

$168,901

$118,983

57,262

24,597

Total receivables

$226,163

$143,580

NOTE 7 Trading Securities Owned and Trading Securities Sold,

but Not Yet Purchased

At December 31, trading securities owned and trad- At December 31, 2003 and 2002, trading securities
owned in the amounts of $314.6 million and
ing securities sold, but not yet purchased were as
$393.6 million, respectively, have been pledged as
follows:
collateral.

(Dollars in thousands)

2003

2002

$ 15,446

Securities sold, but not yet purchased represent
obligations of the Company to deliver the specified
security at the contracted price, thereby creating a
liability to purchase the security in the market at pre-
vailing prices. The Company is obligated to acquire
the securities sold short at prevailing market prices,
87,009
98,950 which may exceed the amount reflected on the Con-
solidated Statements of Financial Condition.
95,041

42,534

$ 15,903

78,474

90,459

92,292

240,248

140,236

134,704

$657,612

$473,684

$ 46,700

$ 17,285

1,137

14,316

47,114

276,750

264

–

40,996

15,573

96,749

1,396

$386,281

$171,999

Owned:

Corporate securities:

Equity securities

Convertible securities

Fixed income securities

Mortgage-backed securities

U.S. government securities

Municipal securities

Sold, but not yet purchased:

Corporate securities:

Equity securities

Convertible securities

Fixed income securities

Mortgage-backed securities

U.S. government securities

Municipal securities

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NOTE 8 Fixed Assets

The following is a summary of ﬁxed assets as of
December 31, 2003 and 2002:

(Dollars in thousands)

Furniture and equipment
Leasehold improvements
Software
Projects in process

Total

Less accumulated depreciation and

amortization

2003

2002

$ 93,323
27,999
40,823
2,185

$ 91,718
25,620
30,645
10,045

164,330

158,028

103,573

88,969

$ 60,757

$ 69,059

NOTE 9 Goodwill

For the years ended December 31, 2003, 2002 and
2001, depreciation and amortization of ofﬁce
equipment, software and leasehold improvements
totaled $19.0 million, $20.8 million and $20.4 mil-
lion, respectively, and is included in occupancy and
equipment on the Consolidated Statements of
Operations.

The Company adopted SFAS 142 on January 1, 2002. Company’s goodwill resulted from the 1998 acquisi-
The most significant changes made by SFAS 142 are
tion of the Company’s former parent company,
that goodwill and other indefinite-lived intangibles are U.S. Bancorp Piper Jaffray Companies Inc. (‘‘Former
Parent’’), and its subsidiaries by USB. The following
no longer amortized and will be tested for impairment
table reflects the consolidated results of operations
at least annually. At December 31, 2003 and 2002,
adjusted as if the adoption of SFAS 142 occurred as of
goodwill of $305.6 million was recorded on the Con-
January 1, 2001:
solidated Statements of Financial Condition. All of the

YEAR ENDED DECEMBER 31
(Dollars in thousands)

Net Earnings:
As reported
Goodwill amortization, net of tax

As adjusted

As reflected in the following table, there were no
changes in the carrying value of goodwill by reporta-
ble segments for the year ended December 31, 2003:

(Dollars in thousands)

Balance at December 31, 2002
Goodwill acquired
Impairment losses

Balance at December 31, 2003

2003

2002

2001

$25,999
–

106
–

$(50,051)
14,439

$25,999

106

$(35,612)

Capital
Markets

Private
Client
Services

Corporate
Support
and Other

Consolidated
Company

$220,035
–
–

$85,600
–
–

$220,035

$85,600

–
–
–

–

$305,635
–
–

$305,635

Management completed an estimate of the fair value management concluded that no impairment existed
of its business segments as of December 31, 2003
and validated its determination through an inde-
pendent third party. Based upon this assessment,

The Company had no indeﬁnite-lived or other
intangible assets at December 31, 2003 or 2002.

at December 31, 2003.

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 10 Borrowings

The Company has uncommitted credit agreements During 2003, Piper Jaffray repaid its outstanding
subordinated debt of $215 million to its Former Par-
with banks and former affiliated entities totaling
ent and executed a $180 million subordinated debt
$550 million at December 31, 2003, composed of
agreement with an affiliate of USB, which satisfies
$450 million in discretionary secured lines and
$100 million in discretionary unsecured lines. In ad-
provisions of Appendix D of Securities and Exchange
dition, the Company has established an arrangement Commission (‘‘SEC’’) Rule 15c3-1 and has been ap-
proved by the New York Stock Exchange, Inc.
to obtain financing using the Company’s securities
(‘‘NYSE’’) and is therefore allowable in Piper
held by its clearing bank at the end of each day as
Jaffray’s net capital computation. The entire amount
collateral. The following table provides a breakdown
of the subordinated debt will mature in 2008.
of borrowings outstanding at December 31:

(Dollars in thousands)

Unsecured borrowings

Secured borrowings

2003

–

159,000

$159,000

The secured borrowings were collateralized with
$169.4 million and $276.1 million of trading securities
owned at December 31, 2003 and 2002, respectively.

2002

$250,040

The Company’s outstanding borrowings bear inter-
est at rates based on the London Interbank Offered
$ 50,040 Rate (‘‘LIBOR’’) or federal funds rates. At Decem-
ber 31, 2003 and 2002, the weighted average interest
200,000
rate on borrowings was 2.07 percent and 2.40 per-
cent, respectively. At December 31, 2003 and 2002,
no formal compensating balance agreements existed,
and the Company was in compliance with all debt
covenants related to these facilities. The Company
recognized and paid to USB and affiliates $9.0 mil-
lion, $15.9 million and $42.0 million of interest ex-
pense related to borrowings for the years ended
December 31, 2003, 2002 and 2001, respectively.

NOTE 11 Commitments and Contingent Liabilities

LEASE COMMITMENTS
The Company leases ofﬁce space and equipment Additionally, in 2003 the Company entered into a
ﬁve-year contract with an outside vendor to support
under various noncancelable leases. Certain leases
have renewal options and clauses for escalation and
the Company’s data center and network manage-
operating cost adjustments. Aggregate minimum ment technology needs. Aggregate minimum con-
tract commitments for data center and remote
lease commitments under operating leases and vari-
network services per the contract as of Decem-
ous other contractual commitments as of Decem-
ber 31, 2003 are as follows:
ber 31, 2003 are as follows:

(Dollars in thousands)

2004

2005

2006

2007

2008

Thereafter

2004

2005

2006

2007

2008

$ 28,257

24,198

19,609

18,431

17,759

84,247

$192,501

$ 9,912

8,698

7,029

7,109

5,383

$ 38,131

Rental expense, including operating costs and real es-
tate taxes, charged to operations was $27.5 million,
$30.8 million and $30.6 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

Network and data center service expense related to
this contract that was charged to operations in
2003 was $2.7 million.

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N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

Litigation-related expenses charged to operations in-
cluded within other operating expenses was $16.1 mil-
lion, $10.9 million, and $8.6 million for the years
ended December 31, 2003, 2002 and 2001, respectively.

Given the uncertainties of the commencement, tim-
VENTURE CAPITAL COMMITMENTS
ing, size, volume and outcome of pending and po-
As of December 31, 2003, the Company had com-
tential litigation and other factors, the reserve is
mitments to invest approximately $1.7 million in
difﬁcult to determine and of necessity subject to
limited partnerships that make private equity in-
future revisions. Subject to the foregoing, manage-
vestments. The commitments will be funded, if
called, through the end of the respective investment ment of the Company believes, based on its current
knowledge, after consultation with counsel and af-
periods ranging from 2006 to 2013.
ter taking into account its established reserves and
the USB indemnity agreement, that pending legal
actions, investigations and proceedings will be re-
solved with no material adverse effect on the ﬁnan-
cial condition of the Company. However, if during
any period a potential adverse contingency should
become probable or resolved for an amount in ex-
cess of the established reserves and indemniﬁcation,
the results of operations in that period could be

LITIGATION
The Company has been the subject of customer
complaints and has also been named as a defendant
in various legal actions arising primarily from secu-
rities brokerage and investment banking activities,
including certain class actions which primarily al-
lege violations of securities laws and seek unspeci-
ﬁed damages, which could be substantial. Also, the
Company is involved from time to time in investiga- materially affected.
tions and proceedings by governmental agencies
and self-regulatory organizations. Included among
these was an industry-wide investigation by the
SEC, the National Association of Securities Dealers
(‘‘NASD’’), the NYSE, the New York Attorney
General and other state securities regulators of re-
search practices of certain brokerage ﬁrms, includ-
ing Piper Jaffray. In April 2003, Piper Jaffray
entered into a ﬁnal settlement agreement with these
regulatory agencies to resolve the investigation con-
cerning research practices. The agreement required,
among other things, that Piper Jaffray pay
$12.5 million as a penalty, contribute $12.5 million
to a distribution fund for the beneﬁt of investors
and pay $7.5 million for the procurement of inde-
pendent research. The charges are included sepa-
rately as regulatory settlement on the Company’s
2002 Consolidated Statement of Operations.

GUARANTEES
The Company participates in securities lending activi-
ties as a funding source for the Company by using
customer margin securities. The Company indemnifies
customers for the difference between the market value
of the securities lent and the market value of the col-
lateral received. Cash collateralizes these transactions.
At December 31, 2003, future payments guaranteed
by the Company under these arrangements were ap-
proximately $175.4 million and represent the market
value of the customer securities lent to third parties.
At December 31, 2003, the Company held cash of
$179.0 million as collateral for these arrangements
and included it within payables to brokers, dealers
The Company has established reserves for potential
losses that are probable and reasonably estimable
and clearing organizations on the Consolidated State-
that may result from pending and potential com- ments of Financial Condition. At December 31, 2003,
the Company had collateral in excess of the market
plaints, legal actions, investigations and proceedings,
value of the securities lent and, therefore, no liability is
including private litigation related to the matters that
recorded related to potential future payments made
were the subject of the final settlement referred to
under these guarantees.
above. The Company’s reserves totaled $49.2 and
$62.9 million at December 31, 2003 and 2002, re-
spectively, and are included within other liabilities OTHER COMMITMENTS
and accrued expenses on the Consolidated State-
ments of Financial Condition. These reserves include
$9.6 million and $32.5 million at December 31,
2003 and 2002, respectively, to be paid as part of the
industry-wide regulatory settlement related to re-
search practices. In addition to the established
reserves, USB has agreed to indemnify the Company
in an amount up to $17.5 million for certain matters.

In the normal course of business, the Company
enters into underwriting and other commitments.
The ultimate settlement of such transactions open
at year-end is not expected to have a material effect
on the ﬁnancial statements of the Company.

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 12 Merger and Restructuring Items

The Company recorded pre-tax merger and restruc-
turing related charges of $8.0 million and
$65.7 million in 2002 and 2001, respectively. In
2002 and 2001, costs were incurred in connection
with the merger of USB and Firstar Corporation
(‘‘Firstar’’). In both 2002 and 2001, the Company
undertook plans to restructure its operations in re-
sponse to significant changes in the securities markets,

including increased market volatility, declines in
equity valuations and an increasingly competitive
environment for the securities industry. The restruc-
turing was designed to improve the operating efﬁ-
ciency of the business by removing excess capacity
from the product distribution network and by im-
plementing more effective business processes.

The components of the charges described above are
shown below:

(Dollars in thousands)

2002

Severance and employee-related

Business integration costs

Asset write-downs and lease terminations

Total

2001

Severance and employee-related

Business integration costs

Asset write-downs and lease terminations

Intangible impairments

Total

The Company determined merger and restructuring
charges and related accruals based on speciﬁc for-
mulated plans or integration strategies.

USB/
Firstar

Piper
Restructuring

Total

–

2,161

–

$ 5,314

–

501

2,161

501

$ 2,161

$ 5,815

$ 7,976

$14,480

$29,286

$43,766

468

–

12,360

9,103

468

12,360

9,103

$14,948

$50,749

$65,697

Business integration charges primarily pertained to
costs incurred to realign the retail distribution net-
works and integrate certain components of a USB
afﬁliate’s ﬁxed income division with Piper Jaffray.

Severance and employee-related charges included the
cost of severance, other benefits and outplacement Asset write-downs and lease terminations repre-
sented costs associated with redundant ofﬁce space,
costs associated with the termination of employees
branches that were vacated and equipment disposed
due to the reconfiguration or closure of certain
branches and the downsizing and consolidation of
of as part of the restructuring plans. Generally, pay-
certain back office support functions. The severance ments related to terminated lease contracts continue
amounts were determined based on the Company’s
severance pay programs in place at the time of termi-
nation and were paid out over a benefit period up to
two years from the time of termination. Approxi-
mately 410 employees were included in severance
and employee-related severance charges for 2002
and 2001. Employee-related charges in 2001 in-
cluded approximately $14.0 million in accelerated
vesting of restricted stock due to the merger of USB
and Firstar.

Intangible impairment charges of $9.1 million in
2001 pertained to the write-down of goodwill re-
lated to the Company’s 1999 acquisition of the in-
vestment banking division of The John Nuveen
Company. This goodwill impairment occurred as a
result of the loss of key personnel in certain sales
ofﬁces, acquired in the John Nuveen acquisition,
that were realigned as a result of restructuring deci-
sions made in 2001.

through the original term of the lease.

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

The following table presents a summary of activity
with respect to the merger and restructuring related
accruals:

(Dollars in thousands)

Balance at December 31, 2000

Provision charged to operating expense

Cash outlays

Noncash writedowns and other

Balance at December 31, 2001

Provision charged to operating expense

Cash outlays

Noncash writedowns and other

Balance at December 31, 2002

Cash outlays

Noncash writedowns and other

Balance at December 31, 2003

USB/
Firstar

Piper
Restructuring

Total

–

14,948

–

50,749

65,697

(468)

(22,324)

(22,792)

(14,480)

(10,323)

(24,803)

–

$ 18,102

2,161

(853)

–

5,815

7,976

(13,277)

(14,130)

(1,617)

$ 1,308

$ 9,023

$ 10,331

(1,308)

(6,547)

(7,855)

–

(144)

$ 2,332

The adequacy of the merger and restructuring re-
lated liability is reviewed regularly taking into con-
sideration actual and projected payment liabilities.
Adjustments are made to increase or decrease these
accruals as needed. Reversals of expenses, if any,

can reﬂect a lower use of beneﬁts by affected em-
ployees, changes in initial assumptions as a result of
subsequent events and the alteration of business in-
tegration plans.

NOTE 13 Financial Instruments with Off-balance Sheet Risk

In the normal course of business, the Company’s
customer and trading activities involve the execu-
tion, settlement and ﬁnancing of various securities
transactions. These activities may expose the Com-
pany to off-balance sheet risk in the event that the
other party to the transaction is unable to fulﬁll its
contractual obligations.

The Company’s ﬁnancing and customer securities
activities involve the Company using securities as
collateral. In the event that the counterparty does
not meet its contractual obligation to return securi-
ties used as collateral, or customers do not deposit
additional securities or cash for margin when re-
quired, the Company may be exposed to the risk of
reacquiring the securities or selling the securities at
unfavorable market prices in order to satisfy its
obligations to its customers or counterparties. The
Company seeks to control this risk by monitoring
the market value of securities pledged or used as
collateral on a daily basis and requiring adjustments
in the event of excess market exposure.

The Company from time to time uses ﬁnancial fu-
tures and interest rate swap contracts to manage
interest rate risk related to ﬁxed income trading
securities against market interest rate ﬂuctuations
and the residual cash ﬂows on the Company’s
tender option bond program. In addition, the Com-
pany uses exchange-traded options to manage the
In the normal course of business, the Company ob-
risk related to market value ﬂuctuations of converti-
tains securities under resale, securities borrowed and
ble inventories. Such contracts are subject to the
same controls as securities owned for the Com- margin agreements on terms which permit it to re-
pledge or resell the securities to others. The Company
pany’s account and are not intended to be entered
obtained securities with a fair value of approximately
into for speculative purposes. Contracts are marked
$914.5 million and $811.0 million at December 31,
to market with gains or losses recorded in principal
2003 and 2002, respectively, of which $220.5 million
transactions. As of December 31, 2003 and 2002,
and $210.6 million, respectively, has been either
the fair value of these contracts was not material.

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

pledged or otherwise transferred to others in
connection with the Company’s ﬁnancing activities
or to satisfy its commitments under proprietary
short sales.

The Company provides investment, capital raising
and related services to a diverse group of domestic
and foreign customers, including governments, cor-
porations, and institutional and individual inves-
tors. The Company’s exposure to credit risk
associated with the non-performance of customers
in fulﬁlling their contractual obligations pursuant
to securities transactions can be directly impacted

by volatile securities markets, credit markets and
regulatory changes. This exposure is measured on
an individual customer basis, as well as for groups
of customers that share similar attributes. To allevi-
ate the potential for risk concentrations, credit lim-
its are established and continually monitored in
light of changing customer and market conditions.
As of December 31, 2003 and 2002, the Company
did not have signiﬁcant concentrations of credit risk
with any one single customer or counterparty, or
group of customers or counterparties.

NOTE 14 Transactions with U.S. Bancorp

The Company entered into certain interest rate
Prior to the Distribution, the Company regularly en-
swap contracts during 2002 with a USB afﬁliate as
tered into transactions with USB and its affiliates.
These transactions were either charges to or reim-
counterparty. During 2003, these swap contracts
bursements from the Company and included fees for with USB were terminated and were subsequently
referrals, fees for the underwriting and selling of USB
reestablished with other unafﬁliated counterparties.
affiliated mutual funds and costs for occupancy,
technology support and general and administrative
services. Royalty fees for the use of the USB brand
name and other trademarks of $3.9 million,
$7.5 million and $55.8 million were incurred to a
USB affiliate for the years ended December 31, 2003,
2002 and 2001, respectively. USB or its affiliates will
continue to provide asset management services under
a negotiated market-based fee arrangement.

During 2003, Piper Jaffray repaid its outstanding
subordinated debt of $215 million to its Former
Parent and entered into a new subordinated debt
agreement of $180 million with an afﬁliate of USB.
The Company received capital contributions of
$37.5 million, $250.0 million and $75.0 million in
2003, 2002 and 2001, respectively, from USB. Ad-
ditionally, the Company made distributions of
$3.6 million, $19.0 million and $8.6 million to USB
in 2003, 2002 and 2001, respectively.

NOTE 15 Net Capital Requirements and Other Regulatory Matters

As an SEC registered broker dealer and member At December 31, 2003, net capital under the Rule
ﬁrm of the NYSE, Piper Jaffray is subject to the was $216.9 million or 38.8 percent of aggregate
Uniform Net Capital Rule (the ‘‘Rule’’) of the SEC debit balances, and $205.7 million in excess of the
and the net capital rule of the NYSE. Piper Jaffray minimum required net capital.
has elected to use the alternative method permitted
by the Rule, which requires that it maintain mini-
mum net capital of the greater of $1.0 million or
2 percent of aggregate debit balances arising from
customer transactions, as such term is deﬁned in the
Rule. The NYSE may prohibit a member ﬁrm from
Piper Jaffray Ltd., a registered United Kingdom
expanding its business or paying dividends if result-
broker dealer, is subject to the capital requirements
ing net capital would be less than 5 percent of
aggregate debit balances. In addition, Piper Jaffray
of the Financial Services Authority (‘‘FSA’’). As of
is subject to certain notiﬁcation requirements re- December 31, 2003, Piper Jaffray Ltd. was in com-
lated to withdrawals of excess net capital. Piper
Jaffray is also registered with the Commodity Fu-
tures Trading Commission (‘‘CFTC’’) and therefore
is subject to the CFTC regulations.

Advances to afﬁliates, repayment of subordinated
liabilities, dividend payments and other equity
withdrawals are subject to certain notiﬁcation and
other provisions of the net capital rule of the SEC
and regulatory bodies.

pliance with the requirements of the FSA.

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 16 Employee Beneﬁt Plans

During 2002, the Company implemented a quali- will be paid by USB. The Company has created
similar health and welfare plans for its employees’
ﬁed, non-contributory proﬁt sharing plan covering
use on a prospective basis. As such, all claims in-
substantially all employees. Company contributions
curred subsequent to the Distribution are the re-
to the plan are discretionary within limits to qualify
as deductions for income tax purposes. Employees
sponsibility of the Company.
are fully vested after ﬁve years of service. The Com-
pany expensed $9.5 million related to the proﬁt
sharing plan in 2003. There was no such expense in
2002.

Additionally, prior to the Distribution the Com-
pany provided certain health and welfare beneﬁts to
retired employees through post-retirement beneﬁt
plans offered by USB. Generally, all employees were
eligible for retiree health care beneﬁts by meeting
deﬁned age and service requirements. The estimated
cost of these retiree health care beneﬁts is accrued
during the employees’ active service. Effective upon
the Distribution, the existing post-retirement beneﬁt
plans were separated from the USB post-retirement
beneﬁt plan. All active employees of the Company
are eligible for post-retirement health care beneﬁts
and the existing liability for those employees will be
the responsibility of the Company. All retired em-
ployees of the Company will be considered termi-
nated employees of USB and continue to receive the
beneﬁts under the USB post-retirement plan.

In 2001, employees of the Company participated in
the USB cash balance pension plan. Participant cash
balance pension accounts ceased receiving further
service credits as of December 31, 2001. Participant
balances will continue to receive investment credits
based on participant investment elections. As a re-
sult of the Distribution, employees who were fully
vested in the plan are considered inactive partici-
pants similar to other terminated employees of USB
and its afﬁliates. Employees who were not fully
vested on the Distribution date continue to receive
vesting within the USB plan, based on working a
minimum of 1,000 hours in a given plan year, pro-
vided they remain actively employed by the Com-
pany. Once an employee is fully vested he or she
will receive similar treatment as a fully vested em-
ployee, as outlined above. In addition, certain em-
ployees were eligible to participate in an unfunded,
non-qualiﬁed component of the USB cash balance
pension plan. Because the non-qualiﬁed component
was unfunded, the aggregate accumulated beneﬁt
obligation exceeds the plan assets. Similar to the
qualiﬁed component of the pension plan, service
credits for employees of the Company participating
in the non-qualiﬁed component were frozen at De-
cember 31, 2001. Effective upon the Distribution,
the existing non-qualiﬁed liability of $23.9 million
and $21.5 million at December 31, 2003 and 2002,
respectively, was separated from the USB cash bal-
ance pension plan and is included within accrued
compensation on the Consolidated Statements of
Financial Condition.

Prior to the Distribution, Company employees also
participated in a USB defined contribution retirement
savings plan, which allowed qualified employees, at
their option, to make contributions through salary
deductions under Section 401(k) of the Internal Rev-
enue Code. Employee contributions were 100 per-
cent matched by the Company, up to the first
4 percent of an employee’s compensation and were
invested, at the employees’ direction, among various
investment alternatives. Although the Company’s
matching contribution vests immediately, a partici-
pant must be employed on December 31 to receive
that year’s matching contribution. Although the
matching contribution was initially invested in USB
common stock, an employee was allowed to rein-
vest the matching contributions among various
investment alternatives. Effective upon
the
Distribution, employees of the Company became
inactive participants in the USB plan similar to ter-
Prior to the Distribution, Company employees par- minated employees. The Company has created a
similar deﬁned contribution retirement savings plan
ticipated in health and welfare plans provided by
under Section 401(k) of the Internal Revenue Code
USB. The Company subsidized the cost of coverage
for employees meeting certain work schedule and
for its employees’ use beginning in 2004.
service requirements. The medical plan contained
other cost-sharing features such as deductibles and
coinsurance. Costs charged to the consolidated ﬁ-
nancial statements are based on actual employee
participation in the plans. All claims incurred in the
health and welfare plans prior to the Distribution

During the years ended December 31, 2003, 2002
and 2001, the Company incurred expenses of
$31.3 million, $23.2 million and $51.5 million, re-
spectively, related to USB employee beneﬁt plans.

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 17 Cash Award Program and Stock-Based Compensation

Prior to the Distribution, many of the Company’s
Certain of the Company’s employees are eligible to
employees held options to purchase USB common
participate in a cash award program implemented
stock under a variety of USB option plans and held
concurrent with the Distribution from USB. The pro-
shares of unvested USB restricted stock. Grants under
gram is intended to aid in retention of employees and
the option plans can be summarized into two catego-
to compensate employees for the value of USB stock
options and restricted stock lost by employees as a
ries: USB 90-day options that generally expire 90 days
result of the Distribution. The cash award program after an employee terminates from USB and USB term
options that generally expire after a specified period of
has an aggregate value of approximately $47 million.
time. As a result of the Distribution, 90-day options
The Company incurred a $24 million charge at the
that were not exercised either expired on the Distribu-
time of the Distribution from USB. The remaining
tion date or will expire within 90 days of the Distribu-
$23.0 million will be paid out over the next four
tion date as the Distribution was deemed a
years, which will result in an annual charge of ap-
termination of employment of the Company’s em-
proximately $5.9 million over the next three years and
ployees by USB. USB 90-day options held by Com-
$5.3 million in the fourth year.
pany employees who have reached retiree status did
not expire in connection with the Distribution but
rather remained with USB and continue to vest in
accordance with their terms. USB term options re-
mained with USB after the Distribution and continue
to vest in accordance with their terms, as provided in
the applicable USB stock incentive plans.

Prior to the Distribution, certain of the Company’s
employees were eligible to participate in the stock
incentive plans offered by USB, which include in-
centive stock options, restricted stock, and other
stock-based awards. While part of USB, the Com-
pany applied APB 25 in accounting for USB em-
ployee stock incentive plans. Because the exercise
price of the USB employee stock options equaled
The total amount of USB restricted stock held by the
the market price of the underlying stock on the date Company’s employees at the time of Distribution was
148,238 shares. Since the Distribution was deemed to
of the grant, under APB 25, no compensation ex-
be a termination of employment of the Company’s
pense was recognized at the grant date. Options
employees under the terms of the applicable USB
granted under the plans are generally exercisable up
to ten years from the date of grant and vest over
stock incentive plans, approximately 76,325 shares of
three to ﬁve years. Restricted shares vested over USB restricted stock were forfeited in connection with
the Distribution. The remaining shares of USB re-
three to ﬁve years. Expense for restricted stock was
stricted stock held by the Company’s employees at the
based on the market price of USB stock at the time
time of the Distribution, totaling approximately
of the grant and amortized on a straight-line basis
71,913 shares, have terms that permit those shares to
over the vesting period. Expense related to re-
continue to vest in accordance with their terms after a
stricted stock grants was $3.9 million, $3.9 million
termination of employment such as that occurring in
and $14.9 million in 2003, 2002 and 2001,
the Distribution.
respectively.

No Company employees, ofﬁcers or directors re-
ceived Piper Jaffray Company options or restricted
stock as part of the Distribution.

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

The following table summarizes USB stock options
and restricted stock outstanding and exercised
under various equity plans of USB while the Com-
pany’s employees were employed by USB:

December 31, 2000

Granted:

Stock options

Restricted stock

Exercised

Canceled options

Canceled/vested restricted stock

December 31, 2001

Granted:

Stock options

Restricted stock

Exercised

Canceled options

Canceled/vested restricted stock

December 31, 2002

Exercised

Canceled options and canceled/vested restricted stock

Options /restricted stock remaining with USB

December 31, 2003

Options
Outstanding

Weighted
Average
Exercise Price

Shares of
Restricted
Stock
Outstanding

18,041,960

$22.62

2,277,106

3,937,315

23.29

–

1,776,404

1,066,451

–

474,271

22.95

24.71

–

2,158,141

19,136,420

$23.28

593,236

2,820,104

–

1,305,813

98,330

–

20,552,381

4,992,438

3,821,652

11,738,291

–

22.84

–

22.36

27.29

–

193,569

$23.47

399,667

25.87

24.49

24.19

–

327,754

71,913

–

in the subjective

traded options, including vesting provisions and
Piper Jaffray Companies had no options or re-
trading limitations that impact their liquidity. Be-
stricted stock outstanding as of December 31, 2003.
cause employee stock options have differing charac-
On February 12, 2004 the Company granted ap-
input
teristics and changes
proximately 500,000 shares of Piper Jaffray Com-
panies restricted stock and approximately 290,000
assumptions can materially affect the fair value esti-
options on Piper Jaffray Companies common stock mate, the existing models do not necessarily provide
a reliable measure of the fair value of employee
to employees, executive ofﬁcers and directors.
These awards will vest 100 percent on February 12,
stock options.
2007.

The pro forma disclosures include USB options
granted to our employees while employed by USB
Pro forma information regarding net income (loss)
and will not be representative of future years. In
is required by SFAS No. 123 and has been deter-
addition, the value of certain of these options that
mined as if the Company had accounted for em-
expired as a result of our separation from USB were
ployee stock option and stock purchase plans
(collectively, the ‘‘options’’) under the fair value
replaced by cash awards to our employees. The esti-
method of SFAS 123. The fair value of the options mated fair value of the options is amortized to ex-
pense over the options’ vesting period. The cash
was estimated at the grant date using a Black-
Scholes option-pricing model. Option valuation
award program has an aggregate value of approxi-
models require the use of highly subjective assump- mately $47 million, of which $24 million was in-
tions. Also, employee stock options have character-
istics that are signiﬁcantly different from those of

cluded in our results of operations for 2003.

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

The following table shows pro forma compensation
expense and net income (loss) adjusted for the im-
pact of applying the fair value method of account-
ing for stock-based compensation.

YEAR ENDED DECEMBER 31
(Dollars in thousands)

Reported compensation expense

Stock-based compensation

Pro forma compensation expense

Reported net income (loss)

Stock-based compensation, net of tax

Pro forma net income (loss)

Weighted average assumptions in USB option valuation

Risk-free interest rates

Dividend yields

Stock volatility factor

Expected life of options (in years)

Weighted average fair value of shares granted

Effective January 1, 2004, the Company will ac-
count for future stock-based employee compensa-
tion under the fair value based method as
prescribed by SFAS 123 as amended by SFAS 148.

NOTE 18 Shareholders’ Equity

Piper Jaffray Companies’ articles of incorporation
provide for the issuance of up to 100,000,000
shares of common stock with a par value of $0.01
and 5,000,000 shares of undesignated preferred
stock also with a par value of $0.01.

COMMON STOCK
The holders of Piper Jaffray Companies common
stock are entitled to one vote per share on all mat-
ters to be voted upon by its shareholders. Subject to
preferences that may be applicable to any of Piper
Jaffray Companies outstanding preferred stock, the
holders of its common stock are entitled to receive
ratably such dividends, if any, as may be declared
from time to time by Piper Jaffray Companies
board of directors out of funds legally available for
that purpose. In the event of Piper Jaffray Compa-
nies liquidation, dissolution or winding-up, the
holders of its common stock are entitled to share
ratably in all assets remaining after payment of lia-
bilities, subject to prior distribution rights of Piper
Jaffray Companies stock, if any, then outstanding.
The holders of common stock have no preemptive

P I P E R J A F F R AY A N N U A L R E P O R T 2003

2003

2002

2001

$ 482,397

$449,329

$513,623

21,457

27,973

52,504

$ 503,854

$477,302

$566,127

$ 25,999

106

$ (50,051)

(12,874)

(16,784)

(31,502)

$ 13,125

$ (16,678)

$ (81,553)

N/A

4.90%

3.00%

0.38

6.00

7.27

4.75%

3.00%

0.39

6.25

7.66

or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions
applicable to Piper Jaffray Companies common
stock.

Piper Jaffray Companies does not intend to pay
cash dividends on its common stock for the foresee-
able future. Instead, Piper Jaffray Companies in-
tends to retain all available funds and any future
earnings for use in the operation and expansion of
its business. Additionally, as set forth in Note 15,
there are restrictions on its broker dealer subsidiary
in paying dividends.

PREFERRED STOCK
Piper Jaffray Companies board of directors has the
authority, without action by its shareholders, to
designate and issue preferred stock in one or more
series and to designate the rights, preferences and
privileges of each series, which may be greater than
the rights of common stock. It is not possible to
state the actual effect of the issuance of any shares
of preferred stock upon the rights of holders of

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

common stock until Piper Jaffray Companies board
of directors determines the speciﬁc rights of the
holders of preferred stock. However, the effects
might include, among other things, the following:
restricting dividends on its common stock, diluting
the voting power of its common stock, impairing
the liquidation rights of its common stock and de-
laying or preventing a change in control of Piper
Jaffray Companies without further action by its
shareholders.

RIGHTS AGREEMENT
Piper Jaffray Companies adopted a rights agree-
ment prior to the Distribution date. The issuance of
a share of Piper Jaffray Companies common stock
also constitutes the issuance of a preferred stock
purchase right associated with such share. These

rights are intended to have anti-takeover effects in
that the existence of the rights may deter a potential
acquirer from making a takeover proposal or a
tender offer.

EARNINGS PER SHARE
Basic earnings per common share are calculated by
dividing net income (loss) by the weighted average
number of common shares outstanding during the
year. Since Piper Jaffray Companies common stock
was not issued until December 31, 2003, the date of
the Distribution, the weighted average number of
common shares outstanding during each year
presented was calculated by applying the Distribu-
tion Ratio to USB’s historical weighted average
number of common shares outstanding for applica-
ble years.

YEAR ENDED DECEMBER 31
(Amounts in thousands, except per share data)

Earnings per common share

Net income (loss)

Weighted average number of common shares

Basic earnings per common share

2003

2002

2001

$ 25,999

106

$(50,051)

19,237

19,160

19,279

1.35

.01

$ (2.60)

NOTE 19 Accounting for Transfers and Servicing of

Financial Assets and Extinguishments of Liabilities

retained interests.

losses of 0 percent, and a 15 percent discount rate.
The Company, in connection with its tender option
The Company receives a fee to remarket the varia-
bond program, has securitized $166.2 million of
ble rate certiﬁcates derived from the securitizations.
highly-rated ﬁxed rate municipal bonds. Each mu-
nicipal bond is sold into a separate trust that is
The Company enters into interest rate swaps to
funded by the sale of variable rate certiﬁcates to minimize any interest rate risk associated with the
institutional customers seeking variable rate tax-
free investment products. These variable rate certiﬁ-
cates reprice weekly. The Company retains a
residual interest in each structure that is accounted
for as a trading security, recorded at fair value on
the Consolidated Statements of Financial Condi-
tion. The fair value of retained interests was Certain cash ﬂow activity for the municipal bond
securitizations described above during 2003
$7.4 million at December 31, 2003 with a weighted
average life of 9.6 years. Securitization transactions
includes:
are treated as sales with the resulting gain included
in principal transactions on the Consolidated State-
ments of Operations. Fair value of retained interests
is estimated based on the present value of future
cash ﬂows using management’s best estimates of the
key assumptions – forward yield curves, credit

At December 31, 2003, the sensitivity of the current
fair value of retained interests to immediate 10 per-
cent and 20 percent adverse changes in the key
economic assumptions was not material.

Remarketing fees received

Proceeds from new sales

Cash ﬂows received on

retained interests

$22.6 million

$4.9 million

$89,000

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 20 Business Segments

Within the Company, ﬁnancial performance is mea-
sured by lines of business. The Company’s reporta-
ble business segments include Capital Markets,
Private Client Services and Corporate Support and
Other. The business segments are determined based
upon factors such as the type of customers, the
nature of products and services provided and the
distribution channels used to provide those prod-
ucts and services. Certain services that the Com-
pany offers are provided to clients through more
than one of our business segments. These business
segments are components of the Company about
which ﬁnancial information is available and is eval-
uated on a regular basis in deciding how to allocate
resources and assess performance relative to
competitors.

BASIS FOR PRESENTATION
Segment results are derived from the Company’s
ﬁnancial reporting systems by speciﬁcally attribut-
ing customer relationships and their related reve-
nues and expenses to segments. Revenue-sharing of
sales credits associated with underwritten offerings
is based on the distribution channel generating the
sales. Expenses directly managed by the business
line, including salaries, commissions, incentives,
employee beneﬁts, occupancy, marketing and busi-
ness development and other direct expenses are ac-
counted for within each segment’s ﬁnancial results
in a manner similar to the consolidated ﬁnancial
results. Research, operations, technology and com-
pliance related costs are allocated based on the seg-
ment’s use of these areas to support their
businesses. General and administrative expenses in-
curred by centrally managed corporate support
functions are not allocated. To enhance the compa-
rability of business segment results, goodwill amor-
tization for periods prior to the adoption of SFAS
142 is no longer assigned to each segment. Also,
cash award plan charges related to the Distribution,
merger and restructuring related charges, royalty
fees assessed by USB, income taxes and certain in-
frequent regulatory settlement costs are not as-
signed to the business segments. The ﬁnancial
management of assets, liabilities and capital is per-

formed on an enterprise-wide basis. Revenues from
the Company’s non-U.S. operations were $9.2 mil-
lion, $8.2 million and $6.6 million for the years
ended December 31, 2003, 2002 and 2001, respec-
tively, while long-lived assets were $0.6 million and
$0.8 million at December 31, 2003 and 2002,
respectively.

Designations, assignments and allocations may
change from time to time as ﬁnancial reporting sys-
tems are enhanced and methods of evaluating per-
formance change or business segments are realigned
to better serve the clients of the Company. Accord-
ingly, prior periods are reclassiﬁed and presented on
a comparable basis.

CAPITAL MARKETS (‘‘CM’’)
CM includes institutional sales and trading services
with an emphasis on the sale of U.S. equities and
ﬁxed income products to institutions. This segment
also includes management of and participation in
underwritings, merger and acquisition services and
public ﬁnance activities. Additionally, CM includes
earnings on investments acquired in connection
with its business activities and net interest revenues
on trading securities held in inventory.

PRIVATE CLIENT SERVICES (‘‘PCS’’)
PCS principally provides individual investors with
ﬁnancial advice and investment products and ser-
vices, including equity and ﬁxed income securities,
mutual funds and annuities. This segment also in-
cludes net interest income on client margin loans.
PCS has approximately 830 ﬁnancial advisers oper-
ating in 96 branch ofﬁces in 18 Midwest, Mountain
and West Coast states.

CORPORATE SUPPORT AND OTHER
Corporate Support and Other consists primarily of
the Company’s investments in limited partnerships
that invest in venture capital funds and the venture
capital subsidiary. It also includes business activities
managed on a corporate basis, including enterprise-
wide administrative support functions.

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

Reportable segment ﬁnancial results for the respec-
tive year ended December 31, are as follows:

(Dollars in thousands)

2003

2002

2003

2002

2003

2002

2003

2002

Capital Markets

Private Client Services

Corporate Support
and Other

Consolidated
Company

Net revenues

$430,355

$376,074

$352,113

$357,155

$ 4,262

$ (4,177)

$786,730

$729,052

Direct operating expense

293,106

248,870

288,412

291,156

40,945

37,461

622,463

577,487

Direct contribution

Support cost

137,249

59,303

127,204

61,549

63,701

35,219

65,999

36,097

(36,683)

(41,638)

164,267

151,565

–

94,522

97,646

Pre-tax operating income

(loss) before unallocated

charges

$ 77,946

$ 65,655

$ 28,482

$ 29,902

$(36,683)

$ (41,638)

69,745

53,919

Cash award plan

Regulatory settlement

Merger and restructuring

Royalty fee

Consolidated income before

taxes

24,000

–

3,911

–

32,500

7,976

7,482

$ 41,834

$ 5,961

Capital Markets

Private Client Services

Corporate Support
and Other

Consolidated
Company

(Dollars in thousands)

2002

2001

2002

2001

2002

2001

2002

2001

Net revenues

$376,074

$422,235 $357,155

$392,447

$ (4,177)

$ (13,910) $729,052

$800,772

Direct operating expense

248,870

274,688

291,156

324,470

37,461

35,351

577,487

634,509

Direct contribution

Support cost

127,204

147,547

61,549

71,013

65,999

36,097

67,977

28,964

(41,638)

(49,261)

151,565

166,263

–

97,646

99,977

Pre-tax operating income (loss)

before unallocated charges

$ 65,655

$ 76,534 $ 29,902

$ 39,013

$(41,638)

$ (49,261)

53,919

66,286

Regulatory settlement

Amortization of goodwill and

acquisition-related

compensation

Merger and restructuring

Royalty fee

Consolidated income (loss)

before taxes

32,500

–

7,976

7,482

17,641

65,697

55,753

$ 5,961

$ (72,805)

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 21

Income Taxes

On the consolidated ﬁnancial statements, income
taxes were determined on a separate return basis as
if the Company had not been eligible to be included
in the consolidated income tax return of USB and
its afﬁliates.

The components of income tax expense (beneﬁt) were:

YEAR ENDED DECEMBER 31
(Dollars in thousands)

Current:

Federal

State

Foreign

Deferred:

Federal

State

Total tax expense (beneﬁt)

A reconciliation of the statutory federal income tax
rates to the Company’s effective tax rates for the
ﬁscal years ended December 31 was as follows:

(Dollars in thousands)

Federal income tax at statutory rates

Increase (reduction) in taxes resulting from:

State income taxes, net of federal tax beneﬁt

Goodwill amortization

Net tax-exempt interest income

Fines and penalties

Other, net

Total tax expense (beneﬁt)

7 0

P I P E R J A F F R AY A N N U A L R E P O R T 2003

2003

2002

2001

$17,528

$ 12,809

$(20,876)

4,380

418

4,152

280

(2,891)

230

22,326

17,241

(23,537)

(5,529)

(962)

(9,952)

(1,434)

(6,491)

(11,386)

697

783

$15,835

$ 5,855

$(22,754)

2003

2002

2001

$14,642

$ 2,087

$(25,482)

2,270

–

1,767

–

(1,823)

5,054

(2,933)

(3,692)

(1,525)

350

1,506

4,953

740

–

1,022

$15,835

$ 5,855

$(22,754)

The Company has reviewed the components of the
deferred tax assets and has determined that no valu-
ation allowance is deemed necessary based on man-
agement’s expectation of future taxable income.

As part of the Distribution, the Company entered
into a tax sharing agreement with USB that governs
each parties’ responsibilities, as it relates to income
taxes, going forward. Pursuant to this agreement,
USB is generally responsible for any future liabilities
resulting from Internal Revenue Service audits for
those years the Company was part of the USB con-
solidated income tax return.

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

Deferred income tax assets and liabilities reﬂect the
tax effect of temporary differences between the car-
rying amount of assets and liabilities for ﬁnancial
reporting purposes and the amounts used for the
same items for income tax reporting purposes.

The net deferred tax asset included in other assets at
December 31 on the Consolidated Statements of
Financial Condition consisted of the following items:

(Dollars in thousands)

Deferred tax assets:

Liabilities /accruals not currently

deductible

Pension and retirement costs

Deferred compensation

Other

Deferred tax liabilities:

Partnership investments

Fixed assets

Other

2003

2002

$26,254

$28,628

10,086

14,854

5,382

8,503

7,651

5,613

56,576

50,395

588

3,188

130

1,700

2,180

336

3,906

4,216

Net deferred tax assets

$52,670

$46,179

P I P E R J A F F R AY A N N U A L R E P O R T 2003

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

S U P P L E M E N TA L I N F O R M AT I O N

Quarterly Information (Unaudited)

2003 FISCAL QUARTER
(Amounts in thousands, except per share data)

Total revenues
Interest expense
Net revenues
Non-interest expenses
Income (loss) before income taxes
Net income (loss)
Earnings per common share

Basic
Diluted

Weighted average number of common shares

Basic
Diluted

2002 FISCAL QUARTER
(Amounts in thousands, except per share data)

Total revenues
Interest expense
Net revenues
Non-interest expenses
Income (loss) before income taxes
Net income (loss)
Earnings per common share

Basic
Diluted

Weighted average number of common shares

Basic
Diluted

First

Second

Third

Fourth

$174,634
5,427
169,207
162,024
7,183
4,693

$210,377
5,327
205,050
191,380
13,670
8,622

$214,900
4,225
210,675
184,570
26,105
16,030

$206,330
4,532
201,798
206,922
(5,124)
(3,346)

$
$

0.24
0.24

$
$

0.45
0.45

$
$

0.83
0.83

$
$

(0.17)
(0.17)

19,190
19,190

19,223
19,223

19,260
19,260

19,273
19,273

First

Second

Third

Fourth

$191,405
8,127
183,278
168,001
15,277
9,076

$215,774
13,379
202,395
186,509
15,886
9,947

$170,702
6,630
164,072
158,765
5,307
4,308

$185,486
6,179
179,307
209,816
(30,509)
(23,225)

$
$

0.47
0.47

$
$

0.52
0.52

$
$

0.23
0.23

$
$

(1.21)
(1.21)

19,198
19,198

19,132
19,132

19,150
19,150

19,162
19,162

Market for Piper Jaffray Common Stock and Related Shareholder Matters

any future earnings for use in the operation and
STOCK PRICE INFORMATION
expansion of our business. Our board of directors is
Our common stock is listed on the New York Stock
Exchange under the symbol ‘‘PJC.’’ Our separation
free to change our dividend policy at any time and
from U.S. Bancorp was completed on December 31, will make any such future determination regarding
the payment of dividends based upon various fac-
2003 and our common stock began ‘‘regular trad-
ing’’ on the New York Stock Exchange on January 2,
tors then existing, including:
2004. Consequently, historical quarterly price infor-
mation is not available for shares of our common
stock. On February 6, 2004, the last reported sale
price of our common stock was $46.75 per share.

) our ﬁnancial condition, operating results and cur-

rent and anticipated cash needs,

) general economic and business conditions,
) our strategic plans and business prospects,
) legal, contractual and regulatory restrictions on

our ability to pay dividends, and

) other factors that our board of directors may

consider to be relevant.

Restrictions on our broker dealer subsidiary’s abil-
ity to pay dividends are described in Note 15 to the
consolidated ﬁnancial statements.

SHAREHOLDERS
We had 49,217 shareholders of record and an esti-
mated 217,000 beneﬁcial owners of our common
stock as of February 6, 2004.

DIVIDENDS
We do not intend to pay cash dividends on our
common stock for the foreseeable future. Instead,
we currently intend to retain all available funds and

7 2

P I P E R J A F F R AY A N N U A L R E P O R T 2003