Piper Jaffray Companies Annual Report 2007

Plain-text annual report

We are building a leading international middle market investment bank and institutional securities firm. The 2007 Piper Jaffray Companies Annual Report P i p e r J a f f r a y C o m p a n i e s A n n u a l R e p o r t 2 0 0 7 Cert no. SW-COC-1865 Corporate Headquarters Piper Jaffray Companies Mail Stop J09N05 800 Nicollet Mall, Suite 800 Minneapolis, MN 55402 612 303-6000 Company Web Site www.piperjaffray.com Stock Transfer Agent and Registrar Mellon Investor Services LLC acts as transfer agent and registrar for Piper Jaffray Companies and maintains all shareholder records for the company. For questions regarding owned Piper Jaffray Companies stock, stock transfers, address corrections or changes, lost stock certificates or duplicate mailings, please contact Mellon Investor Services by writing or calling: Mellon Investor Services LLC P.O. Box 358010 Pittsburgh, PA 15252-8010 800 872-4409 Street Address for Overnight Deliveries: 480 Washington Blvd. Jersey City, NJ 07310-1900 Web Site Access to Registrar Shareholders may access their investor statements online 24 hours a day, seven days a week with MLinkSM; for more information, go to www.melloninvestor.com/ISD. E-mail Delivery of Shareholder Materials Piper Jaffray invites its shareholders to join in its commitment to being an environmentally responsible corporation by receiving future shareholder materials electronically. Registered shareholders may sign up for electronic delivery of future proxy statements, proxy cards and annual reports by accessing the Web site, www.proxyvote.com, and following the instructions to vote. After you have voted your proxy, you will be prompted regarding electronic delivery. Electronic delivery will help Piper Jaffray reduce paper waste and minimize printing and postage costs. This book was printed on 100% post-consumer recycled paper. Independent Accountants Ernst & Young LLP Common Stock Listing New York Stock Exchange (symbol: PJC) Investor Inquiries Shareholders, securities analysts and investors seeking more information about the company should contact Jennifer A. Olson- Goude, director of Investor Relations, at jennifer. a.olson-goude@pjc.com, 612 303-6277, or the corporate headquarters address. Web Site Access to SEC Reports and Corporate Governance Information Piper Jaffray Companies makes available free of charge on its Web site, www.piperjaffray.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as all other reports filed by Piper Jaffray Companies with the SEC, as soon as reasonably practicable after it electronically files them with, or furnishes them to, the SEC. Piper Jaffray Companies also makes available free of charge on its Web site the company’s codes of ethics and business conduct, its corporate governance principles and the charters of the audit, compensation, and nominating and governance committees of the board of directors. Printed copies of these materials will be mailed upon request. Dividends Piper Jaffray Companies does not currently pay cash dividends on its common stock. Certifications The certifications by the chief executive officer and chief financial officer of Piper Jaffray Companies required under Section 302 of the Sarbanes-Oxley Act of 2002 have been filed as exhibits to its 2006 Annual Report on Form 10-K. The certification by the chief executive officer of Piper Jaffray Companies required under Section 303A.12(a) of the corporate governance rules of the New York Stock Exchange has been submitted to the New York Stock Exchange. Growth in our core business will come from our continued focus on broadening our product offerings, extending our geographic reach and deepening our expertise in select middle market sectors. Andrew S. Duff Chairman and Chief Executive Officer Fellow shareholders, In 2007, our company continued to advance the mission we set forth in 2006: to build a leading international middle market investment bank and institutional securities firm. Despite difficult capital markets conditions in the second half of the year, we made progress toward that mission while maintaining a strong market position in our core business and delivering sound financial results relative to our industry. As we move forward, our aim is to grow and diversify our revenue base, expand operating margins and enhance our return on equity. We will deliver on these financial goals by building both our core business and new revenue streams that leverage our investment management capabilities. Growth in our core business will come from our continued focus on broadening our product offerings, extending our geographic Piper Jaffray Companies Annual Report 2007 | 1 Chairman’s Letter reach and deepening our expertise in select middle market sectors. In investment management, we are committed to building out our capabilities in two key areas: asset management and principal activity — both of which provide attractive margins and support our revenue diversification goals. For the full year 2007, we generated a return on tangible common equity of 6.4 percent. This return was low because of the substantial excess capital generated from the 2006 sale of our Private Client Services (pcs) branch network. In the 14 months following the pcs sale, we Robert W. Peterson Head of Equities Wiley D. Angell Executive Managing Director of FAMCO financial performance Despite the volatile capital markets in the last half of 2007—and a particularly difficult third quarter—we held revenues steady compared to 2006. We generated a pre-tax margin of 12.6 percent compared to 19.5 percent in 2006 (of which 4.2 percentage points were due to the benefit of a litigation reserve reduction). We finished the year with a solid fourth quarter— particularly when placed in a competitive context—reflecting strength in our equity financing, equity sales and trading and advisory services businesses. Debbra L. Schoneman Treasurer Despite the challenging conditions, we maintained our strong market position in core sectors—including, for example, health care, consumer, and state and local government—where we have long held leadership positions. This demonstrates the strength of our established core business, and positions us well for growth during more favorable market cycles. 2 | Piper Jaffray Companies Annual Report 2007 Chairman’s Letter redeployed a major portion of the proceeds into key acquisitions and the completion of a $180 million share repurchase program. industry, a rapidly-evolving and innovative space. These actions should positively impact the return on tangible common equity going forward. Looking ahead, we will consider leveraging our balance sheet in order to grow our business and enhance returns to shareholders. sector expertise Our ability to serve as our clients’ primary advisor is due in large part to our deep expertise in their industries. By focusing on specific middle market sectors, we have attained long-term leadership positions in securities underwriting, trading and research coverage. We also are seeing success in emerging sectors—for example, the clean technology and renewables 2007 equity underwriting leadership* No. 1 Health care IPO underwriter Piper Jaffray – 13 transactions No. 1 Clean technology equity underwriter Piper Jaffray – 8 transactions No. 2 China-based underwriter Piper Jaffray – 18 transactions *Source: Dealogic and Piper Jaffray Equity Capital Markets Our clean technology and renewables group includes research, project finance and equity and fixed income investment banking professionals with expertise in clean technology, distributed power generation, ethanol/bio-fuels, fuel cells, solar power, wind and other renewable energy solutions. Our ability to serve as our clients’ primary advisor is due in large part to our deep expertise in their industries. The firm’s innovation and expertise in this sector was exemplified in 2007 as the Piper Jaffray Private Capital team successfully closed its clean tech fund of funds. This fund invests in venture capital and private-equity groups with portfolios concentrated in alternative energy, water technology and advanced materials. Our expertise in this industry also allowed us to complete our largest bookrun ipo ever—and the best-performing ipo of any company to go public on an exchange in the United States in 2007—with Shanghai- based client, JA Solar. We also served as co-manager in three of the six best- Piper Jaffray Companies Annual Report 2007 | 3 Chairman’s Letter performing China-based IPOs of the year, two of which were in the clean technology and renewables sector. geographic reach We have operated successfully from our European headquarters in London since 1988, and have been doing business with China-based companies since 2003. Our presence in Asia has enabled us to underwrite Chinese issuers listing on exchanges in the United States. We have completed 36 such deals since 2003. are now able to raise capital and provide financial advisory services for clients in three of the world’s leading centers of finance: New York, London and Hong Kong. Ajay P. Kasargod Senior Research Analyst In October 2007, our Asia platform took a major step forward with the acquisition of Goldbond Capital Holdings Ltd., a Hong Kong-based investment bank. The acquisition demonstrates our long-term commitment to Asia and provides us with an experienced, locally based management team with proven middle market leadership in Greater China. Lois E. Quam Head of Alternative Investments Thomas P. Schnettler Vice Chairman and Chief Financial Officer, and Alex P. Ko Chief Executive Officer of Piper Jaffray Asia With this acquisition, we Brian E. Bellows U.S. Equities Sales Trader 4 | Piper Jaffray Companies Annual Report 2007 Financial Highlights Years ended December 31 (Amounts in thousands) Revenues: Investment banking Institutional brokerage Interest Asset management Other income Total revenues Interest expense Net revenues Non-interest expenses: Compensation and benefits Cash award program Restructuring-related expense Other non-compensation expense 2007 $302,361 151,591 60,873 6,173 1,613 522,611 23,689 2006 $298,309 160,502 64,110 222 12,094 535,237 32,303 2005 $251,750 155,990 44,857 227 978 453,802 32,494 498,922 502,934 421,308 291,870 1,677 - 142,461 291,265 2,980 - 110,816 243,833 4,205 8,595 128,644 Total non-interest expenses 436,008 405,061 385,277 Income from continuing operations before income tax expense Income tax expense Net income from continuing operations Discontinued operations: Income (loss) from discontinued operations, net of tax Net income Net revenues* In millions $503 $499 $421 62,914 17,887 45,027 97,873 34,974 62,899 36,031 10,863 25,168 (2,811) 172,354 14,915 $42,216 $235,253 $40,083 Pretax operating margin* # 19.5% 12.6% 8.6% Net income* # In millions $63 $45 Earnings per common share*# Diluted $3.32 $2.59 $25 $1.32 ‘05 ‘06 ‘07 ‘05 ‘06 ‘07 ‘05 ‘06 ‘07 ‘05 ‘06 ‘07 *All from continuing operations. #2006 pretax operating margin, net income and earnings per common share included a benefit of $13.1 million, 420 basis points and $0.69, respectively, due to a reduction of litigation reserves related to a development in a particular industrywide litigation matter. Piper Jaffray Companies Annual Report 2007 | 5 Chairman’s Letter traditional, quantitative and hedged equity, master limited partnerships and fixed income strategies. With its long-lasting client relationships, competitive investment performance, disciplined investment processes and talented team of professionals, famco provides a solid foundation for our asset management business—a business in a growth industry with attractive margins. In 2007, we also created a new strategic senior position focused on developing alternative investment offerings in clean technology/renewables and health care—two areas with important growth potential. This new head of alternative investments role— along with our proprietary efforts—will leverage our existing sector expertise and knowledge of the middle market to enhance margins and provide new investment opportunities for clients. We also expanded the commitment of our own capital to targeted proprietary trading and principal investing activities in 2007. • Experienced asset managers • About $9 billion in assets under management • Traditional core equity, quantitative and hedged equity, master limited partnerships and fixed income product offerings • Diversifies revenue and offers attractive margins • Based in Hong Kong with an office in Shanghai • Middle market focus • Investment banking, sales and trading, equity capital markets and research • Extends Piper Jaffray international reach In addition, the Goldbond team, which has combined with our previously established operations in China to form Piper Jaffray Asia, allows us to offer top-quality investment opportunities to Asian-based institutional investors. Piper Jaffray Asia is instrumental in our continued efforts to diversify our international revenue, which has grown from about 5 percent in 2005 to more than 14 percent in 2007. We will continue to build our international capabilities to capitalize on growth opportunities overseas and to diversify our revenues. asset management and revenue diversification Also among the key strategic achievements in 2007 was our acquisition of Fiduciary Asset Management, LLC (famco), a St. Louis-based investment management firm with approximately 50 employees and $9 billion of assets under management. famco was founded in 1994 and serves its clients through separately managed accounts and closed-end funds, offering an array of investment products including 6 | Piper Jaffray Companies Annual Report 2007 Using a disciplined approach, our goal is to employ our existing market expertise to generate returns on capital that improve overall margins for the firm. outlook for 2008: leadership in the middle market Turmoil in the credit markets created challenging conditions in the second half of 2007 and into the new year, which has caused us to have a cautious outlook for 2008. While we anticipate difficult markets u.k. bi otech leadershi p* In 2007, Piper Jaffray was involved in two of the three largest European biotech IPOs, as well as the two largest European follow-ons in the biotech sector. *Source: Piper Jaffray 2007 public finance r ankings* No. 1 for municipal underwriter in the Midwest by number of issues and par amount No. 3 in health care/hospital long-term municipal issues No. 4 for long- and short-term transactions by par amount sub-$10 million *Source: Thomson Financial Chairman’s Letter ahead, we enter the year in a stronger position, with critical platforms in asset management and Asia, as well as meaningful progress in building out our capital markets capabilities. We consider our culture to be a further differentiator in our industry, allowing us to attract and retain talented employees to help us maintain leadership in our chosen sectors, build new revenue streams and succeed in new markets. With a shared commitment to creating value for clients, an environment that encourages innovation and a highly capable workforce, we are well on our way to building a leading international middle market investment bank and institutional securities firm. Sincerely, Andrew S. Duff Chairman and Chief Executive Officer Piper Jaffray Companies Piper Jaffray Companies Annual Report 2007 | 7 executive leadership Andrew S. Duff Chairman and Chief Executive Officer 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. principal office locations Minneapolis, MN (headquarters) Global Hong Kong London Shanghai U.S. Boston, MA Charlotte, NC Chicago, IL Denver, CO Des Moines, IA Houston, TX Kansas City, KS Los Angeles, CA Milwaukee, WI New York, NY Palo Alto, CA Phoenix, AZ Portland, OR San Francisco, CA Seattle, WA St. Louis, MO Thomas P. Schnettler Vice Chairman and Chief Financial Officer James L. Chosy General Counsel and Secretary Frank E. Fairman Head of Public Finance Services R. Todd Firebaugh Chief Administrative Officer Benjamin T. May Head of High-Yield and Structured Products Robert W. Peterson Head of Equities Jon W. Salveson Head of Investment Banking board of directors Andrew S. Duff Chairman and Chief Executive Officer Piper Jaffray Companies Addison (Tad) L. Piper Retired Former Chairman and Chief Executive Officer Piper Jaffray Companies Inc. Michael R. Francis Executive Vice President of Marketing Target Corporation B. Kristine Johnson President Affinity Capital Management Samuel L. Kaplan Partner and Founding Member Kaplan, Strangis and Kaplan, P.A. Lisa K. Polsky President Polsky Partners LLC Frank L. Sims Retired Former Corporate Vice President Transportation and Product Assurance Cargill, Inc. Jean M. Taylor President and Chief Executive Officer Taylor Corporation PiperJaffrayCompaniesSELECTEDFINANCIALDATAThefollowingtablepresentsourselectedconsolidatedfinancialdatafortheperiodsanddatesindicated.Theinformationsetforthbelowshouldbereadinconjunc-tionwith“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”andourconsolidatedfinancialstatementsandnotesthereto.FORTHEYEARENDEDDECEMBER31,(Dollarsandsharesinthousands,exceptpersharedata)20072006200520042003Revenues:Investmentbanking$302,361$298,309$251,750$234,925$197,966Institutionalbrokerage151,591160,502155,990174,311209,230Interest60,87364,11044,85735,71827,978Assetmanagement6,1732222275,0935,844Otherincome1,61312,0949786,5804,483Totalrevenues522,611535,237453,802456,627445,501Interestexpense23,68932,30332,49422,42116,476Netrevenues498,922502,934421,308434,206429,025Non-interestexpenses:Compensationandbenefits291,870291,265243,833251,187246,868Cashawardprogram1,6772,9804,2054,71724,000Restructuring-relatedexpense––8,595––Royaltyfee––––3,911Other142,461110,816128,644129,264123,411Totalnon-interestexpenses436,008405,061385,277385,168398,190Incomefromcontinuingoperationsbeforeincometaxexpense62,91497,87336,03149,03830,835Incometaxexpense17,88734,97410,86316,72710,176Netincomefromcontinuingoperations45,02762,89925,16832,31120,659Discontinuedoperations:Income/(loss)fromdiscontinuedoperations,netoftax(2,811)172,35414,91518,0375,340Netincome$42,216$235,253$40,083$50,348$25,999EarningsperbasiccommonshareIncomefromcontinuingoperations$2.73$3.49$1.34$1.67$1.07Income/(loss)fromdiscontinuedoperations(0.17)9.570.790.930.28Earningsperbasiccommonshare$2.56$13.07$2.13$2.60$1.35EarningsperdilutedcommonshareIncomefromcontinuingoperations$2.59$3.32$1.32$1.67$1.07Income/(loss)fromdiscontinuedoperations(0.16)9.090.780.930.28Earningsperdilutedcommonshare$2.43$12.40$2.10$2.60$1.35WeightedaveragenumberofcommonsharesBasic16,47418,00218,81319,33319,237Diluted17,35518,96819,08119,39919,237OtherdataTotalassets$1,723,156$1,851,847$2,354,191$2,828,257$2,380,647Long-termdebt$–$–$180,000$180,000$180,000Shareholders’equity$912,589$924,439$754,827$725,428$669,795Totalemployees1,2391,1082,8713,0272,991PiperJaffrayAnnualReport20079MANAGEMENT’SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONSThefollowinginformationshouldbereadinconjunc-tionwiththeaccompanyingconsolidatedfinancialstatementsandrelatednotesandexhibitsincludedelsewhereinthisreport.Certainstatementsinthisreportmaybeconsideredforward-looking.Statementsthatarenothistoricalorcurrentfacts,includingstate-mentsaboutbeliefsandexpectations,areforward-lookingstatements.Theseforwardlookingstatementsinclude,amongotherthings,statementsotherthanhistoricalinformationorstatementsofcurrentcondi-tionandmayrelatetoourfutureplansandobjectivesandresults,andalsomayincludeourbeliefregardingtheeffectofvariouslegalproceedings,assetforthunder“LegalProceedings”inPartI,Item3ofthisAnnualReportonForm10-KandinoursubsequentreportsfiledwiththeSEC.Forward-lookingstatementsinvolveinherentrisksanduncertainties,andimportantfactorscouldcauseactualresultstodiffermateriallyfromthoseanticipated,includingthosefactorsdis-cussedbelowunder“ExternalFactorsImpactingOurBusiness”aswellasthefactorsidentifiedunder“RiskFactors”inPart1,Item1AofourAnnualReportonForm10-KfortheyearendedDecember31,2007,asupdatedinoursubsequentreportsfiledwiththeSEC.Thesereportsareavailableatourwebsiteatwww.pi-perjaffray.comandattheSECwebsiteatwww.sec.gov.Forward-lookingstatementsspeakonlyasofthedatetheyaremade,andweundertakenoobligationtoupdatetheminlightofnewinformationorfutureevents.ExecutiveOverviewOurbusinessfromcontinuingoperationsprincipallyconsistsofprovidinginvestmentbanking,institutionalbrokerage,assetmanagementandrelatedfinancialser-vicestomiddle-marketcompanies,privateequitygroups,publicentities,non-profitentitiesandinstitu-tionalinvestorsintheUnitedStates,EuropeandAsia.Wegeneraterevenuesprimarilythroughthereceiptofadvisoryandfinancingfeesearnedoninvestmentbank-ingactivities,commissionsandsalescreditsearnedonequityandfixedincomeinstitutionalsalesandtradingactivities,netinterestearnedonsecuritiesinventories,profitsandlossesfromtradingactivitiesrelatedtothesesecuritiesinventoriesandassetmanagementfees.Thesecuritiesbusinessisahumancapitalbusiness.Accordingly,compensationandbenefitscomprisethelargestcomponentofourexpenses,andourperformanceisdependentuponourabilitytoattract,developandretainhighlyskilledemployeeswhoaremotivatedandcommittedtoprovidingthehighestqualityofserviceandguidancetoourclients.OnSeptember14,2007,weexpandedourassetman-agementbusinesswiththeacquisitionofFiduciaryAssetManagement,LLC(“FAMCO”).FAMCOisaSt.Louis-basedassetmanagementfirmwithapproxi-mately$9.0billioninassetsundermanagementservingclientsthroughseparatelymanagedaccountsandclosedendfunds.FAMCOoffersinvestmentproductsthatincludetraditionalcoreequity,quantitativeandhedgedequity,masterlimitedpartnershipsandfixedincome.Thisacquisitionexpandsourassetmanage-mentcapabilitiesandhelpstodiversifyourrevenuebase.FAMCOresultsofoperationsareincludedinourconsolidatedresultsofoperationsfromthedateofacquisition.WepurchasedFAMCOfor$52.2millionincashandwemaypayfuturecashconsiderationcontingentontheperformanceofFAMCOineachofthe2008,2009and2010calendaryears.OnOctober2,2007,weexpandedourAsianplatformwiththeacquisitionofGoldbondCapitalHoldingsLimited(“Goldbond”)for$47.1millionincashand$4.5millioninrestrictedstock.GoldbondisaHongKong-basedinvestmentbankfocusingprimarilyonraisingcapitalforandprovidingfinancialadvisoryservicestocompanieslistedortobelistedontheHongKongStockExchange.OurAsiaplatformnowincludescorporatefinance,salesandtrading,equitycapitalmarketsandresearchandisknownasPiperJaffrayAsia.Weplantocontinueourfocusonrevenuegrowththroughexpansionofourcapitalmarketsandassetmanagementbusinesses.Withinourcapitalmarketsbusiness,oureffortswillbefocusedongrowingoursectorexpertise,productdepthandgeographicreach.Weexpectthatcontinuedgrowthfrombothourbusi-nesseswillcomefromacombinationoforganicgrowthandacquisitions.Inaddition,wehavebeguntouseourowncapitaltoagreaterextentbyengaginginprincipalactivitiesthatleverageourexpertise.Theseactivitiesinclude,amongotherthings,proprietarypositionsinequityanddebtsecuritiesofpublicandprivatecom-panies,arbitragetradingstrategies,proprietaryderiv-ativetradingandprivateequityfunds.Weintendtoincreasetheamountofcapitalwehavecommittedtoprincipalactivitiesasopportunitiesarise.Weare10PiperJaffrayAnnualReport2007Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationscurrentlyevaluatingaddingadditionalcapitaltofacil-itatethesegrowthinitiatives.Allofthesegrowthini-tiativeswillrequireinvestmentsinpersonnelandotherexpenses,whichmayhaveashort-termnegativeimpactonourprofitabilityasitmaytaketimetodevelopmeaningfulrevenuesfromthem.DiscontinuedoperationsincludetheoperatingresultsofourPrivateClientServices(“PCS”)retailbrokeragebusiness,thegainonthesaleofthePCSbranchnet-workin2006andrelatedrestructuringcosts.WeclosedonthesaleofourPCSbranchnetworkandcertainrelatedassetstoUBSFinancialServices,Inc.,asubsid-iaryofUBSAG(“UBS”),onAugust11,2006.OurPCSretailbrokeragebusinessprovidedawiderangeoffinancialproductsandservicestoindividualinvestorsthroughanetworkofapproximately90branchoffices.In2007,discontinuedoperationsrecordedanetlossof$2.8million,whichincludedcostsrelatedtodecom-missioningaretail-orientedback-officesystem,PCSlitigation-relatedexpensesandadditionalrestructuringcharges.Thedecommissioningofourretail-orientedback-officesystemwascompletedinthethirdquarterandwedonotanticipateincurringanyadditionalexpensesrelatedtothissysteminthefuture.Costsassociatedwithimplementingournewback-officesys-temtosupportourcapitalmarketsbusinessarerecordedincontinuingoperations.Wemayincuraddi-tionaldiscontinuedoperationsexpensesorincomeinthefuturefromchangesinlitigationreserveestimatesforretainedPCSlitigationmattersandforchangesinestimatestooccupancyandseverancerestructuringchargesifthefactssupportingourestimateschange.SeeNotes4and18toourconsolidatedfinancialstate-mentsforafurtherdiscussionofourdiscontinuedoperationsandrestructuring.RESULTSFORTHEYEARENDEDDECEMBER31,2007FortheyearendedDecember31,2007,ournetincome,includingcontinuinganddiscontinuedoperations,was$42.2million,or$2.43perdilutedshare,downfromnetincomeof$235.3million,or$12.40perdilutedshare,fortheprioryear.Netincomein2006included$165.6million,aftertaxandnetofrestructuringandtransactioncosts,relatedtothegainonthesaleofthePCSbranchnetworkandcertainrelatedassetstoUBS.In2007,netincomefromcontinuingoperationstotaled$45.0million,or$2.59perdilutedshare,downfromnetincomeof$62.9million,or$3.32perdilutedshare,in2006.Netincomefromcontinuingoperationsin2006includedanaftertaxbenefitof$13.1million,or$0.69perdilutedshare,resultingfromareductionofalitigationreserverelatedtodevelopmentsinaspecificindustry-widelitigationmatter.Netrevenuesfromcon-tinuingoperationsfortheyearendedDecember31,2007were$498.9million,slightlylessthanthe$502.9millionreportedintheprioryear.MARKETDATAThefollowingtableprovidesasummaryofrelevantmarketdataoverthepastthreeyears.YEARENDEDDECEMBER31,2007200620052007v20062006v2005DowJonesIndustrialsa13,26512,46310,7186.4%16.3%NASDAQa2,6522,4152,2059.89.5NYSEAverageDailyValueTraded($BILLIONS)$86.8$68.3$56.127.121.7NASDAQAverageDailyValueTraded($BILLIONS)$60.0$46.5$39.529.017.7MergersandAcquisitions(NUMBEROFTRANSACTIONS)b11,51010,9508,8185.124.2PublicEquityOfferings(NUMBEROFTRANSACTIONS)ce8087947751.82.5InitialPublicOfferings(NUMBEROFTRANSACTIONS)c1961801708.95.9ManagedMunicipalUnderwritings(NUMBEROFTRANSACTIONS)d12,48612,75213,948(2.1)(8.6)ManagedMunicipalUnderwritings(VALUEOFTRANSACTIONSINBILLIONS)d$429.0$388.6$408.310.4(4.8)10-YearTreasuriesAverageRate4.63%4.79%4.29%(3.3)11.73-MonthTreasuriesAverageRate4.35%4.73%3.15%(8.0)50.2(a)Dataprovidedisatperiodend.(b)Source:SecuritiesDataCorporation.(c)Source:Dealogic(offeringswithreportedmarketvaluegreaterthan$20million).(d)Source:ThomsonFinancial.(e)Numberoftransactionsincludesconvertibleofferings.PiperJaffrayAnnualReport200711Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsEXTERNALFACTORSIMPACTINGOURBUSINESSPerformanceinthefinancialservicesindustryinwhichweoperateishighlycorrelatedtotheoverallstrengthofeconomicconditionsandfinancialmarketactivity.Overallmarketconditionsareaproductofmanyfac-tors,whicharebeyondourcontrolandmostlyunpre-dictable.Thesefactorsmayaffectthefinancialdecisionsmadebyinvestors,includingtheirlevelofparticipationinthefinancialmarkets.Inturn,thesedecisionsmayaffectourbusinessresults.Withrespecttofinancialmarketactivity,ourprofitabilityissensitivetoavarietyoffactors,includingthevolumeandvalueoftradinginsecurities,thevolatilityoftheequityandfixedincomemarkets,thelevelandshapeofvariousyieldcurves,thedemandforinvestmentbankingser-vicesasreflectedbythenumberandsizeofequityanddebtfinancingsandmergerandacquisitiontransac-tions,andthedemandforassetmanagementservicesasreflectedbytheamountofassetsundermanagement.Factorsthatdifferentiateourbusinesswithinthefinan-cialservicesindustryalsomayaffectourfinancialresults.Forexample,ourbusinessfocusesonspecificindustrysectors.Thesesectorsmayexperiencegrowthordownturnsindependentlyofgeneraleconomicandmarketconditions,ormayfacemarketconditionsthataredisproportionatelybetterorworsethanthoseimpactingtheeconomyandmarketsgenerally.Ineithercase,ourbusinesscouldbeaffecteddifferentlythanoverallmarkettrends.Giventhevariabilityofthecapitalmarketsandsecuritiesbusinesses,ourearningsmayfluctuatesignificantlyfromperiodtoperiod,andresultsforanyindividualperiodshouldnotbeconsid-eredindicativeoffutureresults.OUTLOOKFOR2008Marketconditionsinearly2008arechallenging,caus-ingustohaveacautiousviewofatleastthefirsthalfof2008.Weakeconomicindicators,recessionfearsandcontinuedturmoilinthecreditmarketshavecausedsignificantmarketuncertaintyandincreasedvolatility.Continuedmarketuncertaintyandincreasedvolatilitywilllikelyhaveanadverseimpactonouroverallresultsofoperations.Forexample,thusfarin2008wehaveexperiencedsignificantlyreducedequityanddebtfinancingopportunitiesandachallengingmarketenvi-ronmentforourproprietarytradingactivities.Further,themunicipalcreditmarketsareunderparticularstress.Themajorityofourfixedincomebusinessisgeneratedbymunicipaldebtunderwritingandsalesandtrading.Theturmoilinthecreditmarketsduring2007hascarriedoverinto2008,andspreadtootherareasofthecreditmarkets.Specifically,themunicipalcreditmarketshavebeenadverselyimpactedbyratingagencydowngrades(andtheexpectationofpotentialfuturedowngrades)ofMonolinebondinsurers(“Mono-lines”).Thishascausedasignificantdecreaseinthedemandforshort-termvariableratemunicipalprod-ucts,includingvariableratedemandnotes,auctionratesecuritiesandvariableratecertificateswhichsupportourtenderoptionbondprogram.Certainauctionratesecuritiesforwhichweactasbroker-dealerhavemax-imuminterestratecaps,whicharebelowprevailingmarketratesand,asaresult,wehavedeterminednottosupportmultipleauctionsaswemanageourexposuretothesesecuritiesandourliquidityposition.Thedecreaseindemandforvariableratecertificatescol-lateralizedbymunicipalbonds,themonolineinsurerforwhichhasbeendowngraded,hasresultedinusdissolvingtwotenderoptionbondtrusts.Thecreditmarketturmoilisnegativelyimpactingourfixedincomebusinessandcouldadverselyaffectouroverallresultsofoperations.12PiperJaffrayAnnualReport2007Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsResultsofOperationsFINANCIALSUMMARYThefollowingtableprovidesasummaryoftheresultsofouroperationsandtheresultsofouroperationsasapercentageofnetrevenuesfortheperiodsindicated.FORTHEYEARENDEDDECEMBER31,(Amountsinthousands)2007200620052007v20062006v2005200720062005ASAPERCENTAGEOFNETREVENUESFORTHEYEARENDEDDECEMBER31,Revenues:Investmentbanking$302,361$298,309$251,7501.4%18.5%60.6%59.3%59.8%Institutionalbrokerage151,591160,502155,990(5.6)2.930.431.937.0Interest60,87364,11044,857(5.0)42.912.212.710.6Assetmanagement6,173222227N/M(2.2)1.20.10.1Otherincome1,61312,094978(86.7)N/M0.32.40.2Totalrevenues522,611535,237453,802(2.4)17.9104.7106.4107.7Interestexpense23,68932,30332,494(26.7)(0.6)4.76.47.7Netrevenues498,922502,934421,308(0.8)19.4100.0100.0100.0Non-interestexpenses:Compensationandbenefits291,870291,265243,8330.219.558.557.957.9Occupancyandequipment32,48230,66030,8085.9(0.5)6.56.17.3Communications24,77223,18923,9876.8(3.3)5.04.65.7Floorbrokerageandclearance14,70113,29214,78510.6(10.1)2.92.63.5Marketingandbusinessdevelopment26,61924,66421,5377.914.55.44.95.1Outsideservices34,59428,05323,88123.317.56.95.65.7Cashawardprogram1,6772,9804,205(43.7)(29.1)0.30.61.0Restructuring-relatedexpense––8,5950.0N/M––2.0Otheroperatingexpenses9,293(9,042)13,646N/MN/M1.9(1.8)3.2Totalnon-interestexpenses436,008405,061385,2777.65.187.480.591.4Incomefromcontinuingoperationsbeforeincometaxexpense62,91497,87336,031(35.7)171.612.619.58.6Incometaxexpense17,88734,97410,863(48.9)222.03.67.02.6Netincomefromcontinuingoperations45,02762,89925,168(28.4)149.99.012.56.0Discontinuedoperations:Income/(loss)fromdiscontinuedoperations,netoftax(2,811)172,35414,915N/M1,055.6(0.5)34.33.5Netincome$42,216$235,253$40,083(82.1)%486.9%8.5%46.8%9.5%N/M—NotMeaningfulFortheyearendedDecember31,2007,netincome,includingcontinuinganddiscontinuedoperations,totaled$42.2million.Netrevenuesfromcontinuingoperationswere$498.9million,aslightdeclinecom-paredto$502.9millionin2006.In2007,investmentbankingrevenuesincreasedslightlyto$302.4millionasincreasesinequityfinancingrevenuesmorethanoffsetthedeclineindebtfinancingandadvisoryser-vicesrevenues.Institutionalbrokeragerevenuesdeclined5.6percentto$151.6millionin2007,from$160.5millionin2006.Equitysalesandtradingrev-enueswereessentiallyflatcomparedto2006.Fixedincomesalesandtradingrevenuesdeclined,mainlydrivenbytheturmoilinthefinancialmarketsinthelasthalfof2007.In2007,netinterestincomeincreasedto$37.2million,comparedwith$31.8millionin2006.TheincreasewasprimarilydrivenbysignificantlyreducedborrowingneedsfollowingthesaleofourPCSbranchnetworkinAugust2006.In2007,assetmanagementfeeswere$6.2million,almostallofPiperJaffrayAnnualReport200713Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationswhichweregeneratedbyFAMCO.In2007,otherincomewas$1.6million,comparedwith$12.1millionin2006,primarilyduetoa$9.9milliongainin2006relatedtoourownershipoftwoseatsontheNewYorkStockExchange,whichwereexchangedforcashandrestrictedsharesofcommonstockofNYSEEuronext.Non-interestexpensesincreasedto$436.0millionin2007,from$405.1millionin2006.Thisincreasewasprimarilytheresultofa$21.3millionexpensereduc-tionrelatedtolitigationreservesin2006pertainingtodevelopmentsinanindustry-widelitigationmatter.FortheyearendedDecember31,2006,netincome,includingcontinuinganddiscontinuedoperations,totaled$235.3million,whichincludedagainof$165.6million,after-taxandnetofrestructuringandtransactioncosts,fromthesaleofourPCSbranchnetwork.Netrevenuesfromcontinuingoperationsincreasedto$502.9millionfor2006,anincreaseof19.4percentfromtheprioryear.In2006,investmentbankingrevenuesincreased18.5percentto$298.3mil-lion,comparedwithrevenuesof$251.8millionintheprioryear.Thisincreasewasprimarilyattributabletohigherequityfinancingactivity.Institutionalbrokeragerevenuesincreasedslightlyto$160.5millionwhencomparedwith2005.In2006,netinterestincomeincreasedto$31.8million,comparedwith$12.4mil-lionin2005.Theincreasewasdrivenbytwoprimaryfactors.First,inthethirdquarterof2006,werepaid$180millioninsubordinateddebtandpaiddownothershort-termfinancingwithproceedsfromthesaleofthePCSbranchnetwork,whichreducedinterestexpense.Second,duringthethirdandfourthquartersof2006,weinvestedtheexcessproceedsfromthesaleinshort-terminterestbearinginstruments,whichgeneratedinterestincome.In2006,otherincomeincreasedto$12.1million,comparedwith$1.0millionin2005,primarilyduetoa$9.9milliongainrecordedin2006relatedtoourownershipoftwoseatsontheNewYorkStockExchange,whichwereexchangedforcashandrestrictedsharesofcommonstockoftheNYSEEuro-next.Wesoldapproximately65percentofourNYSEEuronextrestrictedsharesinasecondaryofferingdur-ingthesecondquarterof2006.Non-interestexpensesincreasedto$405.1millionin2006,from$385.3mil-lionin2005.Thisincreasewasattributabletoincreasedvariablecompensationandbenefitsexpensesduetohigherprofitability,offsetinpartbyareductioninlitigationreservesrelatedtodevelopmentsinaspe-cificindustry-widelitigationmatterandan$8.6millionrestructuringchargetakenin2005.CONSOLIDATEDNON-INTERESTEXPENSESCompensationandBenefits–Compensationandbenefitsexpenses,whicharethelargestcomponentofourexpenses,includesalaries,bonuses,commissions,ben-efits,amortizationofstock-basedcompensation,employmenttaxesandotheremployeecosts.Asub-stantialportionofcompensationexpenseiscomprisedofvariableincentivearrangements,includingdiscre-tionarybonuses,theamountofwhichfluctuatesinproportiontothelevelofbusinessactivity,increasingwithhigherrevenuesandoperatingprofits.Othercom-pensationcosts,primarilybasesalaries,stock-basedcompensationamortizationandbenefits,aremorefixedinnature.Thetimingofbonuspayments,whichgenerallyoccurinFebruary,haveagreaterimpactonourcashpositionandliquidity,thanisreflectedinourstatementsofoperations.In2007,compensationandbenefitsexpenseswereessentiallyflatat$291.9million,comparedwiththeprioryear.Compensationandbenefitsexpensesasapercentageofnetrevenueswere58.5percentfor2007,comparedwith57.9percentfor2006.Compensationandbenefitsexpensesincreased19.5percentto$291.3millionin2006,from$243.8millionin2005.Thisincreasewasduetohighervariablecompensationcostsresultingfromincreasedprofitability.Compensationandbenefitsexpensesasapercentageofnetrevenueswereflatat57.9percentfor2006and2005.OccupancyandEquipment–Occupancyandequipmentexpenseswere$32.5millionin2007,comparedwith$30.7millionin2006.Theincreasewasdrivenbyhigherbaserentcostsduring2007associatedwithnewandexistinglocations,aswellas$0.7millionofadditionaloccupancyexpensefromtheacquisitionsofFAMCOandGoldbondinSeptemberandOctober2007,respectively.In2006,occupancyandequipmentexpenseswere$30.7million,essentiallyflatcomparedwith2005.Inthefourthquarterof2006,weenteredintoanewleasecontractrelatedtoourLondonofficeandexitedourexistinglease.Asaresult,weincurredapproxi-mately$1.2millioninthefourthquarterrelatedtoearlyexitpenaltiesandleaseholdwrite-offs.Offsettingthisexpensewasadeclineindepreciationrelatedtopriorinvestmentsintechnologybecomingfullydepre-ciatedinthefirstquarterof2006.Communications–Communicationexpensesincludecostsfortelecommunicationanddatacommunication,primarilyconsistingofexpensesforobtainingthird-partymarketdatainformation.In2007,14PiperJaffrayAnnualReport2007Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationscommunicationexpenseswere$24.8million,anincreaseof6.8percentfrom2006.Theincreasewasprimarilyattributabletohighermarketdataserviceexpensesfromobtainingexpandedservicesandpriceincreases.In2006,communicationexpenseswere$23.2million,down3.3percentfrom2005.Thedecreasewasduetocostssavingsassociatedwithachangeinvendorsrelatedtoourequitytradingsystemandaportionofthesecostsbeingrecordedwithinoutsideservicesasaresultofthechangeinvendors.FloorBrokerageandClearance–Floorbrokerageandclearanceexpensesin2007increased10.6percentto$14.7million,comparedwith2006,duetohigherexpensesassociatedwithaccessingafter-marketsup-portofdeal-relatedstocks.In2006,floorbrokerageandclearanceexpenseswere$13.3million,comparedwith$14.8millionin2005,adecreaseof10.1percent.Thisdecreasewasaresultofeffortstoreduceexpensesassociatedwithaccessingelectroniccommunicationnetworks,offsetinpartbyincrementalexpenserelatedtoourEuropeantradingsystem.MarketingandBusinessDevelopment–Marketingandbusinessdevelopmentexpensesincludetravelandentertainmentandpromotionalandadvertisingcosts.In2007,marketingandbusinessdevelopmentexpensesincreased7.9percentto$26.6million,comparedwith$24.7millionintheprioryear.Thisincreasewaspri-marilyaresultofhighertravelcostsdrivenbyourinternationalexpansion.In2006,marketingandbusinessdevelopmentexpenseswere$24.7million,comparedwith$21.5millionin2005,anincreaseof14.5percent.Thisincreasewasattributabletohigherconferenceexpensesandincreaseddeal-relatedtravelandentertainmentcosts.OutsideServices–Outsideservicesexpensesincludesecuritiesprocessingexpenses,outsourcedtechnologyfunctions,outsidelegalfeesandotherprofessionalfees.In2007,outsideservicesexpensesincreasedto$34.6million,comparedwith$28.1millionin2006.Thisincreasewasprimarilyduetoexpensesrelatedtoanewback-officesystemtosupportourcapitalmarketsbusiness,whichwasimplementedinthethirdquarterof2007,andhigheroutsidelegalfees.Inaddition,weincurredhighertradingsystemexpensesrelatedtoincreasedvolumesinourEuropeanbusinessandexpandedservices.Outsideservicesexpensesincreasedto$28.1millionin2006,comparedwith$23.9millionfor2005.Thisincreasewasduetoourequitytradingsystembeingbundledandprovidedbyasinglevendor.Previously,theseserviceswereprovidedbymultiplevendorsandwererecordedinvariousexpensecategoriessuchascommunications,floorbrokerageandclearanceandoutsideservicesexpensesbaseduponthetypeofservicebeingprovided.Inaddition,weincurredincreasedprofessionalfeeexpenserelatedtorecruitmentofcap-italmarketspersonnel.CashAwardProgram–Inconnectionwithourspin-offfromU.S.Bancorpin2003,weestablishedacashawardprogrampursuanttowhichwegrantedcashawardstoabroad-basedgroupofouremployees.TheawardprogramwasdesignedtoaidinretentionofemployeesandtocompensateforthevalueofU.S.Ban-corpstockoptionsandrestrictedstocklostbyouremployeesasaresultofthespin-off.In2007,cashawardsexpensedecreasedto$1.7million,comparedwith$3.0millionintheprioryear.Thecashawardswerebeingexpensedoverafour-yearperiodthatendedDecember31,2007.Wewillincurnofurtherexpensefromthecashawardprogram.Restructuring-RelatedExpense–Inthethirdquarterof2005,weimplementedcertainexpensereductionmea-suresasameanstobetteralignourcostinfrastructurewithourrevenues.Thisresultedinapre-taxrestruc-turingchargeof$8.6million,consistingof$4.9millioninseverancebenefitsand$3.7millionrelatedtothereductionofofficespace.OtherOperatingExpenses–Otheroperatingexpensesincludeinsurancecosts,licenseandregistrationfees,expensesrelatedtoourcharitablegivingprogram,amortizationofintangibleassetsandlitigation-relatedexpenses,whichconsistoftheamountswereserveand/orpayoutrelatedtolegalandregulatorymatters.In2007,otheroperatingexpensesincreasedto$9.3million,comparedwithabenefitof$9.0millionin2006.Inthefourthquarterof2006,wereduceda$21.3millionlitigationreserverelatedtodevelopmentsinaspecificindustry-widelitigationmatter,whichcausedthesignificantincreasein2007inotheroper-atingexpenses,comparedwith2006.WeanticipatethatotherexpenseswillincreaseinfutureperiodsasaresultofamortizationofintangibleassetsacquiredintheFAMCOacquisition.Otheroperatingexpensesdecreasedsubstantiallytoabenefitof$9.0millionin2006,comparedwithexpensesof$13.6millionin2005asaresultofthechangeinlitigationreservesdiscussedabove.IncomeTaxes–In2007,ourprovisionforincometaxesfromcontinuingoperationswas$17.9million,aneffectivetaxrateof28.4percent,comparedwith$35.0million,aneffectivetaxrateof35.7percent,PiperJaffrayAnnualReport200715Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsfor2006,andcomparedwith$10.9million,aneffec-tivetaxrateof30.1percent,for2005.Thedecreasedeffectivetaxratein2007comparedwith2006wasprimarilyattributabletoanincreaseintheratioofnetmunicipalinterestincome,whichisnon-taxable,tototaltaxableincome.NETREVENUESFROMCONTINUINGOPERATIONS(DETAIL)FORTHEYEARENDEDDECEMBER31,(Dollarsinthousands)2007200620052007v20062006v2005PERCENTINC/(DEC)Netrevenues:InvestmentbankingFinancingEquities$141,981$124,304$83,22014.2%49.4%Debt80,32382,86175,628(3.1)9.6Advisoryservices89,44997,22596,774(8.0)0.5Totalinvestmentbanking311,753304,390255,6222.419.1InstitutionalsalesandtradingEquities119,961120,341113,220(0.3)6.3Fixedincome60,83470,13460,027(13.3)16.8Totalinstitutionalsalesandtrading180,795190,475173,247(5.1)9.9Assetmanagement6,173222227N/M(2.2)Otherincome/(loss)2017,847(7,788)(97.4)N/MTotalnetrevenues$498,922$502,934$421,308(0.8)%19.4%N/M—NotmeaningfulInvestmentbankingrevenuescomprisealltherevenuesgeneratedthroughfinancingandadvisoryservicesactiv-itiesincludingderivativeactivitiesthatrelatetodebtfinancing.Toassesstheprofitabilityofinvestmentbank-ing,weaggregateinvestmentbankingfeeswiththenetinterestincomeorexpenseassociatedwiththeseactivities.Despitechallengingmarketconditionsinthelasthalfof2007,investmentbankingrevenuesincreasedto$311.8million,comparedwith$304.4millionin2006.Increasedequityfinancingrevenuesmorethanoffsetloweradvisoryservicesrevenuesandslightlylowerdebtfinancingrevenues.In2007,equityunder-writingrevenuesincreased14.2percentto$142.0mil-lionduetoanincreaseinthenumberofcompletedtransactions.During2007,wecompleted117equityfinancings,raising$17.5billionincapitalforourcli-ents,comparedwith102equityfinancings,raising$13.9billionincapital,during2006.Debtfinancingrevenuesin2007decreased3.1percentto$80.3mil-lion.In2007,advisoryservicesrevenuesdecreased8.0percentto$89.4millionduetoadeclineindomes-ticmergersandacquisitionrevenues.LoweraveragerevenuespertransactionintheU.S.morethanoffsettheincreaseinmergerandacquisitionsrevenuescon-tributedbyourinternationaloperations.Weexpectcontinuedmarketuncertaintytonegativelyimpactourinvestmentbankingrevenuesinthenearterm.Institutionalsalesandtradingrevenuescomprisealltherevenuesgeneratedthroughtradingactivities,whichconsistprimarilyoffacilitatingcustomertrades.Toassesstheprofitabilityofinstitutionalsalesandtradingactivities,weaggregateinstitutionalbrokeragereve-nueswiththenetinterestincomeorexpenseassociatedwithfinancing,economicallyhedgingandholdinglongorshortinventorypositions.Ourresultsmayvaryfromquartertoquarterasaresultofchangesintradingmargins,tradinggainsandlosses,netinterestspreads,tradingvolumesandthetimingoftransactionsbasedonmarketopportunities.Increasedpricetransparencyinthefixedincomemarket,pressurefrominstitutionalclientsintheequitymarkettoreducecommissionsandtheuseofalternativetradingsystemsintheequitymarkethaveputpressureontradingmargins.Weexpectthispressuretocontinue.In2007,institutionalsalesandtradingrevenuesdecreased5.1percentto$180.8million,comparedwith$190.5millionin2006.Equityinstitutionalsalesandtradingrevenueswereflatat$120.0millionin2007,comparedwiththeprioryear.IncreasedrevenuesfromtheacquisitionofGoldbondandhigher16PiperJaffrayAnnualReport2007Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsproprietarytradinggainswereoffsetbyadeclineinconvertiblerevenues.Fixedincomeinstitutionalsalesandtradingrevenuesdecreased13.3percentto$60.8millionin2007,comparedwith$70.1millionin2006duetolowerrevenuesintaxableproductsandhigh-yieldandstructuredproducts.In2007,assetmanagementfeeswere$6.2milliondueprimarilytothebusinessofFAMCO,whichweacquiredinSeptember2007.Assetmanagementfeesalsoincludemanagementfeesfromourprivateequityfunds.Otherincome/lossincludesgainsandlossesfromourinvestmentsinprivateequityandventurecapitalfundsaswellasotherfirminvestments.Inaddition,otherincome/lossincludedinterestexpensefromoursubor-dinateddebtpriortoitsrepaymentinAugust2006.In2007,otherincometotaled$0.2million,comparedwith$7.8millionin2006.During2006,werecordeda$9.9milliongainrelatedtoourownershipoftwoseatsontheNewYorkStockExchange,whichwereexchangedforcashandrestrictedsharesofcommonstockoftheNYSEEuronext,Inc.Wesoldapproxi-mately65percentofourNYSEEuronext,Inc.restrictedsharesinasecondaryofferingduringthesecondquarterof2006.In2006,investmentbankingrevenuesincreased19.1percentto$304.4million,comparedwith$255.6millionin2005.Equityunderwritingrevenuesincreased49.4percentto$124.3millionin2006,duetoanincreaseincompletedtransactionsandanincreaseinthenumberofbook-rundealswhichgen-eratealargerpercentageofrevenuepertransaction.During2006,wecompleted102equityfinancings,raising$13.9billionincapitalforourclients,com-paredwith73equityfinancings,raising$8.8billionincapital,during2005.Ofthesecompletedtransactions,wewerebookrunneron41oftheequityfinancingsin2006,comparedwith25equityfinancingsin2005.Debtfinancingsrevenuesin2006increased9.6percentto$82.9million.Theincreasewasdrivenbyhigherpublicfinancerevenues,asanincreaseinaveragerev-enuepertransactionmorethanoffsetfewercompletedtransactions.Weunderwrote452municipalissueswithaparvalueof$6.6billionduring2006,comparedwith473municipalissueswithaparvalueof$6.1billionduring2005.Advisoryservicesrevenuesremainedflatin2006,comparedwith2005ashigheraveragereve-nuespertransactionoffsetthedeclineincompletedtransactions.Wecompleted48mergersandacquisi-tionstransactionsvaluedat$7.7billionduring2006,comparedwith47dealsvaluedat$9.1billionduring2005.In2006,institutionalsalesandtradingrevenuesincreased9.9percentto$190.5million,comparedwith$173.2millionin2005.Fixedincomeinstitutionalsalesandtradingrevenuesincreased16.8percentto$70.1millionin2006,comparedwith$60.0millionin2005.Wewereabletoimproveyear-over-yearperfor-manceinfixedincomeinstitutionalsalesandtradingthroughhighercashsalesandtradingandincreasedhigh-yieldandstructuredproductrevenues,offsetinpartbylowerinterestrateproductrevenues.Equityinstitutionalsalesandtradingrevenueincreased6.3percentin2006,to$120.3millionduetoincre-mentalsalesandtradingrevenuerelatedtoourEuro-peanexpansionandincreasedrevenuesfromAPTandconvertibles,partiallyoffsetbydecreasedrevenuesfromlowervolumesandpressurebyinstitutionalcli-entstoreducecommissionsinourtraditionalequitysalesandtradingbusiness.In2006,otherincometotaled$7.8million,comparedwithalossof$7.8millionin2005.During2006,werecordeda$9.9milliongainrelatedtoourownershipoftwoseatsontheNewYorkStockExchange,whichwereexchangedforcashandrestrictedsharesofcom-monstockofNYSEEuronext,Inc.Inaddition,inthethirdquarterof2006,werepaid$180millioninsub-ordinateddebtwithproceedsfromthesaleofthePCSbranchnetwork,whichreducedinterestexpense,andinthethirdandfourthquartersof2006,investedtheexcessproceedsfromthesaleinshort-terminterestbearinginstruments,whichgeneratedinterestincome.DISCONTINUEDOPERATIONSDiscontinuedoperationsincludetheoperatingresultsofourPCSbusiness,thegainonthesaleofthePCSbranchnetworkin2006andrelatedrestructuringcosts.ThesaleofthePCSbranchnetworktoUBSclosedonAugust11,2006.OurPCSretailbrokeragebusinessprovidedfinancialadviceandawiderangeoffinancialproductsandservicestoindividualinvestorsthroughanetworkofapproximately90branchoffices.Revenuesweregen-eratedprimarilythroughthereceiptofcommissionsearnedonequityandfixedincometransactionsandfordistributionofmutualfundsandannuities,feesearnedonfee-basedclientaccountsandnetinterestfromcustomers’marginloanbalances.In2007,discontinuedoperationsrecordedanetlossof$2.8million,whichincludedcostsrelatedtodecom-missioningaretail-orientedback-officesystem,PCSlitigation-relatedexpensesandadditionalrestructuringcharges.Thedecommissioningofourretail-orientedback-officesystemwascompletedinthethirdquarterPiperJaffrayAnnualReport200717Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsof2007,andwedonotexpecttoincuranyadditionalcostsrelatedtothissystem.WemayincurdiscontinuedoperationsexpenseorincomeinfutureperiodsrelatedtochangesinlitigationreserveestimatesforretainedPCSlitigationmattersandforchangesinestimatestooccupancyandseverancerestructuringchargesifthefactsthatsupportourestimateschange.SeeNote4andNote18toourconsolidatedfinancialstatementsforfurtherdiscussionofourdiscontinuedoperationsandrestructuringactivities.RecentAccountingPronouncementsRecentaccountingpronouncementsaresetforthinNote3toourconsolidatedfinancialstatementsincludedinourAnnualReporttoShareholders,andareincorporatedhereinbyreference.CriticalAccountingPoliciesOuraccountingandreportingpoliciescomplywithgenerallyacceptedaccountingprinciples(“GAAP”)andconformtopracticeswithinthesecuritiesindustry.ThepreparationoffinancialstatementsincompliancewithGAAPandindustrypracticesrequiresustomakeestimatesandassumptionsthatcouldmateriallyaffectamountsreportedinourconsolidatedfinancialstate-ments.Criticalaccountingpoliciesarethosepoliciesthatwebelievetobethemostimportanttothepor-trayalofourfinancialconditionandresultsofopera-tionsandthatrequireustomakeestimatesthataredifficult,subjectiveorcomplex.Mostaccountingpol-iciesarenotconsideredbyustobecriticalaccountingpolicies.Severalfactorsareconsideredindeterminingwhetherornotapolicyiscritical,includingwhethertheestimatesaresignificanttotheconsolidatedfinan-cialstatementstakenasawhole,thenatureoftheestimates,theabilitytoreadilyvalidatetheestimateswithotherinformation(e.g.third-partyorindependentsources),thesensitivityoftheestimatestochangesineconomicconditionsandwhetheralternativeaccount-ingmethodsmaybeusedunderGAAP.Forafulldescriptionofoursignificantaccountingpolicies,seeNote2toourconsolidatedfinancialstate-mentsincludedinourAnnualReporttoShareholders.Webelievethatofoursignificantaccountingpolicies,thefollowingareourcriticalaccountingpolicies.VALUATIONOFFINANCIALINSTRUMENTSTradingsecuritiesowned,tradingsecuritiesownedandpledgedascollateral,andtradingsecuritiessold,butnotyetpurchased,onourconsolidatedstatementsoffinancialconditionconsistoffinancialinstrumentsrecordedatfairvalue.Unrealizedgainsandlossesrelatedtothesefinancialinstrumentsarereflectedonourconsolidatedstatementsofoperations.Thefairvalueofafinancialinstrumentistheamountatwhichtheinstrumentcouldbeexchangedinacurrenttransactionbetweenwillingparties,otherthaninaforcedorliquidationsale.Whenavailable,weuseobservablemarketprices,observablemarketparame-ters,orbrokerordealerprices(bidandaskprices)toderivethefairvalueoftheinstrument.Inthecaseoffinancialinstrumentstransactedonrecognizedexchanges,theobservablemarketpricesrepresentquo-tationsforcompletedtransactionsfromtheexchangeonwhichthefinancialinstrumentisprincipallytraded.Bidpricesrepresentthehighestpriceabuyeriswillingtopayforafinancialinstrumentataparticulartime.Askpricesrepresentthelowestpriceaselleriswillingtoacceptforafinancialinstrumentataparticulartime.Asubstantialpercentageofthefairvalueofourtradingsecuritiesowned,tradingsecuritiesownedandpledgedascollateral,andtradingsecuritiessold,butnotyetpurchased,arebasedonobservablemarketprices,observablemarketparameters,orderivedfrombrokerordealerprices.Theavailabilityofobservablemarketpricesandpricingparameterscanvaryfromproducttoproduct.Whereavailable,observablemarketpricesandpricingormarketparametersinaproductmaybeusedtoderiveapricewithoutrequiringsignificantjudgment.Incertainmarkets,observablemarketpricesormarketparametersarenotavailableforallproducts,andfairvalueisdeterminedusingtechniquesappro-priateforeachparticularproduct.Thesetechniquesinvolvesomedegreeofjudgment.Forinvestmentsinilliquidorprivatelyheldsecuritiesthatdonothavereadilydeterminablefairvalues,thedeterminationoffairvaluerequiresustoestimatethevalueofthesecuritiesusingthebestinformationavail-able.Amongthefactorsconsideredbyusindetermin-ingthefairvalueoffinancialinstrumentsarethecost,termsandliquidityoftheinvestment,thefinancialconditionandoperatingresultsoftheissuer,thequotedmarketpriceofpubliclytradedsecuritieswithsimilarqualityandyield,andotherfactorsgenerallypertinenttothevaluationofinvestments.Ininstanceswhereasecurityissubjecttotransferrestrictions,thevalueofthesecurityisbasedprimarilyonthequotedpriceofasimilarsecuritywithoutrestrictionbutmaybereducedbyanamountestimatedtoreflectsuchrestrictions.Inaddition,evenwherethevalueofasecurityisderivedfromanindependentsource,certainassumptionsmayberequiredtodeterminethesecurity’sfairvalue.Forinstance,weassumethatthesizeofpositionsinsecu-ritiesthatweholdwouldnotbelargeenoughtoaffect18PiperJaffrayAnnualReport2007Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsthequotedpriceofthesecuritiesifwesellthem,andthatanysuchsalewouldhappeninanorderlymanner.Theactualvaluerealizedupondispositioncouldbedifferentfromthecurrentlyestimatedfairvalue.Fairvaluesforderivativecontractsrepresentamountsestimatedtobereceivedfromorpaidtoathirdpartyinsettlementoftheseinstruments.Thesederivativesarevaluedusingquotedmarketpriceswhenavailableorpricingmodelsbasedonthenetpresentvalueofesti-matedfuturecashflows.Managementdeemedthenetpresentvalueofestimatedfuturecashflowsmodeltobethebestestimateoffairvalueasmostofourderiv-ativeproductsareinterestrateproducts.Thevaluationmodelsusedrequireinputsincludingcontractualterms,marketprices,yieldcurves,creditcurvesandmeasuresofvolatility.Thevaluationmodelsaremonitoredoverthelifeofthederivativeproduct.Ifthereareanychangesintheunderlyinginputs,themodelisupdatedforthosenewinputs.Thefollowingtablepresentsthecarryingvalueofourtradingsecuritiesowned,tradingsecuritiesownedandpledgedascollateralandtradingsecuritiessold,butnotyetpurchasedforwhichfairvalueismeasuredbasedonquotedpricesorotherindependentsourcesversusthoseforwhichfairvalueisdeterminedbymanagement.DECEMBER31,2007(Dollarsinthousands)TradingSecuritiesOwnedorPledgedTradingSecuritiesSold,ButNotYetPurchasedFairvalueofsecuritiesexcludingderivatives,basedonquotedpricesandindependentsources$721,421$157,664Fairvalueofsecuritiesexcludingderivatives,asdeterminedbymanagement14,116–Fairvalueofderivativesasdeterminedbymanagement36,41918,527$771,956$176,191Financialinstrumentscarriedatcontractamountshaveshort-termmaturities(oneyearorless),arerepricedfrequentlyorbearmarketinterestratesand,accord-ingly,thosecontractsarecarriedatamountsapprox-imatingfairvalue.Financialinstrumentscarriedatcontractamountsonourconsolidatedstatementsoffinancialconditionincludereceivablesfromandpay-ablestobrokers,dealersandclearingorganizations,securitiespurchasedunderagreementstoresell,secu-ritiessoldunderagreementstorepurchase,receivablesfromandpayablestocustomersandshort-termfinancing.InSeptember2006,theFinancialAccountingStan-dardsBoard(“FASB”)issuedStatementofFinancialAccountingStandardNo.157,“FairValueMeasure-ments”(“SFAS157”).SFAS157definesfairvalue,establishesaframeworkformeasuringfairvalueandexpandsdisclosuresregardingfairvaluemeasure-ments.SFAS157doesnotrequireanynewfairvaluemeasurements,butitsapplicationmay,forsomeenti-ties,changecurrentpractice.SFAS157iseffectiveforfiscalyearsbeginningafterNovember15,2007.SFAS157isnotexpectedtohaveamaterialaffectonourresultsofoperationsandfinancialcondition.InFebruary2007,theFASBissuedSFASNo.159,“TheFairValueOptionforFinancialAssetsandFinancialLiabilities”(“SFAS159”).SFAS159permitsentitiestochoosetomeasurecertainfinancialassetsandliabilitiesandothereligibleitemsatfairvalue,whicharenototherwisecurrentlyallowedtobemeasuredatfairvalue.UnderSFAS159,thedecisiontomeasureitemsatfairvalueismadeatspecifiedelectiondatesonanirrevocableinstrument-by-instrumentbasis.Entitieselectingthefairvalueoptionwouldberequiredtorecognizechangesinfairvalueinearningsandtoexpenseupfrontcostsandfeesassociatedwiththeitemforwhichthefairvalueoptioniselected.Entitieselectingthefairvalueoptionarerequiredtodistinguishonthefaceofthestatementoffinancialposition,thefairvalueofassetsandliabilitiesforwhichthefairvalueoptionhasbeenelectedandsimilarassetsandliabilitiesmeasuredusinganothermeasurementattribute.SFAS159iseffectiveasofthebeginningofthefirstfiscalyearthatbeginsafterNovember15,2007,withearlieradoptionpermittedprovidedthattheentityalsoearlyadoptsalloftherequirementsofSFAS157.SFAS159isnotexpectedtohaveamaterialaffectonourresultsofoperationsandfinancialcondition.GOODWILLANDINTANGIBLEASSETSWerecordallassetsandliabilitiesacquiredinpurchaseacquisitions,includinggoodwillandotherintangibleassets,atfairvalueasrequiredbyStatementofFinan-cialAccountingStandardsNo.141,“BusinessCombi-nations.”DeterminingthefairvalueofassetsandPiperJaffrayAnnualReport200719Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsliabilitiesacquiredrequirescertainmanagementesti-mates.In2007,werecorded$34.1millionofgoodwilland$18.0millionofidentifiableintangibleassetsrelatedtotheacquisitionofFAMCOandrecorded$19.2millionofgoodwillrelatedtotheacquisitionofGoldbond.AtDecember31,2007,wehadgoodwillof$284.8million.Ofthisgoodwillbalance,$220.0millionisaresultofthe1998acquisitionofourpredecessor,PiperJaffrayCompaniesInc.,anditssubsidiariesbyU.S.Bancorp.InconjunctionwiththesaleofourPCSbranchnetworktoUBS,wewrote-off$85.6millionofgoodwillduringthethirdquarterof2006.UnderStatementofFinancialAccountingStandardsNo.142,“GoodwillandOtherIntangibleAssets,”wearerequiredtoperformimpairmenttestsofourgoodwillandindefinite-livedintangibleassetsannuallyandmorefrequentlyincertaincircumstances.Wehaveelectedtotestforgoodwillimpairmentinthefourthquarterofeachcalendaryear.Thegoodwillimpair-menttestisatwo-stepprocess,whichrequiresman-agementtomakejudgmentsindeterminingwhatassumptionstouseinthecalculation.Thefirststepoftheprocessconsistsofestimatingthefairvalueofourtwooperatingsegmentsbasedonthefollowingfactors:adiscountedcashflowmodelusingrevenueandprofitforecasts,ourmarketcapitalization,publicmarketcomparablesandmultiplesofrecentmergersandacquisitionsofsimilarbusinesses.Valuationmultiplesmaybebasedonrevenues,price-to-earningsandtan-giblecapitalratiosofcomparablepubliccompaniesandbusinesssegments.Thesemultiplesmaybeadjustedtoconsidercompetitivedifferencesincludingsize,operatingleverageandotherfactors.Theesti-matedfairvaluesofouroperatingsegmentsarecom-paredwiththeircarryingvalues,whichincludestheallocatedgoodwill.Iftheestimatedfairvalueislessthanthecarryingvalues,asecondstepisperformedtocomputetheamountoftheimpairmentbydeterminingan“impliedfairvalue”ofgoodwill.Thedeterminationofareportingunit’s“impliedfairvalue”ofgoodwillrequiresustoallocatetheestimatedfairvalueofthereportingunittotheassetsandliabilitiesofthereport-ingunit.Anyunallocatedfairvaluerepresentsthe“impliedfairvalue”ofgoodwill,whichiscomparedtoitscorrespondingcarryingvalue.WecompletedourlastgoodwillimpairmenttestasofNovember30,2007,andnoimpairmentwasidentified.Asnotedabove,theinitialrecognitionofgoodwillandotherintangibleassetsandthesubsequentimpairmentanalysisrequiresmanagementtomakesubjectivejudg-mentsconcerningestimatesofhowtheacquiredassetsorbusinesseswillperforminthefutureusingvaluationmethodsincludingdiscountedcashflowanalysis.Eventsandfactorsthatmaysignificantlyaffecttheestimatesinclude,amongothers,competitiveforcesandchangesinrevenuegrowthtrends,coststructures,technology,discountratesandmarketconditions.Additionally,estimatedcashflowsmayextendbeyondtenyearsand,bytheirnature,aredifficulttodetermineoveranextendedtimeperiod.Toassessthereason-ablenessofcashflowestimatesandvalidateassump-tionsusedinourestimates,wereviewhistoricalperformanceoftheunderlyingassetsorsimilarassets.Inassessingthefairvalueofouroperatingsegments,thevolatilenatureofthesecuritiesmarketsandourindustryrequiresustoconsiderthebusinessandmar-ketcycleandassessthestageofthecycleinestimatingthetimingandextentoffuturecashflows.Ifduringanyfutureperioditisdeterminedthatanimpairmentexists,theresultsofoperationsinthatperiodcouldbemateriallyadverselyaffected.STOCK-BASEDCOMPENSATIONAspartofourcompensationtoemployeesanddirec-tors,weusestock-basedcompensation,consistingofstockoptionsandrestrictedstock.PriortoJanuary1,2006,weelectedtoaccountforstock-basedemployeecompensationonaprospectivebasisunderthefairvaluemethod,asprescribedbyStatementofFinancialAccountingStandardsNo.123,“AccountingandDis-closureofStock-BasedCompensation,”andasamendedbyStatementofFinancialAccountingStan-dardsNo.148,“AccountingforStock-BasedCompen-sation—TransitionandDisclosure.”Thefairvaluemethodrequiredstockbasedcompensationtobeexpensedintheconsolidatedstatementofoperationsattheirfairvalue.EffectiveJanuary1,2006,weadoptedtheprovisionsofStatementofFinancialAccountingStandardsNo.123(R),“Share-BasedPayment,”(“SFAS123(R)”),usingthemodifiedprospectivetransitionmethod.SFAS123(R)requiresallstock-basedcompensationtobeexpensedintheconsolidatedstatementofoperationsatfairvalue,netofestimatedforfeitures.Becausewehadhistoricallyexpensedallequityawardsbasedonthefairvaluemethod,netofestimatedforfeitures,SFAS123(R)didnothaveamaterialeffectonourmeasurementorrecog-nitionmethodsforstock-basedcompensation.Compensationpaidtoemployeesintheformofstockoptionsorrestrictedstockisgenerallyamortizedonastraight-linebasisovertherequiredserviceperiodoftheaward,whichistypicallythreeyears,andisincludedinourresultsofoperationsascompensationexpense,netofestimatedforfeitures.Themajorityofourrestrictedstockgrantsprovideforcontinued20PiperJaffrayAnnualReport2007Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsvestingaftertermination,providedthattheemployeedoesnotviolatecertainpost-terminationrestrictionsassetforthintheawardagreementsoranyagreementsenteredintoupontermination.Weconsidertherequiredserviceperiodtobethegreaterofthevestingperiodorthepost-terminationrestrictedperiod.Webelievethatournon-competitionrestrictionsmeettheSFAS123(R)definitionofasubstantiveservicerequirement.Stock-basedcompensationgrantedtoournon-employeedirectorsisintheformofcommonsharesofPiperJaffrayCompaniesstockand/orstockoptions.Stock-basedcompensationpaidtodirectorsisimme-diatelyvested(i.e.,thereisnocontinuingservicerequirement)andisincludedinourresultsofopera-tionsasoutsideservicesexpenseasofthedateofgrant.Indeterminingtheestimatedfairvalueofstockoptions,weusetheBlack-Scholesoption-pricingmodel.Thismodelrequiresmanagementtoexercisejudgmentwithrespecttocertainassumptions,includ-ingtheexpecteddividendyield,theexpectedvolatility,andtheexpectedlifeoftheoptions.Theexpecteddividendyieldassumptionisderivedfromtheassumeddividendpayoutovertheexpectedlifeoftheoption.Theexpectedvolatilityassumptionforgrantssubse-quenttoDecember31,2006isderivedfromacombi-nationofourhistoricaldataandindustrycomparisons,aswehavelimitedinformationonwhichtobaseourvolatilityestimatesbecausewehaveonlybeenapubliccompanysincethebeginningof2004.TheexpectedvolatilityassumptionforgrantspriortoDecember31,2006werebasedsolelyonindustrycomparisons.Theexpectedlifeofoptionsassumptionisderivedfromtheaverageofthefollowingtwofactors:industrycompar-isonsandtheguidanceprovidedbytheSECinStaffAccountingBulletinNo.107(“SAB107”).SAB107allowstheuseofan“acceptable”methodologyunderwhichwecantakethemidpointofthevestingdateandthefullcontractualterm.Webelieveourapproachforcalculatinganexpectedlifetobeanappropriatemethodinlightofthelimitedhistoricaldataregardingemployeeexercisebehaviororemployeepost-termina-tionbehavior.AdditionalinformationregardingassumptionsusedintheBlack-ScholespricingmodelcanbefoundinNote22toourconsolidatedfinancialstatements.CONTINGENCIESWeareinvolvedinvariouspendingandpotentiallegalproceedingsrelatedtoourbusiness,includinglitiga-tion,arbitrationandregulatoryproceedings.Someofthesemattersinvolveclaimsforsubstantialamounts,includingclaimsforpunitiveandotherspecialdamages.Wehave,afterconsultationwithoutsidelegalcounselandconsiderationoffactscurrentlyknownbymanagement,recordedestimatedlossesinaccordancewithStatementofFinancialAccountingStandardsNo.5,“AccountingforContingencies,”totheextentthatclaimsareprobableoflossandtheamountofthelosscanbereasonablyestimated.Thedeterminationofthesereserveamountsrequiressignificantjudgmentonthepartofmanagement.Inmakingthesedetermina-tions,weconsidermanyfactors,including,butnotlimitedto,thelossanddamagessoughtbytheplaintifforclaimant,thebasisandvalidityoftheclaim,thelikelihoodofasuccessfuldefenseagainsttheclaim,andthepotentialfor,andmagnitudeof,damagesorsettle-mentsfromsuchpendingandpotentiallitigationandarbitrationproceedings,andfinesandpenaltiesorordersfromregulatoryagencies.UnderthetermsofourseparationanddistributionagreementwithU.S.Bancorpandancillaryagreementsenteredintoinconnectionwiththespin-offinDecem-ber2003,wegenerallyareresponsibleforallliabilitiesrelatingtoourbusiness,includingthoseliabilitiesrelat-ingtoourbusinesswhileitwasoperatedasasegmentofU.S.Bancorpunderthesupervisionofitsmanage-mentandboardofdirectorsandwhileouremployeeswereemployeesofU.S.Bancorpservicingourbusiness.Similarly,U.S.BancorpgenerallyisresponsibleforallliabilitiesrelatingtothebusinessesU.S.Bancorpretained.However,inadditiontoourestablishedreserves,U.S.Bancorpagreedtoindemnifyusinanamountupto$17.5millionforlossesthatresultfromcertainmatters,primarilythird-partyclaimsrelatingtoresearchanalystindependence.U.S.Bancorphastherighttoterminatethisindemnificationobligationintheeventofachangeincontrolofourcompany.AsofDecember31,2007,approximately$13.2millionoftheindemnificationremainedavailable.AspartoftheassetpurchaseagreementforthesaleofourPCSbranchnetworktoUBSthatclosedinAugust2006,UBSagreedtoassumecertainliabilitiesofthePCSbusiness,includingcertainliabilitiesandobliga-tionsarisingfromlitigation,arbitration,customercomplaintsandotherclaimsrelatedtothePCSbusi-ness.Incertaincases,wehaveagreedtoindemnifyUBSforlitigationmattersafterUBShasincurredcostsof$6.0millionrelatedtothesematters,andasofDecem-ber31,2007,wehaveexceededthis$6.0millionthreshold.Inaddition,wehaveretainedliabilitiesaris-ingfromregulatorymattersandcertainPCSlitigationarisingpriortothesale.Theamountofexposureinexcessofthe$6.0millionindemnificationthresholdandforotherPCSlitigationmattersdeemedtobePiperJaffrayAnnualReport200721Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsprobableandreasonablyestimableareincludedinourestablishedreserves.Subjecttotheforegoing,webelieve,basedonourcurrentknowledge,afterappropriateconsultationwithoutsidelegalcounselandaftertakingintoaccountourestablishedreserves,theU.S.Bancorpindemnityagree-ment,theassumptionbyUBSofcertainliabilitiesofthePCSbusinessandourindemnificationobligationstoUBS,thatpendinglitigation,arbitrationandregulatoryproceedingswillberesolvedwithnomaterialadverseeffectonourfinancialcondition.However,if,duringanyperiod,apotentialadversecontingencyshouldbecomeprobableorresolvedforanamountinexcessoftheestablishedreservesandindemnificationavail-abletous,theresultsofoperationsinthatperiodcouldbemateriallyadverselyaffected.INCOMETAXESProvisionsforfederalandstateincometaxesarecal-culatedbasedonreportedpre-taxearningsandcurrenttaxlaw.Suchprovisionsdifferfromtheamountscur-rentlyreceivableorpayablebecausecertainitemsofincomeandexpensearerecognizedindifferenttimeperiodsforfinancialreportingpurposesthanforincometaxpurposes.Significantjudgmentisrequiredinevaluatinguncertaintaxpositions.Weestablishreservesforuncertainincometaxpositionsinaccor-dancewithFIN48when,itisnotmorelikelythannotthatacertainpositionorcomponentofapositionwillbeultimatelyupheldbytherelevanttaxingauthorities.Ourtaxprovisionandrelatedaccrualsincludetheimpactofestimatesforuncertaintaxpositionsandchangestothereservesthatareconsideredappropriate.Totheextenttheprobabletaxoutcomeofthesematterschanges,suchchangeinestimatewillimpacttheincometaxprovisionintheperiodofchange.Liquidity,FundingandCapitalResourcesLiquidityisofcriticalimportancetousgiventhenatureofourbusiness.Insufficientliquidityresultingfromadversecircumstancescontributesto,andmaybethecauseof,financialinstitutionfailure.Accordingly,weregularlymonitorourliquidityposition,includingourcashandnetcapitalpositions,andwehaveimple-mentedaliquiditystrategydesignedtoenableourbusinesstocontinuetooperateevenunderadversecircumstances,althoughtherecanbenoassurancethatourstrategywillbesuccessfulunderallcircumstances.Withtheexceptionofourintangibleassets,wehavealiquidbalancesheet.Mostofourtangibleassetsconsistofcashandassetsreadilyconvertibleintocash.Secu-ritiesinventoriesarestatedatfairvalueandaregenerallyreadilymarketableinmostmarketcondi-tions.Receivablesandpayableswithcustomersandbrokersanddealersusuallysettlewithinafewdays.Aspartofourliquiditystrategy,weemphasizediversifi-cationoffundingsources.Weutilizeamixoffundingsourcesand,totheextentpossible,maximizeourlower-costfinancingalternatives.Ourassetsarefinancedbyourcashflowsfromoperations,equitycapital,proceedsfromsecuritiessoldunderagreementstorepurchaseandbanklinesofcredit.Thefluctuationsincashflowsfromfinancingactivitiesaredirectlyrelatedtodailyoperatingactivitiesfromourvariousbusinesses.Certainmarketconditionscanimpacttheliquidityofourinventorypositionsrequiringustoholdlargerinventorypositionsforlongerthanexpectedorrequir-ingustotakeotheractionsthatmayadverselyimpactourresults.Duringthelatterhalfof2007,thecreditmarketsexperiencedasignificantcontractioninavail-ableliquiditystemmingfromcreditproblemsinsub-primeresidentialmortgagesandstructuredcreditvehicles.While,wedonothavedirectexposuretoresidentialmortgagesorstructuredproductscontain-ingresidentialmortgages,theturmoilinthecreditmarketsduring2007hascarriedoverinto2008andhasspreadtootherareasbeyondresidentialmortgagesandstructuredcreditvehicles.Specifically,themunic-ipalcreditmarketshavebeenadverselyimpactedbyratingagencydowngrades(andtheexpectationofpotentialfuturedowngrades)ofsomeMonolineswhichhavesignificantcreditexposuretosubprimemortgages.Monolinesinsureasignificantpartoftheoverallmunicipalcreditmarket,includingalmostalloftheshort-termvariableratemunicipalcreditmarket.ThecreditriskofsomeMonolineshascausedasignif-icantdecreaseinthedemandforauctionratemunicipalsecurities,variableratedemandnotesandvariableratecertificateswhichsupportourtenderoptionbondpro-gram.Inanefforttoincreaseliquidityforthesesecu-ritieswemay(butarenotrequiredto)takeinventorypositionsinthesesecurities,whichrequiresadditionalcapitalandalsoexposesustopotentialfinanciallossesfromthereductioninvalueofthesepositions.Forfurtherdiscussionofourliquidity,marketandcreditriskrelatedtovariableratecertificatesissuedfromunconsolidatedtrustsaspartofourtenderoptionbondprogram,referto“Off-BalanceSheetArrangements”below.Forfurtherdiscussionofourliquidity,marketandcreditrisksrelatedtoauctionratemunicipalsecu-ritiesandvariableratedemandnotes,referto“Enter-priseRiskManagement”below.Asignificantcomponentofouremployees’compensa-tionispaidinanannualdiscretionarybonus.The22PiperJaffrayAnnualReport2007Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationstimingofthesebonuspayments,whichgenerallyarepaidinFebruary,hasasignificantimpactonourcashpositionandliquiditywhenpaid.Wecurrentlydonotpaycashdividendsonourcommonstock.InAugust2006,wesoldourPCSbranchnetworktoUBSforapproximately$750million.Mostoftheseproceedshavebeeneitherredeployedtooursharehold-ersorinvestedbackintoourbusinessasfollows:approximately$100millionwasusedtorepaystockloanliabilitiesrelatedtofinancingthePCScustomermarginaccountsreceivable,$180millionwasusedtoextinguishoursubordinateddebt,$180millionwasusedtorepurchasecommonstock,$160millionwaspaidincorporateandstateincometaxesonthePCSsalegain,$51millionwasusedinSeptember2007topurchaseFAMCOand$47millionwasusedinOctober2007topurchaseGoldbond.Wearecurrentlyevaluatingaddingadditionalcapitaltofacilitatecertainofourgrowthinitiatives.CASHFLOWSCashandcashequivalentsincreased$110.4millionto$150.3millionatDecember31,2007from2006.Weincreasedourcashpositionattheendof2007tofacilitateliquidityintheeventofanycredittightnessinthemarketsatornearyear-end.Operatingactivitiesprovidedcashof$135.4millionduetocashreceivedfromearningsandareductioninoperatingassets.Investingactivitiesused$95.6millionofcashfortheacquisitionsofFAMCOandGoldbondduring2007andthepurchaseoffixedassets.Cashof$70.8millionwasprovidedthroughfinancingactivitiesduetoa$153.9millionincreaseinsecuredfinancingactivitiesoffsetinpartby$87.5millionutilizedtorepurchasecommonstock.Cashandcashequivalentsdecreased$21.0millionto$39.9millionatDecember31,2006from2005.Oper-atingactivitiesusedcashof$72.4million,ascashpaidoutforoperatingassetsandliabilitiesexceededcashreceivedfromearnings.Cashof$707.4millionwasprovidedbyinvestingactivitiesduetothesaleofthePCSbranchnetworktoUBS.Cashof$657.2millionwasusedinfinancingactivities.WeusedtheproceedsfromthesaleofPCStorepay$180millioninsubor-dinateddebtandrepurchaseapproximately1.6millionsharesofcommonstockthroughanacceleratedsharerepurchaseprogramintheamountof$100million.Inaddition,wepaiddownothershort-termborrowingsusedtofinanceourcontinuingoperations.Cashandcashequivalentsdecreased$6.5millionin2005to$60.9millionatDecember31,2005from2004.Operatingactivitiesprovidedcashof$95.2mil-lion,ascashreceivedfromearningsandoperatingassetsandliabilitiesexceededcashutilizedtoincreasenettradingsecuritiesowned.Cashof$15.3millionwasusedforinvestingactivitiestowardthepurchaseoffixedassets.Cashof$86.3millionwasusedinfinanc-ingactivities,includinga$55.5millionreductionofoursecuredfinancingactivitiesand$42.6millionuti-lizedtorepurchasecommonstockinconjunctionwithasharerepurchaseprogramof1.3millionsharesofcommonstockcompletedonOctober4,2005.Thecashusedinfinancingactivitieswasoffsetbyanincreaseinsecuritiesloanedactivitiesof$11.8million.FUNDINGSOURCESWehaveavailablediscretionaryshort-termfinancingonbothasecuredandunsecuredbasis.Securedfinanc-ingisobtainedthroughtheuseofrepurchaseagree-mentsandsecuredbankloans.Bankloansandrepurchaseagreementsaretypicallycollateralizedbythefirm’ssecuritiesinventory.Short-termfundingisgenerallyobtainedatratesbaseduponthefederalfundsrate.Tofinancecustomerandtrade-relatedreceivablesweutilizedanaverageof$10millioninshort-termbankloansandanaverageof$1millioninsecuritieslendingarrangementsin2007.Thiscomparestoanaverageof$15millioninshort-termbankloansandanaverageof$133millioninsecuritieslendingarrangementsin2006.Thereductioninaveragesecuritieslendingarrangementsin2007comparedwith2006wasduetothesaleofourPCSbranchnetworkinAugust2006andthecorrespondingreductioninourcustomermar-ginbalances.Averagenetrepurchaseagreements(excludingrepurchaseagreementsusedtofacilitateeconomichedges)of$122millionand$80millionin2007and2006,respectively,wereprimarilyusedtofinanceinventory.Growthinoursecuritiesinventoryisgenerallyfinancedthroughrepurchaseagreements.Bankfinancingsupplementsrepurchaseagreementfinancingasnecessary.OnDecember31,2007,wehadnooutstandingshort-termbankfinancing.OnDecember31,2007,U.S.Bank,N.A.agreedtoprovideupto$50millionintemporarysubordinateddebtuponapprovalbytheFinancialIndustryRegula-toryAuthority(“FINRA”).OnFebruary19,2008,wealsoenteredintoa$600mil-lionrevolvingcreditfacilitywithU.S.BankN.A.pur-suanttowhichwearepermittedtorequestadvancestofundcertainshort-termmunicipalsecurities(includingPiperJaffrayAnnualReport200723Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsauctionratesecuritiesandvariableratedemandnotes).Interestispayablemonthly,andtheunpaidprincipalamountofalladvanceswillbedueAugust19,2008.Wecurrentlydonothaveacreditrating,whichmayadverselyaffectourliquidityandincreaseourborrow-ingcostsbylimitingaccesstosourcesofliquiditythatrequireacreditratingasaconditiontoprovidingfunds.CONTRACTUALOBLIGATIONSInthenormalcourseofbusiness,weenterintovariouscontractualobligationsthatmayrequirefuturecashpayments.Thefollowingtablesummarizesthecon-tractualamountsatDecember31,2007intotalandbyremainingmaturity.Excludedfromthetableareanumberofobligationsrecordedintheconsolidatedstatementsoffinancialconditionthatgenerallyareshort-terminnature,includingsecuredfinancingtrans-actions,tradingliabilities,short-termborrowingsandotherpayablesandaccruedliabilities.(Dollarsinmillions)20082009through20102011through20122013andthereafterTotalOperatingleaseobligations15.129.722.117.884.7Purchasecommitments12.916.612.65.547.6Fundcommitments(a)––––4.9FAMCOcontingentconsideration(b)–––––(a)Thefundcommitmentshavenospecifiedcalldates.Thetimingofcapitalcallsisbasedonmarketconditionsandinvestmentopportunities.(b)TheacquisitionofFAMCOincludedthepotentialforadditionalcashconsiderationtobepaidintheformofthreeannualpaymentscontingentuponrevenueexceedingcertainrevenuerun-ratethresholds.Theamountofthethreeannualpayments(assumingtherevenuerun-ratethresholdhasbeenmet)willbeequaltoapercentageofearningsbeforeincometaxes,depreciationandamortizationforthepreviousyear.Thepercentagein2008is120%and110%in2009and2010.Weareunabletomakereasonablyreliableestimatesfortheamountoftheseannualpayments.Purchaseobligationsincludeagreementstopurchasegoodsorservicesthatareenforceableandlegallybind-ingandthatspecifyallsignificantterms,includingfixedorminimumquantitiestobepurchased,fixed,minimumorvariablepriceprovisionsandtheapprox-imatetimingofthetransaction.Purchaseobligationswithvariablepricingprovisionsareincludedinthetablebasedontheminimumcontractualamounts.Certainpurchaseobligationscontainterminationorrenewalprovisions.Thetablereflectstheminimumcontractualamountslikelytobepaidundertheseagreementsassumingthecontractsarenotterminated.Theamountspresentedinthetableabovemaynotnecessarilyreflectouractualfuturecashfundingrequirements,becausetheactualtimingofthefuturepaymentsmademayvaryfromthestatedcontractualobligation.Inaddition,duetotheuncertaintywithrespecttothetimingoffuturecashflowsassociatedwithourunrecognizedtaxbenefitsasofDecember31,2007,weareunabletomakereasonablyreliableesti-matesoftheperiodofcashsettlementwiththerespec-tivetaxingauthority.Therefore,$10.5millionofunrecognizedtaxbenefitshavebeenexcludedfromthecontractualtableabove.SeeNote25tothecon-solidatedfinancialstatementsforadiscussionofincometaxes.CAPITALREQUIREMENTSAsaregisteredbrokerdealerandmemberfirmofFINRA,ourU.S.brokerdealersubsidiaryissubjecttotheuniformnetcapitalruleoftheSECandthenetcapitalruleofFINRA.Wehaveelectedtousethealternativemethodpermittedbytheuniformnetcap-italrule,whichrequiresthatwemaintainminimumnetcapitalofthegreaterof$1.0millionor2percentofaggregatedebitbalancesarisingfromcustomertrans-actions,asthisisdefinedintherule.FINRAmayprohibitamemberfirmfromexpandingitsbusinessorpayingdividendsifresultingnetcapitalwouldbelessthan5percentofaggregatedebitbalances.Advancestoaffiliates,repaymentofsubordinatedliabilities,divi-dendpaymentsandotherequitywithdrawalsaresub-jecttocertainnotificationandotherprovisionsoftheuniformnetcapitalruleandthenetcapitalruleofFINRA.Weexpectthattheseprovisionswillnotimpactourabilitytomeetcurrentandfutureobliga-tions.Wealsoaresubjecttocertainnotificationrequirementsrelatedtowithdrawalsofexcessnetcap-italfromourbrokerdealersubsidiary.AtDecember31,2007,ournetcapitalundertheSEC’sUniformNetCapitalRulewas$198.7million,andexceededtheminimumnetcapitalrequiredundertheSECruleby$196.7million.Althoughweoperatewithalevelofnetcapitalsub-stantiallygreaterthantheminimumthresholdsestab-lishedbyFINRAandtheSEC,asubstantialreduction24PiperJaffrayAnnualReport2007Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsofourcapitalwouldcurtailmanyofourrevenuepro-ducingactivities.PiperJaffrayLtd.,ourbrokerdealersubsidiaryregis-teredintheUnitedKingdom,issubjecttothecapitalrequirementsoftheU.K.FinancialServicesAuthority.EachofourPiperJaffrayAsiaentitieslicensedbytheHongKongSecuritiesandFuturesCommissionissub-jecttotheliquidcapitalrequirementsoftheSecuritiesandFutures(FinancialResources)RulepromulgatedundertheSecuritiesandFuturesOrdinance.Off-BalanceSheetArrangementsIntheordinarycourseofbusinessweenterintovarioustypesofoff-balancesheetarrangementsincludingcer-tainreimbursementguaranteesmeetingtheFINNo.45,“Guarantor’sAccountingandDisclosureRequire-mentsforGuarantees,IncludingIndirectGuaranteesofIndebtednessofOthers”(“FIN45”),definitionofaguaranteethatmayrequirefuturepayments.Thefol-lowingtablesummarizesouroff-balance-sheetarrangementsatDecember31,2007and2006asfollows:EXPIRATIONPERPERIODATDECEMBER31,(Dollarsinthousands)200820092010-20112012-2013Later20072006TotalContractualAmountDecember31,Matched-bookderivativecontracts(1)(2)$30,040$–$173,038$1,680$6,763,111$6,967,869$5,483,766Derivativecontractsexcludingmatched-bookderivatives(2)40,671–25,00061,810435,225562,706362,938Tenderoptionbondsecuritizations––61,16010,255205,060276,475228,510Loancommitments–––––––Privateequityandotherprincipalinvestments–––––4,9005,900(1)Consistsofinterestrateswaps.Wehaveminimalmarketriskrelatedtothesematched-bookderivativecontracts,however,wedohavecounterpartyriskwithonemajorfinancialinstitution,whichismitigatedbycollateraldeposits.(2)Webelievethefairvalueofthesederivativecontractsisamorerelevantmeasureoftheobligationsbecausewebelievethenotionalamountoverstatestheexpectedpayout.AtDecember31,2007and2006,thefairvalueofthesederivativecontractsapproximated$18.4millionand$19.7million,respectively.DERIVATIVESNeitherderivatives’notionalamountsnorunderlyinginstrumentvaluesarereflectedasassetsorliabilitiesinourconsolidatedstatementsoffinancialcondition.Rather,themarket,orfairvalue,ofthederivativetransactionsarereportedintheconsolidatedstate-mentsoffinancialconditionasassetsorliabilitiesintradingsecuritiesownedandtradingsecuritiessold,butnotyetpurchased,asapplicable.Derivativesarepresentedonanet-by-counterpartybasiswhenalegalrightofoffsetexists,andonanet-by-crossproductbasiswhenapplicableprovisionsarestatedinamasternettingagreement.Weenterintoderivativecontractsinaprincipalcapac-ityasadealertosatisfythefinancialneedsofclients.Wealsousederivativeproductstohedgetheinterestrateandmarketvaluerisksassociatedwithoursecuritypositions.Ourinterestratehedgingstrategiesmaynotworkinallmarketenvironmentsandasaresultmaynotbeeffectiveinmitigatinginterestraterisk.Inaddi-tion,weenterintoloanswapagreementstoreceivethetotalreturnofcertainloanassetswithouttransferringactualownershipoftheunderlyingloantous.Foracompletediscussionofouractivitiesrelatedtoderivativeproducts,seeNote7,“Derivatives,”inthenotestoourconsolidatedfinancialstatements.SPECIALPURPOSEENTITIESWeenterintoarrangementswithvariousspecial-pur-poseentities(“SPEs”).SPEsmaybecorporations,trustsorpartnershipsthatareestablishedforalimitedpurpose.TherearetwotypesofSPEs—qualifiedSPEs(“QSPEs”)andvariableinterestentities(“VIEs”).AQSPEgenerallycanbedescribedasanentitywhosepermittedactivitiesarelimitedtopassivelyholdingfinancialassetsanddistributingcashflowstoinvestorsbasedonpre-setterms.OurinvolvementwithQSPEsrelatestosecuritizationtransactionsrelatedtoourtenderoptionbondprograminwhichinvestmentgradefixedratemunicipalbondsaresoldtoanSPEthatqualifiesasaQSPEunderStatementofFinancialAccountingStandardsNo.140,“AccountingforTransfersandServicingofFinancialAssetsandExtin-guishmentsofLiabilitiesaReplacementofFASBState-mentNo.125,”(“SFAS140”).InaccordancewithSFAS140andFIN46(R),wedonotconsolidateQSPEs.WerecognizeatfairvaluetheretainedinterestsweholdintheQSPEs.WederecognizefinancialassetsPiperJaffrayAnnualReport200725Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationstransferredtoQSPEs,providedwehavesurrenderedcontrolovertheassets.ThesaleofmunicipalbondsintoaQSPEtrustisfundedbythesaleofvariableratecertificatestoinstitutionalcustomersseekingvariableratetax-freeinvestmentproducts.Thesevariableratecertificatesrepriceweekly.AtDecember31,2007,$266.5millionofthemunicipalbondsinsecuritizationwereinsuredagainstdefaultofprincipalorinterestbyMonolines.Wehavecontractedwithamajorthird-partyfinancialinstitutiontoactastheliquiditypro-viderforourtenderoptionbondtrusts.Thisliquidityproviderhastheabilitytoterminateitsagreementwiththetrustduetoseveralfactors,includingadowngradeoftheMonolinesbelowinvestmentgrade.Theabsenceofaliquidityproviderwouldlikelyresultinthedisso-lutionofthetrustandapotentialfinancialloss.Wehaveagreedtoreimbursetheliquidityproviderforanylossesassociatedwithprovidingliquiditytothetrusts.ThecurrentcreditenvironmenthasseverelyaffectedtheMonolines,resultinginsomeMonolineshavingtheir“AAA”creditratingsdowngraded.Inaddition,thereisdecreasedmarketdemandforvariableratecertificatescollateralizedbymunicipalbondswhosemonolinefinancialguarantorhasbeendowngraded.Themunicipalitieswhosebondswehavesecuritizedallhaveinvestmentgradecreditratingsandover90per-centarecurrentlyrated“A”orhigher.Despitethecreditqualityofthebondsinourtrustsandthehistor-icallylowdefaultrateonmunicipalbonds,wehaveexperiencedreduceddemandforthevariableratecer-tificatesissuedfromtrustswithmunicipalbondsbackedbyMonolineswithdowngradedcreditratings.Weincurred$3.1millionoflossesrelatedtothedis-solutionoftwotenderoptionbondtrustscollateralizedbybondsissuedbytriple-Bratedmunicipalitiesinearly2008,relatedtothemonolineinsurerissuesdescribedabove,andwemayincuradditionallosses,whichcouldadverselyimpactourresultsofoperations.Thefollow-ingtablepresentsasummaryofouroff-balancesheettrustsbymonolineinsureratDecember31,2007:MonolineBondInsurerMunicipalityCreditRatingParValueofBondsMarketValueofBondsOutstandingVariableRateCertificatesAmbacA3toAa1$85,395$76,648$73,140FGICAtoAa140,23532,19530,350FGIC(1)Baa2toBaa129,000(1)28,990(1)29,105(1)FSAA2toAaa58,06561,26959,075PSFA2toAa241,93039,17037,255MBIAAa311,85012,33111,934NoinsuranceAa110,00010,5489,945$276,475$261,151$250,804(1)SubsequenttoDecember31,2007,twotrustswithparvalueofmunicipalbondstotaling$29.0millioninsuredbyFGICweredissolvedforalossof$3.1million.CertainSPEsdonotmeettheQSPEcriteriabecausetheirpermittedactivitiesarenotlimitedsufficientlyorcontrolremainswithoneoftheowners.TheseSPEsarereferredtoasVIEs.UnderFIN46(R),weconsolidateaVIEifwearetheprimarybeneficiaryoftheentity.Theprimarybeneficiaryisthepartythateither(i)absorbsamajorityoftheVIEsexpectedlosses;(ii)receivesamajorityoftheVIEsexpectedresidualreturns;or(iii)both.ThreetenderoptionbondsecuritizationsweredesignedsuchthatcontrolremainedwithoneoftheownersandwearetheprimarybeneficiaryoftheVIE.Accordingly,wehaverecordedanassetfortheunderlyingbondsof$49.5millionandaliabilityforthecertificatessoldbythetrustsfor$48.7millionasofDecember31,2007.SeeNote8,“Securitizations,”inthenotestoourconsolidatedfinancialstatementsforacompletediscussionofoursecuritizationactivities.Inaddition,wehaveinvestmentsinvariousentities,typicallypartnershipsorlimitedliabilitycompanies,establishedforthepurposeofinvestinginprivateorpublicequitysecuritiesandvariouspartnershipenti-ties.Wecommitcapitaloractasthemanagingpartnerormemberoftheseentities.SomeoftheseentitiesaredeemedtobeVIEs.Foracompletediscussionofouractivitiesrelatedtothesetypesofpartnerships,seeNote9,“VariableInterestEntities,”toourconsoli-datedfinancialstatementsincludedinourAnnualReporttoShareholdersonForm10-KfortheyearendedDecember31,2007.LOANCOMMITMENTSWemaycommittoshort-term“bridge-loan”financingforourclientsormakecommitmentstounderwritecorporatedebt.Wehadnoloancommitmentsout-standingatDecember31,2007.26PiperJaffrayAnnualReport2007Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsPRIVATEEQUITYANDOTHERPRINCIPALINVESTMENTSWehavecommittedcapitaltocertainnon-consolidatedprivate-equityfunds.Thesecommitmentshavenospecifiedcalldates.OTHEROFF-BALANCESHEETEXPOSUREOurothertypesofoff-balance-sheetarrangementsincludecontractualcommitmentsandguarantees.Foradiscussionofouractivitiesrelatedtotheseoff-balancesheetarrangements,seeNote17,“Contingen-cies,CommitmentsandGuarantees,”toourconsoli-datedfinancialstatements.EnterpriseRiskManagementRiskisaninherentpartofourbusiness.Inthecourseofconductingbusinessoperations,weareexposedtoavarietyofrisks.Marketrisk,liquidityrisk,creditrisk,operationalrisk,legal,regulatoryandcompliancerisk,andreputationalriskaretheprincipalriskswefaceinoperatingourbusiness.Weseektoidentify,assessandmonitoreachriskinaccordancewithdefinedpoliciesandprocedures.Theextenttowhichweproperlyiden-tifyandeffectivelymanageeachoftheserisksiscriticaltoourfinancialconditionandprofitability.Withrespecttomarketriskandcreditrisk,thecorner-stoneofourriskmanagementprocessisdailycommu-nicationamongtraders,tradingdepartmentmanagementandseniormanagementconcerningourinventorypositionsandoverallriskprofile.Ourriskmanagementfunctionssupplementthiscommunica-tionprocessbyprovidingtheirindependentperspec-tivesonourmarketandcreditriskprofileonadailybasis.Thebroadergoalsofourriskmanagementfunc-tionsaretounderstandtheriskprofileofeachtradingarea,toconsolidateriskmonitoringcompany-wide,toassistinimplementingeffectivehedgingstrategies,toarticulatelargetradingorpositionriskstoseniorman-agement,andtoensureaccuratemark-to-marketpricing.Inadditiontosupportingdailyriskmanagementpro-cessesonthetradingdesks,ourriskmanagementfunc-tionssupportourMarketandCreditRiskCommittee.Thiscommitteeoverseesriskmanagementpractices,includingdefiningacceptablerisktolerancesandapprovingriskmanagementpolicies.MARKETRISKMarketriskrepresentstheriskoffinancialvolatilitythatmayresultfromthechangeinvalueofafinancialinstrumentduetofluctuationsinitsmarketprice.Ourexposuretomarketriskisdirectlyrelatedtoourroleasafinancialintermediaryforourclients,toourmarket-makingactivitiesandourproprietaryactivities.Mar-ketrisksinherenttobothcashandderivativefinancialinstruments.Thescopeofourmarketriskmanagementpoliciesandproceduresincludesallmarket-sensitivefinancialinstruments.Ourdifferenttypesofmarketriskinclude:InterestRateRisk–Interestrateriskrepresentsthepotentialvolatilityfromchangesinmarketinterestrates.Weareexposedtointerestrateriskarisingfromchangesinthelevelandvolatilityofinterestrates,changesintheshapeoftheyieldcurve,changesincreditspreads,andtherateofprepayments.InterestrateriskismanagedthroughtheuseofappropriatehedginginU.S.governmentsecurities,agencysecuri-ties,mortgage-backedsecurities,corporatedebtsecu-rities,interestrateswaps,options,futuresandforwardcontracts.Weutilizeinterestrateswapcontractstohedgeaportionofourfixedincomeinventory,tohedgeresidualcashflowsfromourtenderoptionbondpro-gram,andtohedgeratelockagreementsandforwardbondpurchaseagreementswemayenterintowithourpublicfinancecustomers.Ourinterestratehedgingstrategiesmaynotworkinallmarketenvironmentsandasaresultmaynotbeeffectiveinmitigatinginterestraterisk.Theseinterestrateswapcontractsarerecordedatfairvaluewiththechangesinfairvaluerecognizedinearnings.EquityPriceRisk–Equitypriceriskrepresentsthepotentiallossinvalueduetoadversechangesinthelevelorvolatilityofequityprices.WeareexposedtoequitypriceriskthroughourtradingactivitiesintheU.S.,HongKongandEuropeanmarketsonbothlistedandover-the-counterequitymarkets.Weattempttoreducetheriskoflossinherentinourmarket-makingandinourinventoryofequitysecuritiesbyestablishinglimitsonthenotionallevelofourinventoryandbymanagingnetpositionlevelswiththoselimits.CurrencyRisk–Currencyriskarisesfromthepossi-bilitythatfluctuationsinforeignexchangerateswillimpactthevalueoffinancialinstruments.AportionofourbusinessisconductedincurrenciesotherthantheU.S.dollar,andchangesinforeignexchangeratesrel-ativetotheU.S.dollarcanthereforeaffectthevalueofnon-U.S.dollarnetassets,revenuesandexpenses.Achangeintheforeigncurrencyratescouldcreateeitheraforeigncurrencytransactiongain/loss(recordedinourconsolidatedstatementsofoperations)oraforeigncurrencytranslationadjustmenttothestockholders’equitysectionofourconsolidatedstatementsoffinan-cialcondition.PiperJaffrayAnnualReport200727Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsVALUE-AT-RISKValue-at-Risk(“VaR”)isthepotentiallossinvalueofourtradingpositionsduetoadversemarketmovementsoveradefinedtimehorizonwithaspecifiedconfidencelevel.WeperformadailyhistoricalsimulatedVaRanalysisonsubstantiallyallofourtradingpositions,includingfixedincome,equities,convertiblebondsandallassociatedeconomichedges.WeuseaVaRmodelbecauseitprovidesacommonmetricforassessingmarketriskacrossbusinesslinesandproducts.Themodelingofthemarketriskcharacteristicsofourtrad-ingpositionsinvolvesanumberofassumptionsandapproximations.Whilewebelievethattheseassump-tionsandapproximationsarereasonable,differentassumptionsandapproximationscouldproducemate-riallydifferentVaRestimates.WereportanempiricalVaRbasedonnetrealizedtradingrevenuevolatility.EmpiricalVaRpresentsaninclusivemeasureofourhistoricalriskexposure,asitincorporatesvirtuallyalltradingactivitiesandtypesofriskincludingmarket,credit,liquidityandoperationalrisk.ThetablebelowpresentsVaRusingthepast250daysofnettradingrevenue.Consistentwithindus-trypractice,whencalculatingVaRweusea95percentconfidencelevelandaone-daytimehorizonforcalcu-latingbothempiricalandsimulatedVaR.Thismeansthat,overtime,thereisa1in20chancethatdailytradingnetrevenueswillfallbelowtheexpecteddailytradingnetrevenuesbyanamountatleastaslargeasthereportedVaR.ThefollowingtablequantifiestheempiricalVaRforeachcomponentofmarketriskfortheperiodspresented:ATDECEMBER31,(Dollarsinthousands)20072006InterestRateRisk$748$281EquityPriceRisk381261AggregateUndiversifiedRisk1,129542DiversificationBenefit(180)(112)AggregateDiversifiedValue-at-Risk$949$430Thetablebelowillustratesthedailyhigh,lowandaveragevalue-at-riskcalculatedforeachcomponentofmarketriskduringtheyearsended2007and2006,respectively.FORTHEYEARENDEDDECEMBER31,2007(Dollarsinthousands)HighLowAverageInterestRateRisk$748$354$509EquityPriceRisk381257316AggregateUndiversifiedRisk1,129623825AggregateDiversifiedValue-at-Risk949510686FORTHEYEARENDEDDECEMBER31,2006(Dollarsinthousands)HighLowAverageInterestRateRisk$355$262$308EquityPriceRisk346254290AggregateUndiversifiedRisk679521598AggregateDiversifiedValue-at-Risk541404474Weusemodel-basedVaRsimulationsformanagingriskonadailybasis.Model-basedVaRderivedfromsimulationhasinherentlimitations,includingrelianceonhistoricaldatatopredictfuturemarketriskandtheparametersestablishedincreatingthemodelsthatlimitquantitativeriskinformationoutputs.TherecanbenoassurancethatactuallossesoccurringonanygivendayarisingfromchangesinmarketconditionswillnotexceedtheVaRamountsshownbeloworthatsuchlosseswillnotoccurmorethanonceina20-daytradingperiod.Inaddition,differentVaRmethodologiesanddistributionassumptionscouldproducemateriallydif-ferentVaRnumbers.ChangesinVaRbetweenreport-ingperiodsaregenerallyduetochangesinlevelsofriskexposure,volatilitiesand/orcorrelationsamongassetclasses.28PiperJaffrayAnnualReport2007Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsThefollowingtablequantifiesthemodel-basedVaRsimulatedforeachcomponentofmarketriskfortheperiodspresented:ATDECEMBER31,(Dollarsinthousands)20072006InterestRateRisk$812$574EquityPriceRisk258177AggregateUndiversifiedRisk1,070751DiversificationBenefit(218)(150)AggregateDiversifiedValue-at-Risk$852$601SupplementarymeasuresemployedbyPiperJaffraytomonitorandmanagemarketriskexposureincludethefollowing:netmarketposition,durationexposure,optionsensitivities,andinventoryturnover.Allmetricsareaggregatedbyassetconcentrationandareusedformonitoringlimitsandexceptionapprovals.Inearly2008ouraggregateVaRremainedrelativelyconsistentwithlevelsreportedasofDecember31,2007,however,weanticipateouraggregateVaRmayincreaseinfutureperiodsaswecommitmoreofourowncapitaltoproprietaryinvestments.LIQUIDITYRISKMarketriskcanbeexacerbatedintimesoftradingilliquiditywhenmarketparticipantsrefrainfromtrans-actinginnormalquantitiesand/oratnormalbid-offerspreads.Dependingonthespecificsecurity,thestruc-tureofthefinancialproduct,and/oroverallmarketconditions,wemaybeforcedtoholdontoasecurityforsubstantiallylongerthanwehadplanned.Wearealsoexposedtoliquidityriskinourday-to-dayfundingactivities.Inadditiontothebenefitofhavingastrongcapitalstructure,wemanagethisriskbydiver-sifyingourfundingsourcesacrossproductsandamongindividualcounterpartieswithinthoseproducts.Forexample,ourtreasurydepartmentcanswitchbetweenrepurchaseagreements,andsecuredandunsecuredbankborrowingsonanygivendaydependingonthepricingandavailabilityoffundingfromanyoneofthesesources.Inadditiontomanagingourcapitalandfunding,thetreasurydepartmentoverseesthemanagementofnetinterestincomeriskandtheoveralluseofourcapital,funding,andbalancesheet.Asdiscussedwithin“Liquidity,FundingandCapitalResources”above,thecurrentturmoilinthecreditmarketssurroundingMonolineshasreducedtradi-tionalsourcesofliquidityforvariableratedemandnotes,auctionratemunicipalsecuritiesandvariableratemunicipaltrustcertificates,whichsupportourtenderoptionbondprogram.Wecurrentlyactastheremarketingagentforapprox-imately$6.4billionofvariableratedemandnotes,ofwhich$1.3billionisguaranteedbyMonolines.DemandbyinvestorsfordemandnotesbackedbyMonolineswithcreditdifficultieshasdeclinedandourabilitytoremarketthesedemandnotesatfavorablefundingratesforourissuerclientshasbeendiminished.Inearly2008,wehaveperiodicallyneededtoincreasethevariableratesinexcessofprevailingratestosuc-cessfullyremarketthesedemandnotes.Inanefforttoincreaseliquidityforthesesecurities,wemaintained$179.7millionofinventorypositionsasofFebruary15,2008,inthesesecurities.Wecurrentlyactasthebroker-dealerforapproximately$2.3billionofauctionratemunicipalsecurities,whichisallguaranteedbyMonolines.DemandbyinvestorsforauctionratesecuritiesbackedbyMonolineswithcreditdifficultieshasdeclinedsignificantly.Withregardtothesesecurities,wehaveincreasedourinven-torypositionsinanefforttofacilitateliquidity,expos-ingourselvestogreaterconcentrationofriskandpotentialfinanciallossesfromthereductioninvalueofthosepositions.AsofFebruary15,2008,wemain-tained$359.9millionofthesesecuritiesininventory.Inanefforttomanageourexposuretothesesecurities,however,wehavedeterminednottosupportmultipleauctionsofthesesecuritiesinearly2008duetoourinventorylimitationsandourliquidityposition.Thisisparticularlytrueinthecaseofauctionratesecuritieshavingmaximuminterestratecapsbelowprevailingmarketrates.AsofDecember31,2007,ourtenderoptionbondprogramhadsecuritized$325.6millionofmunicipalbondsin24trusts.Eachmunicipalbondissoldintoatrustthatisfundedbythesaleofvariableratemunic-ipaltrustcertificatestoinstitutionalcustomersseekingvariableratetax-freeinvestmentproducts.DecreaseddemandfortrustcertificatesmayresultindissolutionPiperJaffrayAnnualReport200729Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsofcertaintrustsasthemunicipalbondsheldintrustaresoldtoprovideliquiditytoholdersofthevariableratemunicipaltrustcertificates.Thedissolutionofatrustandsaleofthemunicipalbonds,potentiallyatafinan-cialloss,couldadverselyimpactourresultsofopera-tions.See“Off-BalanceSheetArrangements—SpecialPurposeEntities”above,forfurtherdiscussionofourtenderoptionbondprogram.Webelievethatdisruptioninthemunicipaldebtmar-ketsmaycontinueforseveralmonthsorquartersandmayhaveanadverseimpactonourresultsofoperations.CREDITRISKCreditriskinourCapitalMarketsbusinessarisesfrompotentialnon-performancebycounterparties,custom-ers,borrowersorissuersofsecuritiesweholdinourtradinginventory.Weareexposedtocreditriskinourroleasatradingcounterpartytodealersandcustomers,asaholderofsecuritiesandasamemberofexchangesandclearingorganizations.Ourclientactivitiesinvolvetheexecution,settlementandfinancingofvarioustransactions.Clientactivitiesaretransactedonadeliv-eryversuspayment,cashormarginbasis.Ourcreditexposuretoinstitutionalclientbusinessismitigatedbytheuseofindustry-standarddeliveryversuspaymentthroughdepositoriesandclearingbanks.CreditexposureassociatedwithourcustomermarginaccountsintheU.S.andHongKongaremonitoreddailyandarecollateralized.Ourriskmanagementfunctionshavecreatedcreditriskpoliciesestablishingappropriatecreditlimitsforourcustomersutilizingmarginlending.Ourriskmanagementfunctionsreviewriskassociatedwithinstitutionalcounterpartieswithwhomweholdrepurchaseandresaleagreementfacilities,stockbor-roworloanfacilities,derivatives,TBAsandotherdocumentedinstitutionalcounterpartyagreementsthatmaygiverisetocreditexposure.Counterpartylevelsareestablishedrelativetothelevelofcounterpartyratingsandpotentiallevelsofactivity.Wearesubjecttocreditconcentrationriskifweholdlargeindividualsecuritiespositions,executelargetransactionswithindividualcounterpartiesorgroupsofrelatedcounterparties,extendlargeloanstoindi-vidualborrowersormakesubstantialunderwritingcommitments.Concentrationriskcanoccurbyindus-try,geographicareaortypeofclient.Potentialcreditconcentrationriskiscarefullymonitoredandisman-agedthroughtheuseofpoliciesandlimits.Wearealsoexposedtotheriskoflossrelatedtochangesinthecreditspreadsofdebtinstruments.Creditspreadriskarisesfrompotentialchangesinanissuer’screditratingorthemarket’sperceptionoftheissuer’screditworthiness.OPERATIONALRISKOperationalriskreferstotheriskofdirectorindirectlossresultingfrominadequateorfailedinternalpro-cesses,peopleandsystemsorfromexternalevents.Werelyontheabilityofouremployees,ourinternalsys-temsandprocessesandsystemsatcomputercentersoperatedbythirdpartiestoprocessalargenumberoftransactions.Intheeventofabreakdownorimproperoperationofoursystemsorprocessesorimproperactionbyouremployeesorthird-partyvendors,wecouldsufferfinancialloss,regulatorysanctionsanddamagetoourreputation.Wehavebusinesscontinuityplansinplacethatwebelievewillcovercriticalpro-cessesonacompany-widebasis,andredundanciesarebuiltintooursystemsaswehavedeemedappropriate.Thesecontrolmechanismsattempttoensurethatoper-ationspoliciesandproceduresarebeingfollowedandthatourvariousbusinessesareoperatingwithinestab-lishedcorporatepoliciesandlimits.LEGAL,REGULATORYANDCOMPLIANCERISKLegal,regulatoryandcomplianceriskincludestheriskofnon-compliancewithapplicablelegalandregulatoryrequirementsandtheriskthatacounterparty’sperfor-manceobligationswillbeunenforceable.Wearegen-erallysubjecttoextensiveregulationinthevariousjurisdictionsinwhichweconductourbusiness.Wehaveestablishedproceduresthataredesignedtoensurecompliancewithapplicablestatutoryandregulatoryrequirements,including,butnotlimitedto,thoserelatedtoregulatorynetcapitalrequirements,salesandtradingpractices,useandsafekeepingofcustomerfundsandsecurities,creditextension,money-launder-ing,privacyandrecordkeeping.Wehaveestablishedinternalpoliciesrelatingtoethicsandbusinessconduct,andcompliancewithapplicablelegalandregulatoryrequirements,aswellastrainingandotherproceduresdesignedtoensurethatthesepoliciesarefollowed.REPUTATIONANDOTHERRISKWerecognizethatmaintainingourreputationamongclients,investors,regulatorsandthegeneralpubliciscritical.Maintainingourreputationdependsonalarge30PiperJaffrayAnnualReport2007Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsnumberoffactors,includingtheconductofourbusi-nessactivitiesandthetypesofclientsandcounter-partieswithwhomweconductbusiness.Weseektomaintainourreputationbyconductingourbusinessactivitiesinaccordancewithhighethicalstandardsandperformingappropriatereviewsofclientsandcounterparties.EffectsofInflationBecauseourassetsareliquidinnature,theyarenotsignificantlyaffectedbyinflation.However,therateofinflationaffectsourexpenses,suchasemployeecom-pensation,officespaceleasingcostsandcommunica-tionscharges,whichmaynotbereadilyrecoverableinthepriceofservicesweoffertoourclients.Totheextentinflationresultsinrisinginterestratesandhasotheradverseeffectsuponthesecuritiesmarkets,itmayadverselyaffectourfinancialpositionandresultsofoperations.CAUTIONARYNOTEREGARDINGFORWARD-LOOKINGSTATEMENTSThisAnnualReportcontainsforward-lookingstatements.Statementsthatarenothistoricalorcurrentfacts,includingstatementsaboutbeliefsandexpectations,areforward-lookingstatementsandaresubjecttosignificantrisksanduncertaintiesthataredifficulttopredict.Theseforward-lookingstatementscover,amongotherthings,statementsmadeaboutgeneraleconomicandmarketconditions,ourcurrentdealpipelines,theenvironmentandprospectsforcapitalmarketstransactionsandactivity,managementexpectations,anticipatedfinancialresults,theexpectedbenefitsofacquisitions,theamountandtimingofrestructuringexpensesassociatedwithtransactionactivity,orothersimilarmatters.Thesestatementsinvolveinherentrisksanduncertainties,bothknownandunknown,andimportantfactorscouldcauseactualresultstodiffermateriallyfromthoseanticipatedordiscussedintheforward-lookingstatementsincluding(1)marketandeconomicconditionsordevelopmentsmaybeunfavorable,includinginspecificsectorsinwhichweoperate,andtheseconditionsordevelopments(includingmarketfluctuationsorvolatility)mayadverselyaffecttheenvironmentforcapitalmarketstransactionsandactivityandourbusinessandprofitability,(2)thevolumeofanticipatedinvestmentbankingtransactionsasreflectedinourdealpipelines(andthenetrevenuesweearnfromsuchtransactions)maydifferfromexpectedresultsifanytransactionsaredelayedornotcompletedatallorifthetermsofanytransactionsaremodified,(3)acquisitionsmaynotyieldthebenefitsweanticipateoryieldthemwithinexpectedtimeframes,(4)wemaynotbeabletocompetesuccessfullywithothercompaniesinthefinancialservicesindustry,(5)restructuringcostsassociatedwithtransactionactivityaredifficulttopredictaccuratelyandmaybehigherthanweanticipateduetounforeseenexpensesorotherdifficulties,and(6)theotherfactorsdescribedunder“RiskFactors”inPartI,Item1AofourAnnualReportonForm10-KfortheyearendedDecember31,2007,aswellasthosefactorsdiscussedunder“ExternalFactorsImpactingOurBusiness”includedin“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”inPartII,Item7ofourAnnualReportonForm10-KfortheyearendedDecember31,2007,andupdatedinoursubsequentreportsfiledwiththeSEC(availableatourWebsiteatwww.piperjaffray.comandattheSECWebsiteatwww.sec.gov).Forward-lookingstatementsspeakonlyasofthedatetheyaremade,andreadersarecautionednottoplaceunduerelianceonthem.Weundertakenoobligationtoupdatetheminlightofnewinformationorfutureevents.PiperJaffrayAnnualReport200731Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsINDEXTOAUDITEDCONSOLIDATEDFINANCIALSTATEMENTSPiperJaffrayCompaniesPageManagement’sReportonInternalControlOverFinancialReporting33ReportofIndependentRegisteredPublicAccountingFirm34ReportofIndependentRegisteredPublicAccountingFirm35ConsolidatedFinancialStatements:ConsolidatedStatementsofFinancialCondition36ConsolidatedStatementsofOperations37ConsolidatedStatementsofChangesinShareholders’Equity38ConsolidatedStatementsofCashFlows39NotestoConsolidatedFinancialStatements40Note1Background40Note2SummaryofSignificantAccountingPolicies40Note3RecentAccountingPronouncements43Note4DiscontinuedOperations45Note5AcquisitionofFiduciaryAssetManagement,LLC45Note6AcquisitionofGoldbondCapitalHoldingsLimited45Note7Derivatives45Note8Securitizations46Note9VariableInterestEntities46Note10ReceivablesfromandPayablestoBrokers,DealersandClearingOrganizations47Note11ReceivablesfromandPayablestoCustomers47Note12CollateralizedSecuritiesTransactions48Note13TradingSecuritiesOwnedandTradingSecuritiesSold,butNotYetPurchased48Note14GoodwillandIntangibleAssets49Note15FixedAssets49Note16Financing50Note17Contingencies,CommitmentsandGuarantees50Note18Restructuring51Note19Shareholders’Equity52Note20EarningsPerShare53Note21EmployeeBenefitPlans54Note22Stock-BasedCompensationandCashAwardProgram57Note23GeographicAreas60Note24NetCapitalRequirementsandOtherRegulatoryMatters60Note25IncomeTaxes61Note26RelatedParties62Note27SubsequentEvent6232PiperJaffrayAnnualReport2007MANAGEMENT’SREPORTONINTERNALCONTROLOVERFINANCIALREPORTINGOurmanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverourfinancialreporting.OurinternalcontrolsystemisdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithU.S.generallyacceptedaccountingprinciples.Allinternalcontrolsystems,nomatterhowwelldesigned,haveinherentlimitations.Therefore,eventhosesystemsdeterminedtobeeffectivecanprovideonlyreasonableassurancewithrespecttofinancialstatementpreparationandpresentation.OurmanagementassessedtheeffectivenessofourinternalcontroloverfinancialreportingasofDecember31,2007.Inmakingthisassessment,managementusedthecriteriasetforthbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO)inInternalControl-IntegratedFramework.Basedonitsassessmentandthosecriteria,managementhasconcludedthatwemaintainedeffectiveinternalcontroloverfinancialreportingasofDecember31,2007.AspermittedbytheSecuritiesandExchangeCommission,managementelectedtoexcludefromitsassessment,FiduciaryAssetManagement,LLC,whichwasacquiredbyusonSeptember14,2007andGoldbondCapitalHoldingsLimited,andthesubsidiariesofGoldbondCapitalHoldingsLimited,whichwereacquiredbyusonOctober2,2007.Thecombinedassetsrecordedforthesebusinessesrepresentedlessthantenpercentofourtotalconsolidatedassetsandcontributedlessthanfivepercentoftotalconsolidatedrevenuesforfiscalyear2007.Ernst&YoungLLP,theindependentregisteredpublicaccountingfirmthatauditedtheconsolidatedfinancialstatementsofPiperJaffrayCompaniesincludedinthisAnnualReportonForm10-K,hasauditedtheeffectivenessofinternalcontroloverfinancialreportingasofDecember31,2007.Theirreport,whichexpressesanunqualifiedopinionontheeffectivenessofPiperJaffrayCompanies’internalcontroloverfinancialreportingasofDecem-ber31,2007,isincludedherein.PiperJaffrayAnnualReport200733PiperJaffrayCompaniesREPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRMTheBoardofDirectorsandShareholdersPiperJaffrayCompaniesWehaveauditedPiperJaffrayCompanies’(theCompany)internalcontroloverfinancialreportingasofDecember31,2007,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(theCOSOcriteria).PiperJaffrayCom-panies’managementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreporting,andforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreportingincludedintheaccompanyingManagement’sReportonInternalControlOverFinancialReporting.OurresponsibilityistoexpressanopinionontheCompany’sinternalcontroloverfinancialreportingbasedonouraudit.WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinion.Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstate-ments.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.AsindicatedintheaccompanyingManagement’sReportonInternalControlOverFinancialReporting,management’sassessmentofandconclusionontheeffectivenessofinternalcontroloverfinancialreportingdidnotincludetheinternalcontrolsofFiduciaryAssetManagement,LLC(“FAMCO”)andGoldbondCapitalHoldingsLimited,andthesubsidiariesofGoldbondCapitalHoldingsLimited,(collectively,“Goldbond”),whichareincludedinthe2007consolidatedfinancialstatementsofPiperJaffrayCompaniesandconstitutedlessthantenpercentoftotalconsolidatedassetsasofDecember31,2007,andlessthanfivepercentoftotalconsolidatedrevenuesfortheyearthenended.OurauditofinternalcontroloverfinancialreportingofPiperJaffrayCompaniesalsodidnotincludeanevaluationoftheinternalcontroloverfinancialreportingofFAMCOorGoldbond.Inouropinion,PiperJaffrayCompaniesmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2007,basedontheCOSOcriteria.Wehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),the2007consolidatedfinancialstatementsofPiperJaffrayCompaniesandourreportdatedFebruary26,2008,expressedanunqualifiedopinionthereon.Minneapolis,MinnesotaFebruary26,200834PiperJaffrayAnnualReport2007PiperJaffrayCompaniesREPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRMTheBoardofDirectorsandShareholdersPiperJaffrayCompaniesWehaveauditedtheaccompanyingconsolidatedstatementsoffinancialconditionofPiperJaffrayCompanies(theCompany)asofDecember31,2007and2006,andtherelatedconsolidatedstatementsofoperations,changesinshareholders’equity,andcashflowsforeachofthethreeyearsintheperiodendedDecember31,2007.ThesefinancialstatementsaretheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.Inouropinion,thefinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,theconsolidatedfinancialpositionofPiperJaffrayCompaniesatDecember31,2007and2006,andtheconsolidatedresultsofitsoperationsanditscashflowsforeachofthethreeyearsintheperiodendedDecember31,2007,inconformitywithU.S.generallyacceptedaccountingprinciples.Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),PiperJaffrayCompanies’internalcontroloverfinancialreportingasofDecember31,2007,basedoncriteriaestablishedinInternalControl-IntegratedFrameworkissuedbytheCommitteeofSponsoringOrga-nizationsoftheTreadwayCommissionandourreport,datedFebruary26,2008,expressedanunqualifiedopinionthereon.Minneapolis,MinnesotaFebruary26,2008PiperJaffrayAnnualReport200735PiperJaffrayCompaniesCONSOLIDATEDSTATEMENTSOFFINANCIALCONDITIONDECEMBER31,(Amountsinthousands,exceptsharedata)20072006AssetsCashandcashequivalents$150,348$39,903Cashandcashequivalentssegregatedforregulatorypurposes—25,000Receivables:Customers124,32951,441Brokers,dealersandclearingorganizations87,668312,874Depositswithclearingorganizations51,24230,223Securitiespurchasedunderagreementstoresell52,931139,927Tradingsecuritiesowned529,742776,684Tradingsecuritiesownedandpledgedascollateral242,21489,842Totaltradingsecuritiesowned771,956866,526Fixedassets(netofaccumulateddepreciationandamortizationof$55,508and$48,603,respectively)27,20825,289Goodwill284,804231,567Intangibleassets(netofaccumulatedamortizationof$5,609and$3,333,respectively)17,1441,467Otherreceivables47,71939,347Otherassets107,80788,283Totalassets$1,723,156$1,851,847LiabilitiesandShareholders’EquityPayables:Customers$91,272$83,899Checksanddrafts7,44413,828Brokers,dealersandclearingorganizations23,675210,955Securitiessoldunderagreementstorepurchase247,20291,293Tradingsecuritiessold,butnotyetpurchased176,191217,584Accruedcompensation132,908164,346Otherliabilitiesandaccruedexpenses131,875145,503Totalliabilities810,567927,408Shareholders’equity:Commonstock,$0.01parvalue:Sharesauthorized:100,000,000atDecember31,2007andDecember31,2006;Sharesissued:19,494,488atDecember31,2007and19,487,319atDecember31,2006;Sharesoutstanding:15,662,835atDecember31,2007and16,984,474atDecember31,2006195195Additionalpaid-incapital737,735723,928Retainedearnings367,900325,684Lesscommonstockheldintreasury,atcost:3,831,653sharesatDecember31,2007and2,502,845sharesatDecember31,2006(194,461)(126,026)Othercomprehensiveincome1,220658Totalshareholders’equity912,589924,439Totalliabilitiesandshareholders’equity$1,723,156$1,851,847SeeNotestoConsolidatedFinancialStatements36PiperJaffrayAnnualReport2007PiperJaffrayCompaniesCONSOLIDATEDSTATEMENTSOFOPERATIONSYEARENDEDDECEMBER31,(Amountsinthousands,exceptpersharedata)200720062005Revenues:Investmentbanking$302,361$298,309$251,750Institutionalbrokerage151,591160,502155,990Interest60,87364,11044,857Assetmanagement6,173222227Otherincome1,61312,094978Totalrevenues522,611535,237453,802Interestexpense23,68932,30332,494Netrevenues498,922502,934421,308Non-interestexpenses:Compensationandbenefits291,870291,265243,833Occupancyandequipment32,48230,66030,808Communications24,77223,18923,987Floorbrokerageandclearance14,70113,29214,785Marketingandbusinessdevelopment26,61924,66421,537Outsideservices34,59428,05323,881Cashawardprogram1,6772,9804,205Restructuring-relatedexpense––8,595Otheroperatingexpenses9,293(9,042)13,646Totalnon-interestexpenses436,008405,061385,277Incomefromcontinuingoperationsbeforeincometaxexpense62,91497,87336,031Incometaxexpense17,88734,97410,863Netincomefromcontinuingoperations45,02762,89925,168Discontinuedoperations:Income/(loss)fromdiscontinuedoperations,netoftax(2,811)172,35414,915Netincome$42,216$235,253$40,083EarningsperbasiccommonshareIncomefromcontinuingoperations$2.73$3.49$1.34Income/(loss)fromdiscontinuedoperations(0.17)9.570.79Earningsperbasiccommonshare$2.56$13.07$2.13EarningsperdilutedcommonshareIncomefromcontinuingoperations$2.59$3.32$1.32Income/(loss)fromdiscontinuedoperations(0.16)9.090.78Earningsperdilutedcommonshare$2.43$12.40$2.10WeightedaveragenumberofcommonsharesoutstandingBasic16,47418,00218,813Diluted17,35518,96819,081SeeNotestoConsolidatedFinancialStatementsPiperJaffrayAnnualReport200737PiperJaffrayCompaniesCONSOLIDATEDSTATEMENTSOFCHANGESINSHAREHOLDERS’EQUITY(Amountsinthousands,exceptshareamounts)CommonSharesOutstandingCommonStockAdditionalPaid-InCapitalRetainedEarningsTreasuryStockOtherComprehensiveIncome/(Loss)TotalShareholders’EquityBalanceatDecember31,200419,333,261$193$678,755$50,348$–$(3,868)$725,428Netincome–––40,083––40,083Amortizationofrestrictedstock––15,914–––15,914Amortizationofstockoptions––3,341–––3,341Minimumpensionliabilityadjustment–––––(73)(73)Foreigncurrencytranslationadjustment–––––(441)(441)Issuanceofcommonstock154,05826,010–––6,012Repurchaseofcommonstock(1,300,000)–––(42,612)–(42,612)Reissuanceoftreasuryshares177,858–(15)–7,190–7,175BalanceatDecember31,200518,365,177$195$704,005$90,431$(35,422)$(4,382)$754,827Netincome–––235,253––235,253Amortizationofrestrictedstock––17,893–––17,893Amortizationofstockoptions––2,436–––2,436Adjustmenttounrecognizedpensioncost,netoftax–––––2,9882,988Foreigncurrencytranslationadjustment–––––2,0522,052Repurchaseofcommonstock(1,648,527)–––(100,000)–(100,000)Reissuanceoftreasuryshares267,824–(406)–9,396–8,990BalanceatDecember31,200616,984,474$195$723,928$325,684$(126,026)$658$924,439Netincome–––42,216––42,216Amortizationofrestrictedstock––25,621–––25,621Amortizationofstockoptions––1,777–––1,777Adjustmenttounrecognizedpensioncost,netoftax–––––(206)(206)Foreigncurrencytranslationadjustment–––––768768Repurchaseofcommonstock(1,590,477)–––(79,971)–(79,971)Reissuanceoftreasuryshares261,669–(14,056)–11,536–(2,520)Sharesreservedtomeetdeferredcompensationobligations7,169–465–––465BalanceatDecember31,200715,662,835$195$737,735$367,900$(194,461)$1,220$912,589SeeNotestoConsolidatedFinancialStatements38PiperJaffrayAnnualReport2007PiperJaffrayCompaniesCONSOLIDATEDSTATEMENTSOFCASHFLOWSYEARENDEDDECEMBER31,(Dollarsinthousands)200720062005OperatingActivities:Netincome$42,216$235,253$40,083Adjustmentstoreconcilenetincometonetcashprovidedby(usedin)operatingactivities:Depreciationandamortization9,08512,64418,135GainonsaleofPCSbranchnetwork–(381,030)–Deferredincometaxes6874,529(475)Lossondisposaloffixedassets29212,392320Stock-basedcompensation27,86320,32919,255Amortizationofintangibleassets2,2761,6001,600Decrease(increase)inoperatingassets:Cashandcashequivalentssegregatedforregulatorypurposes25,000(25,000)–Receivables:Customers(42,747)499(4,285)Brokers,dealersandclearingorganizations225,311(13,679)237,624Depositswithclearingorganizations(20,920)34,1566,507Securitiespurchasedunderagreementstoresell86,99682,91729,079Nettradingsecuritiesowned53,403(227,341)(183,634)Otherreceivables4,939(14,721)(5,462)Otherassets(15,100)(25,357)7,036Increase(decrease)inoperatingliabilities:Payables:Customers(17,746)10,0939,284Checksanddrafts(6,405)(39,476)(9,966)Brokers,dealersandclearingorganizations(187,745)189,378(39,699)Securitiessoldunderagreementstorepurchase1,983(10,703)(11,031)Accruedcompensation(33,616)4,786110Otherliabilitiesandaccruedexpenses(20,395)7,485(1,651)Assetsheldforsale–75,021(38,000)Liabilitiesheldforsale–(26,182)20,367Netcashprovidedby(usedin)operatingactivities135,377(72,407)95,197InvestingActivities:SaleofPCSbranchnetwork–715,684–Businessacquisitions,netofcashacquired(85,889)––Purchasesoffixedassets,net(9,669)(8,314)(15,257)Netcashprovidedby(usedin)investingactivities(95,558)707,370(15,257)FinancingActivities:Increase(decrease)insecuritiesloaned–(234,676)11,774Increase(decrease)insecuritiessoldunderagreementstorepurchase153,926(143,790)(55,456)Repaymentofsubordinateddebt–(180,000)–Repurchaseofcommonstock(87,542)(100,000)(42,612)Excesstaxbenefitsfromstock-basedcompensation2,070––Proceedsfromstockoptiontransactions2,3831,308–Netcashprovidedby(usedin)financingactivities70,837(657,158)(86,294)Currencyadjustment:Effectofexchangeratechangesoncash(211)1,229(164)Netincrease(decrease)incashandcashequivalents110,445(20,966)(6,518)Cashandcashequivalentsatbeginningofperiod39,90360,86967,387Cashandcashequivalentsatendofperiod$150,348$39,903$60,869Supplementaldisclosureofcashflowinformation—Cashpaidduringtheperiodfor:Interest$22,813$41,475$40,174Incometaxes$553$204,896$20,131Non-cashfinancingactivities—Issuanceofcommonstockforretirementplanobligations:15,788shares,190,966sharesand331,434sharesfortheyearsendedDecember31,2007,2006and2005,respectively$1,063$9,013$13,187SeeNotestoConsolidatedFinancialStatementsPiperJaffrayAnnualReport200739PiperJaffrayCompaniesNOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTSNotestoConsolidatedFinancialStatementsNote1BackgroundPiperJaffrayCompaniesistheparentcompanyofPiperJaffray&Co.(“PiperJaffray”),asecuritiesbro-kerdealerandinvestmentbankingfirm;PiperJaffrayLtd.,afirmprovidingsecuritiesbrokerageandinvest-mentbankingservicesinEuropeheadquarteredinLondon,England;PiperJaffrayFinancialProductsInc.,anentitythatfacilitatescustomerderivativetrans-actions;PiperJaffrayFinancialProductsIIInc.,anentitydealingprimarilyinvariableratemunicipalproducts;FiduciaryAssetManagement,LLC(“FAMCO”),anentityprovidingassetmanagementservicestoclientsthroughseparatelymanagedaccountsandclosedendfundsofferinganarrayofinvestmentproducts;PiperJaffrayAsiaHoldingsLimited,anentityprovidinginvestmentbankingser-vicesinChinaheadquarteredinHongKong;andotherimmaterialsubsidiaries.PiperJaffrayCompaniesanditssubsidiaries(collectively,the“Company”)operateasonereportingsegmentprovidinginvestmentbankingservices,institutionalsales,tradingandresearchser-vices,andassetmanagementservices.AsdiscussedmorefullyinNote4,theCompanycompletedthesaleofitsPrivateClientServicesbranchnetworkandcer-tainrelatedassetstoUBSFinancialServices,Inc.,asubsidiaryofUBSAG(“UBS”),onAugust11,2006,therebyexitingthePrivateClientServices(“PCS”)business.Note2SummaryofSignificantAccountingPoliciesPRINCIPLESOFCONSOLIDATIONTheconsolidatedfinancialstatementsincludetheaccountsofPiperJaffrayCompanies,itssubsidiaries,andallotherentitiesinwhichtheCompanyhasacontrollingfinancialinterest.Allmaterialintercom-panyaccountsandtransactionshavebeeneliminated.TheCompanydetermineswhetherithasacontrollingfinancialinterestinanentitybyfirstevaluatingwhethertheentityisavotinginterestentity,avariableinterestentity(“VIE”),aspecial-purposeentity(“SPE”),oraqualifyingspecial-purposeentity(“QSPE”)underU.S.generallyacceptedaccountingprinciples.Votinginterestentitiesareentitiesinwhichthetotalequityinvestmentatriskissufficienttoenableeachentitytofinanceitselfindependentlyandprovidestheequityholderswiththeobligationtoabsorblosses,therighttoreceiveresidualreturnsandtherighttomakedecisionsabouttheentity’sactivities.VotinginterestentitiesareconsolidatedinaccordancewithAccount-ingResearchBulletinNo.51,“ConsolidatedFinancialStatements,”(“ARB51”),asamended.ARB51statesthattheusualconditionforacontrollingfinancialinterestinanentityisownershipofamajorityvotinginterest.Accordingly,theCompanyconsolidatesvotinginterestentitiesinwhichithasall,oramajorityof,thevotinginterest.AsdefinedinFinancialAccountingStandardsBoardInterpretationNo.46(R),“ConsolidationofVariableInterestEntities,”(“FIN46(R)”),VIEsareentitiesthatlackoneormoreofthecharacteristicsofavotinginterestentitydescribedabove.FIN46(R)statesthatacontrollingfinancialinterestinanentityispresentwhenanenterprisehasavariableinterest,orcombinationofvariableinterests,thatwillabsorbamajorityoftheentity’sexpectedlosses,receiveamajor-ityoftheentity’sexpectedresidualreturns,orboth.Theenterprisewithacontrollingfinancialinterest,knownastheprimarybeneficiary,consolidatestheVIE.Accordingly,theCompanyconsolidatesVIEsinwhichtheCompanyisdeemedtobetheprimarybeneficiary.SPEsaretrusts,partnershipsorcorporationsestab-lishedforaparticularlimitedpurpose.TheCompanyfollowstheaccountingguidanceinStatementofFinan-cialAccountingStandardsNo.140,“AccountingforTransfersandServicingofFinancialAssetsandExtin-guishmentofLiabilities,”(“SFAS140”),todeterminewhetherornotsuchSPEsarerequiredtobeconsoli-dated.TheCompanyestablishesSPEstosecuritizefixedratemunicipalbonds.ThemajorityofthesesecuritizationsmeettheSFAS140definitionofaQSPE.AQSPEcangenerallybedescribedasanentitywithsignificantlylimitedpowersthatareintendedtolimitittopassivelyholdingfinancialassetsanddistributingcashflowsbaseduponpredeterminedcriteria.BasedupontheguidanceinSFAS140,theCompanydoesnotconsolidatesuchQSPEs.TheCompanyaccountsforitsinvolvementwithsuchQSPEsunderafinancialcom-ponentsapproachinwhichtheCompanyrecognizesonlyitsretainedresidualinterestintheQSPE.TheCompanyaccountsforsuchretainedinterestsatfairvalue.CertainSPEsdonotmeettheQSPEcriteriabecausetheirpermittedactivitiesarenotsufficientlylimitedorcontrolremainswithoneoftheowners.TheseSPEsare40PiperJaffrayAnnualReport2007typicallyconsideredVIEsandarereviewedunderFIN46(R)todeterminetheprimarybeneficiary.WhentheCompanydoesnothaveacontrollingfinan-cialinterestinanentitybutexertssignificantinfluenceovertheentity’soperatingandfinancialpolicies(gen-erallydefinedasowningavotingoreconomicinterestofbetween20percentto50percent),theCompanyaccountsforitsinvestmentinaccordancewiththeequitymethodofaccountingprescribedbyAccountingPrinciplesBoardOpinionNo.18,“TheEquityMethodofAccountingforInvestmentsinCommonStock.”IftheCompanydoesnothaveacontrollingfinancialinterestin,orexertsignificantinfluenceover,anentity,theCompanyaccountsforitsinvestmentatfairvalue.USEOFESTIMATESThepreparationoffinancialstatementsandrelateddisclosuresinconformitywithU.S.generallyacceptedaccountingprinciplesrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrev-enuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.CASHANDCASHEQUIVALENTSCashandcashequivalentsconsistofcashandhighlyliquidinvestmentswithmaturitiesof90daysorlessatthedateofpurchase.InaccordancewithRule15c3-3oftheSecuritiesExchangeActof1934,PiperJaffray,asaregisteredbrokerdealercarryingcustomeraccounts,issubjecttorequirementsrelatedtomaintainingcashorqualifiedsecuritiesinasegregatedreserveaccountfortheexclu-sivebenefitofitscustomers.COLLATERALIZEDSECURITIESTRANSACTIONSSecuritiespurchasedunderagreementstoresellandsecuritiessoldunderagreementstorepurchasearecar-riedatthecontractualamountsatwhichthesecuritieswillbesubsequentlyresoldorrepurchased,includingaccruedinterest.ItistheCompany’spolicytotakepossessionorcontrolofsecuritiespurchasedunderagreementstoresellatthetimetheseagreementsareenteredinto.ThecounterpartiestotheseagreementstypicallyareprimarydealersofU.S.governmentsecu-ritiesandmajorfinancialinstitutions.Collateralisvalueddaily,andadditionalcollateralisobtainedfromorrefundedtocounterpartieswhenappropriate.Securitiesborrowedandloanedresultfromtransac-tionswithotherbrokerdealersorfinancialinstitutionsandarerecordedattheamountofcashcollateraladvancedorreceived.Theseamountsareincludedinreceivablesfromandpayabletobrokers,dealersandclearingorganizationsontheconsolidatedstatementsoffinancialcondition.Securitiesborrowedtransac-tionsrequiretheCompanytodepositcashorothercollateralwiththelender.Securitiesloanedtransac-tionsrequiretheborrowertodepositcashwiththeCompany.TheCompanymonitorsthemarketvalueofsecuritiesborrowedandloanedonadailybasis,withadditionalcollateralobtainedorrefundedasnecessary.Interestisaccruedonsecuritiesborrowedandloanedtransactionsandisincludedin(i)otherreceivablesandotherliabilitiesandaccruedexpensesontheconsoli-datedstatementsoffinancialconditionand(ii)therespectiveinterestincomeandexpensebalancesontheconsolidatedstatementsofoperations.CUSTOMERTRANSACTIONSCustomersecuritiestransactionsarerecordedonasettlementdatebasis,whiletherelatedrevenuesandexpensesarerecordedonatradedatebasis.Customerreceivablesandpayablesincludeamountsrelatedtobothcashandmargintransactions.Securitiesownedbycustomers,includingthosethatcollateralizemarginorothersimilartransactions,arenotreflectedontheconsolidatedstatementsoffinancialcondition.ALLOWANCEFORDOUBTFULACCOUNTSManagementestimatesanallowancefordoubtfulaccountstoreserveforprobablelossesfromunsecuredandpartiallysecuredcustomeraccounts.Managementiscontinuallyevaluatingitsreceivablesfromcustomersforcollectibilityandpossiblewrite-offbyexaminingthefactsandcircumstancessurroundingeachcustomerwherealossisdeemedpossible.FAIRVALUEOFFINANCIALINSTRUMENTSSubstantiallyalloftheCompany’sfinancialinstru-mentsarerecordedontheCompany’sconsolidatedstatementsoffinancialconditionatfairvalueorthecontractamount.Thefairvalueofafinancialinstru-mentistheamountatwhichtheinstrumentcouldbeexchangedinacurrenttransactionbetweenwillingparties,otherthaninaforcedorliquidationsale.Tradingsecuritiesownedandtradingsecuritiessold,butnotyetpurchasedarerecordedonatradedatebasisandarestatedatmarketorfairvalue.TheCompany’svaluationpolicyistousequotedmarketordealerpricesfromindependentsourceswheretheyareavailableandreliable.AsubstantialpercentageofthefairvaluesrecordedfortheCompany’stradingsecuritiesownedandtradingsecuritiessold,butnotyetpurchasedarebasedonobservablemarketprices.Thefairvaluesoftradingsecuritiesforwhichaquotedmarketordealerpriceisnotavailablearebasedonmanagement’sesti-mate,usingthebestinformationavailable,ofamountsPiperJaffrayAnnualReport200741NotestoConsolidatedFinancialStatementsthatcouldberealizedundercurrentmarketconditions.Amongthefactorsconsideredbymanagementindeter-miningthefairvalueofthesesecuritiesarethecost,termsandliquidityoftheinvestment,thefinancialconditionandoperatingresultsoftheissuer,thequotedmarketpriceofsecuritieswithsimilarqualityandyieldthatarepubliclytraded,andotherfactorsgenerallypertinenttothevaluationofinvestments.Thefairvalueofover-the-counterderivativecontractsarevaluedusingvaluationmodels.Themodelprima-rilyusedbytheCompanyisthepresentvalueofcashflowmodel,asmostoftheCompany’sderivativeprod-uctsareinterestrateswaps.Thismodelrequiresinputsincludingcontractualterms,marketprices,yieldcurves,creditcurvesandmeasuresofvolatility.Financialinstrumentscarriedatcontractamountsthatapproximatefairvalueeitherhaveshort-termmaturi-ties(oneyearorless),arerepricedfrequently,orbearmarketinterestratesand,accordingly,arecarriedatamountsapproximatingfairvalue.Financialinstru-mentscarriedatcontractamountsontheconsolidatedstatementsoffinancialconditionincludereceivablesfromandpayablestobrokers,dealersandclearingorganizations,securitiespurchasedunderagreementstoresell,securitiessoldunderagreementstorepurchaseandreceivablesfromandpayablestocustomers.FIXEDASSETSFixedassetsincludefurnitureandequipment,softwareandleaseholdimprovements.Depreciationoffurnitureandequipmentandsoftwareisprovidedusingthestraight-linemethodoverestimatedusefullivesofthreetotenyears.Leaseholdimprovementsareamortizedovertheirestimatedusefullifeorthelifeofthelease,whicheverisshorter.Additionally,certaincostsincurredinconnec-tionwithinternal-usesoftwareprojectsarecapitalizedandamortizedovertheexpectedusefullifeoftheasset,generallythreetosevenyears.LEASESTheCompanyleasesitscorporateheadquartersandotherofficesundervariousnon-cancelableleases.Theleasesrequirepaymentofrealestatetaxes,insuranceandcommonareamaintenance,inadditiontorent.ThetermsoftheCompany’sleaseagreementsgenerallyrangeupto10years.Someoftheleasescontainrenewaloptions,escalationclauses,rentfreeholidaysandoperatingcostadjustments.Forleasesthatcontainescalationsandrent-freeholi-days,theCompanyrecognizestherelatedrentexpenseonastraight-linebasisfromthedatetheCompanytakespossessionofthepropertytotheendoftheinitialleaseterm.TheCompanyrecordsanydifferencebetweenthestraight-linerentamountsandamountspayableundertheleasesaspartofotherliabilitiesandaccruedexpenses.Cashorleaseincentivesreceiveduponenteringintocertainleasesarerecognizedonastraight-linebasisasareductionofrentexpensefromthedatetheCompanytakespossessionofthepropertyorreceivesthecashtotheendoftheinitialleaseterm.TheCompanyrecordstheunamortizedportionofleaseincentivesaspartofotherliabilitiesandaccruedexpenses.GOODWILLANDINTANGIBLEASSETSGoodwillrepresentstheexcessofpurchasepriceoverthefairvalueofnetassetsacquiredusingthepurchasemethodofaccounting.Therecoverabilityofgoodwillisevaluatedannually,ataminimum,oronaninterimbasisifeventsorcircumstancesindicateapossibleinabilitytorealizethecarryingamount.Theevaluationincludesassessingtheestimatedfairvalueofthegood-willbasedonmarketpricesforsimilarassets,whereavailable,theCompany’smarketcapitalizationandthepresentvalueoftheestimatedfuturecashflowsasso-ciatedwiththegoodwill.Intangibleassetswithdeterminablelivesconsistofassetmanagementcontractualrelationships,non-competeagreements,certaintradenamesandtrademarks,andsoftwaretechnologiesthatareamortizedovertheiresti-matedusefullivesrangingfromthreetotenyears.OTHERRECEIVABLESOtherreceivablesincludesmanagementfeesreceivable,bridgeloanfinancingreceivables,accruedinterestandloansmadetorevenue-producingemployees,typicallyinconnectionwiththeirrecruitment.Employeeloansareforgivenbasedoncontinuedemploymentandareamortizedtocompensationandbenefitsusingthestraight-linemethodovertherespectivetermsoftheloans,whichgenerallyrangeuptothreeyears.OTHERASSETSOtherassetsincludesinvestmentsinpartnerships,invest-mentstofunddeferredcompensationliabilities,prepaidexpenses,andnetdeferredtaxassets.Inaddition,otherassetsincludes55,440restrictedsharesofNYSEEuro-next,Inc.commonstock.OnMarch7,2006,upontheconsummationofthemergeroftheNewYorkStockExchange,Inc.(“NYSE”)andArchipelagoHoldings,Inc.,NYSEEuronext,Inc.becametheparentcompanyofNewYorkStockExchange,LLC(whichisthesucces-sortotheNYSE)andArchipelagoHoldings,Inc.Inconnectionwiththemerger,theCompanyreceived$0.8millionincashand157,202sharesofNYSEEuro-next,Inc.commonstockinexchangeforthetwoNYSEseatsownedbytheCompany.TheCompanysold101,762sharesofNYSEEuronext,Inc.commonstock42PiperJaffrayAnnualReport2007NotestoConsolidatedFinancialStatementsinasecondaryofferingduringthesecondquarterof2006andtheremainderofthesharesaresubjecttorestrictionsontransferuntilMarch2009.REVENUERECOGNITIONInvestmentBanking—Investmentbankingrevenues,whichincludeunderwritingfees,managementfeesandadvisoryfees,arerecordedwhenservicesforthetransac-tionsarecompletedunderthetermsofeachengagement.Expensesassociatedwithsuchtransactionsaredeferreduntiltherelatedrevenueisrecognizedortheengagementisotherwiseconcluded.Investmentbankingrevenuesarepresentednetofrelatedexpenses.Expensesrelatedtoinvestmentbankingdealsnotcompletedarerecognizedasnon-interestexpensesonthestatementofoperations.InstitutionalBrokerage—Institutionalbrokeragerev-enuesinclude(i)commissionsreceivedfromcustomersfortheexecutionofbrokeragetransactionsinlistedandover—the—counter(OTC)equity,fixedincomeandconvertibledebtsecurities,whicharerecordedonatradedatebasis,(ii)tradinggainsandlossesand(iii)feesreceivedbytheCompanyforequityresearch.AssetManagement—assetmanagementfees,whicharederivedfromprovidinginvestmentadvisoryser-vices,arerecognizedintheperiodinwhichservicesareprovided.Feesaredefinedinclientcontractsaseitherfixedorbasedonapercentageofportfolioassetsundermanagement.STOCK-BASEDCOMPENSATIONEffectiveJanuary1,2006,theCompanyadoptedtheprovisionsofStatementofFinancialAccountingStan-dardsNo.123(R),“Share-BasedPayment,”(“SFAS123(R)”),usingthemodifiedprospectivetran-sitionmethod.SFAS123(R)requiresallstock-basedcompensationtobeexpensedintheconsolidatedstate-mentofoperationsatfairvalue,netofestimatedfor-feitures.BecausetheCompanyhistoricallyexpensedallequityawardsbasedonthefairvaluemethod,netofestimatedforfeitures,SFAS123(R)didnothaveamaterialeffectontheCompany’smeasurementorrec-ognitionmethodsforstock-basedcompensation.INCOMETAXESIncometaxexpenseisrecordedusingtheassetandliabilitymethod.Deferredtaxassetsandliabilitiesarerecognizedfortheexpectedfuturetaxconsequencesattributabletotemporarydifferencesbetweenamountsreportedforincometaxpurposesandfinancialstate-mentpurposes,usingcurrenttaxrates.Avaluationallowanceisrecognizedifitisanticipatedthatsomeorallofadeferredtaxassetwillnotberealized.TaxreservesforuncertaintaxpositionsarerecordedinaccordancewithFASBInterpretationNo.48,“AccountingforUncertaintyinIncomeTaxes—aninterpretationofFASBStatement109”(“FIN48”).EARNINGSPERSHAREBasicearningspercommonshareiscomputedbydivid-ingnetincomebytheweightedaveragenumberofcommonsharesoutstandingfortheyear.Dilutedearn-ingspercommonshareiscalculatedbyadjustingtheweightedaverageoutstandingsharestoassumecon-versionofallpotentiallydilutiverestrictedstockandstockoptions.FOREIGNCURRENCYTRANSLATIONTheCompanyconsolidatesforeignsubsidiaries,whichhavedesignatedtheirlocalcurrencyastheirfunctionalcurrency.Assetsandliabilitiesoftheseforeignsubsid-iariesaretranslatedatyear-endratesofexchange,andstatementofoperationsaccountsaretranslatedatanaverageratefortheperiod.InaccordancewithState-mentofFinancialAccountingStandardsNo.52,“For-eignCurrencyTranslation,”(“SFAS52”),gainsorlossesresultingfromtranslatingforeigncurrencyfinan-cialstatementsarereflectedinothercomprehensiveincome,aseparatecomponentofshareholders’equity.Gainsorlossesresultingfromforeigncurrencytrans-actionsareincludedinnetincome.RECLASSIFICATIONSCertainpriorperiodamountshavebeenreclassifiedtoconformtothecurrentyearpresentation.Note3RecentAccountingPronouncementsInFebruary2006,theFinancialAccountingStandardsBoard(“FASB”)issuedStatementofFinancialAccountingStandardsNo.155,“AccountingforCer-tainHybridFinancialInstruments”(“SFAS155”),whichamendsSFASNo.133,“AccountingforDeriv-ativeInstrumentsandHedgingActivities,”(“SFAS133”),andSFASNo.140,“AccountingforTransfersandServicingofFinancialAssetsandExtin-guishmentsofLiabilities”(“SFAS140”).Theprovi-sionsofSFAS155provideafairvaluemeasurementoptionforcertainhybridfinancialinstrumentsthatcontainanembeddedderivativethatwouldotherwiserequirebifurcation.SFAS155alsoprovidesclarifica-tionthatonlythesimplestseparationsofinterestpay-mentsandprincipalpaymentsqualifyfortheexceptionaffordedtointerest-onlystripsandprincipal-onlystripsfromderivativeaccountingunderparagraph14ofSFAS133.Thestandardalsoclarifiesthatconcentra-tionofcreditriskintheformofsubordinationisnotanembeddedderivative.Lastly,thenewstandardamendsPiperJaffrayAnnualReport200743NotestoConsolidatedFinancialStatementsSFAS140toeliminatetheprohibitiononaqualifyingspecialpurposeentityfromholdingaderivativefinan-cialinstrumentthatpertainstoabeneficialinterestotherthananotherderivativefinancialinstrument.SFAS155waseffectivefortheCompanyforallfinan-cialinstrumentsacquiredorissuedbeginningJanuary1,2007.TheadoptionofSFAS155didnothaveamate-rialeffectontheconsolidatedfinancialstatementsoftheCompany.InJune2006,theFASBissuedFIN48.FIN48clarifiestheaccountingforuncertaintyinincometaxesrecog-nizedinaccordancewithFASBStatementNo.109,“AccountingforIncomeTaxes.”FIN48prescribesatwo-stepprocesstorecognizeandmeasureataxposi-tiontakenorexpectedtobetakeninataxreturn.Thefirststepisrecognition,wherebyadeterminationismadewhetheritismore-likely-than-notthatataxpositionwillbesustaineduponexaminationbasedonthetechnicalmeritsoftheposition.Thesecondstepistomeasureataxpositionthatmeetstherecognitionthresholdtodeterminetheamountofbenefittorec-ognize.FIN48alsoprovidesguidanceonderecogni-tion,classification,interestandpenalties,accountingininterimperiods,disclosureandtransition.FIN48waseffectivefortheCompanybeginningJanuary1,2007.TheadoptionofFIN48didnothaveamaterialeffectontheconsolidatedfinancialstatementsoftheCompany.InSeptember2006,theFASBissuedStatementofFinancialAccountingStandardsNo.157,“FairValueMeasurements”(“SFAS157”).SFAS157definesfairvalue,establishesaframeworkformeasuringfairvalueandexpandsdisclosuresregardingfairvaluemeasure-ments.SFAS157doesnotrequireanynewfairvaluemeasurements,butitsapplicationmay,forsomeenti-ties,changecurrentpractice.Changestocurrentprac-ticestemfromthereviseddefinitionoffairvalueandtheapplicationofthisdefinitionwithintheframeworkestablishedbySFAS157.SFAS157iseffectiveforfiscalyearsbeginningafterNovember15,2007.SFAS157isnotexpectedtohaveamaterialaffectonourconsol-idatedfinancialstatements.InFebruary2007,theFASBissuedStatementofFinan-cialAccountingStandardsNo.159,“TheFairValueOptionforFinancialAssetsandFinancialLiabilities”(“SFAS159”).SFAS159permitsentitiestochoosetomeasurecertainfinancialassetsandliabilitiesandothereligibleitemsatfairvalue,whicharenototherwisecurrentlyallowedtobemeasuredatfairvalue.UnderSFAS159,thedecisiontomeasureitemsatfairvalueismadeatspecifiedelectiondatesonanirrevocableinstrument-by-instrumentbasis.Entitieselectingthefairvalueoptionwouldberequiredtorecognizechangesinfairvalueinearningsandtoexpenseupfrontcostsandfeesassociatedwiththeitemforwhichthefairvalueoptioniselected.Entitieselectingthefairvalueoptionarerequiredtodistinguishonthefaceofthestatementoffinancialposition,thefairvalueofassetsandliabilitiesforwhichthefairvalueoptionhasbeenelectedandsimilarassetsandliabilitiesmeasuredusinganothermeasurementattribute.SFAS159iseffectiveasofthebeginningofthefirstfiscalyearthatbeginsafterNovember15,2007,withearlieradoptionpermittedprovidedthattheentityalsoearlyadoptsalloftherequirementsofSFAS157.SFAS159isnotexpectedtohaveamaterialaffectonourconsolidatedfinancialstatements.InApril2007,theFASBissuedFSPNo.FIN39-1,“AmendmentofFASBInterpretationNo.39”(“FSPFIN39-1”).FSPFIN39-1modifiesFINNo.39,“Off-settingofAmountsRelatedtoCertainContracts,”andpermitscompaniestooffsetcashcollateralreceivablesorpayableswithnetderivativepositionsundercertaincircumstances.FSPFIN39-1iseffectiveforfiscalyearsbeginningafterNovember15,2007,withearlyadop-tionpermitted.FSPFIN39-1isnotexpectedtohaveamaterialaffectonourconsolidatedfinancialstatements.InDecember2007,theFASBissuedStatementofFinancialAccountingStandardsNo.141(revised2007),“BusinessCombinations”(“SFAS141(R)”).SFAS141(R)expandsthedefinitionoftransactionsandeventsthatqualifyasbusinesscombinations;requiresthatacquiredassetsandliabilities,includingcontingencies,berecordedatthefairvaluedeterminedontheacquisitiondateandchangesthereafterreflectedinrevenue,notgoodwill;changestherecognitiontim-ingforrestructuringcosts;andrequiresacquisitioncoststobeexpensedasincurred.AdoptionofSFAS141(R)isrequiredforcombinationsafterDecem-ber15,2008.Earlyadoptionandretroactiveapplica-tionofSFAS141(R)tofiscalyearsprecedingtheeffectivedatearenotpermitted.InDecember2007,theFASBissuedStatementofFinancialAccountingStandardsNo.160,“Noncon-trollingInterestinConsolidatedFinancialStatements”(SFAS160).SFAS160re-characterizesminorityinter-estsinconsolidatedsubsidiariesasnon-controllinginterestsandrequirestheclassificationofminorityinterestsasacomponentofequity.UnderSFAS160,achangeincontrolwillbemeasuredatfairvalue,withanygainorlossrecognizedinearnings.SFAS160iseffectiveforfiscalyearsbeginningafterDecember15,2008.WeareevaluatingtheimpactofSFAS160onourconsolidatedfinancialstatements.44PiperJaffrayAnnualReport2007NotestoConsolidatedFinancialStatementsNote4DiscontinuedOperationsOnAugust11,2006,theCompanyandUBScompletedthesaleoftheCompany’sPCSbranchnetworkunderapreviouslyannouncedassetpurchaseagreement.Thepurchasepriceundertheassetpurchaseagreementwasapproximately$750million,whichincluded$500mil-lionforthebranchnetworkandapproximately$250millionforthenetassetsofthebranchnetwork,consistingprincipallyofcustomermarginreceivables.InaccordancewiththeprovisionsofStatementofFinancialAccountingStandardsNo.144,“AccountingfortheImpairmentorDisposalofLong-LivedAssets”(“SFAS144”),theresultsofPCSoperationshavebeenclassifiedasdiscontinuedoperationsforallperiodspresented.TheCompanyrecordedalossfromdiscon-tinuedoperations,netoftax,of$2.8millionfortheyearendedDecember31,2007,relatedtothecostofdecommissioningaPCS-orientedbackofficesystem,litigation-relatedexpensesandrestructuringcharges.TheCompanymayincurdiscontinuedoperationsexpenseorincomerelatedtochangesinlitigationreserveestimatesforretainedPCSlitigationmattersandforchangesinestimatestoPCSrelatedunrecog-nizedtaxbenefits,andoccupancyandseverancerestructuringchargesifthefactsthatsupporttheCom-pany’sestimateschange.InconnectionwiththesaleoftheCompany’sPCSbranchnetwork,theCompanyinitiatedaplanin2006tosignificantlyrestructuretheCompany’ssup-portinfrastructure.AllrestructuringcostsrelatedtothesaleofthePCSbranchnetworkareincludedwithindiscontinuedoperationsinaccordancewithSFAS144.SeeNote18foradditionalinformationregardingtheCompany’srestructuringactivities.Note5AcquisitionofFiduciaryAssetManagement,LLCOnSeptember14,2007,theCompanyacquiredFAMCO,aSt.Louis-basedassetmanagementfirm,whichexpandstheCompany’sassetmanagementcapa-bilities.TheCompanyrecorded$34.1millioningood-will,$18.0millioninidentifiableintangibleassetsand$1.7millioninnetassetsinconnectionwiththisacqui-sitionin2007.TheacquisitionofFAMCOincludesthepotentialforadditionalcashconsiderationtobepaidintheformofthreeannualpaymentscontingentuponrevenueexceedingcertainrevenuerun-ratethresholds.Theamountofthethreeannualpayments(assumingtherevenuerun-ratethresholdhasbeenmet)willbeequaltoapercentageofearningsbeforeincometaxes,depreciationandamortizationforthepreviousyear.Thepercentagein2008is120%and110%in2009and2010.Note6AcquisitionofGoldbondCapitalHoldingsLimitedOnOctober2,2007,theCompanyacquiredGoldbondCapitalHoldingsLimited(“Goldbond”),aHongKong-basedinvestmentbankwhichprovidestheCom-panywithcapitalmarketscapabilitiesinHongKong.Asconsiderationforthetransaction,theCompanypaid$47.1millionincashand$4.5millionintheformofrestrictedstockoftheCompany.Therestrictedstockistiedtotheemploymentofakeyemployeeandwillbeamortizedtocompensationandbenefitsexpenseovertheperiodofrestriction.TheCompanyrecorded$19.2millioningoodwilland$28.9millioninnetassetsinconnectionwiththisacquisition.Followingthetransaction,theCompanyrenamedGoldbondasPiperJaffrayAsiaHoldingsLimited(“PiperJaffrayAsia”).Note7DerivativesDerivativecontractsarefinancialinstrumentssuchasforwards,futures,swapsoroptioncontractsthatderivetheirvaluefromunderlyingassets,referencerates,indicesoracombinationofthesefactors.Aderivativecontractgenerallyrepresentsfuturecommitmentstopurchaseorsellfinancialinstrumentsatspecifiedtermsonaspecifieddateortoexchangecurrencyorinterestpaymentstreamsbasedonthecontractornotionalamount.Derivativecontractsexcludecertaincashinstruments,suchasmortgage-backedsecurities,inter-est-onlyandprincipal-onlyobligationsandindexeddebtinstrumentsthatderivetheirvaluesorcontractuallyrequiredcashflowsfromthepriceofsomeothersecurityorindex.TheCompanyusesinterestrateswaps,interestratelocks,andforwardcontractstofacilitatecustomertransactionsandasameanstomanageriskincertaininventorypositions.InterestrateswapsarealsousedtomanageinterestrateexposureassociatedwithholdingresidualinterestsecuritiesfromtheCompany’stenderoptionbondprogram.Inaddition,theCompanyentersintototalreturnloanswapagreementstoreceivethetotalreturnon$36.5millionincertaincorporateloanassetswithouttransferringactualownershipofthePiperJaffrayAnnualReport200745NotestoConsolidatedFinancialStatementsunderlyingloantotheCompany.AsofDecember31,2007and2006,theCompanywascounterpartytonotional/contractamountsof$7.5billionand$5.8bil-lion,respectively,ofderivativeinstruments.Themarketorfairvaluesrelatedtoderivativecontracttransactionsarereportedintradingsecuritiesownedandtradingsecuritiessold,butnotyetpurchasedontheconsolidatedstatementsoffinancialconditionandanyunrealizedgainorlossresultingfromchangesinfairvaluesofderivativesisrecognizedininstitutionalbro-kerageontheconsolidatedstatementsofoperations.TheCompanydoesnotutilize“hedgeaccounting”asdescribedwithinSFASNo.133.Derivativesarereportedonanet-by-counterpartybasiswhenalegalrightofoffsetexistsand,onanet-by-crossproductbasiswhenapplicableprovisionsarestatedinamasternettingagreementinaccordancewithFASBInterpre-tationNo.39,“OffsettingofAmountsRelatedtoCertainContracts.”Fairvaluesforderivativecontractsrepresentamountsestimatedtobereceivedfromorpaidtoacounterpartyinsettlementoftheseinstruments.Thesederivativesarevaluedusingquotedmarketpriceswhenavailableorpricingmodelsbasedonthenetpresentvalueofesti-matedfuturecashflows.Thevaluationmodelsusedrequireinputsincludingcontractualterms,marketprices,yieldcurves,creditcurvesandmeasuresofvol-atility.Thenetfairvalueofderivativecontractswasapproximately$18.4millionand$19.7millionasofDecember31,2007and2006,respectively.Note8SecuritizationsInconnectionwithitstenderoptionbondprogram,theCompanysecuritizeshighlyratedmunicipalbonds.AtDecember31,2007and2006,theCompanyhad$325.6millionand$279.2million,respectively,ofparvalueofmunicipalbondsinsecuritization.Eachmunicipalbondissoldintoaseparatetrustthatisfundedbythesaleofvariableratecertificatestoinsti-tutionalcustomersseekingvariableratetax-freeinvest-mentproducts.Thesevariableratecertificatesrepriceweekly.SecuritizationtransactionsmeetingcertainSFAS140criteriaaretreatedassales,withtheresultinggainincludedininstitutionalbrokeragerevenueontheconsolidatedstatementsofoperations.Ifasecuritiza-tiondoesnotmeettheassetsalerequirementsofSFAS140,thetransactionisrecordedasaborrowing.TheCompanyretainsaresidualinterestineachstruc-tureandaccountsfortheresidualinterestasatradingsecurity,whichisrecordedatfairvalueontheconsol-idatedstatementsoffinancialcondition.Thefairvalueofretainedinterestswas$13.9millionand$8.1millionatDecember31,2007and2006,respectively,withaweightedaveragelifeof8.0yearsand8.4years,respec-tively.Thefairvalueofretainedinterestsisestimatedbasedonthepresentvalueoffuturecashflowsusingmanagement’sbestestimatesofthekeyassumptions—expectedyield,creditlossesof0percentanda12per-centdiscountrate.AtDecember31,2007,thesensi-tivityofthecurrentfairvalueofretainedintereststoimmediate10percentand20percentadversechangesinthekeyeconomicassumptionswasnotmaterial.TheCompanyreceivesafeetoremarketthevariableratecertificatesderivedfromthesecuritizations.Certaincashflowactivityforthemunicipalbondsecuritizationsdescribedaboveincludes:YEARENDEDDECEMBER31,(Dollarsinthousands)200720062005Proceedsfromnewsecuritizations$58,913$7,578$22,655Remarketingfeesreceived125132132Cashflowsreceivedonretainedinterests5,0396,0198,465ThreesecuritizationtransactionsweredesignedsuchthattheydidnotmeettheassetsalerequirementsofSFAS140,causingtheCompanytoconsolidatethesetrusts.Accordingly,theCompanyrecordedanassetfortheunderlyingbondsof$49.5millionand$51.2mil-lionasofDecember31,2007and2006,respectively,intradingsecuritiesownedandaliabilityforthecertif-icatessoldbythetrustsfor$48.7millionand$50.1mil-lionasofDecember31,2007and2006,respectively,inotherliabilitiesandaccruedexpensesontheconsoli-datedstatementsoffinancialcondition.TheCompanyentersintointerestrateswapagreementstomanageinterestrateexposureassociatedwithhold-ingtheresidualinterestsecuritiesfromitssecuritiza-tions,whichhavebeenrecordedatfairvalueandresultedinaliabilityofapproximately$11.1millionand$5.7millionatDecember31,2007and2006,respectively.Note9VariableInterestEntitiesInthenormalcourseofbusiness,theCompanyregu-larlycreatesortransactswithentitiesthatmaybeVIEs.Theseentitiesareeithersecuritizationvehiclesorinvestmentvehicles.TheCompanyactsastransferor,seller,investor,orstructurerinsecuritizations.Thesetransactionstypi-callyinvolveentitiesthatarequalifyingspecialpurpose46PiperJaffrayAnnualReport2007NotestoConsolidatedFinancialStatementsentitiesasdefinedinSFAS140.Forfurtherdiscussiononthesetypesoftransactions,seeNote8.TheCompanyhasinvestmentsinand/oractsasthemanagingpartnerormembertoapproximately19partnershipsandlimitedliabilitycompanies(“LLCs”).Theseentitieswereestablishedforthepurposeofinvestinginequityanddebtsecuritiesofpublicandprivateinvestments.AtDecember31,2007,theCom-pany’saggregatenetinvestmentinthesepartnershipsandLLCstotaled$10.8million.TheCompany’sremainingcommitmenttothesepartnershipsandLLCswas$4.9millionatDecember31,2007.TheCompanyhasidentifiedonepartnershipandfourLLCsdescribedaboveasVIEs.Furthermore,itwasdeterminedthattheCompanyisnottheprimaryben-eficiaryoftheseVIEs.However,theCompanyownsasignificantvariableinterestintheseVIEs.TheseVIEshadassetsapproximating$200.4millionatDecem-ber31,2007.TheCompany’sexposuretolossfromtheseentitiesis$5.8million,whichisthevalueofitscapitalcontributionsatDecember31,2007.Note10ReceivablesfromandPayablestoBrokers,DealersandClearingOrganizationsAmountsreceivablefrombrokers,dealersandclearingorganizationsatDecember31,2007and2006included:(Dollarsinthousands)20072006Receivablearisingfromunsettledsecuritiestransactions,net$591$18,233Depositspaidforsecuritiesborrowed55,257271,028Receivablefromclearingorganizations7,0776,811Securitiesfailedtodeliver7,6471,674Other17,09615,128$87,668$312,874Amountspayabletobrokers,dealersandclearingorga-nizationsatDecember31,2007and2006included:(Dollarsinthousands)20072006Depositsreceivedforsecuritiesloaned$–$189,214Payabletoclearingorganizations12,64817,140Securitiesfailedtoreceive11,0214,531Other670$23,675$210,955DepositspaidforsecuritiesborrowedanddepositsreceivedforsecuritiesloaneddeclinedsignificantlyfromDecember31,2006astheCompanydiscontinueditsstockloanconduitbusinessinthefirstquarterof2007.Depositspaidforsecuritiesborrowedanddepositsreceivedforsecuritiesloanedapproximatethemarketvalueofthesecurities.SecuritiesfailedtodeliverandreceiverepresentthecontractvalueofsecuritiesthathavenotbeendeliveredorreceivedbytheCompanyonsettlementdate.Note11ReceivablesfromandPayablestoCustomersAmountsreceivablefromcustomersatDecember31included:(Dollarsinthousands)20072006Cashaccounts$80,099$27,407Marginaccounts44,23024,034Totalreceivables$124,329$51,441Securitiesownedbycustomersareheldascollateralformarginloanreceivables.Thiscollateralisnotreflectedontheconsolidatedfinancialstatements.Marginloanreceivablesearninterestatfloatinginterestratesbasedonprimerates.AmountspayabletocustomersatDecember31included:(Dollarsinthousands)20072006Cashaccounts$64,205$43,714Marginaccounts27,06740,185Totalpayables$91,272$83,899Payablestocustomersprimarilycomprisecertaincashbalancesincustomeraccountsconsistingofcustomerfundspendingsettlementofsecuritiestransactionsandcustomerfundsondeposit.Exceptforamountsarisingfromcustomershortsales,allamountspayabletocustomersaresubjecttowithdrawalbycustomersupontheirrequest.PiperJaffrayAnnualReport200747NotestoConsolidatedFinancialStatementsNote12CollateralizedSecuritiesTransactionsTheCompany’sfinancingandcustomersecuritiesactivitiesinvolvetheCompanyusingsecuritiesascol-lateral.Intheeventthatthecounterpartydoesnotmeetitscontractualobligationtoreturnsecuritiesusedascollateral,orcustomersdonotdepositadditionalsecu-ritiesorcashformarginwhenrequired,theCompanymaybeexposedtotheriskofreacquiringthesecuritiesorsellingthesecuritiesatunfavorablemarketpricesinordertosatisfyitsobligationstoitscustomersorcounterparties.TheCompanyseekstocontrolthisriskbymonitoringthemarketvalueofsecuritiespledgedorusedascollateralonadailybasisandrequiringadjust-mentsintheeventofexcessmarketexposure.Inthenormalcourseofbusiness,theCompanyobtainssecuritiespurchasedunderagreementstoresell,secu-ritiesborrowedandmarginagreementsontermsthatpermitittorepledgeorresellthesecuritiestoothers.TheCompanyobtainedsecuritieswithafairvalueofapproximately$152.1millionand$434.2millionatDecember31,2007and2006,respectively,ofwhich$51.6millionand$314.3million,respectively,hasbeeneitherpledgedorotherwisetransferredtoothersinconnectionwiththeCompany’sfinancingactivitiesortosatisfyitscommitmentsundertradingsecuritiessold,butnotyetpurchased.AtDecember31,2007,theCompany’ssecuritiessoldunderagreementstorepurchase(“RepurchaseLiabil-ities”)exceeded10percentoftotalassets.ThemajorityofRepurchaseLiabilitiesatDecember31,2007,con-sistedofmunicipalobligations.ThefollowingisasummaryofRepurchaseLiabilitiesasofDecember31,2007:(Dollarsinthousands)CarryingAmountofAssetsSoldRepurchaseLiabilitiesInterestRatesOvernightmaturity$48,690$46,3704.85%1-30daysmaturity204,200195,8455.13%-5.18%Ondemandmaturity5,1054,9873.25%-4.00%$257,995$247,202Note13TradingSecuritiesOwnedandTradingSecuritiesSold,butNotYetPurchasedTradingsecuritiesownedandtradingsecuritiessold,butnotyetpurchasedwereasfollows:DECEMBER31,(Dollarsinthousands)20072006Owned:Corporatesecurities:Equitysecurities$14,977$14,163Convertiblesecurities102,93859,118Fixedincomesecurities104,222235,120Asset-backedsecurities52,225158,108U.S.governmentsecurities4,52010,715Auctionratemunicipalsecurities202,50076,000Othermunicipalsecurities240,692288,160Othersecurities49,88225,142$771,956$866,526Sold,butnotyetpurchased:Corporatesecurities:Equitysecurities$66,856$31,452Convertiblesecurities4,7642,543Fixedincomesecurities26,31016,378Asset-backedsecurities25,75251,001U.S.governmentsecurities33,971109,719Municipalsecurities115Othersecurities18,5276,486$176,191$217,584AtDecember31,2007and2006,tradingsecuritiesownedintheamountof$242.2millionand$89.8mil-lion,respectively,hadbeenpledgedascollateralfortheCompany’srepurchaseagreements,securedborrow-ingsandsecuritiesloanedactivities.Tradingsecuritiessold,butnotyetpurchasedrepresentobligationsoftheCompanytodeliverthespecifiedsecurityatthecontractedprice,therebycreatingaliabilitytopurchasethesecurityinthemarketatpre-vailingprices.TheCompanyisobligatedtoacquirethesecuritiessoldshortatprevailingmarketprices,whichmayexceedtheamountreflectedontheconsolidatedstatementsoffinancialcondition.TheCompanyeco-nomicallyhedgeschangesinmarketvalueofitstradingsecuritiesownedutilizingtradingsecuritiessold,butnotyetpurchased,interestrateswaps,futuresandexchange-tradedoptions.48PiperJaffrayAnnualReport2007NotestoConsolidatedFinancialStatementsNote14GoodwillandIntangibleAssetsThefollowingtablepresentsthechangesinthecarryingvalueofgoodwillandintangibleassetsfortheyearendedDecember31,2007:(Dollarsinthousands)ContinuingOperationsDiscontinuedOperationsConsolidatedCompanyGoodwillBalanceatDecember31,2005$231,567$85,600$317,167Goodwillacquired–––GoodwilldisposedinPCSsale–(85,600)(85,600)Impairmentlosses–––BalanceatDecember31,2006231,567–231,567Goodwillacquired53,237–53,237Impairmentlosses–––BalanceatDecember31,2007$284,804$–$284,804IntangibleassetsBalanceatDecember31,2005$3,067$–$3,067Intangibleassetsacquired–––Amortizationofintangibleassets(1,600)–(1,600)Impairmentlosses–––BalanceatDecember31,20061,467–1,467Intangibleassetsacquired17,953–17,953Amortizationofintangibleassets(2,276)–(2,276)Impairmentlosses–––BalanceatDecember31,2007$17,144$–$17,144Theadditionofgoodwillandintangibleassetsduring2007werebasedonthepurchasepriceallocationsofFAMCOandGoldbond.TheCompanyexpects$34.1millionofgoodwillacquiredin2007tobedeductiblefortaxpurposes.Thepurchasepriceallo-cationofFAMCOidentified$18.0millionofintangi-bleassets,consistingprincipallyofassetmanagementcontractualrelationships,thatwillbeamortizedoveraweightedaveragelifeof8.8years.Thefollowingtablepresentstheaggregateintangibleassetamortizationexpensefortheyearsended:(Dollarsinthousands)2008$2,62220092,45620102,31220112,17720121,804Thereafter5,773$17,144Note15FixedAssetsThefollowingisasummaryoffixedassetsasofDecem-ber31,2007and2006:(Dollarsinthousands)20072006Furnitureandequipment$41,730$38,514Leaseholdimprovements22,15518,518Software18,80715,601Projectsinprocess241,259Total82,71673,892Lessaccumulateddepreciationandamortization(55,508)(48,603)$27,208$25,289FortheyearsendedDecember31,2007,2006and2005,depreciationandamortizationoffurnitureandequipment,softwareandleaseholdimprovementsforcontinuingoperationstotaled$9.1million,$9.5millionand$11.4million,respectively,andareincludedinoccupancyandequipmentontheconsolidatedstate-mentsofoperations.PiperJaffrayAnnualReport200749NotestoConsolidatedFinancialStatementsNote16FinancingTheCompanyhasdiscretionaryshort-termfinancingavailableonbothasecuredandunsecuredbasis.Inaddition,theCompanyhasestablishedarrangementstoobtainfinancingusingascollateraltheCompany’ssecuritiesheldbyitsclearingbankandbyanotherbrokerdealerattheendofeachbusinessday.Repur-chaseagreementsandsecuritiesloanedtootherbrokerdealersarealsousedassourcesoffunding.TheCompany’sshort-termfinancingbearsinterestatratesbasedonthefederalfundsrate.AtDecember31,2007and2006,theweightedaverageinterestrateonborrowingswas5.41percentand5.72percent,respec-tively.AtDecember31,2007and2006,noformalcompensatingbalanceagreementsexisted,andtheCompanywasincompliancewithalldebtcovenantsrelatedtothesefacilities.OnDecember31,2007,theCompanyenteredintoanagreementwherebyathirdpartyhasagreedtoprovideupto$50millionintemporarysubordinateddebtuponapprovalbytheFinancialIndustryRegulatoryAuthor-ity(“FINRA”).Note17Contingencies,CommitmentsandGuaranteesLEGALCONTINGENCIESTheCompanyhasbeennamedasadefendantinvariouslegalproceedingsarisingprimarilyfromsecuritiesbro-kerageandinvestmentbankingactivities,includingcer-tainclassactionsthatprimarilyallegeviolationsofsecuritieslawsandseekunspecifieddamages,whichcouldbesubstantial.Also,theCompanyisinvolvedfromtimetotimeininvestigationsandproceedingsbygovernmentalagenciesandself-regulatoryorganizations.TheCompanyhasestablishedreservesforpotentiallossesthatareprobableandreasonablyestimablethatmayresultfrompendingandpotentialcomplaints,legalactions,investigationsandproceedings.InadditiontotheCompany’sestablishedreserves,U.S.Bancorp,fromwhomtheCompanyspun-offonDecember31,2003,hasagreedtoindemnifytheCompanyinanamountupto$17.5millionforcertainlegalandregulatorymatters.Approximately$13.2millionofthisamountremainedavailableasofDecember31,2007.AspartoftheassetpurchaseagreementbetweenUBSandtheCompanyforthesaleofthePCSbranchnet-work,UBSagreedtoassumecertainliabilitiesofthePCSbusiness,includingcertainliabilitiesandobliga-tionsarisingfromlitigation,arbitration,customercomplaintsandotherclaimsrelatedtothePCSbusi-ness.Incertaincases,wehaveagreedtoindemnifyUBSforlitigationmattersafterUBShasincurredcostsof$6.0millionrelatedtothesematters.Inaddition,wehaveretainedliabilitiesarisingfromregulatorymattersandcertainlitigationrelatingtothePCSbusinesspriortothesale.Theamountofexposureinexcessofthe$6.0millionindemnificationthresholdandforotherPCSlitigationmattersdeemedtobeprobableandreasonablyestimableareincludedintheCompany’sestablishedreserves.AdjustmentstolitigationreservesformatterspertainingtothePCSbusinessareincludedwithindiscontinuedoperationsontheconsolidatedstatementsofoperations.Givenuncertaintiesregardingthetiming,scope,vol-umeandoutcomeofpendingandpotentiallitigation,arbitrationandregulatoryproceedingsandotherfac-tors,theamountsofreservesaredifficulttodetermineandofnecessitysubjecttofuturerevision.Subjecttotheforegoing,managementoftheCompanybelieves,basedonitscurrentknowledge,afterconsultationwithoutsidelegalcounselandaftertakingintoaccountitsestablishedreserves,theU.S.Bancorpindemnityagree-ment,theassumptionbyUBSofcertainliabilitiesofthePCSbusinessandourindemnificationobligationstoUBS,thatpendinglegalactions,investigationsandproceedingswillberesolvedwithnomaterialadverseeffectontheconsolidatedfinancialconditionoftheCompany.However,ifduringanyperiodapotentialadversecontingencyshouldbecomeprobableorresolvedforanamountinexcessoftheestablishedreservesand/ortheU.S.Bancorpindemnification,theresultsofoperationsinthatperiodcouldbemateriallyadverselyaffected.Litigation-relatedreserveactivityforcontinuingoper-ationsincludedwithinotheroperatingexpensesresultedinabenefitof$4.4million,abenefitof$21.4million,andanexpenseof$3.5millionfortheyearsendedDecember31,2007,2006and2005,respectively.OPERATINGLEASECOMMITMENTSTheCompanyleasesofficespacethroughouttheUnitedStatesandinalimitednumberofforeigncoun-trieswheretheCompany’sinternationaloperationsreside.TheCompany’sonlymaterialleaseisforitscorporateheadquarterslocatedinMinneapolis,Min-nesota.Aggregateminimumleasecommitmentsunder50PiperJaffrayAnnualReport2007NotestoConsolidatedFinancialStatementsoperatingleasesasofDecember31,2007areasfollows:(Dollarsinthousands)2008$15,128200915,281201014,391201111,642201210,454Thereafter17,813$84,709Totalminimumrentalstobereceivedfrom2008through2014undernoncancelablesubleaseswere$20.5millionatDecember31,2007.Rentalexpense,includingoperatingcostsandrealestatetaxes,chargedtocontinuingoperationswas$15.4million,$13.7millionand$13.5millionfortheyearsendedDecember31,2007,2006and2005,respectively.FUNDCOMMITMENTSAsofDecember31,2007,theCompanyhadcommit-mentstoinvestapproximately$4.9millioninlimitedpartnershipsthatmakeinvestmentsinprivateequityandventurecapitalfunds.Thecommitmentswillbefunded,ifcalled,throughtheendoftherespectiveinvestmentperiodsrangingfrom2008to2011.OTHERCOMMITMENTSTheCompanyisamemberofnumerousexchangesandclearinghouses.Underthemembershipagreementswiththeseentities,membersgenerallyarerequiredtoguaranteetheperformanceofothermembers,andifamemberbecomesunabletosatisfyitsobligationstotheclearinghouse,othermemberswouldberequiredtomeetshortfalls.Tomitigatetheseperformancerisks,theexchangesandclearinghousesoftenrequiremem-berstopostcollateral.TheCompany’smaximumpotentialliabilityunderthesearrangementscannotbequantified.However,managementbelievesthelike-lihoodthattheCompanywouldberequiredtomakepaymentsunderthesearrangementsisremote.Accord-ingly,noliabilityisrecordedintheconsolidatedfinan-cialstatementsforthesearrangements.REIMBURSEMENTGUARANTEETheCompanyhascontractedwithamajorthird-partyfinancialinstitutiontoactastheliquidityproviderfortheCompany’stenderoptionbondsecuritizedtrusts.TheCompanyhasagreedtoreimbursethispartyforanylossesassociatedwithprovidingliquiditytothetrusts.ThemaximumexposuretolossatDecember31,2007was$299.3millionrepresentingtheoutstandingamountofalltrustcertificates.Thisexposuretolossismitigatedbytheunderlyingbondsinthetrusts.Thesebondshadamarketvalueofapproximately$310.7mil-lionatDecember31,2007.AtDecember31,2007,$300.2millionofthesebondswereinsuredagainstdefaultofprincipalorinterestbytriple-Aratedmono-linebondinsurancecompanies.Onetrustrepresenting$10.5millioninbondsdoesnothavecreditenhance-ment,however,theunderlyingmunicipalitywasrateddouble-AatDecember31,2007.Themunicipalitiesthatissuedbondswehavesecuritizedallhaveinvest-mentgradecreditratingsandover90percentarerated“A”orhigher.TheCompanybelievesthelikelihooditwillberequiredtofundthereimbursementagreementobligationunderanyprovisionofthearrangementisremote,andaccordingly,noliabilityforsuchguaranteehasbeenrecordedintheaccompanyingconsolidatedfinancialstatements.CONCENTRATIONOFCREDITRISKTheCompanyprovidesinvestment,capital-raisingandrelatedservicestoadiversegroupofdomesticandforeigncustomers,includinggovernments,corpora-tions,andinstitutionalandindividualinvestors.TheCompany’sexposuretocreditriskassociatedwiththenon-performanceofcustomersinfulfillingtheircon-tractualobligationspursuanttosecuritiestransactionscanbedirectlyimpactedbyvolatilesecuritiesmarkets,creditmarketsandregulatorychanges.Thisexposureismeasuredonanindividualcustomerbasisandonagroupbasisforcustomersthatsharesimilarattributes.Toalleviatethepotentialforriskconcentrations,coun-terpartycreditlimitshavebeenimplementedforcertainproductsandarecontinuallymonitoredinlightofchangingcustomerandmarketconditions.AsofDecember31,2007and2006,theCompanydidnothavesignificantconcentrationsofcreditriskwithanyonecustomerorcounterparty,oranygroupofcustom-ersorcounterparties.Note18RestructuringTheCompanyincurredpre-taxrestructuringcostsof$60.7millionin2006inconnectionwiththesaleoftheCompany’sPCSbranchnetworktoUBS.TheexpensewasincurreduponimplementationofaspecificrestructuringplantoreorganizetheCompany’ssup-portinfrastructureasaresultofthesale.PiperJaffrayAnnualReport200751NotestoConsolidatedFinancialStatementsThecomponentsofthischargeareshownbelow:(Dollarsinthousands)Severanceandemployee-related$23,063Leaseterminationsandassetwrite-downs26,484Contractterminationcosts11,177Total$60,724Therestructuringchargesincludedthecostofsever-ance,benefits,outplacementcostsandequityawardacceleratedvestingcostsassociatedwiththetermina-tionofemployees.Theseveranceamountsweredeter-minedbasedonaone-timeseverancebenefitenhancementtotheCompany’sexistingseverancepayprograminplaceatthetimeofterminationnoti-ficationandwerepaidoutoverabenefitperiodofuptooneyearfromthetimeoftermination.Approximately295employeesreceivedaseverancepackage.Inaddi-tion,theCompanyincurredrestructuringchargesforcontractterminationcostsrelatedtothereductionofofficespaceandthemodificationoftechnologycon-tracts.ContractterminationfeesaredeterminedbasedontheprovisionsofStatementofFinancialAccountingStandardsNo.146,“AccountingforCostsAssociatedwithExitorDisposalActivities,”whichrequirestherecognitionofaliabilityforcontractterminationunderacease-usedateconcept.Paymentsrelatedtotermi-natedleasecontractscontinuethroughtheoriginaltermsoftheleases,whichrunforvariousperiods,withthelongestleasetermrunningthrough2016.TheCompanyalsoincurredrestructuringchargesfortheimpairmentordisposaloflong-livedassetsdeterminedinaccordancewithSFAS144.AllrestructuringcostsrelatedtothesaleofthePCSbranchnetworkareincludedwithindiscontinuedoperationsinaccordancewithSFAS144.TheCompanyincurredapre-taxrestructuring-relatedexpenseof$8.6millionin2005.TheexpensewasincurredtorestructuretheCompany’soperationsasameanstobetteralignitscostinfrastructurewithitsrevenues.TheCompanydeterminedrestructuringchargesandrelatedaccrualsbasedonaspecificfor-mulatedplan.Thecomponentsofthischargeareshownbelow:(Dollarsinthousands)Severanceandemployee-related$4,886Leaseterminationsandassetwrite-downs3,709Total$8,595Severanceandemployee-relatedchargesincludedthecostofseverance,otherbenefitsandoutplacementcostsassociatedwiththeterminationofemployees.TheseveranceamountsweredeterminedbasedontheCompany’sseverancepayprograminplaceatthetimeoftermination.Approximately100employeesreceivedseverance.Leaseterminationsandassetwrite-downsrepresentedcostsassociatedwithredundantofficespaceandequip-mentdisposedofaspartoftherestructuringplan.Paymentsrelatedtoterminatedleasecontractscon-tinuethroughtheoriginaltermsoftheleases,whichrunforvariousperiods,withthelongestleasetermrunningthrough2014.Thefollowingtablepresentsasummaryofactivitywithrespecttotherestructuring-relatedliabilitiesincludedwithinotherliabilitiesandaccruedexpenseonthestatementsoffinancialcondition.(Dollarsinthousands)PCSRestructure2005RestructureBalanceatDecember31,2004$–$–Provisionchargedtooperatingexpense–8,595Cashoutlays–(4,432)Non-cashwrite-downs–(1,138)BalanceatDecember31,2005–3,025Provisionchargedtodiscontinuedoperations60,724–Cashoutlays(28,903)(1,599)Non-cashwrite-downs(3,238)(190)BalanceatDecember31,200628,5831,236Recoveryofprovisionchargedtodiscontinuedoperations(118)–Cashoutlays(13,501)(628)Non-cashwrite-downs(398)–BalanceatDecember31,2007$14,566$608Note19Shareholders’EquityThecertificateofincorporationofPiperJaffrayCom-paniesprovidesfortheissuanceofupto100,000,000sharesofcommonstockwithaparvalueof$0.01pershareandupto5,000,000sharesofundesignatedpreferredstockwithaparvalueof$0.01pershare.COMMONSTOCKTheholdersofPiperJaffrayCompaniescommonstockareentitledtoonevotepershareonallmatterstobevoteduponbytheshareholders.SubjecttopreferencesthatmaybeapplicabletoanyoutstandingpreferredstockofPiperJaffrayCompanies,theholdersofitscommonstockareentitledtoreceiveratablysuch52PiperJaffrayAnnualReport2007NotestoConsolidatedFinancialStatementsdividends,ifany,asmaybedeclaredfromtimetotimebythePiperJaffrayCompaniesboardofdirectorsoutoffundslegallyavailableforthatpurpose.IntheeventthatPiperJaffrayCompaniesisliquidatedordissolved,theholdersofitscommonstockareentitledtoshareratablyinallassetsremainingafterpaymentofliabil-ities,subjecttoanypriordistributionrightsofPiperJaffrayCompaniespreferredstock,ifany,thenoutstanding.Theholdersofthecommonstockhavenopreemptiveorconversionrightsorothersubscriptionrights.Therearenoredemptionorsinkingfundpro-visionsapplicabletoPiperJaffrayCompaniescommonstock.PiperJaffrayCompaniesdoesnotintendtopaycashdividendsonitscommonstockfortheforeseeablefuture.Instead,PiperJaffrayCompaniesintendstoretainallavailablefundsandanyfutureearningsforuseintheoperationandexpansionofitsbusinessandtorepurchaseoutstandingcommonstocktotheextentauthorizedbyitsboardofdirectors.Additionally,assetforthinNote24,therearedividendrestrictionsonPiperJaffray.DuringtheyearendedDecember31,2007,theCom-panyreissued8,619commonsharesoutoftreasuryinfulfillmentof$0.6millioninobligationsunderthePiperJaffrayCompaniesRetirementPlan(“RetirementPlan”)andreissued253,050commonsharesoutoftreasuryasaresultofvestingandexercisetransactionsunderthePiperJaffrayCompaniesAmendedandRestated2003AnnualandLong-TermIncentivePlan(the“Long-TermIncentivePlan”).DuringtheyearendedDecember31,2006,theCompanyreissued190,966commonsharesoutoftreasuryinfulfillmentof$9.0millioninobligationsundertheRetirementPlan.TheCompanyalsoreissued76,858commonsharesoutoftreasuryasaresultofvestingandexercisetransactionsundertheLong-TermIncentivePlan.Inthethirdquarterof2006,theCompany’sboardofdirectorsauthorizedtherepurchaseofupto$180.0mil-lionincommonsharesthroughDecember31,2007.TheCompanyexecutedanacceleratedstockrepur-chaseunderthisauthorizationrepurchasing1.6millionsharesoftheCompany’sstockatanaveragepriceof$60.66pershareforanaggregatepurchasepriceof$100millionduring2006.DuringtheyearendedDecember31,2007,theCompanyrepurchasedanadditional1.6millionsharesoftheCompany’scom-monstockatanaveragepriceof$50.28pershareforanaggregatepurchasepriceof$80.0million.Thisrepurchaseactivitycompletedthe$180.0millionsharerepurchaseauthorization.PREFERREDSTOCKThePiperJaffrayCompaniesboardofdirectorshastheauthority,withoutactionbyitsshareholders,todesig-nateandissuepreferredstockinoneormoreseriesandtodesignatetherights,preferencesandprivilegesofeachseries,whichmaybegreaterthantherightsasso-ciatedwiththecommonstock.Itisnotpossibletostatetheactualeffectoftheissuanceofanysharesofpre-ferredstockupontherightsofholdersofcommonstockuntilthePiperJaffrayCompaniesboardofdirec-torsdeterminesthespecificrightsoftheholdersofpreferredstock.However,theeffectsmightinclude,amongotherthings,thefollowing:restrictingdivi-dendsonitscommonstock,dilutingthevotingpowerofitscommonstock,impairingtheliquidationrightsofitscommonstockanddelayingorpreventingachangeincontrolofPiperJaffrayCompanieswithoutfurtheractionbyitsshareholders.RIGHTSAGREEMENTPiperJaffrayCompanieshasadoptedarightsagree-ment.TheissuanceofashareofPiperJaffrayCompa-niescommonstockalsoconstitutestheissuanceofapreferredstockpurchaserightassociatedwithsuchshare.Theserightsareintendedtohaveanti-takeovereffectsinthattheexistenceoftherightsmaydeterapotentialacquirerfrommakingatakeoverproposaloratenderofferforPiperJaffrayCompaniesstock.Note20EarningsPerShareBasicearningspercommonshareiscomputedbydivid-ingnetincomebytheweightedaveragenumberofcommonsharesoutstandingfortheperiod.Dilutedearningspercommonshareiscalculatedbyadjustingtheweightedaverageoutstandingsharestoassumeconversionofallpotentiallydilutiverestrictedstockandstockoptions.Thecomputationofearningspershareisasfollows:PiperJaffrayAnnualReport200753NotestoConsolidatedFinancialStatementsYEARENDEDDECEMBER31,(Amountsinthousands,exceptpersharedata)200720062005Netincome$42,216$235,253$40,083Sharesforbasicanddilutedcalculations:Averagesharesusedinbasiccomputation16,47418,00218,813Stockoptions104894Restrictedstock777877264Averagesharesusedindilutedcomputation17,35518,96819,081Earningspershare:Basic$2.56$13.07$2.13Diluted$2.43$12.40$2.10TheCompanyhasexcluded0.6millionofoptionstopurchasesharesofcommonstockfromitscalculationofdilutedearningspersharefortheperiodendedDecember31,2005,astheyrepresentedanti-dilutivestockoptions.Therewerenoanti-dilutiveeffectsfromstockoptionsorrestrictedstockfortheperiodsendedDecember31,2007and2006.Note21EmployeeBenefitPlansTheCompanyhasvariousemployeebenefitplans,andsubstantiallyallemployeesarecoveredbyatleastoneplan.Theplansincludeatax-qualifiedretirementplan,anon-qualifiedretirementplan,apost-retirementben-efitplan,andhealthandwelfareplans.DuringtheyearsendedDecember31,2007,2006and2005,theCompanyincurredemployeebenefitexpensesfromcontinuingoperationsof$10.7million,$9.4millionand$10.7million,respectively.RETIREMENTPLANTheRetirementPlanpreviouslyhadtwocomponents:adefinedcontributionretirementsavingsplanandatax-qualified,non-contributoryprofit-sharingplan.Effec-tiveJanuary1,2007,theprofitsharingcomponentoftheretirementplanwasterminated.Therewerenoprofitsharingcontributionsmadein2007or2006.TheCompanyincurred$1.6millionofcontinuingoperationsexpenserelatedtoprofit-sharingcontribu-tionsin2005.Thedefinedcontributionretirementsavingsplanallowsqualifiedemployees,attheiroption,tomakecontributionsthroughsalarydeductionsunderSec-tion401(k)oftheInternalRevenueCode.Employeecontributionsare100percentmatchedbytheCom-panytoamaximumof6percentofrecognizedcom-pensationuptothesocialsecuritytaxablewagebase.AlthoughtheCompany’smatchingcontributionvestsimmediately,aparticipantmustbeemployedonDecember31toreceivethatyear’smatchingcontribu-tion.ThematchingcontributioncanbemadeincashorPiperJaffrayCompaniescommonstock,intheCom-pany’sdiscretion.PENSIONANDPOST-RETIREMENTMEDICALPLANSCertainemployeesparticipateinthePiperJaffrayCom-paniesNon-QualifiedRetirementPlan,anunfunded,non-qualifiedcashbalancepensionplan.TheCom-panyfrozetheplaneffectiveJanuary1,2004,therebyeliminatingfuturebenefitsrelatedtopayincreasesandexcludingnewparticipantsfromtheplan.In2006,theCompanyadoptedtherecognitionanddisclosureprovisionsofStatementofFinancialAccountingStandardNo.158,“Employers’Account-ingforDefinedBenefitPensionandOtherPostretire-mentPlans—anamendmentofFASBStatementsNo.87,88,106and123(R)”(“SFAS158”).SFAS158requirestheCompanytorecognizethefundedstatusofitspensionandpost-retirementmedicalplansintheconsolidatedstatementsoffinancialconditionwithacorrespondingadjustmenttoaccumulatedothercom-prehensiveincome,netoftax.Theadjustmenttoaccu-mulatedothercomprehensiveincomeatadoptionrepresentedthenetunrecognizedactuariallossesandunrecognizedpriorservicecostswhichwerepreviouslynettedagainsteachplan’sfundedstatusintheCompa-ny’sconsolidatedstatementoffinancialconditionpur-suanttotheprovisionsofStatementofFinancialAccountingStandardNo.87,“Employers’AccountingforPensions”(“SFAS87”).Theseamountsareamor-tizedasacomponentofnetperiodicbenefitcost.Fur-ther,actuarialgainsandlossesthatariseinsubsequentperiodsandarenotrecognizedasnetperiodicbenefitcostinthesameperiodsarerecognizedasacomponentofothercomprehensiveincome.Theseamountsareamortizedasacomponentofnetperiodicbenefitcostonthesamebasisastheamountsrecognizedinaccu-mulatedothercomprehensiveincomeinaccordancewithSFAS158.TheadoptionofSFAS158hadno54PiperJaffrayAnnualReport2007NotestoConsolidatedFinancialStatementsimpactontheCompany’spensionbenefitliabilitiesandanimmaterialimpactontheCompany’spost-retire-mentmedicalbenefitliabilitiesin2006.In2006and2005,theCompanypaidoutamountsunderthepensionplanthatexceededitsserviceandinterestcost.ThesepayoutstriggeredsettlementaccountingunderStatementofFinancialAccountingStandardNo.88,“Employers’AccountingforSettle-mentsandCurtailmentsofDefinedBenefitPensionPlansandforTerminationBenefits”(“SFAS88”),whichresultedinrecognitionofpre-taxsettlementlossesof$2.1millionand$1.2millionin2006and2005,respectively.AllemployeesoftheCompanywhomeetdefinedageandservicerequirementsareeligibletoreceivepost-retirementhealthcarebenefitsprovidedunderapost-retirementbenefitplanestablishedbytheCompanyin2004.Theestimatedcostoftheseretireehealthcarebenefitsisaccruedduringtheemployees’activeservice.InconnectionwiththesaleoftheCompany’sPCSbranchnetworkin2006,theCompanyrecognizeda$1.9millioncurtailmentgainwithindiscontinuedoperationsrelatedtothereductionofpost-retirementhealthplanparticipants.TheCompanyusesaSeptember30measurementdateforthepensionandpost-retirementbenefitplans.Financialinformationonchangesinbenefitobligation,fairvalueofplanassetsandthefundedstatusofthepensionandpost-retirementbenefitplansasofDecem-ber31,2007and2006,isasfollows:(Dollarsinthousands)2007200620072006PensionBenefitsPost-RetirementMedicalBenefitsChangeinbenefitobligation:Benefitobligation,atOctober1ofprioryear$11,817$27,550$431$2,012Servicecost––69295Interestcost7071,38326102Planparticipants’contributions––9664Netactuarialloss(gain)127(172)19(155)Curtailmentgain–––(1,750)Settlementgain–(2,170)––Benefitspaid(412)(14,774)(118)(137)BenefitobligationatSeptember30$12,239$11,817$523$431Changeinplanassets:FairvalueofplanassetsatOctober1ofprioryear$–$–$–$–Actualreturnonplanassets––––Employercontributions41214,7742274Planparticipants’contributions––9663Benefitspaid(412)(14,774)(118)(137)FairvalueofplanassetsatSeptember30$–$–$–$–FundedstatusatSeptember30$(12,239)$(11,817)$(523)$(431)Employerfourthquartercontributions(174)(226)(45)(27)Benefitspaidinfourthquarter198094054Amountsrecognizedintheconsolidatedstatementsoffinancialcondition$(12,394)$(11,234)$(528)$(404)Componentsofaccumulatedothercomprehensive(income)loss,netoftax:Netactuarialloss$1,148$980$57$41Priorservicecredits––(46)(58)TotalatDecember31$1,148$980$11$(17)PiperJaffrayAnnualReport200755NotestoConsolidatedFinancialStatementsThecomponentsofthenetperiodicbenefitscostsfortheyearsendedDecember31,2007,2006and2005,areasfollows:(Dollarsinthousands)200720062005200720062005PensionBenefitsPost-RetirementMedicalBenefitsServicecost$–$–$–$69$295$306Interestcost7071,3831,6432610299Amortizationofpriorservicecredit–––(20)(58)(64)Amortizationofnetloss423763952213Netperiodicbenefitcost$749$1,759$2,038$77$341$354SFAS88eventloss/(gain)(328)2,0861,168–(1,947)–Totalexpense/(benefit)fortheyear$421$3,845$3,206$77$(1,606)$354Amortizationexpenseofnetactuariallossesexpectedtoberecognizedduring2008isapproximately$65,000and$3,000forthepensionplanandpost-retirementmedicalplan,respectively.Inaddition,thepost-retire-mentmedicalplanexpectstorecognizeacreditof$20,000in2008fortheamortizationofpriorservicecredits.Theassumptionsusedinthemeasurementofourben-efitobligationsareasfollows:2007200620072006PensionBenefitsPost-RetirementBenefitsDiscountrateusedtodetermineyear-endobligation6.50%6.25%6.50%6.25%Discountrateusedtodeterminefiscalyearexpense6.25%5.87%6.25%5.87%Expectedlong-termrateofreturnonparticipantbalances6.50%6.50%N/AN/ARateofcompensationincreaseN/AN/AN/AN/A20072006Healthcarecosttrendrateassumedfornextyear(pre-medicare/post-medicare)7.5%/9.0%8.0%/10.0%Ratetowhichthecosttrendrateisassumedtodecline(theultimatetrendrate)(pre-medicare/post-medicare)5.0%/5.0%5.0%/5.0%Yearthattheratereachestheultimatetrendrate(pre-medicare/post-medicare)2012/20132012/2013Aone-percentage-pointchangeintheassumedhealthcarecosttrendrateswouldnothaveamaterialeffectontheCompany’spost-retirementbenefitobligationsornetperiodicpost-retirementbenefitcost.Thepensionplanandpost-retirementmedicalplandonothaveassetsandarenotfunded.Pensionandpost-retirementbenefitpayments,whichreflectexpectedfutureservice,areexpectedtobepaidasfollows:(Dollarsinthousands)PensionBenefitsPost-RetirementBenefits2008$1,404$962009971742010940472011906432012888442013to20174,349393$9,458$697HEALTHANDWELFAREPLANSCompanyemployeeswhomeetcertainworkscheduleandservicerequirementsareeligibletoparticipateintheCompany’shealthandwelfareplans.TheCompanysubsidizesthecostofcoverageforemployees.Themedicalplancontainscost-sharingfeaturessuchasdeductiblesandcoinsurance.56PiperJaffrayAnnualReport2007NotestoConsolidatedFinancialStatementsNote22Stock-BasedCompensationandCashAwardProgramTheCompanymaintainsonestock-basedcompensationplan,theLong-TermIncentivePlan.Theplanpermitsthegrantofequityawards,includingnon-qualifiedstockoptionsandrestrictedstock,totheCompany’semploy-eesanddirectorsforupto4.5millionsharesofcommonstock.TheCompanyperiodicallygrantssharesofrestrictedstockandoptionstopurchasePiperJaffrayCompaniescommonstocktoemployeesandgrantsoptionstopurchasePiperJaffrayCompaniescommonstockandsharesofPiperJaffrayCompaniescommonstocktoitsnon-employeedirectors.TheCompanybelievesthatsuchawardshelpaligntheinterestsofemployeesanddirectorswiththoseofshareholdersandserveasanemployeeretentiontool.Theawardsgrantedtoemployeesgenerallyhavethree-yearcliffvestingperiods.Thedirectorawardsarefullyvestedupongrant.Themaximumtermofthestockoptionsgrantedtoemployeesanddirectorsistenyears.TheplanprovidesforacceleratedvestingofoptionandrestrictedstockawardsifthereisachangeincontroloftheCompany(asdefinedintheplan),intheeventofaparticipant’sdeath,andatthediscretionofthecompen-sationcommitteeoftheCompany’sboardofdirectors.PriortoJanuary1,2006,theCompanyaccountedforstock-basedcompensationunderthefairvaluemethodofaccountingasprescribedbySFAS123,asamendedbySFAS148.Assuch,theCompanyrecordedstock-basedcompensationexpenseintheconsolidatedstate-mentsofoperationsatfairvalue,netofestimatedforfeitures.EffectiveJanuary1,2006,theCompanyadoptedtheprovisionsofSFAS123(R)usingthemodifiedprospec-tivetransitionmethod.SFAS123(R)requiresallshare-basedpaymentstoemployees,includinggrantsofemployeestockoptions,toberecognizedinthestate-mentsofoperationsbasedonfairvalue,netofesti-matedforfeitures.BecausetheCompanyhistoricallyexpensedallequityawardsbasedonthefairvaluemethod,netofestimatedforfeitures,SFAS123(R)didnothaveamaterialeffectontheCompany’smea-surementorrecognitionmethodsforstock-basedcompensation.EmployeeanddirectorstockoptionsgrantedpriortoJanuary1,2006,wereexpensedbytheCompanyonastraight-linebasisovertheoptionvestingperiod,basedontheestimatedfairvalueoftheawardonthedateofgrantusingaBlack-Scholesoption-pricingmodel.EmployeeanddirectorstockoptionsgrantedafterJanuary1,2006,areexpensedbytheCompanyonastraight-linebasisovertherequiredserviceperiod,basedontheestimatedfairvalueoftheawardonthedateofgrantusingaBlack-Scholesoption-pricingmodel.AtthetimeitadoptedSFAS123(R),theCom-panychangedtheexpensingperiodfromthevestingperiodtotherequiredserviceperiod,whichshortenedtheperiodoverwhichoptionsareexpensedforemploy-eeswhoareretiree-eligibleonthedateofgrantorbecomeretiree-eligibleduringthevestingperiod.ThenumberofemployeesthatfellwithinthiscategoryatJanuary1,2006wasnotmaterial.InaccordancewithSECguidelines,theCompanydidnotaltertheexpenserecordedinconnectionwithprioroptiongrantsforthechangeintheexpensingperiod.EmployeerestrictedstockgrantspriortoJanuary1,2006,areamortizedonastraight-linebasisoverthevestingperiodbasedonthemarketpriceofPiperJaffrayCompaniescommonstockonthedateofgrant.RestrictedstockgrantsafterJanuary1,2006,areval-uedatthemarketpriceoftheCompany’scommonstockonthedateofgrantandamortizedonastraight-linebasisovertherequiredserviceperiod.ThemajorityoftheCompany’srestrictedstockgrantsprovideforcontinuedvestingaftertermination,solongastheemployeedoesnotviolatecertainpost-terminationrestrictions,assetforthintheawardagreementsoranyagreementsenteredintoupontermination.TheCompanyconsiderstherequiredserviceperiodtobethegreaterofthevestingperiodorthepost-terminationrestrictedperiod.TheCompanybelievesthatthepost-terminationrestrictionsmeettheSFAS123(R)defini-tionofasubstantiveservicerequirement.TheCompanyrecordedcompensationexpense,netofestimatedforfeitures,withincontinuingoperationsof$27.2million,$20.8millionand$13.8millionfortheyearsendedDecember31,2007,2006and2005,respectively,relatedtoemployeestockoptionandrestrictedstockgrantsand$0.3millioninoutsideser-vicesexpenserelatedtodirectorstockoptiongrantsforeach2006and2005.Thetaxbenefitrelatedtothetotalcompensationcostforstock-basedcompensationarrangementstotaled$10.4million,$8.1millionand$5.4millionfortheyearsendedDecember31,2007,2006and2005,respectively.InconnectionwiththesaleoftheCompany’sPCSbranchnetwork,theCompanyundertookaplantosignificantlyrestructuretheCompany’ssupportinfra-structure.TheCompanyacceleratedtheequityawardvestingforemployeesterminatedaspartofthisrestruc-turing.TheaccelerationofequityawardswasdeemedtobeamodificationoftheawardsasdefinedbySFAS123(R).FortheyearendedDecember31,2006,theCompanyrecorded$2.7millionofexpenseindiscontinuedoperationsrelatedtothemodificationofequityawardstoaccelerateservicevesting.UnvestedPiperJaffrayAnnualReport200757NotestoConsolidatedFinancialStatementsequityawardsrelatedtoemployeestransferringtoUBSaspartofthePCSsalewerecanceled.SeeNotes4and18forfurtherdiscussionoftheCompany’sdiscontin-uedoperationsandrestructuringactivities.ThefairvalueofeachstockoptionisestimatedonthedateofgrantusingtheBlack-Scholesoption-pricingmodel,whichisbasedonassumptionssuchastherisk-freeinterestrate,thedividendyield,theexpectedvol-atilityandtheexpectedlifeoftheoption.Therisk-freeinterestrateassumptionisderivedfromtheU.S.trea-surybillratewithamaturityequaltotheexpectedlifeoftheoption.Thedividendyieldassumptionisderivedfromtheassumeddividendpayoutovertheexpectedlifeoftheoption.Theexpectedvolatilityassumptionfor2007grantsisderivedfromacombinationofCompanyhistoricaldataandindustrycomparisons.TheCompanyhasonlybeenapubliclytradedcompanyforapproximately48months;therefore,itdoesnothavesufficienthistoricaldatatodetermineanappro-priateexpectedvolatilitysolelyfromtheCompany’sownhistoricaldata.Theexpectedlifeassumptionisbasedonanaverageofthefollowingtwofactors:1)industrycomparisons;and2)theguidanceprovidedbytheSECinStaffAccountingBulletinNo.107,(“SAB107”).SAB107allowstheuseofan“accept-able”methodologyunderwhichtheCompanycantakethemidpointofthevestingdateandthefullcontractualterm.ThefollowingtableprovidesasummaryofthevaluationassumptionsusedbytheCompanytodeter-minetheestimatedvalueofstockoptiongrantsinPiperJaffrayCompaniescommonstockforthetwelvemonthsendedDecember31:Weightedaverageassumptionsinoptionvaluation:20072006(1)2005Risk-freeinterestrates4.68%4.64%3.77%Dividendyield0.00%0.00%0.00%Stockvolatilityfactor32.20%39.35%38.03%Expectedlifeofoptions(inyears)6.005.535.83Weightedaveragefairvalueofoptionsgranted$28.57$22.92$16.58(1)2006weightedaverageassumptionsexcludetheassumptionsutilizedinequityawardmodificationsrelatedtothesaleoftheCompany’sPCSbranchnetworktoaidcomparabilitybetweenyears.ThefollowingtablesummarizesthechangesintheCompany’soutstandingstockoptionsfortheyearsendedDecember31,2007,2006and2005:OptionsOutstandingWeightedAverageExercisePriceWeightedAverageRemainingContractualTerm(Years)AggregateIntrinsicValueDecember31,2004296,030$47.509.1$133,214Granted426,35238.78Exercised––Canceled(79,350)42.91December31,2005643,032$42.298.7$–Granted50,56053.16Exercised(31,562)41.64Canceled(151,849)42.82December31,2006510,181$43.257.8$11,172,964Granted35,64170.13Exercised(51,170)46.92Canceled(23,937)41.09December31,2007470,715$44.997.1$624,215OptionsexercisableatDecember31,200554,041$37.188.9$174,012OptionsexercisableatDecember31,200659,623$44.167.9$1,251,487OptionsexercisableatDecember31,2007182,120$46.326.5$–58PiperJaffrayAnnualReport2007NotestoConsolidatedFinancialStatementsAdditionalinformationregardingPiperJaffrayCompaniesoptionsoutstandingasofDecember31,2007isasfollows:RangeofExercisePricesSharesWeightedAverageRemainingContractualLife(Years)WeightedAverageExercisePriceSharesWeightedAverageExercisePriceOptionsOutstandingExercisableOptions$28.0122,8527.3$28.0122,852$28.01$33.404,0017.6$33.404,001$33.40$39.62226,6467.1$39.62624$39.62$47.30–$51.05169,8036.5$47.67142,871$47.64$70.13–$70.6547,4138.9$70.2611,772$70.65AsofDecember31,2007,therewas$1.1millionoftotalunrecognizedcompensationcostrelatedtostockoptionsexpectedtoberecognizedoveraweightedaverageperiodof1.63years.CashreceivedfromoptionexercisesfortheyearsendedDecember31,2007,2006and2005were$2.4million,$1.3millionand$0,respectively.ThefairvalueofoptionsexercisedduringtheyearsendedDecember31,2007,2006and2005were$1.1million,$0.5millionand$0.Thetaxbenefitrealizedforthetaxdeductionfromoptionexercisestotaled$0.4million,$0.3millionand$0fortheyearsendedDecember31,2007,2006and2005,respectively.ThefollowingtablesummarizesthechangesintheCompany’snon-vestedrestrictedstockfortheyearsendedDecember31,2007,2006and2005:NonvestedRestrictedStockWeightedAverageGrantDateFairValueDecember31,2004531,885$48.68Granted993,91937.77Vested(482)48.75Canceled(107,878)44.23December31,20051,417,444$41.37Granted847,66948.35Vested(68,940)45.03Canceled(639,372)44.28December31,20061,556,801$43.81Granted793,94866.08Vested(314,905)48.70Canceled(207,875)50.05December31,20071,827,969$51.93ThefairvalueofrestrictedstockvestedduringtheyearsendedDecember31,2007,2006and2005were$15.3million,$3.1millionand$0.AsofDecember31,2007,therewas$47.9millionoftotalunrecognizedcompensationcostrelatedtorestrictedstockexpectedtoberecognizedoveraweightedaverageperiodof2.04years.TheCompanyhasapolicyofissuingsharesoutoftreasury(totheextentavailable)tosatisfyshareoptionexercisesandrestrictedstockvesting.TheCompanyexpectstowithholdapproximately0.1millionsharesfromemployeeequityawardsvestingin2008,relatedtothepaymentofindividualincometaxonrestrictedstockvesting.Foraccountingpurposes,withholdingsharestocoveremployees’taxobligationsisdeemedtobearepurchaseofsharesbytheCompany.InconnectionwiththeCompany’sspin-offfromU.S.BancorponDecember31,2003,theCompanyestablishedacashawardprogrampursuanttowhichitgrantedcashawardstoabroad-basedgroupofemploy-eestoaidinretentionofemployeesandtocompensateemployeesforthevalueofU.S.Bancorpstockoptionsandrestrictedstocklostbyemployees.Thecashawardswereexpensedoverafour-yearperiodendingPiperJaffrayAnnualReport200759NotestoConsolidatedFinancialStatementsDecember31,2007.Participantsmustbeemployedonthedateofpaymenttoreceivepaymentundertheaward.ExpenserelatedtothecashawardprogramisincludedasaseparatelineitemontheCompany’sconsolidatedstatementsofoperations.Note23GeographicAreasThefollowingtablepresentsnetrevenuesandlong-livedassetsbygeographicregion:YEARENDEDDECEMBER31,(Dollarsinthousands)200720062005Netrevenues:UnitedStates$431,222$466,149$398,985Europe37,20331,34320,192Asia30,4975,4422,131Consolidated$498,922$502,934$421,308DECEMBER31,(Dollarsinthousands)20072006Long-livedassets:UnitedStates$347,885$297,601Europe2,9092,549Asia20,080236Consolidated$370,874$300,386Note24NetCapitalRequirementsandOtherRegulatoryMattersPiperJaffrayisregisteredasasecuritiesbrokerdealerandaninvestmentadvisorwiththeSECandisamem-berofvariousSelfRegulatoryOrganizations(“SRO”)andsecuritiesexchanges.InJulyof2007,theNationalAssociationofSecuritiesDealers,Inc.(“NASD”)andthememberregulation,enforcementandarbitrationfunctionsoftheNewYorkStockExchange(“NYSE”)consolidatedtoformFINRA,whichnowservesasourprimarySRO.PiperJaffrayissubjecttotheuniformnetcapitalruleoftheSECandthenetcapitalruleofFINRA.PiperJaffrayhaselectedtousethealternativemethodpermittedbytheSECrule,whichrequiresthatitmaintainminimumnetcapitalofthegreaterof$1.0millionor2percentofaggregatedebitbalancesarisingfromcustomertransactions,assuchtermisdefinedintheSECrule.UndertheFINRArule,FINRAmayprohibitamemberfirmfromexpandingitsbusi-nessorpayingdividendsifresultingnetcapitalwouldbelessthan5percentofaggregatedebitbalances.Advancestoaffiliates,repaymentofsubordinateddebt,dividendpaymentsandotherequitywithdrawalsbyPiperJaffrayaresubjecttocertainnotificationandotherprovisionsoftheSECandFINRArules.Inaddition,PiperJaffrayissubjecttocertainnotificationrequirementsrelatedtowithdrawalsofexcessnetcapital.AtDecember31,2007,netcapitalcalculatedundertheSECrulewas$198.7million,andexceededthemini-mumnetcapitalrequiredundertheSECruleby$196.7million.PiperJaffrayLtd.,whichisaregisteredUnitedKing-dombrokerdealer,issubjecttothecapitalrequire-mentsoftheU.K.FinancialServicesAuthority(“FSA”).AsofDecember31,2007,PiperJaffrayLtd.wasincompliancewiththecapitalrequirementsoftheFSA.WeoperatefourentitieslicensedbytheHongKongSecuritiesandFuturesCommission,whicharesubjecttotheliquidcapitalrequirementsoftheSecuritiesandFutures(FinancialResources)RulespromulgatedundertheSecuritiesandFuturesOrdinance.AsofDecember31,2007,PiperJaffrayAsiaregulatedenti-tieswereincompliancewiththeliquidcapitalrequire-mentsoftheHongKongSecuritiesandFuturesOrdinance.60PiperJaffrayAnnualReport2007NotestoConsolidatedFinancialStatementsNote25IncomeTaxesIncometaxexpenseisprovidedusingtheassetandliabilitymethod.Deferredtaxassetsandliabilitiesarerecognizedfortheexpectedfuturetaxconsequencesattributabletotemporarydifferencesbetweenamountsreportedforincometaxpurposesandfinancialstate-mentpurposes,usingcurrenttaxrates.Thecomponentsofincometaxexpensefromcontinu-ingoperationsareasfollows:YEARENDEDDECEMBER31,(Dollarsinthousands)200720062005Current:Federal$12,988$25,270$10,904State2,5444,560324Foreign1,66861511617,20030,44511,344Deferred:Federal9733,571(2,103)State1535781,595Foreign(439)380276874,529(481)Totalincometaxexpense$17,887$34,974$10,863AreconciliationofthestatutoryfederalincometaxratestotheCompany’seffectivetaxratesforthefiscalyearsendedDecember31,isasfollows:(Dollarsinthousands)200720062005Federalincometaxatstatutoryrates$22,020$34,256$12,611Increase(reduction)intaxesresultingfrom:Stateincometaxes,netoffederaltaxbenefit1,6543,3401,247Nettax-exemptinterestincome(5,033)(3,947)(3,426)Other,net(754)1,325431Totalincometaxexpense$17,887$34,974$10,863Incometaxesfromdiscontinuedoperationswerea$2.4millionbenefit,$160.7millionexpenseand$10.2millionexpensefortheyearsendedDecember31,2007,2006and2005,respectively.InaccordancewithAccountingPrinciplesBulletin23,“AccountingforIncomeTaxes-SpecialAreas,”U.S.incometaxesarenotprovidedonundistributedearningsofinternationalsubsidiariesthatareperma-nentlyreinvested.AsofDecember31,2007,undistrib-utedearningspermanentlyreinvestedintheCompany’sforeignsubsidiarieswereapproximately$5.6million.Atcurrenttaxrates,additionalfederalincometaxes(netofavailabletaxcredits)of$0.8millionwouldbecomepayableifsuchincomeweretoberepatriated.Deferredincometaxassetsandliabilitiesreflectthetaxeffectoftemporarydifferencesbetweenthecarryingamountofassetsandliabilitiesforfinancialreportingpurposesandtheamountsusedforthesameitemsforincometaxreportingpurposes.Thenetdeferredtaxassetincludedinotherassetsontheconsolidatedstatementsoffinancialconditionconsistedofthefol-lowingitemsatDecember31:(Dollarsinthousands)20072006Deferredtaxassets:Liabilities/accrualsnotcurrentlydeductible$10,444$17,351Pensionandretirementcosts4,9595,201Deferredcompensation25,11422,574Other6,4923,33547,00948,461Deferredtaxliabilities:Firminvestments7951,228Fixedassets1,3144,672Other1354982,2446,398Netdeferredtaxasset$44,765$42,063TheCompanyhasreviewedthecomponentsofthedeferredtaxassetsandhasdeterminedthatnovalua-tionallowanceisdeemednecessarybasedonmanage-ment’sexpectationoffuturetaxableincome.PiperJaffrayAnnualReport200761NotestoConsolidatedFinancialStatementsTheCompanyadoptedtheprovisionsofFIN48onJanuary1,2007.ImplementationofFIN48resultedinnoadjustmenttotheCompany’sliabilityforunrecog-nizedtaxbenefits.Asofthedateofadoptionthetotalamountofunrecognizedtaxbenefitswas$1.1million.Areconciliationofthebeginningandendingamountofunrecognizedtaxbenefitsisasfollows:(Dollarsinthousands)BalanceatJanuary1,2007$1,100Additionsbasedontaxpositionsrelatedtothecurrentyear–Additionsfortaxpositionsofprioryears9,400Reductionsfortaxpositionsofprioryears–Settlements–BalanceatDecember31,2007$10,500Approximately$7.5millionoftheCompany’sunrec-ognizedtaxbenefitswouldimpacttheannualeffectivetaxrateifrecognized.Includedinthetotalliabilityforunrecognizedtaxbenefitsis$0.2millionofinterestandpenalties,bothofwhichtheCompanyrecognizesasacomponentofincometaxexpense.TheCompanyoroneofitssubsidiariesfileincometaxreturnswiththeU.S.federaljurisdiction,allstates,andvariousforeignjurisdictions.TheCompanyisnotsubjecttoU.S.fed-eral,stateandlocalornon-U.S.incometaxexamina-tionbytaxauthoritiesfortaxableyearsbefore2004.DuetothepotentialforresolutionofU.S.federalandstateexaminations,andtheexpirationofvariousstat-utesoflimitation,itisreasonablypossiblethattheCompany’sunrecognizedtaxbenefitsbalancemaychangewithinthenexttwelvemonthsbyarangeof$0.4millionto$10.5million.Note26RelatedPartiesOnDecember28,2007,ConsumerPartnersAcquisi-tionCorp.(“ConsumerPartners”),anewly-organizedspecialpurposeacquisitioncompanythattheCompanyformedwithAriaPartners,filedaregistrationstate-mentonFormS-1withtheSECtoraise$125.0million(the“IPO”),throughthesaleof6,250,000unitsatanexpectedofferingpriceof$20perunit.ConsumerPartnersexpectstogranttheunderwritersa45-dayoptiontopurchaseuptoanadditional937,500unitstocoverover-allotments,ifany.ItisanticipatedthateachunitwillconsistoftwosharesofcommonstockofConsumerPartnersandonewarrant,withsuchwar-rantentitlingtheholdertopurchaseoneshareofcom-monstockfor$7.00.ConsumerPartnershasappliedtotheAmericanStockExchangeforapprovaltolisttheunits,commonsharesandwarrants.ConsumerPartnerswasformedforthepurposeofeffectingamerger,capitalstockexchange,assetacqui-sition,stockpurchase,reorganizationorsimilarbusi-nesscombinationwithoneormoreoperatingbusinesses(collectivelyreferredtoasthe“initialbusi-nesscombination”).InconnectionwiththeformationofConsumerPart-ners,theCompanyhasadvanced$142,500toConsumerPartners,payableoutoftheproceedsoftheIPO,andpurchased1,601,934foundersharesofConsumerPartnersatatotalcostofapproximately$11,688,whichrepresentsapproximately37percentoftheoutstandingcommonstockofConsumerPartnersandapproximately8.5percentofthecommonstockoutstandingfollowingtheIPO(assumingnoexercisebytheunderwritersoftheover-allotmentoption).Inaddition,theCompanyanticipatespurchasing2.5mil-lionfounderwarrantsatatotalcostof$2.5million,exercisableinto1shareofcommonstockatapriceof$7perwarrant.The$2.5millionusedtopurchasefounderwarrantswillbefundedapproximately60per-centbytheCompanyand40percentbyemployeesoftheCompany.IntheeventthatConsumerPartnersdoesnotconsum-mateaninitialbusinesscombinationwithin24monthsofthedateofitsfinalIPOprospectus,itscorporateexistencewillceaseexceptforthepurposeofwindingupitsaffairsandliquidating.Insuchevent,theinvest-mentsmadebytheCompanyinthefoundersharesandfounderwarrantswouldbecomeworthless.Note27SubsequentEventOnFebruary19,2008,theCompany,enteredintoa$600millionrevolvingcreditfacilitywithU.S.BankN.A.pursuanttowhichtheCompanyispermittedtorequestadvancestofundcertainshort-termmunicipalsecurities(includingauctionratesecuritiesandvariableratedemandnotes).TheadvanceswillbesecuredbycertainpledgedassetsoftheCompany,whichareexpectedtoconsistprimarilyofcertainshort-termmunicipalsecurities.Interestwillbepayablemonthly,andtheunpaidprincipalamountofalladvanceswillbedueonAugust19,2008.Advancesmaybeprepaidinwholeorinpartatanytimewithoutpenalty.62PiperJaffrayAnnualReport2007NotestoConsolidatedFinancialStatementsSUPPLEMENTALINFORMATIONPiperJaffrayCompaniesQuarterlyInformation(unaudited)2007FISCALQUARTER(Amountsinthousands,exceptpersharedata)FirstSecondThirdFourthTotalrevenues$143,652$126,993$98,541$153,425Interestexpense6,7024,4175,6476,923Netrevenues136,950122,57692,894146,502Non-interestexpenses114,366107,42586,860127,357Incomefromcontinuingoperationsbeforeincometaxexpense22,58415,1516,03419,145Netincomefromcontinuingoperations14,72210,3774,81215,116Lossfromdiscontinuedoperations,netoftax(1,304)(1,051)(456)—Netincome$13,418$9,326$4,356$15,116EarningsperbasiccommonshareIncomefromcontinuingoperations$0.86$0.61$0.30$0.97Lossfromdiscontinuedoperations(0.08)(0.06)(0.03)—Earningsperbasiccommonshare$0.79$0.55$0.27$0.97EarningsperdilutedcommonshareIncomefromcontinuingoperations$0.82$0.58$0.28$0.91Lossfromdiscontinuedoperations(0.07)(0.06)(0.03)—Earningsperdilutedcommonshare$0.74$0.52$0.26$0.91WeightedaveragenumberofcommonsharesBasic17,07117,07316,09615,663Diluted18,01817,91916,90416,5872006FISCALQUARTER(Amountsinthousands,exceptpersharedata)FirstSecondThirdFourthTotalrevenues$143,112$114,393$124,597$153,135Interestexpense8,1539,1438,4906,517Netrevenues134,959105,250116,107146,618Non-interestexpenses106,27493,091101,058104,638(2)Incomefromcontinuingoperationsbeforeincometaxexpense28,68512,15915,04941,980Netincomefromcontinuingoperations18,7067,9299,52826,736(2)Income/(loss)fromdiscontinuedoperations,netoftax5,151(3,792)177,085(1)(6,090)Netincome$23,857$4,137$186,613$20,646EarningsperbasiccommonshareIncomefromcontinuingoperations$1.01$0.43$0.53$1.58(2)Income/(loss)fromdiscontinuedoperations0.28(0.20)9.82(1)(0.36)Earningsperbasiccommonshare$1.29$0.22$10.35$1.22EarningsperdilutedcommonshareIncomefromcontinuingoperations$0.98$0.40$0.50$1.49(2)Income/(loss)fromdiscontinuedoperations0.27(0.19)9.29(1)(0.34)Earningsperdilutedcommonshare$1.25$0.21$9.79$1.15WeightedaveragenumberofcommonsharesBasic18,46218,55618,03116,973Diluted19,14619,66919,07118,004(1)Thethirdquarterof2006includedthegainonthesaleoftheCompany’sPCSbranchnetwork.(2)Thefourthquarterof2006includedanaftertaxreductionoflitigationreservesof$13,100or$0.73perdilutedshare.PiperJaffrayAnnualReport200763MarketforPiperJaffrayCompaniesCommonStockandRelatedShareholderMattersSTOCKPRICEINFORMATIONOurcommonstockislistedontheNewYorkStockExchangeunderthesymbol“PJC.”ThefollowingtablecontainshistoricalquarterlypriceinformationfortheyearsendedDecember31,2007and2006.OnFebru-ary21,2008,thelastreportedsalepriceofourcom-monstockwas$41.45.2007FISCALYEARHighLowFirstQuarter$74.30$58.53SecondQuarter68.1255.26ThirdQuarter59.4644.24FourthQuarter58.7641.442006FISCALYEARHighLowFirstQuarter$55.40$38.74SecondQuarter74.6553.18ThirdQuarter66.8046.60FourthQuarter71.6158.80SHAREHOLDERSWehad19,883shareholdersofrecordandapproxi-mately77,000beneficialownersofourcommonstockasofFebruary21,2008.DIVIDENDSWedonotintendtopaycashdividendsonourcommonstockfortheforeseeablefuture.Ourboardofdirectorsisfreetochangeourdividendpolicyatanytime.Restrictionsonourbrokerdealersubsidiary’sabilitytopaydividendsaredescribedinNote24tothecon-solidatedfinancialstatements.StockPerformanceGraphThefollowinggraphcomparestheperformanceofaninvestmentinourcommonstockfromJanuary2,2004,thedateourcommonstockbeganregular-waytradingontheNewYorkStockExchangefollowingourspin-offfromU.S.Bancorp,withtheS&P500IndexandtheS&P500DiversifiedFinancialsIndex.Thegraphassumes$100wasinvestedonJanuary2,2004,ineachofourcommonstock,theS&P500IndexandtheS&P500DiversifiedFinancialsIndexandthatalldividendswerereinvestedonthedateofpaymentwithoutpaymentofanycommissions.Dollaramountsinthegraphareroundedtothenearestwholedollar.Basedontheseassumptions,thecumulativetotalreturnfor2007wouldhavebeen$107.72forourcommonstock,$142.54fortheS&P500Indexand$120.24fortheS&P500DiversifiedFinancialsIndex.For2006,thecumulativetotalreturnwouldhavebeen$151.51forourcommonstock,$135.12fortheS&P500Indexand$147.74fortheS&P500DiversifiedFinancialsIndex.For2005,thecumulativetotalreturnwouldhavebeen$93.95forourcommonstock,$116.69fortheS&P500Indexand$119.24fortheS&P500DiversifiedFinancialsIndex.For2004,thecumulativetotalreturnwouldhavebeen$111.51forourcommonstock,$111.23fortheS&P500Indexand$108.59fortheS&P500DiversifiedFinancialsIndex.Theperformanceshowninthegraphrepresentspastperformanceandshouldnotbeconsideredanindicationoffutureperformance.CUMULATIVETOTALRETURNPIPERJAFFRAYCOMMONSTOCK,THES&P500INDEXANDTHES&P500DIVERSIFIEDFINANCIALSINDEX12/31/0712/31/0612/31/0512/31/041/02/04$80$90$100$110$120$130$140$150$160S&P 500 Diversified FinancialsS&P 500 PJC64PiperJaffrayAnnualReport2007PiperJaffrayCompaniesCorporate Headquarters Piper Jaffray Companies Mail Stop J09N05 800 Nicollet Mall, Suite 800 Minneapolis, MN 55402 612 303-6000 Company Web Site www.piperjaffray.com Stock Transfer Agent and Registrar Mellon Investor Services LLC acts as transfer agent and registrar for Piper Jaffray Companies and maintains all shareholder records for the company. For questions regarding owned Piper Jaffray Companies stock, stock transfers, address corrections or changes, lost stock certificates or duplicate mailings, please contact Mellon Investor Services by writing or calling: Mellon Investor Services LLC P.O. Box 358010 Pittsburgh, PA 15252-8010 800 872-4409 Street Address for Overnight Deliveries: 480 Washington Blvd. Jersey City, NJ 07310-1900 Web Site Access to Registrar Shareholders may access their investor statements online 24 hours a day, seven days a week with MLinkSM; for more information, go to www.melloninvestor.com/ISD. E-mail Delivery of Shareholder Materials Piper Jaffray invites its shareholders to join in its commitment to being an environmentally responsible corporation by receiving future shareholder materials electronically. Registered shareholders may sign up for electronic delivery of future proxy statements, proxy cards and annual reports by accessing the Web site, www.proxyvote.com, and following the instructions to vote. After you have voted your proxy, you will be prompted regarding electronic delivery. Electronic delivery will help Piper Jaffray reduce paper waste and minimize printing and postage costs. This book was printed on 100% post-consumer recycled paper. Independent Accountants Ernst & Young LLP Common Stock Listing New York Stock Exchange (symbol: PJC) Investor Inquiries Shareholders, securities analysts and investors seeking more information about the company should contact Jennifer A. Olson- Goude, director of Investor Relations, at jennifer. a.olson-goude@pjc.com, 612 303-6277, or the corporate headquarters address. Web Site Access to SEC Reports and Corporate Governance Information Piper Jaffray Companies makes available free of charge on its Web site, www.piperjaffray.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as all other reports filed by Piper Jaffray Companies with the SEC, as soon as reasonably practicable after it electronically files them with, or furnishes them to, the SEC. Piper Jaffray Companies also makes available free of charge on its Web site the company’s codes of ethics and business conduct, its corporate governance principles and the charters of the audit, compensation, and nominating and governance committees of the board of directors. Printed copies of these materials will be mailed upon request. Dividends Piper Jaffray Companies does not currently pay cash dividends on its common stock. Certifications The certifications by the chief executive officer and chief financial officer of Piper Jaffray Companies required under Section 302 of the Sarbanes-Oxley Act of 2002 have been filed as exhibits to its 2006 Annual Report on Form 10-K. The certification by the chief executive officer of Piper Jaffray Companies required under Section 303A.12(a) of the corporate governance rules of the New York Stock Exchange has been submitted to the New York Stock Exchange. We are building a leading international middle market investment bank and institutional securities firm. The 2007 Piper Jaffray Companies Annual Report P i p e r J a f f r a y C o m p a n i e s A n n u a l R e p o r t 2 0 0 7 Cert no. SW-COC-1865

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