e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 001-32147
GREENHILL & CO., INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
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51-0500737
(I.R.S. Employer
Identification No.) |
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300 Park Avenue |
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New York, New York
(Address of Principal Executive Offices)
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10022
(ZIP Code) |
Registrants telephone number, including area code: (212) 389-1500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting Company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of May 6, 2011, there were 29,671,617 shares of the registrants common stock outstanding.
AVAILABLE INFORMATION
Greenhill & Co., Inc. files current, annual and quarterly reports, proxy statements and other
information required by the Securities Exchange Act of 1934, as amended (the Exchange Act),
with the United States Securities and Exchange Commission (the SEC). You may read and copy any
document the company files at the SECs public reference room located at 100 F Street, N.E.,
Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. The firms SEC filings are also available to the public from the SECs
internet site at http://www.sec.gov. Copies of these reports, proxy statements and other
information can also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005, U.S.A.
Our public internet site is http://www.greenhill.com. We make available free of charge through
our internet site, via a link to the SECs internet site at http://www.sec.gov, our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and
Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to those
reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. Also posted on our website in
the Corporate Governance section, and available in print upon request of any stockholder to our
Investor Relations Department, are charters for our Audit Committee, Compensation Committee and
Nominating & Corporate Governance Committee, our Corporate Governance Guidelines, Related Party
Transaction Policy and Code of Business Conduct & Ethics governing our directors, officers and
employees. You may need to have Adobe Acrobat Reader software installed on your computer to view
these documents, which are in PDF format.
Part I. Financial Information
Item 1. Financial Statements
Greenhill & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Financial Condition
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As of |
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March 31, |
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2011 |
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December 31, |
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(unaudited) |
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2010 |
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Assets |
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Cash and cash equivalents ($7.6 million and
$7.7 million restricted from use at March
31, 2011 and December 31, 2010,
respectively) |
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$ |
42,823,901 |
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$ |
78,227,209 |
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Financial advisory fees receivable |
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32,654,819 |
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30,187,204 |
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Other receivables |
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9,835,659 |
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2,899,309 |
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Property and equipment (net of
accumulated depreciation of $47.0 million
and $45.8 million at March 31, 2011 and
December 31, 2010, respectively) |
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16,677,208 |
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17,563,099 |
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Investments in merchant banking funds |
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75,709,212 |
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73,532,503 |
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Other investments |
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85,683,671 |
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87,372,799 |
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Goodwill |
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164,410,077 |
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162,507,267 |
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Deferred tax asset |
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42,987,303 |
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47,842,045 |
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Other assets |
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7,729,452 |
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8,546,405 |
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Total assets |
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$ |
478,511,302 |
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$ |
508,677,840 |
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Liabilities and Equity |
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Compensation payable |
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$ |
10,957,721 |
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$ |
30,515,366 |
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Accounts payable and accrued expenses |
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10,540,991 |
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13,123,718 |
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Bank loan payable |
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73,270,000 |
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67,000,000 |
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Deferred tax liability |
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25,300,907 |
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25,031,882 |
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Due to affiliates |
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2,833 |
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144,365 |
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Total liabilities |
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120,072,452 |
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135,815,331 |
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Common stock, par value $0.01 per
share; 100,000,000 shares authorized,
35,688,040 and 35,117,356 shares issued as
of March 31, 2011 and December 31, 2010,
respectively; 29,658,014 and 29,341,604
shares outstanding as of March 31, 2011 and
December 31, 2010, respectively |
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356,880 |
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351,174 |
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Contingent convertible preferred
stock, par value $0.01 per share; 10,000,000
shares authorized, 1,099,877 shares issued
and outstanding as of March 31, 2011 and
December 31, 2010 |
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46,950,226 |
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46,950,226 |
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Restricted stock units |
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67,751,164 |
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89,365,292 |
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Additional paid-in capital |
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405,669,290 |
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368,090,229 |
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Exchangeable shares of subsidiary;
257,156 shares issued as of March 31, 2011
and December 31, 2010; 110,191 shares
outstanding as of March 31, 2011 and
December 31, 2010 |
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6,578,403 |
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6,578,403 |
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Retained earnings |
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168,667,007 |
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184,621,197 |
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Accumulated other comprehensive income |
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9,297,002 |
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5,127,132 |
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Treasury stock, at cost, par value
$0.01 per share; 6,030,026 and 5,775,752
shares as of March 31, 2011 and December 31,
2010, respectively |
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(348,253,869 |
) |
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(330,602,168 |
) |
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Stockholders equity |
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357,016,103 |
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370,481,485 |
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Noncontrolling interests |
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1,422,747 |
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2,381,024 |
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Total equity |
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358,438,850 |
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372,862,509 |
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Total liabilities and equity |
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$ |
478,511,302 |
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$ |
508,677,840 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
4
Greenhill & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
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For the Three Months Ended |
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March 31, |
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2011 |
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2010 |
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Revenues |
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Financial advisory fees |
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$ |
48,508,763 |
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$ |
36,597,309 |
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Merchant banking and other investment revenues |
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(272,418 |
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12,238,653 |
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Interest income |
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131,541 |
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19,966 |
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Total revenues |
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48,367,886 |
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48,855,928 |
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Expenses |
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Employee compensation and benefits |
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36,227,063 |
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32,155,012 |
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Occupancy and equipment rental |
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4,185,508 |
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3,149,289 |
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Depreciation and amortization |
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1,856,954 |
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752,157 |
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Information services |
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1,565,094 |
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1,739,077 |
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Professional fees |
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1,285,127 |
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2,243,866 |
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Travel related expenses |
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2,816,686 |
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2,217,730 |
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Interest expense |
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725,882 |
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528,042 |
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Other operating expenses |
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2,214,892 |
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2,898,498 |
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Total expenses |
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50,877,206 |
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45,683,671 |
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Income (loss) before taxes |
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(2,509,320 |
) |
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3,172,257 |
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Provision (benefit) for taxes |
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(928,448 |
) |
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320,455 |
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Consolidated net income (loss) |
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(1,580,872 |
) |
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2,851,802 |
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Less: Net income allocated to noncontrolling interests |
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2,339,906 |
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Net income (loss) allocated to common stockholders |
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$ |
(1,580,872 |
) |
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$ |
511,896 |
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Average shares outstanding: |
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Basic |
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31,072,284 |
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29,607,997 |
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Diluted |
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31,072,284 |
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29,701,773 |
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Earnings (loss) per share: |
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Basic |
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$ |
(0.05 |
) |
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$ |
0.02 |
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Diluted |
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$ |
(0.05 |
) |
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$ |
0.02 |
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Dividends declared and paid per share |
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$ |
0.45 |
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$ |
0.45 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
5
Greenhill & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
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For the Three Months Ended |
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March 31, |
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2011 |
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2010 |
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Consolidated net income (loss) |
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$ |
(1,580,872 |
) |
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$ |
2,851,802 |
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Currency translation adjustment, net of tax |
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4,169,870 |
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(3,212,940 |
) |
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Comprehensive income (loss) |
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2,588,998 |
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(361,138 |
) |
Less: Net income allocated to noncontrolling interests |
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2,339,906 |
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Comprehensive income (loss) allocated to common stockholders |
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$ |
2,588,998 |
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$ |
(2,701,044 |
) |
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See accompanying notes to condensed consolidated financial statements (unaudited).
6
Greenhill & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
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Three Months Ended |
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March 31, |
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Year Ended |
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2011 |
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December 31, |
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(unaudited) |
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2010 |
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Common stock, par value $0.01 per share |
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Common stock, beginning of the year |
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$ |
351,174 |
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$ |
332,543 |
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Common stock issued |
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5,706 |
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18,631 |
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Common stock, end of the period |
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356,880 |
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351,174 |
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Contingent convertible preferred stock, par value $0.01 per share |
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Contingent convertible preferred stock, beginning of the year |
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46,950,226 |
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Contingent convertible preferred stock issued |
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46,950,226 |
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Contingent convertible preferred stock, end of the period |
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46,950,226 |
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46,950,226 |
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Restricted stock units |
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Restricted stock units, beginning of the year |
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89,365,292 |
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81,219,868 |
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Restricted stock units recognized |
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14,861,302 |
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43,214,505 |
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Restricted stock units delivered |
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(36,475,430 |
) |
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(35,069,081 |
) |
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Restricted stock units, end of the period |
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67,751,164 |
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89,365,292 |
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Additional paid-in capital |
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Additional paid-in capital, beginning of the year |
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368,090,229 |
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237,716,672 |
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Common stock issued |
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36,891,157 |
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125,850,372 |
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Restricted stock unit cash settlement |
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(1,010,273 |
) |
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Tax benefit from the delivery of restricted stock units |
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687,904 |
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5,533,458 |
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Additional paid-in capital, end of the period |
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405,669,290 |
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368,090,229 |
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Exchangeable shares of subsidiary |
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Exchangeable shares of subsidiary, beginning of the year |
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6,578,403 |
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7,937,414 |
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Exchangeable shares of subsidiary delivered |
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(1,359,011 |
) |
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Exchangeable shares of subsidiary, end of the period |
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6,578,403 |
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6,578,403 |
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Retained earnings |
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Retained earnings, beginning of the year |
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184,621,197 |
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206,974,630 |
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Dividends |
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(14,373,318 |
) |
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(56,879,344 |
) |
Net income (loss) allocated to common stockholders |
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(1,580,872 |
) |
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34,525,911 |
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Retained earnings, end of the period |
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168,667,007 |
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184,621,197 |
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Accumulated other comprehensive income (loss) |
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Accumulated other comprehensive income (loss), beginning of
the year |
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5,127,132 |
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(8,737,728 |
) |
Currency translation adjustment, net of tax |
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4,169,870 |
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13,864,860 |
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Accumulated other comprehensive income (loss), end of the period |
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9,297,002 |
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5,127,132 |
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Treasury stock, at cost; par value $0.01 per share |
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Treasury stock, beginning of the year |
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(330,602,168 |
) |
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(293,391,405 |
) |
Repurchased |
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(17,651,701 |
) |
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(37,210,763 |
) |
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Treasury stock, end of period |
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(348,253,869 |
) |
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(330,602,168 |
) |
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|
Total stockholders equity |
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(357,016,103 |
) |
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370,481,485 |
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Noncontrolling interests |
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Noncontrolling interests, beginning of the year |
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2,381,024 |
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|
1,501,214 |
|
Net income allocated to noncontrolling interests |
|
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|
4,894,833 |
|
Contributions from noncontrolling interests |
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|
163,761 |
|
Distributions to noncontrolling interests |
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(958,277 |
) |
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(4,178,784 |
) |
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Noncontrolling interests, end of period |
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|
1,422,747 |
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|
2,381,024 |
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Total equity |
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$ |
358,438,850 |
|
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$ |
372,862,509 |
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|
See accompanying notes to condensed consolidated financial statements (unaudited).
7
Greenhill & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
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For the Three Months Ended |
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March 31, |
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|
2011 |
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2010 |
|
Operating activities: |
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Consolidated net income (loss) |
|
$ |
(1,580,872 |
) |
|
$ |
2,851,802 |
|
Adjustments to reconcile consolidated net income to net
cash provided by (used in) operating activities: |
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Non-cash items included in consolidated net income (loss): |
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|
Depreciation and amortization |
|
|
1,856,954 |
|
|
|
752,157 |
|
Net investment (gains) losses |
|
|
475,172 |
|
|
|
(7,540,421 |
) |
Restricted
stock units recognized and common stock issued |
|
|
14,861,302 |
|
|
|
12,034,794 |
|
Deferred taxes |
|
|
4,918,272 |
|
|
|
8,027,741 |
|
Deferred
gain on the sale of certain merchant banking assets |
|
|
(202,755 |
) |
|
|
(300,509 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Financial advisory fees receivable |
|
|
(2,467,615 |
) |
|
|
3,763,256 |
|
Due from affiliates |
|
|
(141,532 |
) |
|
|
(613,890 |
) |
Other receivables and assets |
|
|
(6,603,478 |
) |
|
|
(13,576,918 |
) |
Compensation payable |
|
|
(17,465,049 |
) |
|
|
(30,674,997 |
) |
Accounts payable and accrued expenses |
|
|
(2,328,112 |
) |
|
|
(2,268,473 |
) |
Settlement of restricted stock units in cash |
|
|
(2,092,596 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(10,770,309 |
) |
|
|
(27,545,458 |
) |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of merchant banking investments |
|
|
|
|
|
|
(10,968,702 |
) |
Distributions from investments |
|
|
|
|
|
|
54,849 |
|
Purchases of property and equipment |
|
|
(27,825 |
) |
|
|
(285,308 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(27,825 |
) |
|
|
(11,199,161 |
) |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds of revolving bank loan |
|
|
14,370,000 |
|
|
|
38,555,000 |
|
Repayment of revolving bank loan |
|
|
(8,100,000 |
) |
|
|
|
|
Contributions from noncontrolling interests |
|
|
|
|
|
|
134,511 |
|
Distributions to noncontrolling interests |
|
|
(958,277 |
) |
|
|
(413,000 |
) |
Dividends paid |
|
|
(14,373,318 |
) |
|
|
(14,025,279 |
) |
Purchase of treasury stock |
|
|
(17,651,701 |
) |
|
|
(20,064,197 |
) |
Net tax
benefit from the delivery of restricted stock units and payment of dividend equivalents |
|
|
687,904 |
|
|
|
7,040,962 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(26,025,392 |
) |
|
|
11,227,997 |
|
|
Effect of exchange rate changes on cash and cash
equivalents |
|
|
1,420,218 |
|
|
|
(1,658,941 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(35,403,308 |
) |
|
|
(29,175,563 |
) |
Cash and cash equivalents, beginning of period |
|
|
78,227,209 |
|
|
|
74,473,459 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
42,823,901 |
|
|
$ |
45,297,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
688,718 |
|
|
$ |
383,429 |
|
Cash paid for taxes, net of refunds |
|
$ |
1,925,809 |
|
|
$ |
6,209,976 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
8
Greenhill & Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1 Organization
Greenhill & Co., Inc., a Delaware corporation, together with its subsidiaries (collectively,
the Company), is a leading independent investment bank focused on providing financial advice on
significant mergers, acquisitions, restructurings, financings and capital raising to corporations,
partnerships, institutions and governments. The Company acts for clients located throughout the
world from offices located in New York, London, Frankfurt, Sydney, Tokyo, Toronto, Chicago, Dallas,
Houston, Los Angeles, Melbourne and San Francisco.
The Companys activities as an investment banking firm constitute a single business segment,
with two principal sources of revenue:
|
|
|
Financial advisory, which includes engagements relating to mergers and acquisitions,
financing advisory and restructuring, and private equity and real estate capital advisory
services; and |
|
|
|
Merchant banking, which includes the Companys principal investments in certain merchant
banking funds, Iridium Communications Inc. (Iridium) and other investments. Prior to 2011,
merchant banking also included the management of outside capital invested in affiliated
merchant banking funds. |
The Companys wholly-owned subsidiaries that provide financial advisory services include
Greenhill & Co., LLC (G&Co), Greenhill & Co. International LLP (GCI), Greenhill & Co. Europe
LLP (GCEI), Greenhill & Co. Japan Ltd. (GCJ), Greenhill & Co. Canada Ltd. (GCC) and Greenhill
Caliburn Pty Limited (Greenhill Caliburn).
G&Co is engaged in investment banking activities principally in the U.S. G&Co is registered
as broker-dealer with the Securities and Exchange Commission (SEC) and the Financial Industry
Regulation Authority (FINRA), and is licensed in all 50 states and the District of Columbia.
G&Co is also registered as a municipal advisor with the SEC and the Municipal Securities Rulemaking
Board.
GCI and GCEI are engaged in investment banking activities in the U.K. and Europe,
respectively, and are subject to regulation by the U.K. Financial Services Authority (FSA). GCJ
and GCC are engaged in investment banking activities in Japan and Canada, respectively.
On April 1, 2010, Greenhill acquired all of the outstanding capital stock of Caliburn
Partnership Pty Limited (Caliburn, which was renamed Greenhill Caliburn Pty Limited), an
Australian-based independent financial advisory firm. The Company, through Greenhill Caliburn,
engages in investment banking activities in Australia and New Zealand. Greenhill Caliburn is
licensed and subject to regulation by the Australian Securities and Investment Commission (ASIC).
See Note 3 Acquisition.
Greenhill Aviation Co., LLC (GAC), a wholly-owned subsidiary of the Company, owns and
operates an aircraft, which is used for the exclusive benefit of the Companys employees and their
immediate family members.
The Company separated from the merchant banking business on December 31, 2010. Prior to that
time, the merchant banking activities consisted primarily of the management of and the investment
in Greenhills affiliated merchant banking funds: Greenhill Capital Partners (GCP I), Greenhill
Capital Partners II (GCP II), Greenhill Capital Partners Europe (GCP Europe), and Greenhill SAV
Partners
9
(GSAVP, together with GCP I, GCP II, and GCP Europe, the Merchant Banking Funds), which are families
of merchant banking funds.
The Companys U.S and international wholly-owned subsidiaries that invest in merchant banking
funds include Greenhill Capital Partners, LLC (GCPLLC) and Greenhill Venture Partners, LLC
(GVP). The Company also owns a majority of the interests in Greenhill Capital Partners II, LLC
(GCPII LLC). Greenhill Capital Partners Europe LLP (GCPE) was a wholly-owned subsidiary of the
Company however, as a result of the separation from the merchant banking business, as of December
31, 2010, GCPE is no longer included in the condensed consolidated results.
GCPLLC is an investment adviser registered under the Investment Advisers Act of 1940 (IAA).
Prior to 2011, GCPLLC provided investment advisory services to GCP I and GCP II, the U.S. based
private equity funds that invest in a diversified portfolio of private equity and equity-related
investments. During 2010 GCPII LLC acted as manager for GCP I, GCP II and GSAVP.
GVP is an investment adviser registered under the IAA. Prior to 2011, GVP provided investment
advisory services to GSAVP, a venture fund that invests in early growth stage companies in the
tech-enabled and business information services industries.
The majority of the investors in GCP I, GCP II and GSAVP are unaffiliated third parties;
however, the Company and its employees have also made investments in such entities.
The Company also owns an interest in Iridium and certain other investments. See Note 4
Investments Other Investments.
Note 2 Summary of Significant Accounting Policies
Basis of Financial Information
These condensed consolidated financial statements are prepared in conformity with accounting
principles generally accepted (GAAP) in the United States, which require management to make
estimates and assumptions regarding future events that affect the amounts reported in our financial
statements and these footnotes, including investment valuations, compensation accruals and other
matters. Management believes that the estimates used in preparing its condensed consolidated
financial statements are reasonable and prudent. Actual results could differ materially from those
estimates. Certain reclassifications have been made to prior year information to conform to current
year presentation.
The condensed consolidated financial statements of the Company include all consolidated
accounts of Greenhill & Co., Inc. and all other entities in which the Company has a controlling
interest after eliminations of all significant inter-company accounts and transactions. In
accordance with the accounting pronouncements related to the consolidation of variable interest
entities, the Company consolidates the general partners of the Merchant Banking Funds in which it
has a majority of the economic interest and control. The general partners account for their
investments in the Merchant Banking Funds under the equity method of accounting. As such, the
general partners record their proportionate shares of income (loss) from the underlying Merchant
Banking Funds. As the Merchant Banking Funds follow investment company accounting, and generally
record all their assets and liabilities at fair value, the general partners investment in the Merchant
Banking Funds represents an estimation of fair value. The Company does not consolidate the Merchant
Banking Funds since the Company, through its general partner and limited partner interests, does
not have a majority of the economic interest in such funds and the limited partners have certain
rights to remove the general partner by a simple majority vote of unaffiliated third-party
investors.
10
These condensed consolidated financial statements are unaudited and should be read in
conjunction with the audited consolidated financial statements and notes thereto for the year ended
December 31, 2010 included in the Companys Annual Report on Form 10-K filed with the Securities
and Exchange Commission. The condensed consolidated financial information as of December 31, 2010
has been derived from audited consolidated financial statements not included herein. The results of
operations for interim periods are not necessarily indicative of results for the entire year.
Noncontrolling Interests
The Company records the noncontrolling interests of other consolidated entities as equity in
the condensed consolidated statements of financial condition. Additionally, the condensed
consolidated statements of operations separately present income allocated to both noncontrolling
interests and common stockholders.
The portion of the consolidated interests in the general partners of the Merchant Banking
Funds not held by the Company is presented as noncontrolling interest in equity. See Note 4
Investments Affiliated Merchant Banking Funds.
GCP Capital Partners Holdings LLC (GCP Capital), an entity not controlled by the Company,
had a preferred economic interest in the 2010 profits of GCPII LLC. During 2010 the excess of
management fees revenues over amounts paid for compensation and other operating costs associated
with the management of the Merchant Banking Funds accrued to the benefit of GCP Capital and was
recorded as noncontrolling interest.
Revenue Recognition
Financial Advisory Fees
The Company recognizes financial advisory fee revenue for mergers and acquisitions or
financing advisory and restructuring engagements when the services related to the underlying
transactions are completed in accordance with the terms of the engagement letter. The Company
recognizes private equity and real estate capital advisory fees at the time of the clients
acceptance of capital or capital commitments in accordance with the terms of the engagement letter.
Retainer fees are recognized as financial advisory fee revenue over the period in which the related
service is rendered.
The Companys clients reimburse certain expenses incurred by the Company in the conduct of
financial advisory engagements. Expenses are reported net of such client reimbursements. Client
reimbursements totaled $1.3 million and $0.8 million for the three months ended March 31, 2011 and
2010, respectively.
Merchant Banking and Other Investment Revenues
Merchant banking revenues consist of (i) management fees derived from merchant banking
activities (for periods prior to January 1, 2011), (ii) gains (or losses) on the Companys
investments in Merchant Banking Funds, Iridium and other principal investment activities, and if
any, (iii) profit overrides from the Merchant Banking Funds. See Note 4 Investments Affiliated
Merchant Banking Funds.
Management fees earned from merchant banking activities are recognized over the period of
related service.
The Company recognizes revenue on its investments in the Merchant Banking Funds based on its
allocable share of realized and unrealized gains (or losses) reported by such funds. Investments
held by the Merchant Banking Funds and certain other investments are recorded at estimated fair
value. The value of Merchant Banking Fund investments in privately held companies is determined by
the general partner of the fund after giving consideration to the cost of the security, the pricing
of other sales of securities by the
11
portfolio company, the price of securities of other companies comparable to the portfolio
company, purchase multiples paid in other comparable third-party transactions, the original
purchase price multiple, market conditions, liquidity, operating results and other qualitative and
quantitative factors. Discounts may be applied to the funds privately held investments to reflect
the lack of liquidity and other transfer restrictions. Investments in publicly traded securities
are valued using quoted market prices discounted for any legal or contractual restrictions on sale.
Because of the inherent uncertainty of valuations as well as the discounts applied, the estimated
fair values of investments in privately held companies may differ significantly from the values
that would have been used had a ready market for the securities existed. The values at which the
Companys investments are carried on its condensed consolidated statements of financial condition
are adjusted to estimated fair value at the end of each quarter and the volatility in general
economic conditions, stock markets and commodity prices may result in significant changes in the
estimated fair value of the investments from period to period.
If certain financial returns are achieved over the life of the fund, the Company recognizes
merchant banking profit overrides at the time that certain financial returns are achieved. Profit
overrides are generally calculated as a percentage of the profits over a specified threshold earned
by each fund on investments managed on behalf of unaffiliated investors except the Company. When
applicable, the profit overrides earned by the Company are recognized on an accrual basis
throughout the year. In accordance with the relevant guidance, the Company records as revenue the
amount that would be due pursuant to the fund agreements at each period end as if the fund
agreements were terminated at that date. Overrides are generally calculated on a deal-by-deal basis
but are subject to investment performance over the life of each merchant banking fund. The Company
may be required to repay a portion of the overrides it realized in the event a minimum performance
level is not achieved by the fund as a whole (we refer to these potential repayments as
clawbacks). The Company would be required to establish a reserve for potential clawbacks if it
were to determine that the likelihood of a clawback is probable and the amount of the clawback can
be reasonably estimated. As of March 31, 2011, the Company believes it is more likely than not that
the amount of profit overrides recognized as revenue in prior periods will be realized and
accordingly, the Company has not reserved for any clawback obligations under applicable fund
agreements. See Note 4 Investments Affiliated Merchant Banking Funds for further discussion
of the merchant banking revenues recognized.
Investments
The Companys investments in the Merchant Banking Funds are recorded under the equity method
of accounting based upon the Companys proportionate share of the fair value of the underlying
merchant banking funds net assets. The Companys other investments, which consider the Companys
influence or control of the investee, are recorded at estimated fair value or under the equity
method of accounting based, in part, upon the Companys proportionate share of the investees net
assets.
Gains and losses on investment positions held, which arise from sales or changes in the fair
value of investments are not predictable and can cause periodic fluctuations in net income and
therefore subject the Company to market and credit risk.
Financial Advisory Fees Receivables
Receivables are stated net of an allowance for doubtful accounts. The estimate for the
allowance for doubtful accounts is derived by the Company by utilizing past client transaction
history and an assessment of the clients creditworthiness. There was no allowance for doubtful
accounts at March 31, 2011 or December 31, 2010. The Company did not record bad debt expense for
the three months ended March 31, 2011 and recorded approximately $0.1 million of bad debt expense
during the three months ended March 31, 2010.
12
Restricted Stock Units
The Company accounts for its share-based compensation payments under which the fair value of
restricted stock units granted to employees with future service requirements is recorded as
compensation expense and generally amortized over a five-year service period following the date of
grant. Compensation expense is determined based upon the fair market value of the Companys common
stock at the date of grant. As the Company expenses the awards, the restricted stock units
recognized are recorded within equity. The restricted stock units are reclassified into common
stock and additional paid-in capital upon vesting. The Company records dividend equivalent
payments, net of estimated forfeitures, on outstanding restricted stock units as a dividend payment
and a charge to equity.
Earnings per Share
The Company calculates basic earnings per
share (EPS) by dividing net income
allocated to common stockholders by the weighted average number of shares outstanding for
the period. Diluted EPS includes the determinants of basic EPS plus the dilutive effect of the
common stock deliverable pursuant to restricted stock units for which future service is required as
a condition to the delivery of the underlying common stock.
Under the treasury method, the number of
shares issuable upon the vesting of restricted
stock units included in the calculation of diluted EPS is the excess, if any, of the number of
shares expected to be issued, less the number of shares that could be purchased by
the Company with the proceeds to be received upon settlement at the average market closing price
during the reporting period. The denominator for basic EPS includes the number of shares
deemed issuable due to the vesting of restricted stock units for accounting purposes.
See Note 8
Earnings (Loss) per Share for further discussion of the calculation of earnings per
share.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies have been translated at rates of
exchange prevailing at the end of the periods presented in accordance with the accounting guidance
for foreign currency translation. Income and expenses transacted in foreign currencies have been
translated at average monthly exchange rates during the period. Translation gains and losses are
included in the foreign currency translation adjustment which is included as a component of other
comprehensive income (loss) in the condensed consolidated statements of changes in equity. Foreign
currency transaction gains and losses are included in the condensed consolidated statements of
operations.
Goodwill
Goodwill is the cost of acquired companies in excess of the fair value of identifiable net
assets at acquisition date. The Company tests its goodwill for impairment at least annually. An
impairment loss is triggered if the estimated fair value of an operating unit is less than
estimated net book value. Such loss is calculated as the difference between the estimated fair
value of goodwill and its carrying value.
Goodwill is translated at the rate of exchange prevailing at the end of the periods presented
in accordance with the accounting guidance for foreign currency translation. Any translation gain
or loss is included in the foreign currency translation adjustment included as a component of other
comprehensive income (loss) in the condensed consolidated statement of changes in equity.
13
Business Combinations
Business combinations are accounted for in accordance with the guidance for business
combinations. The Company uses a fair value approach to measure the assets acquired and the
liabilities assumed in a business combination. Assets acquired and liabilities assumed in a
business combination are valued at fair value, regardless of the purchasers cost of acquisition.
Any associated transaction costs are expensed as incurred.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the life of the assets. Amortization
of leasehold improvements is computed using the straight-line method over the lesser of the life of
the asset or the remaining term of the lease. Estimated useful lives of the Companys fixed assets
are generally as follows:
Aircraft 7 years
Equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements the lesser of 10 years or the remaining lease term
Provision for Taxes
The Company accounts for taxes in accordance with the accounting guidance for income taxes
which requires the recognition of tax benefits or expenses on the temporary differences between the
financial reporting and tax bases of its assets and liabilities.
The Company follows the guidance for income taxes in recognizing, measuring, presenting and
disclosing in its financial statements uncertain tax positions taken or expected to be taken on its
income tax returns. Income tax expense is based on pre-tax accounting income, including adjustments
made for the recognition or derecognition related to uncertain tax positions. The recognition or
derecognition of income tax expense related to uncertain tax positions is determined under the
guidance.
Deferred tax assets and liabilities are recognized for the future tax attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period of change. Management applies the
more-likely-than-not criteria when determining tax benefits.
Cash and Cash Equivalents
The Companys cash and cash equivalents consist of (i) cash held on deposit with financial
institutions, (ii) cash equivalents and (iii) restricted cash.
At March 31, 2011 and December 31, 2010, the Company had $42.8 million
and $78.2 million, respectively, of
cash and cash equivalents. The Company considers all highly liquid investments with a maturity date
of three months or less, when purchased, to be cash equivalents. Cash equivalents primarily consist
of money market funds and overnight deposits. At March 31, 2011 and December 31, 2010, the carrying
value of the Companys cash equivalents amounted to $4.6 million and $9.4 million, respectively,
which approximated fair value, and are included in total cash and cash equivalents.
Also included in the total cash and cash equivalents balance at March 31, 2011 and December
31, 2010 was $7.6 million and $7.7 million, respectively (including $3.2 million and $3.3 million
at March 31, 2011 and December 31, 2010, respectively, restricted for the payout of the Greenhill
Caliburn deferred compensation plan), of restricted cash. See Note 3 Acquisition.
14
The Company maintains its cash and cash equivalents with financial institutions with high
credit ratings. The Company maintains deposits in federally insured financial institutions in
excess of federally insured (FDIC) limits. However, management believes that the Company is not
exposed to significant credit risk due to the financial position of the depository institutions in
which those deposits are held.
Financial Instruments and Fair Value
The Company accounts for financial instruments measured at fair value in accordance with
accounting guidance for fair value measurements and disclosures which establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level
3 measurements). The three levels of the fair value hierarchy under the pronouncement are described
below:
Basis of Fair Value Measurement
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities;
Level 2 Quoted prices in markets that are not considered to be active or financial
instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3 Prices or valuations that require inputs that are both significant to the fair value
measurement and unobservable.
A financial instruments level within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities that are subject to these
disclosures. At each reporting period, all assets and liabilities for which the fair value
measurement is based on significant unobservable inputs or instruments which trade infrequently and
therefore have little or no price transparency are classified as Level 3. Transfers between levels
are recognized as of the end of the period in which they occur.
Derivative Instruments
The Company accounts for warrants under the guidance for accounting for derivative instruments
and hedging activities. In accordance with that guidance, the Company records warrants at
estimated fair value in the condensed consolidated statements of financial condition with changes
in estimated fair value during the period recorded in merchant banking and other investment
revenues in the condensed consolidated statements of operations. The warrants held by the Company
are not designated as hedging instruments.
Subsequent Events
The Company evaluates subsequent events through the date on which financial statements are
issued.
Accounting Developments
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements. ASU
No. 2010-06 provides amended disclosure requirements related to fair value measurements and
specifically require entities to disclose i) the amounts of significant transfers between Level 1
and Level 2 of the fair value hierarchy and the reasons for the transfers; ii) the reasons for any
transfers in or out of Level 3; and iii) information in the reconciliation of recurring Level 3
measurements about purchases, sales issuances and settlements on a gross basis. Since these amended
principles require only additional disclosures concerning fair value measurements, adoption did not
and will not affect the Companys condensed consolidated financial statements.
15
Note 3 Acquisition
On April 1, 2010, the Company acquired 100% ownership of Caliburn from its founding partners
(the Acquisition). The Acquisition has been accounted for using the purchase method of accounting
and the results of operations for Greenhill Caliburn have been included in the condensed
consolidated statement of operations from the date of acquisition.
The total purchase price was allocated to the assets acquired and liabilities assumed based on
their estimated fair values as of April 1, 2010. The excess of the purchase price over the fair
value of net assets acquired was recorded as goodwill. The fair value of the identifiable
intangible assets acquired, which consisted of the trade name, the backlog of investment banking
client assignments that existed at the time of the closing, and customer relationships, is
amortized on a straight-line basis over the estimated remaining useful life of each asset over
periods ranging between 2 to 3 years. For the three months ended March 31, 2011, the Company
recorded $0.9 million of amortization expense in respect of these assets.
In connection with the Acquisition, the Company assumed amounts due under Caliburns deferred
compensation plan and acquired a corresponding amount of investments. Under this plan a portion of
certain employees compensation was deferred and invested in cash or, at the election of each
respective employee, in certain mutual fund investments. The cash and mutual fund investments will
be distributed to those employees of Greenhill Caliburn, who were employed on the date of
acquisition, over a 7 year period ending in 2016. The invested assets relating to this plan have
been recorded on the condensed consolidated statement of financial condition as components of both
cash and cash equivalents and other investments. The deferred compensation liability relating to
the plan has been recorded on the condensed consolidated statement of financial condition as a
component of compensation payable. Subsequent to the Acquisition the Company has discontinued
future participation in the plan. See Note 2 Summary of Significant Accounting Policies Cash
and Cash Equivalents and Note 4 Investments Other Investments.
Set forth below are the Companys summary unaudited pro forma results of operations for the
three months ended March 31, 2010 and the Companys summary unaudited consolidated results of
operations for the three months ended March 31, 2011. The unaudited pro forma results of operations
for the three months ended March 31, 2010 include the historical results of the Company and give
effect to the Acquisition as if it had occurred on January 1, 2010. These pro forma results include
the actual Caliburn results from January 1, 2010 through March 31, 2010.
The unaudited pro forma results of operations do not purport to represent what the Companys
results of operations would actually have been had the Acquisition occurred as of January 1, 2010,
or to project the Companys results of operations for any future period. Actual
future results may vary considerably based on a variety of factors beyond the Companys control.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Three Months |
|
|
Ended March 31, |
|
Ended March 31, |
|
|
2010 |
|
2011 |
|
|
(in millions, |
|
(in millions, |
|
|
unaudited) |
|
unaudited) |
|
|
(pro forma) |
|
(consolidated) |
Revenues |
|
$ |
53.2 |
|
|
$ |
48.4 |
|
Income (loss) before taxes |
|
|
3.2 |
|
|
|
(2.5 |
) |
Net income (loss) allocated to common stockholders |
|
|
0.5 |
|
|
|
(1.6 |
) |
Diluted earnings (loss) per share |
|
$ |
0.02 |
|
|
$ |
(0.05 |
) |
The
pro forma results include (i) an adjustment to Caliburns compensation expense to
Greenhills historical ratio of compensation expense to revenue for the period presented, (ii) the
elimination of professional fees of $1.4 million incurred by Caliburn in connection with the
Acquisition in the three months ended March 31, 2010, and (iii) the recording of income tax expense
resulting from the pro forma
16
adjustments before tax at the Australian effective tax rate of 30%.
The calculation of pro forma diluted
earnings per share includes 1,099,874 common shares issued to the selling shareholders. The
calculation of pro forma diluted shares does not include the Performance Stock which may be
converted in aggregate to 1,099,877 common shares in the event that Greenhill Caliburn achieves
certain three and five year revenue targets.
Note 4 Investments
Affiliated Merchant Banking Funds
In December 2009 the Company sold certain assets related to the merchant banking business,
including the right to raise subsequent merchant banking funds and a 24% ownership interest in
GCPII LLC, to GCP Capital, an entity not controlled by the Company. The Company retained a 76%
interest in GCPII LLC. Under the terms of the separation agreement, the general partners of the
Merchant Banking Funds delegated to GCPII LLC their obligation to manage and administer the
affiliated funds during a transition period, which ended on December 31, 2010.
During 2010, the Company recorded the revenues and expenses related to the management of the
Merchant Banking Funds in its consolidated results. However, during that period GCP Capital had a
preferred economic interest in the first $10.0 million of profits of GCPII LLC and accordingly, the
excess of management fee revenue over amounts incurred for compensation and other operating
expenses during 2010 that accrued to the benefit of GCP Capital was presented as noncontrolling
interest expense, which reduced net income allocated to common stockholders.
Effective January 1, 2011, the Company no longer manages the Merchant Banking Funds but has
retained its existing investments in and will continue to retain a majority economic interest as
the general partner of the Merchant Banking Funds. In addition to recording its direct investments
in the affiliated funds, the Company consolidates each general partner in which it has a majority
economic interest.
Prior to 2011, the Companys management fee income consisted of fees paid by the Merchant
Banking Funds and other transaction fees paid by the portfolio companies. Thereafter, the Company
no longer receives any management fees. Effective January 1, 2011 the Company delegated the
management of the Merchant Banking Funds to GCP Capital.
Investment gains or losses from merchant banking and other investment activities are comprised
of investment income, realized and unrealized gains or losses from the Companys investment in the
Merchant Banking Funds, Iridium and certain other investments, and the consolidated earnings of the
general partner in which it has a majority economic interest, offset by allocated expenses of the
funds. That portion of the earnings or losses of the general partner which is held by employees and
former employees of the Company is recorded as net income (loss) allocated to noncontrolling
interests.
As the general partner, the Company controls investment decisions for the Merchant Banking
Funds and is entitled to receive from the funds an override of the profits realized for
investments. The Company recognizes profit overrides related to the Merchant Banking Funds at the
time certain performance hurdles are achieved.
As consideration for the sale of the merchant banking business, in December 2009 the Company
received 289,050 shares of its common stock with a value of $24.4 million. The Company recognized
a gain of $21.8 million in 2009 and deferred $2.6 million of gains on the sale related to
non-compete and trademark licensing agreements, which will be amortized over a 5 year period ending
in 2014. For the three month periods ended March 31, 2011 and March 31, 2010, deferred gains of
$0.2 million and $0.3 million, respectively, were recognized.
17
The Companys merchant banking and other investment revenues, by source, are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands, unaudited) |
|
Management fees |
|
$ |
|
|
|
$ |
4,398 |
|
Net realized and unrealized gains on investments in merchant
banking funds |
|
|
1,700 |
|
|
|
1,490 |
|
Net realized and unrealized merchant banking profit overrides |
|
|
|
|
|
|
91 |
|
Net unrealized gain (loss) on investment in Iridium |
|
|
(2,175 |
) |
|
|
5,959 |
|
Sale of certain merchant banking assets |
|
|
203 |
|
|
|
301 |
|
|
|
|
|
|
|
|
Total merchant banking and other investment revenues |
|
$ |
(272 |
) |
|
$ |
12,239 |
|
|
|
|
|
|
|
|
The carrying value of the Companys investments in the Merchant Banking Funds are as
follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands, |
|
|
(in thousands, |
|
|
|
unaudited) |
|
|
audited) |
|
Investment in GCP I |
|
$ |
3,289 |
|
|
$ |
3,289 |
|
Investment in GCP II |
|
|
47,233 |
|
|
|
46,533 |
|
Investment in Greenhill Capital Partners III (GCP III) |
|
|
713 |
|
|
|
713 |
|
Investment in GSAVP |
|
|
4,626 |
|
|
|
4,726 |
|
Investment in GCPE |
|
|
19,848 |
|
|
|
18,271 |
|
|
|
|
|
|
|
|
Total investments in the Merchant Banking Funds |
|
$ |
75,709 |
|
|
$ |
73,532 |
|
|
|
|
|
|
|
|
The investment in GCP I included $0.3 million at March 31, 2011 and December 31, 2010 related
to the noncontrolling interests in the managing general partner of GCP I held directly by the
limited partners of its General Partner. The investment in GCP II included $1.1 million at March
31, 2011 and December 31, 2010, related to the noncontrolling interests in the general
partner of GCP II.
Approximately $0.3 million of the Companys compensation payable related to profit overrides
for unrealized gains of the Merchant Banking Funds at March 31, 2011 and December 31, 2010. This
amount may increase or decrease depending on the change in the fair value of the Merchant Banking
Funds portfolio, and is payable, subject to clawback, at the time cash proceeds are realized.
At March 31, 2011, the Company had unfunded commitments of $35.1 million to certain of the
Merchant Banking Funds, which included unfunded commitments to GSAVP of $3.4 million, which may be
drawn through September 2011, and unfunded commitments to GCP Europe of $19.5 million (or £12.2
million), which may be drawn through December 2012. In addition, the Company committed $5.0 million
to GCP III, of which $4.3 million is unfunded at March 31, 2011 and may be drawn through November
2015. In addition, the Company has unfunded commitments of $7.9 million to GCP II. For each of the
Merchant Banking Funds, up to 15% of the commitment amount may be drawn for follow-on investments
over the two year period after the expiration of the commitment period. The commitment period for
GCP II ended in June 2010; however, the Company expects that an additional $1.5 million of the
remaining unfunded commitment will be drawn down for follow-on investments through June 2012.
18
Other Investments
The
Company has other investments including investments in Iridium, Barrow Street Capital III, LLC (Barrow Street III) and
certain deferred compensation plan investments related to the Caliburn Acquisition. The Companys
other investments are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands, |
|
|
(in thousands, |
|
|
|
unaudited) |
|
|
audited) |
|
Iridium Common Stock |
|
$ |
71,214 |
|
|
$ |
73,623 |
|
Iridium $11.50 Warrants |
|
|
7,960 |
|
|
|
7,280 |
|
Barrow Street III |
|
|
2,383 |
|
|
|
2,383 |
|
|
|
|
|
|
|
|
Deferred compensation plan investments |
|
|
4,127 |
|
|
|
4,087 |
|
|
|
|
|
|
|
|
Total other investments |
|
$ |
85,684 |
|
|
$ |
87,373 |
|
|
|
|
|
|
|
|
Iridium
At March 31, 2011 and December 31, 2010, the Company owned 8,924,016 shares of Iridium Common
Stock and warrants to purchase 4,000,000 additional shares of Iridium Common Stock at $11.50 per
share (Iridium $11.50 Warrants). At March 31, 2011 and December 31, 2010, the Companys fully
diluted share ownership in Iridium was approximately 12%.
At March 31, 2011 and December 31, 2010, the carrying value of the investments in Iridium
Common Stock was valued at its closing quoted market price.
Since the closing of the acquisition of Iridium in September 2009, an active trading market
has not existed for the Iridium $11.50 warrants and accordingly, at March 31, 2011 and December 31,
2010, the Company used an internally developed model to value such warrants, which takes into
account various standard option valuation methodologies, including Black Scholes modeling. Selected
inputs for the Companys model include: (i) the terms of the warrants, including exercise price,
exercisability threshold and expiration date; and (ii) externally observable factors including the
trading price of Iridium shares, yields on U.S. Treasury obligation and various equity volatility
measures, including historical volatility of broad market indices.
Barrow Street Capital III
The Company committed $5.0 million to Barrow Street III, a
real estate investment fund, of which $0.3 million remains unfunded at March 31, 2011. The unfunded
amount may be called at any time prior to the expiration of the fund in 2013 to preserve or enhance
the value of existing investments.
Other Investments
In connection with the Acquisition, the Company acquired certain mutual fund investments
related to Caliburns deferred compensation plan. See Note 3 Acquisition.
19
Fair Value Hierarchy
The following tables set forth by level assets and liabilities measured at fair value on a
recurring basis. Assets and liabilities are classified in their entirety based on the lowest level
of input that is significant to the fair value measurement.
Assets Measured at Fair Value on a Recurring Basis as of March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Significant Other |
|
|
Significant |
|
|
Balance as |
|
|
|
for |
|
|
Observable |
|
|
Unobservable |
|
|
of |
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
March 31, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2011 |
|
|
|
(in thousands, unaudited) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iridium Common Stock |
|
$ |
71,214 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
71,214 |
|
Iridium $11.50 Warrants |
|
|
|
|
|
|
|
|
|
|
7,960 |
|
|
|
7,960 |
|
Deferred compensation
plan investments |
|
|
|
|
|
|
4,127 |
|
|
|
|
|
|
|
4,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
71,214 |
|
|
$ |
4,127 |
|
|
$ |
7,960 |
|
|
$ |
83,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured at Fair Value on a Recurring Basis as of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Significant Other |
|
|
Significant |
|
|
Balance as of |
|
|
|
for |
|
|
Observable |
|
|
Unobservable |
|
|
December |
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
31, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2010 |
|
|
|
(in thousands, unaudited) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iridium Common Stock |
|
$ |
73,623 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
73,623 |
|
Iridium $11.50 Warrants |
|
|
|
|
|
|
|
|
|
|
7,280 |
|
|
|
7,280 |
|
Deferred
compensation plan investments |
|
|
|
|
|
|
4,087 |
|
|
|
|
|
|
|
4,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
73,623 |
|
|
$ |
4,087 |
|
|
$ |
7,280 |
|
|
$ |
84,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 Gains and Losses
The following table sets forth a summary of changes in the fair value of the Companys Level 1
investments for the three months ended March 31, 2011 and 2010, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
Beginning |
|
|
Realized |
|
|
|
|
|
|
Sales, Other |
|
|
|
|
|
|
|
|
|
Balance |
|
|
Gains |
|
|
Unrealized |
|
|
Settlements |
|
|
Net Transfers |
|
|
|
|
|
|
January 1, |
|
|
or |
|
|
Gains or |
|
|
and |
|
|
in and/or |
|
|
Ending Balance |
|
|
|
2011 |
|
|
(Losses) |
|
|
(Losses) |
|
|
Issuances, net |
|
|
out of Level 1 |
|
|
March 31, 2011 |
|
|
|
(in thousands, unaudited) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iridium Common
Stock |
|
$ |
73,623 |
|
|
$ |
|
|
|
$ |
(2,409 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
71,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 1
investments |
|
$ |
73,623 |
|
|
$ |
|
|
|
$ |
(2,409 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
71,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
Beginning |
|
|
Realized |
|
|
|
|
|
|
Sales, Other |
|
|
|
|
|
|
|
|
|
Balance |
|
|
Gains |
|
|
Unrealized |
|
|
Settlements |
|
|
Net Transfers |
|
|
|
|
|
|
January 1, |
|
|
or |
|
|
Gains or |
|
|
and |
|
|
in and/or |
|
|
Ending Balance |
|
|
|
2010 |
|
|
(Losses) |
|
|
(Losses) |
|
|
Issuances, net |
|
|
out of Level 1 |
|
|
March 31, 2010 |
|
|
|
(in thousands, unaudited) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iridium Common Stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
72,374 |
|
|
$ |
72,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 1
investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
72,374 |
|
|
$ |
72,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2010, the Company valued the Iridium Common Stock at its quoted market price,
discounted for legal and contractual restrictions on sale, and accordingly it was recorded as a
Level 2 investment. During the first quarter of 2010, certain legal and contractual restrictions on
sale lapsed and the Company recorded its investment in Iridium at March 31, 2010 as a Level 1
investment.
Level 2 Gains and Losses
The following table sets forth a summary of changes in the fair value of the Companys Level 2
investments for the three months ended March 31, 2011 and 2010, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
Beginning |
|
|
Realized |
|
|
|
|
|
|
Sales, Other |
|
|
|
|
|
|
|
|
|
Balance |
|
|
Gains |
|
|
Unrealized |
|
|
Settlements |
|
|
Net Transfers |
|
|
|
|
|
|
January 1, |
|
|
or |
|
|
Gains or |
|
|
and |
|
|
in and/or |
|
|
Ending Balance |
|
|
|
2011 |
|
|
(Losses) |
|
|
(Losses) |
|
|
Issuances, net |
|
|
out of Level 2 |
|
|
March 31, 2011 |
|
|
|
(in thousands, unaudited) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation plan
investments |
|
$ |
4,087 |
|
|
$ |
|
|
|
$ |
40 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 2
investments |
|
$ |
4,087 |
|
|
$ |
|
|
|
$ |
40 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
Beginning |
|
|
Realized |
|
|
|
|
|
|
Sales, Other
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Gains |
|
|
Unrealized |
|
|
Settlements |
|
|
Net Transfers |
|
|
|
|
|
|
January 1, |
|
|
or |
|
|
Gains or |
|
|
and |
|
|
in and/or |
|
|
Balance Ending |
|
|
|
2010 |
|
|
(Losses) |
|
|
(Losses) |
|
|
Issuances, net |
|
|
out of Level 2 |
|
|
March 31, 2010 |
|
|
|
(in thousands, unaudited) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iridium Common
Stock |
|
$ |
68,077 |
|
|
$ |
|
|
|
$ |
4,297 |
|
|
$ |
|
|
|
$ |
(72,374 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 2
investments |
|
$ |
68,077 |
|
|
$ |
|
|
|
$ |
4,297 |
|
|
$ |
|
|
|
$ |
(72,374 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
The value of the deferred compensation plan investments assumed in the Acquisition consist of
mutual fund investments, which have been recorded at net asset value, and have been recorded as a
Level 2 investment. See Note 3 Acquisition.
Level 3 Gains and Losses
The following tables set forth a summary of changes in the fair value of the Companys Level 3
investments for the three months ended March 31, 2011 and 2010, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
Beginning |
|
|
Realized |
|
|
|
|
|
|
Sales, Other |
|
|
|
|
|
|
|
|
|
Balance |
|
|
Gains |
|
|
Unrealized |
|
|
Settlements |
|
|
Net Transfers |
|
|
|
|
|
|
January 1, |
|
|
or |
|
|
Gains or |
|
|
and |
|
|
in and/or |
|
|
Ending Balance |
|
|
|
2011 |
|
|
(Losses) |
|
|
(Losses) |
|
|
Issuances, net |
|
|
out of Level 3 |
|
|
March 31, 2011 |
|
|
|
(in thousands, unaudited) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iridium $11.50
Warrants |
|
$ |
7,280 |
|
|
$ |
|
|
|
$ |
680 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3
investments |
|
$ |
7,280 |
|
|
$ |
|
|
|
$ |
680 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
Beginning |
|
|
Realized |
|
|
|
|
|
|
Sales, Other |
|
|
|
|
|
|
|
|
|
Balance |
|
|
Gains |
|
|
Unrealized |
|
|
Settlements |
|
|
Net Transfers |
|
|
|
|
|
|
January 1, |
|
|
or |
|
|
Gains or |
|
|
and |
|
|
in and/or |
|
|
Ending Balance |
|
|
|
2010 |
|
|
(Losses) |
|
|
(Losses) |
|
|
Issuances, net |
|
|
out of Level 3 |
|
|
March 31, 2010 |
|
|
|
(in thousands, unaudited) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iridium $11.50
Warrants |
|
$ |
8,015 |
|
|
$ |
|
|
|
$ |
745 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3
investments |
|
$ |
8,015 |
|
|
$ |
|
|
|
$ |
745 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 Related Parties
At March 31, 2011 and December 31, 2010, the Company had payables of $2,833 and $144,365,
respectively, due to the Merchant Banking Funds which relate to general operating expenses, and are
included in due to affiliates on the condensed consolidated statements of financial condition.
In conjunction with the sale of certain assets of the merchant banking business, the Company
agreed to sublease office space to GCP Capital for a period of three to five years beginning in
January 2011. The Company recognized $0.3 million related to the sublease during the three months
ended March 31, 2011, which has been included as a component of occupancy and equipment rental on
the condensed consolidated statements of operations.
Note 6 Revolving Bank Loan Facility
At March 31, 2011, the Company had a $75.0 million revolving loan facility from a U.S. banking
institution to provide for working capital needs and for other general corporate purposes. The
revolving loan facility is secured by any cash distributed in respect of our investment in the U.S.
based merchant banking funds and cash distributions from Greenhill & Co. LLC, and is subject to a
borrowing base
22
limitation. The maturity date of the facility is July 31, 2011. Interest on borrowings is
based on the higher of the Prime Rate or 4.0% and is payable monthly. In addition, the revolving
loan facility has a prohibition on the incurrence of additional indebtedness without the prior
approval of the lenders and the Company is required to comply with certain financial and liquidity
covenants. The weighted average daily borrowings outstanding under the loan facility were
approximately $69.1 million and $52.8 million for the three months ended March 31, 2011 and 2010,
respectively. The weighted average interest rate was 4.0% for both periods ended March 31, 2011 and
2010. At March 31, 2011, the Company was compliant with all loan covenants.
Effective April 30, 2011, the facility amount was reduced to $60.0 million. See Note 12
Subsequent Events.
Note 7 Equity
On March 16, 2011, a dividend of $0.45 per share was paid to stockholders of record on March
2, 2011. Dividend equivalents of $1.4 million were accrued on the restricted stock units that are
expected to vest and has been recorded as compensation payable.
During the three months ended March 31, 2011, 570,049 restricted stock units vested and were
issued as common stock of which the Company is deemed to have repurchased 254,274 shares at an
average price of $69.42 per share in conjunction with the payment of tax liabilities in respect of
stock delivered to its employees in settlement of restricted stock units.
During the three months ended March 31, 2010, 592,521 restricted stock units vested and were
issued as common stock of which the Company is deemed to have repurchased 255,660 shares at an
average price of $78.48 per share in conjunction with the payment of tax liabilities in respect of
stock delivered to its employees in settlement of restricted stock units.
23
Note 8 Earnings (Loss) per Share
The computations of basic and diluted earnings (loss) per share are set forth below:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands, except |
|
|
|
per share amounts, unaudited) |
|
Numerator for basic and diluted EPS net income (loss) allocated to stockholders |
|
$ |
(1,581 |
) |
|
$ |
512 |
|
|
|
|
|
|
|
|
Denominator for basic EPS weighted average number of shares |
|
|
31,072 |
|
|
|
29,608 |
|
Add dilutive effect of: |
|
|
|
|
|
|
|
|
Weighted average number of incremental shares issuable from restricted stock units |
|
|
|
1 |
|
|
94 |
|
|
|
|
|
|
|
|
Denominator for diluted EPS weighted average number of shares and dilutive
potential shares |
|
|
31,072 |
|
|
|
29,702 |
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.05 |
) |
|
$ |
0.02 |
|
Diluted |
|
$ |
(0.05 |
) |
|
$ |
0.02 |
|
The weighted number of shares and dilutive potential shares do not include the
contingent convertible preferred shares. Such shares will potentially convert to shares of the
Companys common stock in tranches of 659,926 and 439,951 shares on the third and fifth anniversary
of the closing of the Acquisition, respectively, if certain revenue targets are achieved. At the
time a revenue target is achieved such shares will be included in the Companys share count. If the
revenue targets for a tranche are not achieved, the contingent convertible preferred shares in that
tranche will be cancelled.
Note 9
Income Taxes
The Companys effective tax rate will vary depending on the source of the income. Investment
and certain foreign sourced income are taxed at a lower effective rate than U.S. trade or business
income.
Based on the Companys historical taxable income and its expectation for taxable income in the
future, management expects that the deferred tax asset, which relates principally to compensation
expense deducted for book purposes but not yet deducted for tax purposes, will be realized as
offsets to (i) the realization of its deferred tax liabilities and (ii) future taxable income.
Included in other receivables in the condensed consolidated statements of financial condition
are income tax receivables of $9.0 million and $1.9 million as of March 31, 2011 and December 31, 2010, respectively.
Any gain or loss resulting from the translation of deferred taxes for foreign affiliates is
included in the foreign currency translation adjustment incorporated as a component of other
comprehensive income, net of tax, in the condensed consolidated statements of changes in equity.
The Company performed a tax analysis as of March 31, 2011 and determined that there was no
requirement to accrue any liabilities. This tax analysis included the Companys tax positions with
respect to applicable income tax issues for open tax years in each respective jurisdiction in which
the Company operates.
|
|
|
1 |
|
Excludes 39,552 shares for the three month
period ended March 31, 2011, which were considered antidilutive and thus were
not included in the above calculation. |
24
Note 10 Regulatory Requirements
Certain subsidiaries of the Company are subject to various regulatory requirements in the
United States, the United Kingdom and Australia, which specify, among other requirements, minimum
net capital requirements for registered broker-dealers.
G&Co is subject to the SECs Uniform Net Capital requirements under Rule 15c3-1 (the Rule),
which specifies, among other requirements, minimum net capital requirements for registered
broker-dealers. The Rule requires G&Co to maintain a minimum net capital of the greater of $5,000
or 1/15 of aggregate indebtedness, as defined in the Rule. As of March 31, 2011, G&Cos net capital
was $8.1 million, which exceeded its requirement by $8.0 million. G&Cos aggregate indebtedness to
net capital ratio was 0.34 to 1 at March 31, 2011. Certain distributions and other capital
withdrawals of G&Co are subject to certain notifications and restrictive provisions of the Rule.
GCI and GCEI are subject to capital requirements of the FSA. Greenhill Caliburn is subject to
capital requirements of the ASIC. As of March 31, 2011, GCI, GCEI and Greenhill Caliburn were in
compliance with local capital adequacy requirements.
Note
11 Business Information
The Companys activities as an investment banking firm constitute a single business segment,
with two principal sources of revenue:
|
|
|
Financial advisory, which includes engagements relating to mergers and acquisitions, financing
advisory and restructuring, and private equity and real estate capital advisory services; and
|
|
|
|
Merchant banking, which includes the Companys principal investments in the Merchant Banking
Funds, Iridium and other investments. Prior to 2011, merchant banking also included the
management of outside capital invested in affiliated merchant banking funds. |
The following provides a breakdown of our aggregate revenues by source for the three month
periods ended March 31, 2011 and 2010, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
|
|
(in millions, unaudited) |
|
Financial advisory fees |
|
$ |
48.5 |
|
|
|
100 |
% |
|
$ |
36.6 |
|
|
|
75 |
% |
Merchant banking and other investment revenues |
|
|
(0.1 |
) |
|
|
|
|
|
|
12.3 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
48.4 |
|
|
|
100 |
% |
|
$ |
48.9 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As described in Note 4 Investments Affiliated Merchant Banking Funds, the Company
completed the sale of certain assets related to our merchant banking business in December 2009.
Effective December 31, 2010, the Company no longer manages the Merchant Banking Funds, but retained
its existing investments in and will continue to act as the general partner of the funds. In
reporting to management, the Company distinguishes the sources of its investment banking revenues
between financial advisory and merchant banking and other investment revenues. However, management
does not evaluate other financial data or operating results such as operating expenses, profit and
loss or assets by its financial advisory and merchant banking activities.
25
Note 12 Subsequent Events
On April 30, 2011, the existing lender of the Companys revolving loan facility (see Note 6
Revolving Bank Loan Facility) extended the maturity date of the facility until July 31, 2011.
The facility amount was reduced to $60.0 million effective April 30, 2011. All other terms and
conditions of the facility remained the same.
On April 20, 2011, the Board of Directors of the Company declared a quarterly dividend of
$0.45 per share. The dividend will be payable on June 15, 2011 to the common stockholders of
record on June 1, 2011.
26
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
In this Managements Discussion and Analysis of Financial Condition and Results of Operations,
we, our, firm and us refer to Greenhill & Co., Inc.
This Managements Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended
December 31, 2010.
Cautionary Statement Concerning Forward-Looking Statements
The following discussion should be read in conjunction with our condensed consolidated
financial statements and the related notes that appear elsewhere in this report. We have made
statements in this discussion that are forward-looking statements. In some cases, you can identify
these statements by forward-looking words such as may, might, will, should,
expect, plan, anticipate, believe, estimate, intend, predict,
potential or continue, the negative of these terms and other comparable terminology. These
forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may
include projections of our future financial performance, based on our growth strategies and
anticipated trends in our business. These statements are only predictions based on our current
expectations and projections about future events. There are important factors that could cause our
actual results, level of activity, performance or achievements to differ materially from the
results, level of activity, performance or achievements expressed or implied by the forward-looking
statements. In particular, you should consider the numerous risks outlined under Risk Factors
in our 2010 Annual Report on Form 10-K.
Although we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness
of any of these forward-looking statements. You should not rely upon forward-looking statements as
predictions of future events. We are under no duty to update any of these forward-looking
statements after the date of this filing to conform our prior statements to actual results or
revised expectations.
Overview
Greenhill is a leading independent investment bank focused on providing financial advice
related to significant mergers, acquisitions, restructurings, financings and capital raising to
corporations, partnerships, institutions and governments. We act for clients located throughout the
world from our offices in New York, London, Frankfurt, Sydney, Tokyo, Toronto, Chicago, Dallas,
Houston, Los Angeles, Melbourne and San Francisco.
Our revenues are principally derived from providing financial advisory services on mergers and
acquisitions, or M&A, financings and restructurings, and are primarily driven by total deal volume
and size of individual transactions. Additionally, our private capital and real estate capital
advisory groups provide fund placement and other capital raising advisory services, where revenues
are driven primarily by the amount of capital raised.
Greenhill was established in 1996 by Robert F. Greenhill, the former President of Morgan
Stanley and former Chairman and Chief Executive Officer of Smith Barney. Since our founding,
Greenhill has grown steadily, recruiting a number of managing directors from major investment banks
(as well as senior professionals from other institutions), with a range of geographic, industry and
transaction specialties as well as different sets of corporate management and other relationships.
As part of this expansion, we opened a London office in 1998, opened a Frankfurt office in 2000 and
began offering financial restructuring advice in 2001. On May 11, 2004, we converted from a limited
liability company to a corporation, and completed an initial public offering of our common stock.
We opened our Dallas office in 2005 and our Toronto office in 2006. In 2008, we opened offices in
Chicago, San Francisco and Tokyo, and we entered the private capital advisory business, which
provides capital raising and related services to private equity and real estate funds. We opened
our Houston and Los Angeles offices in 2009.
27
On April 1, 2010, we acquired the Australian advisory firm Caliburn, with six managing
directors and 40 total employees at that time. Caliburn has established a strong position in that
market over its 11 year history and operates in Australia and New Zealand under the name Greenhill
Caliburn. Caliburn operating results are included in our financial results effective as of the
date of acquisition.
Prior to 2011, we also managed merchant banking funds and similar vehicles. We raised our
first private equity fund in 2000, our first venture capital fund in 2006 and our first European
merchant banking fund in 2007. We completed the initial public offering of our special purpose
acquisition company, GHL Acquisition Corp., in 2008, and that entity merged with Iridium
Communications, Inc. (Iridium) in 2009. Following our exit from this business in 2010, we
continue to retain our historical principal investments in the merchant banking funds and Iridium
and intend to liquidate those investments over time.
Business Environment
Economic and global financial market conditions can materially affect our financial
performance. See Risk Factors in our 2010 Annual Report on Form 10-K filed with the Securities
and Exchange Commission. Revenues and net income in any period may not be indicative of full-year
results or the results of any other period and may vary significantly from year to year and quarter
to quarter.
Our financial advisory revenues increased by 33% to $48.5 million in the first quarter of 2011
compared to $36.6 million in the first quarter of 2010. At the same time, worldwide completed M&A
volume increased by 42%, from $413.2 billion in the first quarter of 2010 to $588.2 billion in the
first quarter of 2011.1
This quarterly increase builds on the increased M&A volume for the year ended December 31,
2010 as compared to prior years since 2007.
Because we earn a majority of our financial advisory revenue from fees that are dependent
on the successful completion of a merger, acquisition, restructuring or similar transaction or the
closing of a fund, our financial advisory business has been negatively impacted over the past few
years by a reduction in total M&A activity, a reduction in average deal size, and a lengthening of
the completion time of transactions.
Over the past few years we have substantially expanded our geographic reach, our industry
sector expertise and the total number of employees focused on our financial advisory business. This
expansion has increased our base compensation costs and other non-compensation costs, such as
travel and information services. Furthermore, due to the opening of new offices and the expansion
of some of our existing offices our occupancy costs have increased. This expansion, combined with a
very modest upturn in general completed transaction activity has increased our cost ratios. While
we will continue to recruit senior bankers on an opportunistic basis, our priority in the near term
will be to realize the benefits of our expansion as transaction activity rebounds and to seek to
return towards our historic cost ratios.
We generally experience significant variations in revenues and profits during each quarterly
period. These variations can generally be attributed to the fact that our revenues are usually
earned in large amounts throughout the year upon the successful completion of a transaction or
restructuring or closing of a fund, the timing of which is uncertain and is not subject to our
control. Moreover, the timing of our recognition of gains or losses from our investment portfolio
may vary significantly from period to period and depends on a number of factors beyond our
control, including most notably market and general economic conditions. In addition, we report the
value of our portfolio of investments at estimated fair value at the end of each quarter. The value
of our investments may increase or decrease significantly depending upon market factors that are
beyond our control. As a result, our quarterly results vary and our results in one period may not
be indicative of our results in any future period.
|
|
|
1 |
|
Global M&A completed transaction volume for
the quarter ended March 31, 2011 as compared to the quarter ended March 31,
2010. Source: Thomson Financial as of April 7, 2011. |
28
Results of Operations
Summary
Our revenues of $48.4 million for the first quarter of 2011 compare with revenues of $48.9
million for the first quarter of 2010, which represents a decrease of $0.5 million, or 1%. These
results reflect increased financial advisory revenues of $48.5 million for the first quarter of
2011 compared to $36.6 million in the first quarter of 2010, offset by decreased merchant banking
revenues. Our first quarter net loss allocable to common stockholders of $1.6 million and diluted
loss per share of $0.05 compare to net income allocable to common stockholders of $0.5 million and
diluted earnings per share of $0.02 in the first quarter of 2010.
Our quarterly revenues and net income can fluctuate materially depending on the number and
size of completed transactions on which it advised, the number and size of investment gains (or
losses) and other factors. Accordingly, the revenues and net income in any particular period may
not be indicative of future results.
Revenues By Source
The following provides a breakdown of total revenues by source for the three month periods
ended March 31, 2011 and 2010, respectively:
Revenue by Principal Source of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
Amount |
|
|
% of Total |
|
|
Amount |
|
|
Total |
|
|
|
(in millions, unaudited) |
|
Financial advisory fees |
|
$ |
48.5 |
|
|
|
100 |
% |
|
$ |
36.6 |
|
|
|
75 |
% |
Merchant banking and other investment revenues |
|
|
(0.1 |
) |
|
|
|
|
|
|
12.3 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
48.4 |
|
|
|
100 |
% |
|
$ |
48.9 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Advisory Revenues
Financial advisory revenues primarily consist of financial advisory and transaction related
fees earned in connection with advising clients in mergers, acquisitions, financings,
restructurings, or similar transactions. We earned $48.5 million in financial advisory revenue in
the first quarter of 2011 compared to $36.6 million in the first quarter of 2010, which represents
an increase of 33%. The increase in financial advisory revenue in the first quarter of 2011 as
compared to the same period in 2010 reflected an increase in strategic advisory assignments with
related retainer fees partially offset by a decline in the scale of completed assignments, which
resulted from smaller average transaction size. During the quarter, we also acted as placement
agent in connection with the modest sized interim closing of the sale of limited partner interests
in a private equity fund, for which our fund raising efforts continue. We also advised on a
secondary market sale of limited partner interests.
29
Completed assignments in the first quarter of 2011 included:
|
|
|
the acquisition by Aetna Inc. of Medicity, Inc.; |
|
|
|
|
the representation of Bosque Power Company LLC in conjunction with its Chapter 11
proceedings; |
|
|
|
|
the representation of Findel plc in the restructuring of its balance sheet; |
|
|
|
|
the acquisition by GlaxoSmithKline plc of Maxinutrition Group Holdings Limited; |
|
|
|
|
the acquisition by Schenck Process GmbH of Clyde Process Solutions plc; |
|
|
|
|
the sale of Suncorp Metway Limiteds Tyndall Investments business to Nikko Asset
Management Co., Ltd.; |
|
|
|
|
the acquisition of the share capital of Telerob GmbH by Cobham plc; and |
|
|
|
|
the acquisition of TSmarine Group Holdings Pty Ltd by Fugro N.V. |
Merchant Banking and Other Investment Revenues
Effective December 31, 2010, we exited the merchant banking business in order to focus
entirely on our financial advisory business. Prior to that time, our merchant banking activities
consisted primarily of management of and investment in Greenhills historic merchant banking funds.
During a transition period in 2010 we managed and administered the merchant banking funds and
recorded the revenue and expenses related to our management of the merchant banking funds in our
consolidated results. Under the arrangement with GCP Capital Partners Holdings LLC (GCP Capital),
an entity which is independent from the firm, during 2010 the excess of the management fee revenue
over the amount paid for compensation and other operating costs associated with the management
of the funds accrued to the benefit of GCP Capital and was recorded as non-controlling
interest. On January 1, 2011, GCP Capital took over the management of the merchant banking funds.
As a result of our separation from the merchant banking business, beginning in 2011 we no longer
generate management fee revenue or incur expenses from the management of the merchant banking
funds.
While we no longer manage the merchant banking funds, we retained our existing investments in
the merchant banking funds and Iridium (NASDAQ: IRDM) and will continue to record realized and
unrealized changes in the fair value of our investments on a quarterly basis until such investments
are liquidated over time. For our investments in the merchant banking funds the size and timing of
changes in the fair value are tied to a number of different factors, including the performance of
the particular portfolio companies, general economic conditions in the debt and equity markets and
other factors which affect the industries in which the funds are invested. Adverse changes in
general economic conditions, commodity prices, credit and public equity markets, could negatively
impact the amount of investment revenue realized by the firm.
Our total investment and other revenues for the first quarter of 2011 were negative ($0.1)
million, which compares to $12.3 million of management fees and other investment revenues for the
first quarter of 2010. This represents a decrease of $12.4 million in the first quarter of 2011 as
compared to the same period in 2010 and resulted from both the absence of management fees in 2011
and a decline in the value of our investment in Iridium, as described in more detail below.
30
The following table sets forth additional information relating to our merchant banking and
other principal investment revenues:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
|
Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in millions, unaudited) |
|
Management fees |
|
$ |
|
|
|
$ |
4.4 |
|
Net realized and unrealized gains on investments in merchant banking funds |
|
|
1.7 |
|
|
|
1.5 |
|
Net realized and unrealized merchant banking profit overrides |
|
|
|
|
|
|
0.1 |
|
Sale of certain merchant banking assets |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on investment in Iridium |
|
|
(2.2 |
) |
|
|
6.0 |
|
|
|
|
|
|
|
|
Interest income |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total merchant banking and other investment revenues |
|
$ |
(0.1 |
) |
|
$ |
12.3 |
|
|
|
|
|
|
|
|
The decline in investment and other revenues principally resulted from the recognition of an
unrealized loss of $2.2 million in the value of our investment in Iridium during the first quarter
of 2011 as compared to the recognition of an unrealized gain of $6.0 million in Iridium in the
first quarter of 2010.
We recognize revenue on investments in merchant banking funds based on our allocable share of
realized and unrealized gains (or losses) reported by such funds on a quarterly basis. In addition,
we recognize the consolidated earnings of the general partners of these funds in which we have a
majority economic interest, offset by allocated expenses of the funds. We also recognize revenue
based on the realized and unrealized gains (or losses) from our investment in Iridium on a
quarterly basis. We record our investments at estimated fair value. The value of the merchant
banking fund investments in privately held companies is determined on a quarterly basis by the
general partner of the fund after giving consideration to the cost of the security, the pricing of
other sales of securities by the portfolio company, the price of securities of other companies
comparable to the portfolio company, purchase multiples paid in other comparable third-party
transactions, the original purchase price multiple, market conditions, liquidity, operating results
and other quantitative and qualitative factors. Discounts may be applied to the funds privately
held investments to reflect the lack of liquidity and other transfer restrictions. Investments held
by the merchant banking funds and publicly traded securities held by the firm are valued using
quoted market prices discounted for any legal or contractual restrictions on sale. Because of the
inherent uncertainty of valuations as well as the discounts applied, the estimated fair values of
investments in privately held companies may differ significantly from the values that would have
been used had a ready market for the securities existed. Furthermore, due to the volatility in
general economic conditions, stock markets and commodity prices we may record significant changes
in the fair value of the investments from quarter to quarter. Significant changes in the estimated
fair value of our investments may have a material effect, positive or negative, on our revenues and
thus our results of operations. See Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical Accounting Policies and Estimates Revenue
Recognition Merchant Banking and Other Investment Revenues.
As the general partner of the existing merchant banking funds, we are entitled to receive an
override of the profits of the funds after certain performance hurdles are met; whether these
hurdles can be met will depend on the underlying fair value of each portfolio company. Overrides
are generally calculated on a deal-by-deal basis but are subject to investment performance over the
life of each merchant banking fund. We may be required to repay a portion of the overrides to the
limited partners of the funds in the event a profit override has been realized and paid to the
general partner and a minimum performance level is not achieved by the fund as a whole (we refer to
these potential repayments as clawbacks). As of March 31, 2011, the net internal rate of return
of the fund investments in Greenhill Capital Partners Europe (GCPE) and Greenhill SAV Partners
(GSAVP) were negative and the investment in Greenhill Capital Partners II (GCP II) was
breakeven. We have not recognized profit overrides from these investments.
31
Unless there are
significant gains in the value of the portfolio companies in each fund it is not likely that the
profit threshold for each fund will be exceeded and accordingly is not likely that profit override
revenue will be recognized. In connection with the sale of the merchant banking business the share
of any profit overrides earned by the merchant banking funds to which we will be entitled was
reduced for investments made by the merchant banking funds after January 1, 2010 to 1 out of 20
points, or 5% of the profit override earned, from 10 out of 20 points, or 50% of the profit
override earned from investments made prior to 2010.
We recognize gains or losses from our investment in Iridium based on the fair market value of
our investment as of the end of any period. At March 31, 2011 and 2010, we owned 8,924,016 shares
of Iridium common stock and 4,000,000 Iridium $11.50 warrants (NASDAQ: IRDMZ), or approximately 12%
of Iridiums common stock on a fully diluted basis.
At March 31, 2011, we had principal investments of $161.4 million, including our investment in
Iridium of $79.2 million and in the merchant banking funds of $75.7 million. Declines in the fair
market value of the merchant banking funds and particularly Iridium, because of the relative size
of that investment, may adversely affect the amount of merchant banking and other investment
revenues recorded in any period.
The investment gains or
losses in our merchant banking funds, Iridium and other investment portfolio
may fluctuate significantly over time due to factors beyond our control, such as performance of
each company in the merchant banking portfolio, equity market valuations, commodity prices and
merger and acquisition opportunities. Revenue recognized from gains (or losses) recorded in any
particular period are not necessarily indicative of revenue that may be realized and/or recognized
in future periods.
Operating Expenses
We classify operating expenses in two categories: employee compensation and benefits expenses
and non-compensation expenses.
Our total operating expenses for the first quarter of 2011 were $50.9 million, which compares
to $45.7 million of total operating expenses for the first quarter of 2010. This represents an
increase in total operating expenses of $5.2 million, or 12%, and results from increases in both
our compensation expense and non-compensation expense, each as described in more detail below.
The following table sets forth information relating to our operating expenses, which are
reported net of reimbursements of certain expenses by our clients:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
Months |
|
|
Ended March 31, |
|
|
2011 |
|
2010 |
|
|
(in millions, |
|
|
unaudited) |
Employee compensation and benefits expense |
|
$ |
36.2 |
|
|
$ |
32.2 |
|
% of revenues |
|
|
75 |
% |
|
|
66 |
% |
Non-compensation expense |
|
|
14.7 |
|
|
|
13.5 |
|
% of revenues |
|
|
30 |
% |
|
|
28 |
% |
Total operating expense |
|
|
50.9 |
|
|
|
45.7 |
|
% of revenues |
|
NM |
|
|
94 |
% |
Total income (loss) before tax |
|
|
(2.5 |
) |
|
|
3.2 |
|
Pre-tax income margin |
|
NM |
|
|
6 |
% |
32
Compensation and Benefits Expenses
Our employee compensation and benefits expenses in the first quarter of 2011 were $36.2
million, which reflects a 75% ratio of compensation to revenue. This amount compared to $32.2
million for the first quarter of 2010, which reflected a 66% ratio of compensation to revenue. The
increase of $4.0 million, or 12%, results principally from the recruitment of a significant number
of Managing Directors after the first quarter of 2010, including those who joined us as part of our
acquisition of Greenhill Caliburn in Australia, which closed on April 1, 2010. The increase in
the ratio of compensation expense to revenue for the first quarter of 2011 as compared to the same
period in the prior year principally resulted from the increased headcount costs spread over a
comparable amount of revenue in each period.
Our compensation expense is generally based upon revenue and can fluctuate materially in any
particular period depending upon the increase in headcount, amount of revenue recognized as well as
other factors. Accordingly, the amount of compensation expense recognized in any particular period
may not be indicative of compensation expense in a future period.
Non-Compensation Expenses
Our non-compensation expenses include the costs for occupancy and equipment rental,
communications, information services, professional fees, recruiting, travel and entertainment,
insurance, depreciation and amortization, interest expense and other operating expenses.
Reimbursable client expenses are netted against non-compensation expenses.
Our non-compensation expenses were $14.7 million in the first quarter of 2011 compared to
$13.5 million in the first quarter of 2010, reflecting an increase of $1.2 million, or 9%. The
increase in non-compensation expenses principally resulted from greater occupancy costs as a result
of the acquisition of Greenhill Caliburn in Australia and the expansion of our New York office as
well as greater travel costs associated with business development by a greater number of employees.
During the first quarter of 2011 we also incurred costs related to the amortization of the
acquired Australian intangible assets while in the first quarter of 2010, in advance of the
Australian acquisition, we incurred transaction costs related to the Australian acquisition of
approximately the same amount.
Non-compensation expenses as a percentage of revenues for the three months ended March 31,
2011 and 2010 were 30% and 28%, respectively.
Our non-compensation expenses as a percentage of revenue can vary as a result of a variety of
factors including fluctuation in revenue amounts, the increase in headcount, the amount of
recruiting and business development activity, the amount of office expansion, the amount of
reimbursement of engagement-related expenses by clients, the amount of short-term borrowings,
interest rate and currency movements and other factors. Accordingly, the non-compensation expenses
as a percentage of revenue in any particular period may not be indicative of the non-compensation
expenses as a percentage of revenue in future periods.
33
Provision for Income Taxes
For the first quarter of 2011 we recognized an income tax benefit of $0.9 million, which
reflects an effective rate of 37%. This compares to a provision for taxes in the first quarter of
2010 of $0.3 million, which reflects an effective tax rate of 38% for the period.
The effective tax rate can fluctuate as a result of variations in the relative amounts of
financial advisory and investment income earned in the tax jurisdictions in which the firm operates
and invests. Accordingly, the effective tax rate in any particular period may not be indicative of
the effective tax rate in future periods.
Liquidity and Capital Resources
Our liquidity position is monitored by our Management Committee, which generally meets
monthly. The Management Committee monitors cash, other significant working capital assets and
liabilities, debt, principal investment commitments and other matters relating to liquidity
requirements. As cash accumulates, it is retained in financial institutions with high credit
ratings and/or invested in short-term investments which are expected to provide significant
liquidity.
We generate cash from our operating activities principally in the form of financial advisory
fees and in the form of distributions of proceeds from our investment activities. We use our cash
primarily for operating purposes, compensation of our employees, payment of income taxes, the
funding of our commitments to the merchant banking funds, payment of dividends, repurchase of
shares of our stock (both in open market purchases and repurchases from our employees in
conjunction with the payment of taxes liabilities incurred on the vesting of restricted stock
awards) and leasehold improvements.
Because a portion of the compensation we pay to our employees is distributed in annual bonus
awards in February of each year, our net cash balance is generally at its lowest level during the
first quarter and generally accumulates from our operating activities throughout the remainder of
the year. In general, we collect our accounts receivable within 60 days except for certain
restructuring transactions, where collections may take longer due to court-ordered holdbacks, and
fees generated through our private equity and real estate capital advisory services, which are
generally paid in installments over a period of three years. Our liabilities typically consist of
accounts payable, which are generally paid monthly, accrued compensation, which includes accrued
cash bonuses that are generally paid February of the following year to the large majority of our
employees, and taxes payable. In February 2011, cash bonuses and accrued benefits of $17.6 million
relating to 2010 compensation were paid to our employees.
Our deferred tax liabilities may increase or decrease from period to period depending upon the
change in the fair value of our investments in the merchant banking funds and other principal
investments. Our current tax liability will increase at the time we realize investment gains. In
the event we realize losses on our investments, such losses will only be available to offset
realized investment gains in the current or future periods.
Although we no longer manage the merchant banking funds, we continue to retain our existing
principal investments in the merchant banking funds as well as our investment in Iridium. We also
retained our allocation of profit override for investments made prior to 2010. However, unless the
funds realize significant gains it is not likely that the earnings of any of the funds will exceed
their profit thresholds and therefore, we currently do not expect to recognize any profit override
revenue in future periods.
As of March 31, 2011, we had total commitments (not reflected on our balance sheet) relating
to future principal investments in GCP II, GSAVP and GCPE and other merchant banking and related
activities of $35.1 million. Approximately $19.5 million of these commitments
relate to GCPE, whose
commitment
34
period ends in 2012. These commitments, which may not be drawn in full, are expected to
be drawn on from time to time and be substantially invested over a period of up to five years from
the relevant commitment dates of each fund.
To provide for working capital needs and other general corporate purposes we have a $60.0
million revolving bank loan facility (reduced from $75.0 million as of April 30, 2011).
We expect to further reduce the facility to $50.0 million as of September 30, 2011.
Borrowings
under the facility are secured by any cash distributed in respect of our investment in the U.S.
based merchant banking funds and cash distributions from Greenhill & Co. LLC, and is subject to a
borrowing base limitation. Interest on borrowings is based on the higher of the Prime Rate or 4.0%.
As of May 6, 2011, we had $53.0 million of borrowings outstanding under our revolving bank loan
facility. The revolving loan facility has a prohibition on the incurrence of additional
indebtedness without the prior approval of the lenders and requires that we comply with certain
financial and liquidity covenants on a quarterly basis. At March 31, 2011, the firm was compliant
with all loan covenants and we expect to continue to be compliant with all loan covenants.
We generally roll over the maturity date of our revolving loan facility annually. The
maturity date of the loan facility is July 31, 2011. In late May we expect to receive approval from
the existing lender to extend the maturity date of the facility until April 30, 2012. Our inability
to extend the maturity date of the loan facility or renew it on acceptable terms with the existing
lender could require us to repay all or a portion of the loan balance outstanding at maturity.
There is no assurance, if our revolving loan facility is not renewed with the existing lender, that
we would be able to obtain a new credit facility from a different lender or raise debt securities
in the public or private markets. If we were required to repay the outstanding balance of our
credit facility we could be required to repatriate funds to the U.S., liquidate some of our
principal investments or issue additional securities, or a combination of each, in each case on
terms which may not be favorable to us.
As a result of our decision to
separate from the merchant banking business we are focused
entirely on our advisory business. In multiple transactions over the next few years we plan to liquidate our investments in
the merchant banking funds, Iridium, and other investments, which had an estimated fair market
value of $161.4 million as of March 31, 2011. While we will continue to fund the remaining
commitments to the existing merchant banking funds as described above, we have substantially
reduced our commitments to successor funds and do not expect to make other fund commitments.
The merchant banking funds typically invest in privately held companies. The ability of the
merchant banking funds to sell or dispose of the securities they own depends on a number of factors
beyond the control of the funds, including general economic and sector conditions, stock market
conditions, commodity prices, and the availability of financing to potential buyers of such
securities, among other issues. As a result we consider our investments illiquid for the short
term.
Our investment in Iridium, which represents approximately 12% of Iridiums fully diluted common
stock, had a value of $79.2 million as of March 31, 2011. In 2010 all contractual restrictions on
the sale of our investments in Iridium lapsed. Our ability to sell all or a portion of our
investments in Iridium at a value that is attractive to us is subject to factors such as general
economic, sector and stock market conditions, and other factors, which we cannot control. Moreover,
we may be limited in our ability to sell our investment in Iridium because one of our employees is
a member of the board of directors of Iridium. It is our intention to monetize our position in a
disciplined manner over time dependent on market conditions.
We generally use a portion of our cash reserves to repurchase shares of our common stock, pay
dividends and fund capital commitments. In April 2010, our Board of Directors authorized the
repurchase
35
of up to $100 million of our common stock through the period ending December 31, 2011,
of which we have repurchased $12.4 million as of May 6, 2011. We expect to fund repurchases of
shares (if any) with proceeds from our investments and/or operating cash flow as transaction
activity further rebounds. Our remaining commitments to our merchant banking funds may require us
to fund capital calls on short notice. We are unable to predict the timing or magnitude of share
repurchase opportunities, capital calls or distribution of investment proceeds.
During the three months ended
March 31, 2011, the firm is deemed to have repurchased
254,274 shares of its common stock at an average price of $69.42 per share in conjunction with the
payment of tax liabilities in respect of stock delivered to its employees in settlement of
restricted stock units.
As of March 31, 2011 we had cash and cash equivalents on hand of $42.8 million, of which $29.1
million were held outside the U.S. We are currently subject to federal income tax on our domestic
earnings and that portion of our foreign earnings which we repatriate. It has been our policy to
retain approximately 50% of our foreign earnings within our non-U.S. subsidiaries to minimize our
global tax burden and to fund our foreign investment needs. However, in the event our cash needs in
the U.S. exceed our cash reserves in the U.S. and availability under the revolving loan facility,
we may repatriate additional cash from our foreign operations, which could result in an incremental
tax liability.
We evaluate our cash operating position on a regular basis in light of current market
conditions. Our recurring monthly operating disbursements consist of base compensation expense and
other operating expenses, which principally include costs for occupancy, information services,
professional fees, travel and entertainment, interest expense and other general expenses. Our
recurring quarterly and annual disbursements consist of tax payments, dividend payments,
repurchases of our common stock from our employees in conjunction with the payment of tax
liabilities incurred on vesting of restricted stock units and cash bonus payments. These amounts
vary depending upon our profitability and other factors. We incur non-recurring disbursements for
our investments in the merchant banking funds, leasehold improvements and open market share
repurchases. While we believe that the cash generated from operations and funds available from the
revolving bank loan facility will be sufficient to meet our expected operating needs, commitments
to the merchant banking activities, build-out costs of new office space, tax obligations, share
repurchases and common dividends, we may adjust our variable expenses and non-recurring
disbursements, if necessary, to meet our liquidity needs. In the event that we are not able to meet
our liquidity needs, we may consider a range of financing alternatives to meet any such needs.
Cash Flows
In the first three months of 2011, our cash and cash equivalents decreased by $35.4
million from December 31, 2010. We used $10.8 million in operating activities, including
$20.3 million from net income after giving effect to the non-cash items and a net decrease
in working capital of $31.1 million principally from the annual payment of bonuses and an
increase in taxes receivable which arose as a result of net operating losses. We used
$27,825 in investing activities, primarily related to the purchases of property and equipment.
We used $26.0 million in financing activities, $14.4 million for the payment of dividends, $1.0
million of distributions to noncontrolling interests and $17.7 million for the repurchase of
our common stock from employees in conjunction with the payment of tax liabilities in settlement
of restricted stock units, partially offset by $6.3 million of net borrowings from our revolving
loan facility and $0.7 million of net tax benefits from the delivery of restricted stock units.
In the first three months of 2010, our cash and cash equivalents decreased by $29.2 million
from December 31, 2009. We used $27.5 million in operating activities, including $15.8 million from
net income after giving effect to the non-cash items and a net decrease in working capital of $43.3
million (principally from the annual payment of bonuses and taxes). We used $11.2 million in
investing activities, including $11.0 million in new investments in our merchant banking funds and
$0.3 million for the build-out of new office space. We generated $11.2 million from financing
activities, including $38.6 million of net borrowings from our revolving loan facility and $7.0
million of net tax benefits from the delivery of
36
restricted stock units and payment of dividend
equivalents, partially offset by $14.0 million for the payment of dividends and $20.1 million for
the repurchase of our common stock from employees in conjunction with the payment of tax
liabilities in settlement of restricted stock units.
Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide financing, liquidity, market
risk or credit risk support, or engage in any leasing or hedging activities that expose us to any
liability that is not reflected in our condensed consolidated financial statements.
Market Risk
We limit
our investments to (1) short-term cash investments, which we believe do not face any
material interest rate risk, equity price risk or other market risk and (2) principal investments
made in merchant banking funds, Iridium and other investments.
We maintain our cash and cash equivalents with financial institutions with high credit
ratings. We may maintain deposits in federally insured financial institutions in excess of
federally insured (FDIC) limits. However, management believes that the firm is not exposed to
significant credit risk due to the financial position of the depository institutions in which those
deposits are held. We monitor the quality of these investments on a regular basis and may choose to
diversify such investments to mitigate perceived market risk. Our cash and cash equivalents are
denominated in U.S. dollars, Australian dollars, Canadian dollars, pound sterling, euros, and yen,
and we face modest foreign currency risk in our cash balances held in accounts outside the United
States due to potential currency movements and the associated foreign currency translation
accounting requirements. We may hedge our foreign currency exposure if we expect we will need to
fund U.S. dollar obligations with foreign currency.
With regard to our investments in both merchant banking funds and Iridium we face exposure to
changes in the estimated fair value of the companies in which we have directly or indirectly
invested, which historically has been volatile. Significant changes in the public equity markets
may have a material effect on our results of operations. Volatility in the general equity markets
would impact our operations primarily because of changes in the fair value of our merchant banking
or principal investments that are publicly traded securities. Volatility in the availability of
credit would impact our operations primarily because of changes in the fair value of merchant
banking or principal investments that rely upon a portion of leverage to operate. We have analyzed
our potential exposure to general equity market risk by performing sensitivity analyses on those
investments held by us and in the merchant banking funds which consist of publicly traded
securities. This analysis showed that if we assume that at March 31, 2011, the market prices of all
public securities, including Iridium, were 10% lower, the impact on our operations would be a
decrease in revenues of $8.2 million. We meet on a quarterly basis to determine the fair value of
the investments held in the merchant banking portfolio and to discuss the risks associated with
those investments. The respective Investment Committees of the merchant banking funds manage the
risks associated with the merchant banking portfolio by closely monitoring and managing the types
of investments made as well as the monetization and realization of existing investments.
In addition, the reported amounts of our financial advisory revenues may be affected by
movements in the rate of exchange between the Australian dollar, Canadian dollar, pound sterling,
euro, and yen (in which collectively 57% of our revenues for the three months ended March 31, 2011
were denominated) and the dollar, in which our financial statements are denominated. We do not
currently hedge against movements in these exchange rates. We analyzed our potential exposure to a
decline in exchange rates by performing a sensitivity analysis on our net income. During the three
month period ended March 31, 2011 as compared to the same period in 2010 the value of the U.S.
dollar weakened, on weighted average basis, relative to each of the currencies in the foreign
jurisdictions in which we operate. Accordingly, our earnings in the first quarter of 2011 were
slightly higher than they would have been in the same period in
37
the prior year had the value of the
U.S. dollar relative to those other currencies remained constant. While our earnings are subject to
volatility from foreign currency changes we do not believe we face any material risk in this
respect.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in conformity with accounting
principles generally accepted (GAAP) in the United States, which require management to make
estimates and assumptions regarding future events that affect the amounts reported in our financial
statements and their footnotes, including investment valuations, compensation accruals and other
matters. Management believes that the estimates used in preparing our condensed consolidated
financial statements are reasonable and prudent. Actual results could differ materially from those
estimates. Certain reclassifications have been made to prior year information to conform to current
year presentation.
We believe that the following discussion addresses Greenhills most critical accounting
policies, which are those that are most important to the presentation of our financial condition
and results of operations and require managements most difficult, subjective and complex
judgments. For further discussion of these and other significant accounting policies, see Note 2
Summary of Significant Accounting Policies in our condensed consolidated financial statements,
and our 2010 Annual Report on Form 10-K.
Revenue Recognition
Financial Advisory Fees
The firm recognizes financial advisory fee revenue for mergers and acquisitions or financing
advisory and restructuring engagements when the services related to the underlying transactions are
completed in accordance with the terms of the engagement letter. The firm recognizes private equity
and real estate capital advisory fees at the time of the clients acceptance of capital or capital
commitments in accordance with the terms of the engagement letter. Retainer fees are recognized as
financial advisory fee revenue over the period in which the related service is rendered.
The firms clients reimburse certain expenses incurred by the firm in the conduct of financial
advisory engagements. Expenses are reported net of such client reimbursements.
Merchant Banking and Other Investment Revenues
Merchant banking revenues consist of (i) management fees derived from merchant banking
activities (for periods prior to January 1, 2011), (ii) gains (or losses) on the firms investments
in merchant banking funds, Iridium and other principal investment activities, and if any, (iii)
profit overrides from the merchant banking funds.
Management fees earned from merchant banking activities are recognized over the period of
related service.
The firm recognizes revenue on its investments in the merchant banking funds based on its
allocable share of realized and unrealized gains (or losses) reported by such funds. Investments
held by the merchant banking funds and certain other investments are recorded at estimated fair
value. The value of merchant banking fund investments in privately held companies is determined by
the general partner of the fund after giving consideration to the cost of the security, the pricing
of other sales of securities by the portfolio company, the price of securities of other companies
comparable to the portfolio company, purchase multiples paid in other comparable third-party
transactions, the original purchase price multiple, market conditions, liquidity, operating results
and other qualitative and quantitative factors. Discounts may be applied to the funds privately
held investments to reflect the lack of liquidity and other transfer restrictions. Investments in
publicly traded securities are valued using quoted market prices discounted for
38
any legal or
contractual restrictions on sale. Because of the inherent uncertainty of valuations as well as the
discounts applied, the estimated fair values of investments in privately held companies may differ
significantly from the values that would have been used had a ready market for the securities
existed. The values at which the firms investments are carried on its condensed consolidated
statements of financial condition are adjusted to estimated fair value at the end of each quarter
and the volatility in general economic conditions, stock markets and commodity prices may result in
significant changes in the estimated fair value of the investments from period to period.
If certain financial returns are achieved over the life of the fund, the firm recognizes
merchant banking profit overrides at the time that certain financial returns are achieved. Profit
overrides are generally calculated as a percentage of the profits over a specified threshold earned
by each fund on investments managed on behalf of unaffiliated investors except the firm. When
applicable, the profit overrides earned by the firm are recognized on an accrual basis throughout
the year. In accordance with the relevant guidance, the firm records as revenue the amount that
would be due pursuant to the fund agreements at each period end as if the fund agreements were
terminated at that date. Overrides are generally calculated on a deal-by-deal basis but are subject
to investment performance over the life of each merchant banking fund. The firm may be required to
repay a portion of the overrides it realized in the event a minimum performance level is not
achieved by the fund as a whole (we refer to these potential repayments as clawbacks). The firm
would be required to establish a reserve for potential clawbacks if it were to determine that the
likelihood of a clawback is probable and the amount of the clawback can be reasonably estimated. As
of March 31, 2011, the firm believes it is more likely than not that the amount of profit overrides
recognized in prior periods as revenue will be realized and accordingly, the firm has not reserved
for any clawback obligations under applicable fund agreements.
Investments
The firms investments in the merchant banking funds are recorded under the equity method of
accounting based upon the firms proportionate share of the fair value of the underlying merchant
banking funds net assets. The firms other investments, which consider the firms influence or
control of the investee, are recorded at estimated fair value or under the equity method of
accounting based, in part, upon the firms proportionate share of the investees net assets.
Earnings per Share
The firm calculates basic earnings per share (EPS) by dividing net income allocated to
common stockholders by the weighted average number of shares outstanding for the period.
Diluted EPS includes the determinants of basic EPS plus the dilutive effect of the common
stock deliverable pursuant to restricted stock units for which future service is required
as a condition to the delivery of the underlying common stock.
Under the treasury method, the number of shares issuable upon the vesting of restricted stock units
included in the calculation of diluted earnings per share is the excess, if any, of the number of
shares expected to be issued, less the number of shares that could be purchased by the firm with
the proceeds to be received upon settlement at the average market closing price during the
reporting period. The denominator for basic EPS includes the number of shares deemed issuable
due to the vesting of restricted stock units for accounting purposes.
Restricted Stock Units
The firm accounts for its share-based compensation payments under which the fair value of
restricted stock units granted to employees with future service requirements is recorded as
compensation expense and generally amortized over a five-year service period following the date of
grant. Compensation expense is determined based upon the fair market value of the firms common
stock at the date of grant. As the firm expenses the awards, the restricted stock units recognized
are recorded within equity. The restricted stock units are reclassified into common stock and
additional paid-in capital upon vesting. The firm records dividend equivalent payments, net of
estimated forfeitures, on outstanding restricted stock units as a dividend payment and a charge to
equity.
Goodwill
Goodwill is the cost of acquired companies in excess of the fair value of identifiable net
assets at acquisition date. The firm tests its goodwill for impairment at least annually. An
impairment loss is triggered if the estimated fair value of an operating unit is less than
estimated net book value. Such loss is calculated as the difference between the estimated fair
value of goodwill and its carrying value.
Goodwill is translated at the rate of exchange prevailing at the end of the periods presented
in accordance with the accounting guidance for foreign currency translation. Any translation gain
or loss is included in the foreign currency translation adjustment included as a component of other
comprehensive income (loss) in the condensed consolidated statement of changes in equity.
Provision for Taxes
The firm accounts for taxes in accordance with the accounting guidance for income taxes which
requires the recognition of tax benefits or expenses on the temporary differences between the
financial reporting and tax bases of its assets and liabilities.
The firm follows the guidance for income taxes in recognizing, measuring, presenting and
disclosing in its financial statements uncertain tax positions taken or expected to be
taken on its income tax returns. Income tax expense is based on pre-tax accounting income,
including adjustments made for the recognition or derecognition related to uncertain tax
positions. The recognition or derecognition of income tax expense related to uncertain
tax positions is determined under the guidance.
Deferred tax assets and liabilities are recognized for the future tax attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period of change. Management applies
the more-likely-than-not criteria when determining tax benefits.
39
Financial Instruments and Fair Value
The firm accounts for financial instruments measured at fair value in accordance with
accounting guidance for fair value measurements and disclosures which establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level
3 measurements). The three levels of the fair value hierarchy under the pronouncement are described
below:
Basis of Fair Value Measurement
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities;
Level 2 Quoted prices in markets that are not active or financial instruments for which all
significant inputs are observable, either directly or indirectly; and
Level 3 Prices or valuations that require inputs that are both significant to the fair value
measurement and unobservable.
A financial instruments level within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement. In determining the appropriate levels,
the firm performs an analysis of the assets and liabilities that are subject to these disclosures.
At each reporting period, all assets and liabilities for which the fair value measurement is based
on significant unobservable inputs or instruments which trade infrequently and therefore have
little or no price transparency are classified as Level 3. Transfers between levels are recognized
as of the end of the period in which they occur.
Derivative Instruments
The firm accounts for warrants under the guidance for accounting for derivative instruments
and hedging activities. In accordance with that guidance, the firm records warrants at estimated
fair value in the condensed consolidated statements of financial condition with changes in
estimated fair value during the period recorded in merchant banking and other investment revenues
in the condensed consolidated statements of operations. The warrants held by the firm are not
designated as hedging instruments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are set forth above in Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations Market
Risk.
Item 4. Controls and Procedures
Under the supervision and with the participation of the firms management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
the firms disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended (the Exchange Act)). Based upon this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this report.
No change in the firms internal control over financial reporting (as defined in Rule
13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the period covered by this report that
has materially affected, or is reasonably likely to materially affect, the firms internal control
over financial reporting.
40
Part II Other Information
Item 1. Legal Proceedings
The firm is from time to time involved in legal proceedings incidental to the ordinary course
of its business. We do not believe any such proceedings will have a material adverse effect on our
results of operations.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in our 2010
Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchases in the First Quarter of 2011:
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Total Number of |
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Approximate |
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Shares Purchased |
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Dollar Value of |
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as Part of |
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Shares that May |
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Total Number of |
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Publicly |
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Yet Be Purchased |
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Shares |
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Average Price |
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Announced Plans |
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under the Plans |
Period |
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Repurchased(1) |
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Paid Per Share |
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or Programs |
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or Programs(2) |
January 1 January 31 |
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$ |
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$ |
87,615,897 |
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February 1 February 28 |
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87,615,897 |
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March 1 March 31 |
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87,615,897 |
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(1) |
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Excludes 254,274 shares the firm is deemed to have repurchased at $69.42 from
employees in conjunction with the payment of tax liabilities in respect of stock delivered to
employees in settlement of restricted stock units. |
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(2) |
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Effective April 22, 2010, the Board of Directors authorized the repurchase of up to
$100,000,000 of its common stock through December 31, 2011. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Removed and Reserved]
Item 5. Other Information
None.
41
Item 6. Exhibits
EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
31.1
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Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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|
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31.2
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Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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|
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32.1*
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Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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32.2*
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Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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101*
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Interactive data files pursuant to Rule 405 of Regulation S-T. |
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* |
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This information is furnished and not filed for purposes of Sections 11 and 12 of the
Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
42
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: May 10, 2011
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GREENHILL & CO., INC.
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By: |
/s/ SCOTT L. BOK
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Name: |
Scott L. Bok |
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Title: |
Chief Executive Officer |
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By: |
/s/ RICHARD J. LIEB
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Name: |
Richard J. Lieb |
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Title: |
Chief Financial Officer |
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S-1