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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2001
Commission File Number 1-15799
LADENBURG THALMANN FINANCIAL SERVICES INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0701248
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
590 MADISON AVENUE
NEW YORK, NEW YORK 10022
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 409-2000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
GBI CAPITAL MANAGEMENT CORP.
1055 STEWART AVENUE, BETHPAGE, NEW YORK 11714
SEPTEMBER 30
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] no [ ]
As of June 30, 2001, there were outstanding 36,988,430 shares of the
registrant's Common Stock, $.0001 par value. (See Note 2 to the Condensed
Consolidated Financial Statements.)
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LADENBURG THALMANN FINANCIAL SERVICES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial Condition
as of June 30, 2001 and December 31, 2000..................... 2
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2001 and 3
2000..........................................................
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the six months ended
June 30, 2001................................................. 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000............... 5
Notes to the Condensed Consolidated Financial Statements ........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 15
Item 2. Changes in Securities and Use of Proceeds......................... 15
Item 4. Submission of Matters to a Vote of Security Holders............... 15
Item 6. Exhibits and Reports on Form 8-K.................................. 17
SIGNATURE.................................................................... 18
-1-
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
(Unaudited)
-------- ------------
June 30, December 31,
2001 2000
-------- ------------
ASSETS
Cash and cash equivalents ........................................................... $ 4,535 $ 3,928
Trading securities owned ............................................................ 12,628 18,348
Due from affiliates ................................................................. -- 347
Receivables from clearing brokers ................................................... 25,168 10,126
Exchange memberships owned, at historical cost ...................................... 1,505 1,505
Furniture and equipment, net ........................................................ 11,222 6,544
Restricted assets ................................................................... 3,295 2,598
Income taxes receivable ............................................................. 2,927 --
Deferred tax assets ................................................................. 6,861 2,050
Goodwill ............................................................................ 19,406 176
Other assets ........................................................................ 7,308 4,732
-------- --------
Total assets ............................................................... $ 94,855 $ 50,354
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold, not yet purchased .................................................. $ 7,876 $ 3,570
Accrued compensation ................................................................ 7,307 7,142
Accounts payable and accrued liabilities ............................................ 7,649 3,484
Deferred rent credit ................................................................ 7,106 5,724
Due to parent and affiliates ........................................................ 450 134
-------- --------
Total liabilities .......................................................... 30,388 20,054
-------- --------
Commitments and contingencies ....................................................... -- --
Senior convertible notes payable .................................................... 20,000 --
Stockholders' equity:
Preferred stock, $.0001 par value; 2,000,000 shares authorized; none issued .... -- --
Common stock, $.0001 par value; 100,000,000 shares authorized;
42,025,211 and 18,806,612 shares issued and outstanding ...................... 4 2
Additional paid-in capital ..................................................... 56,014 38,983
Accumulated deficit ............................................................ (11,551) (8,685)
-------- --------
Total stockholders' equity ................................................. 44,467 30,300
-------- --------
Total liabilities and stockholders' equity ................................. $ 94,855 $ 50,354
======== ========
See accompanying notes to condensed
consolidated financial statements
-2-
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
------------------------------ ------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Principal transactions, net ....................... $ 8,140 $ 4,383 $ 16,988 $ 15,719
Commissions ....................................... 7,658 8,499 11,820 21,528
Investment banking fees ........................... 2,301 4,408 5,875 8,644
Interest and dividends ............................ 1,028 1,330 1,774 2,444
Syndications and underwritings .................... 224 94 270 288
Investment advisory fees .......................... 679 776 1,689 1,565
Other income ...................................... 1,138 541 1,662 1,130
------------ ------------ ------------ ------------
Total revenues ................................ 21,168 20,031 40,078 51,318
------------ ------------ ------------ ------------
Expenses:
Compensation and benefits ......................... 14,370 12,638 26,639 32,398
Brokerage, communication and clearance fees ....... 4,343 2,296 7,394 4,740
Rent and occupancy ................................ 1,595 1,390 2,874 2,709
Depreciation and amortization ..................... 643 271 942 543
Interest .......................................... 293 46 376 92
Other ............................................. 3,612 3,227 5,905 5,790
------------ ------------ ------------ ------------
Total expenses ................................ 24,856 19,868 44,130 46,272
------------ ------------ ------------ ------------
(Loss) income from continuing operations
before income taxes ............................... (3,688) 163 (4,052) 5,046
Income tax (benefit) provision ......................... (1,094) (696) (1,186) 640
------------ ------------ ------------ ------------
Net (loss) income ...................................... $ (2,594) $ 859 $ (2,866) $ 4,406
============ ============ ============ ============
(Loss) income per Common Share (basic and diluted):
Net (loss) income per Common Share ................ $ (0.07) $ 0.02 $ (0.08) $ 0.13
============ ============ ============ ============
Number of shares used in computation ................... 39,025,348 34,647,170 36,848,354 34,647,170
============ ============ ============ ============
See accompanying notes to condensed
consolidated financial statements
-3-
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
(Unaudited)
Common Paid-In Accumulated
Stock Capital Deficit Total
-------- -------- ------------ --------
Balance, December 31, 2000 ........... $ 2 $ 38,983 $ (8,685) $ 30,300
Net loss .......................... -- -- (2,866) (2,866)
Effect of LTS acquisition ......... 2 17,031 -- 17,033
-------- -------- -------- --------
Balance, June 30, 2001 ............... $ 4 $ 56,014 $(11,551) $ 44,467
======== ======== ======== ========
See accompanying notes to condensed
consolidated financial statements
-4-
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(Unaudited)
----------------------
Six Months Ended
June 30,
----------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net (loss) income ................................................. $ (2,866) $ 4,406
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization ..................................... 820 457
Amortization of deferred rent credit .............................. 367 401
Deferred taxes .................................................... (584) (655)
(Increase) decrease in operating assets:
Trading securities owned .......................................... 8,616 2,045
Receivables from clearing brokers ................................. (7,842) (2,692)
Due from affiliates ............................................... (347) 842
Other assets ...................................................... 697 617
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased ................................ 906 (6,649)
Accrued compensation .............................................. (1,149) (1,181)
Income taxes payable .............................................. (735) 705
Accounts payable and other liabilities ............................ (881) (3)
Due to parent and affiliate ....................................... 25 91
-------- --------
NET CASH USED IN OPERATING ACTIVITIES ......................... (2,973) (1,616)
-------- --------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements ....... (1,571) (309)
Cash acquired in LTS acquisition .................................. 5,151 --
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ........... 3,580 (309)
-------- --------
Cash flows from financing activities:
Payments to Ladenburg stockholders ................................ (10,000) --
Convertible note proceeds ......................................... 10,000 --
-------- --------
NET CASH PROVIDED FROM FINANCING ACTIVITIES ................... -- --
-------- --------
Net increase (decrease) in cash and cash equivalents ................... 607 (1,925)
Cash equivalents, beginning of period .................................. 3,928 4,911
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 4,535 $ 2,986
======== ========
Supplemental disclosure of non-cash activity:
Detail of acquisition:
Fair value of assets acquired......................................... 26,619 --
Goodwill.............................................................. 19,385 --
Liabilities assumed................................................... (11,263) --
Fair value of stock acquired.......................................... (34,741) --
-------- --------
Cash paid for acquisition............................................. $ -- $ --
======== ========
See accompanying notes to condensed
consolidated financial statements
-5-
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1. PRINCIPLES OF REPORTING
The condensed consolidated financial statements include the accounts of
Ladenburg Thalmann Financial Services Inc. ("LTS" or the "Company"), formerly
known as GBI Capital Management Corp., and its wholly-owned subsidiaries. The
subsidiaries of LTS include Ladenburg Thalmann & Co. Inc. ("Ladenburg"), GBI
Capital Partners Inc. ("GBI Capital") and GBI Fund Management Corp. ("GBI Fund
Management").
Prior to May 7, 2001, GBI Capital and GBI Fund Management were the only
subsidiaries of the Company. On May 7, 2001, LTS acquired all of the outstanding
common stock of Ladenburg, and its name was changed from GBI Capital Management
Corp. to Ladenburg Thalmann Financial Services Inc. For accounting purposes, the
acquisition has been accounted for as a reverse acquisition with Ladenburg
treated as the acquirer of LTS. (See Note 2). The historical financial
statements prior to May 7, 2001 are those of Ladenburg and LTS has changed its
fiscal year-end from September 30 to December 31. Pro forma information giving
effect to the acquisition as if the acquisition took place on January 1, 2000 is
included in Note 2 to these condensed consolidated financial statements.
The condensed consolidated financial statements as of June 30, 2001
presented herein have been prepared by the Company and are unaudited. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position as of June 30,
2001 and the results of operations, and cash flows for all periods presented
have been made. Results for the interim periods are not necessarily indicative
of the results for the entire year.
These condensed financial statements should be read in conjunction with
the consolidated financial statements of Ladenburg for the year ended December
31, 2000 as filed with the Securities and Exchange Commission as Exhibit J(2) to
the Company's Proxy Statement dated March 28, 2001, as supplemented (Commission
File Number 1-15799).
ORGANIZATION
Ladenburg is a full service-broker dealer that has been a member of the
New York Stock Exchange since 1879. It provides its services principally for
middle market and emerging growth companies and high net worth individuals
through a coordinated effort among corporate finance, research, capital markets,
investment management, brokerage and trading professionals. Ladenburg is subject
to regulation by the Securities and Exchange Commission ("SEC"), the New York
Stock Exchange ("NYSE") and National Association of Securities Dealers, Inc.
("NASD").
GBI Capital is a broker-dealer subject to regulation by the SEC and the
NASD. GBI Capital acts as an introducing broker, market maker, underwriter and
trader for its own account.
Ladenburg and GBI Capital do not carry accounts for customers or perform
custodial functions related to customers' securities. Ladenburg and GBI Capital
introduce all of their customer transactions, which are not reflected in these
financial statements, to their respective clearing brokers, which maintain the
customers' accounts and clear such transactions. Additionally, the clearing
brokers provide the clearing and depository operations for Ladenburg's and GBI
Capital's proprietary securities transactions. These activities may expose
Ladenburg and GBI Capital to off-balance-sheet risk in the event that customers
do not fulfill their obligations with the clearing broker, as Ladenburg and GBI
Capital have agreed to indemnify their respective clearing brokers for any
resulting losses.
-6-
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
At June 30, 2001, all of the securities owned and securities sold, not yet
purchased, and the amount receivable from the clearing brokers reflected
on the condensed consolidated statements of financial condition are
security positions with and amounts due from these clearing brokers.
The Company and its subsidiaries maintain cash in bank deposit accounts,
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash.
Securities transactions, commission revenue and commission expenses are
recorded on a trade-date basis. Unrealized gains and losses on securities
transactions are included in commissions and trading income in the
condensed consolidated statements of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period financial
information to conform to the current interim period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations", and
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, establishes specific criteria
for the recognition of intangible assets separately from goodwill, and
requires unallocated negative goodwill to be written off. SFAS No. 142
primarily addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001 and SFAS 142 is
effective for fiscal years beginning after December 15, 2001. Under the
adoption of SFAS No. 142, effective January 1, 2002, amortization of
goodwill will be subjected to periodic assessments of impairment.
Amortization expense related to goodwill was $151 and $156 for the three
and six months ended June 30, 2001.
2. LADENBURG TRANSACTION
On May 7, 2001, LTS acquired all of the outstanding common stock of
Ladenburg for 23,218,599 shares, $10,000 cash and $10,000 principal amount
of senior convertible notes due December 31, 2005. The notes bear interest
at 7.5% per annum and are convertible into 4,799,271 shares of common
stock. Upon closing, New Valley Corporation ("New Valley"), the previous
80.1% owner of Ladenburg, acquired an additional 3,945,000 shares of LTS
from the former chairman of LTS for $1.00 per share. Following completion
of the transaction, the former stockholders of Ladenburg owned 64.6% and
59.9% of the common stock of LTS on a basic and fully-diluted basis,
respectively.
To provide the funds for the acquisition of the common stock of Ladenburg,
LTS borrowed $10,000 from Frost-Nevada, Limited Partnership
("Frost-Nevada") and issued to Frost-Nevada $10,000 principal amount
-7-
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
of senior convertible notes due December 31, 2005. The notes bear interest
at 8.5% per annum and are convertible into 6,497,475 shares of common
stock. These notes, together with the notes issued to the Ladenburg
stockholders, are secured by a pledge of the Ladenburg stock.
The information above is based on preliminary estimates of the number of
shares of LTS common stock and the conversion price of the LTS notes to be
issued to the former stockholders of Ladenburg and the conversion price of
the LTS note issued to Frost-Nevada. The actual number of shares and the
conversion prices may be further adjusted following completion of a
post-closing determination of the respective changes in the adjusted net
worths of Ladenburg and LTS through April 30, 2001.
The primary reason for the acquisition was both LTS and Ladenburg
concluded that each company needed to enlarge the size of its business and
the scope of services provided to maintain viability as a participant in
today's financial markets.
The transaction has been accounted for under the purchase method of
accounting as a reverse acquisition. For accounting purposes, Ladenburg
has been treated as the acquirer of LTS as Ladenburg's stockholders held a
majority of the LTS common stock following the closing of the transaction.
As a result of the reverse acquisition treatment, the historical financial
statements prior to May 7, 2001 are those of Ladenburg and the financial
results of LTS are included beginning May 7, 2001. LTS has changed its
fiscal year-end from September 30 to December 31 to conform to the fiscal
year-end of Ladenburg. In connection with the acquisition, all per share
data have been restated to reflect retroactively the number of shares of
common stock, convertible notes and cash to be received by the former
stockholders of Ladenburg.
Under the purchase method of accounting, the assets acquired and
liabilities assumed were recorded at estimated fair values as determined
by management based on information currently available and on current
assumptions as to future operations. Goodwill of $19,385 has been
recognized for the amount of the excess of the purchase price paid over
the fair market value of the net assets acquired and is amortized on the
straight line basis over 20 years. The purchase price has been allocated
to the individual assets acquired and liabilities assumed based upon
preliminary estimates of fair value. The actual allocation may be
different from preliminary allocation due to refinements in the estimate
of the fair values of assets acquired and accrued liabilities assumed;
however, such differences are not expected to be material.
The preliminary allocation of the purchase price has been summarized in
the following tables:
CALCULATION OF PURCHASE PRICE:
Common stock ............................... $ 32,912
Stock options .............................. 1,422
Transaction costs .......................... 407
--------
Total purchase price ................... $ 34,741
========
PRELIMINARY ALLOCATION OF PURCHASE PRICE:
Assets:
LTS's assets ............................. $ 26,619
Goodwill.................................. 19,385
Liabilities:
LTS's liabilities ........................ (11,263)
--------
Total purchase price ................... $ 34,741
========
-8-
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
The following adjustments, which increased stockholders' equity by
$17,033, were made to stockholders' equity to record the acquisition of
LTS.
o an increase in paid in capital of $32,912 relating to the
deemed issuance of 18,806,612 shares of LTS common stock at
$1.75 per share to existing LTS stockholders;
o an increase in stockholders' equity of $1,421 to recognize the
value of 1,875,979 stock options outstanding at May 7, 2001 to
LTS employee, based on a weighted average fair value of $0.76
per option. The fair value of the options was determined using
the Black-Scholes option pricing model and was based on the
following weighted-average assumptions; expected volatility of
85.93%; expected lives of three years; a risk-free interest
rate of 4.42%; and no expected dividend yield or forfeiture;
o an increase of $2,700 in stockholders' equity principally
relating to net operating losses acquired from New Valley in
connection with Ladenburg's deconsolidation from New Valley's
consolidated federal income tax group;
o a decrease of $20,000 in stockholders' equity relating to the
issuance of $10,000 of convertible notes and the payment of
$10,000 of cash to the former stockholders of Ladenburg as
part of the consideration in the Stock Purchase Transactions;
and,
o the preliminary allocation of the excess of the purchase
price, including transaction costs, over the book value of the
net assets acquired to goodwill in the amount of $19,385.
Pro forma information giving effect to the acquisition as if the
acquisition took place on January 1, 2000 is presented below:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
----------- ---------- ---------- ---------
Revenues ......................... $ 29,701 $ 39,281 $ 58,980 $ 123,102
========= --------- ========= ---------
(Loss) income from continuing
operations .................... $ (5,086) $ 977 $ (7,316) $ 9,298
========= ========= ========= =========
(Loss) income from
continuing operations
per share ..................... $ (0.12) $ 0.02 $ (0.17) $ 0.22
========= ========= ========= =========
3. INCOME TAXES
Prior to May 7, 2001, Ladenburg participated in the consolidated federal
income tax return of New Valley, its indirect parent, and determined its
income tax provision on a separate company basis. As a result of the LTS
acquisition, New Valley's ownership of Ladenburg was decreased from 80.1%
to 53.6% and Ladenburg is no longer permitted to participate in the filing
of New Valley's consolidated federal income tax return. For the three and
six months ended June 30, 2001, the benefit for income taxes differs from
the amount of income taxes determined by applying the federal statutory
rates principally because of the effect of state and local taxes and
permanent differences. For the three and six months ended June 30, 2000,
the benefit for income taxes differs from the amount of income taxes
determined by applying the federal statutory rates principally because of
the utilization of valuation allowances established in prior years.
Valuation allowances have been established against certain deferred
assets, principally state and local tax net operating losses, that the
Company believes may not be realized in future taxable periods.
-9-
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
4. NET CAPITAL REQUIREMENTS
As registered broker-dealers, Ladenburg and GBI Capital are subject to the
SEC's Uniform Net Capital Rule 15c3-1, which requires the maintenance of
minimum net capital. At June 30, 2001, both Ladenburg and GBI Capital were
in compliance with their respective minimum net capital requirements.
5. EQUITY
In connection with the LTS acquisition, Ladenburg entered into a new
employment agreement with Victor M. Rivas which provided for Mr. Rivas to
become President and Chief Executive Officer of LTS upon closing of the
transaction. As part of Mr. Rivas' compensation under the employment
agreement, LTS granted him on May 7, 2001 a ten-year non-qualified option
to purchase 1,000,000 shares of LTS common stock at $3.05, the closing
market price as reflected by the American Stock Exchange on the date of
grant. The options have a ten-year term and become exercisable as to
one-third of the shares on each of the first three anniversaries of the
date of grant.
On May 7, 2001, the Company granted to each of the new five non-employee
directors of the Company ten-year options to purchase 20,000 shares of
common stock at $3.05 per share. Each option will become exercisable on
the first anniversary of the date of grant.
6. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in litigation and may be subject to unasserted
claims or arbitrations primarily in connection with its activities as a
securities broker-dealer and participation in public underwritings. Such
litigation and claims involve substantial or indeterminate amounts and are
in varying stages of legal proceedings. In the opinion of management,
after consultation with counsel, the ultimate resolution of these matters
is not expected to have a material adverse effect on the Company's
consolidated financial position and results of operations.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
INTRODUCTION
The condensed consolidated financial statements include the accounts of
Ladenburg Thalmann Financial Services Inc. ("LTS"), formerly known as GBI
Capital Management Corp., and its wholly owned subsidiaries. The subsidiaries of
LTS include Ladenburg Thalmann & Co. Inc. ("Ladenburg"), GBI Capital Partners
Inc. ("GBI Capital") and GBI Fund Management Corp. ("GBI Fund Management").
Prior to May 7, 2001, GBI Capital and GBI Fund Management were the only
subsidiaries of the Company. On May 7, 2001, LTS acquired all of the outstanding
common stock of Ladenburg, and its name was changed from GBI Capital Management
Corp. to Ladenburg Thalmann Financial Services Inc. The acquisition of Ladenburg
has been accounted for under the purchase method of accounting as a reverse
acquisition. For accounting purposes, Ladenburg has been treated as the acquirer
of LTS as Ladenburg's stockholders held a majority of the LTS common stock
following the transaction. As a result of the reverse acquisition treatment, the
historical financial statements prior to May 7, 2001 are those of Ladenburg and
the financial results of LTS are included beginning May 7, 2001. In connection
with the acquisition, all per share data have been restated to reflect
retroactively the number of shares of common stock, convertible notes and cash
to be received by the former stockholders of Ladenburg. LTS has changed its
fiscal year-end from September 30 to December 31 to conform to the fiscal
year-end of Ladenburg.
RECENT DEVELOPMENTS
LADENBURG TRANSACTION. On May 7, 2001, LTS acquired all of the outstanding
common stock of Ladenburg for 23,218,599 shares, $10,000 cash and $10,000
principal amount of senior convertible notes due December 31, 2005. The notes
bear interest at 7.5% per annum and are convertible into 4,799,271 shares of
common stock. Upon closing, New Valley Corporation ("New Valley"), the previous
80.1% owner of Ladenburg, acquired an additional 3,945,000 shares of LTS from
the former chairman of LTS for $1.00 per share. Following completion of the
transaction, the former stockholders of Ladenburg owned 64.6% and 59.9% of the
common stock of LTS on a basic and fully-diluted basis, respectively.
To provide the funds for the acquisition of the common stock of Ladenburg,
LTS borrowed $10,000 from Frost-Nevada, Limited Partnership ("Frost-Nevada") and
issued to Frost-Nevada $10,000 principal amount of senior convertible notes due
December 31, 2005. The notes bear interest at 8.5% per annum and are convertible
into 6,497,475 shares of common stock. These notes, together with the notes
issued to the Ladenburg stockholders, are secured by a pledge of the Ladenburg
stock.
The information above is based on preliminary estimates of the number of
shares of LTS common stock and the conversion price of the LTS notes to be
issued to the former stockholders of Ladenburg and the conversion price of the
LTS note issued to Frost-Nevada. The actual number of shares and the conversion
prices may be further adjusted following completion of a post-closing
determination of the respective changes in the adjusted net worths of Ladenburg
and LTS through April 30, 2001.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 VERSUS THREE MONTHS ENDED JUNE 30, 2000
LTS's revenues for the three months ended June 30, 2001 increased $1,137
from 2000 primarily as a result of increased principal transactions of $3,757,
offset by decreases in investment banking fees of $2,107 and decreases in
commissions of $841.
LTS's expenses for the three months ended June 30, 2001 increased $4,988
primarily as a result of increased employee compensation of $1,732 and increased
brokerage, communication and clearance fees of $2,047.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
(Dollars in thousands, except per share amounts)
LTS's revenues for the three months ended June 30, 2001 consisted of
commissions of $7,658, principal transactions of $8,140, investment banking fees
of $2,301, syndicate and underwriting income of $224, interest and dividends of
$1,028, investment advisory fees of $679 and other income of $1,138. LTS's
revenues in the 2000 period consisted of commissions of $8,499, principal
transactions of $4,383, investment banking fees of $4,408, syndicate and
underwriting income of $94, interest and dividends of $1,330, investment
advisory fees of $776 and other income of $541. Expenses of LTS for the three
months ended June 30, 2001 consisted of employee compensation and benefits of
$14,370 and other expenses of $10,486. Expenses of LTS in the 2000 period
consisted of employee compensation and benefits of $12,638 and other expenses of
$7,230.
The $3,757 (85.7%) increase in principal transactions was primarily the
result of the LTS acquisition, which added an additional $2,357 of principal
transactions from the acquired operations of the LTS, and the expansion of
Ladenburg's trading and brokerage activities.
The $2,107 (47.8%) decrease in investment banking fees was primarily the
result of decreased revenue from private placement and advisory assignments due
to the decrease in capital markets activity.
The $841 (9.9%) decrease in commissions was the result of a less active
market for equity securities for the three months ended June 30, 2001 offset by
the impact of the LTS acquisition, which provided additional commission income
of $4,724.
The increase in compensation expense of $1,732 was primarily the result of
an increase in compensation expense associated with the acquired operations of
LTS, offset by a decrease in performance-based compensation.
Income tax benefit for the three months ended June 30, 2001 was $1,094
compared to an income tax benefit of $696 in 2000. The income tax rate for the
2001 period does not bear a customary relationship to effective tax rates as a
result of state and local income tax expense. The income tax rate in the 2000
period did not bear a customary relationship to effective tax rates as a result
of management's evaluation and changes in the Ladenburg's valuation allowance
for deferred taxes and utilization of Ladenburg's net operating loss
carryforwards.
SIX MONTHS ENDED JUNE 30, 2001 VERSUS SIX MONTHS ENDED JUNE 30, 2000
LTS's revenues for the six months ended June 30, 2001 decreased $11,240
from 2000 primarily as a result of decreased commissions of $9,708 and decreased
investment banking fees of $2,769.
LTS's expenses for the six months ended June 30, 2001 decreased $2,142
primarily as a result of decreased employee compensation of $5,759 offset by an
increase in brokerage, communication and clearance fees of $2,654.
LTS's revenues for the six months ended June 30, 2001 consisted of
commissions of $11,820, principal transactions of $16,988, investment banking
fees of $5,875, syndicate and underwriting income of $270, interest and
dividends of $1,774, investment advisory fees of $1,689 and other income of
$1,662. LTS's revenues in the 2000 period consisted of commissions of $21,528,
principal transactions of $15,719, investment banking fees of $8,644, syndicate
and underwriting income of $288, interest and dividends of $2,444, investment
advisory fees of $1,565 and other income of $1,130. Expenses of LTS for the six
months ended June 30, 2001 consisted of employee compensation and benefits of
$26,639 and other expenses of $17,491. Expenses of LTS in the 2000 period
consisted of employee compensation and benefits of $32,398 and other expenses of
$13,874.
The $1,269 (8.1%) increase in principal transactions was primarily the
result of the LTS acquisition, which added an additional $2,357 of principal
transactions from the acquired operations of LTS, and the expansion of
Ladenburg's trading and brokerage activities.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
(Dollars in thousands, except per share amounts)
The $2,769 (32.0%) decrease in investment banking fees was primarily the
result of decreased revenue from private placement and advisory assignments due
to the decrease in capital markets activity.
The $9,708 (45.1%) decrease in commissions was the result of a less active
market for equity securities for the six months ended June 30, 2001, offset by
the impact of the LTS acquisition, which provided additional commission income
of $4,724.
The decrease in compensation expense of $5,759 was primarily the result of
a decrease in performance-based compensation as a result of the decrease in
revenues, offset by the inclusion of the compensation expense associated with
the acquired operations of LTS.
Income tax benefit for the six months ended June 30, 2001 was $1,186
compared to an income tax expense of $640 in 2000. The income tax rate for the
2001 period does not bear a customary relationship to effective tax rates as a
result of state income tax expense. The income tax rate in the 2000 period did
not bear a customary relationship to effective tax rates as a result of
management's evaluation and changes in the Ladenburg's valuation allowance for
deferred taxes and utilization of Ladenberg's net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Approximately 44% of LTS's assets at June 30, 2001 are highly liquid,
consisting primarily of cash and cash equivalents, securities inventories, and
receivables from other broker-dealers, all of which fluctuate, depending upon
the levels of customer business and trading activity. Receivables from
broker-dealers, which are primarily from LTS's clearing broker, turn over
rapidly. As a securities dealer, LTS may carry significant levels of securities
inventories to meet customer needs. LTS's inventory of market-making securities
is readily marketable; however, holding large blocks of the same security may
limit liquidity and prevent realization of full market value for the securities.
A relatively small percentage of LTS's total assets, excluding goodwill, are
fixed. The total assets or the individual components of total assets may vary
significantly from period to period because of changes relating to customer
demand, economic and market conditions, and proprietary trading strategies.
LTS's brokerage subsidiaries, Ladenburg and GBI Capital, are subject to the
net capital rules of the SEC. Therefore, they are subject to certain
restrictions on the use of capital and its related liquidity. At June 30, 2001,
both Ladenburg and GBI Capital were in compliance with their respective minimum
net capital requirements.
Cash used by operating activities for the six months ended June 30, 2001
was $2,973 as compared to $1,616 for the 2000 period. The difference is
primarily due to the net loss of $2,866 in 2001 versus net income of $4,406 in
2000, the increase in receivables from clearing brokers of $7,842 in 2001 versus
$2,692 in 2000 and the decrease of $2,740 in payables and other liabilities in
2001 versus $388 in 2000, offset by a net decrease in LTS's net trading
securities of $14,126.
Cash flows provided from investing activities for the six months ended June
30, 2001 were $3,580 compared to cash flows used by investing activities of $309
for the 2000 period. The difference is primarily attributable to cash of $5,151
acquired in the LTS acquisition, offset by an increase in purchases of
furniture, equipment.
The capital expenditures of $1,571 and $309 for the six months ended June
30, 2001 and 2000, respectively, related principally to the enhancements and
improvements to computer equipment and furniture and fixtures.
LTS's overall capital and funding needs are continually reviewed to ensure
that its capital base can support the estimated needs of its business units.
These reviews take into account business needs as well as regulatory capital
requirements of the subsidiary. Based upon these reviews, management believes
that the Company's capital structure is adequate for current operations and
reasonably foreseeable future needs.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
(Dollars in thousands, except per share amounts)
LTS's brokerage subsidiaries, as guarantors of their customer accounts to
their clearing brokers, are exposed to off-balance-sheet risks in the event that
their customers do not fulfill their obligations with the respective clearing
broker. In addition, to the extent LTS's subsidiaries maintain a short position
in certain securities, they are exposed to a future off-balance-sheet market
risk, since their ultimate obligation may exceed the amount recognized in the
financial statements.
In conjunction with the Ladenburg transaction, LTS issued a total of
$20,000 principal amount of senior convertible notes due December 31, 2005. The
$10,000 principal amount of notes issued to the former Ladenburg stockholders
bears interest at 7.5% per annum, and the $10,000 principal amount of notes
issued to Frost-Nevada bears interest at 8.5% per annum. The notes are
convertible into a total of 11,296,746 shares of common stock and are secured by
a pledge of the stock of Ladenburg. If, during any period of 20 consecutive
trading days, the closing sale price of LTS's common stock is at least $8.00,
the principal and all accrued interest on the notes will be automatically
converted into shares of common stock. The notes also provide that if a change
of control occurs, as defined in the notes, LTS must offer to purchase all of
the outstanding notes at a purchase price equal to the unpaid principal amount
of the notes and the accrued interest.
Ladenburg has a $2,500 junior subordinated revolving credit agreement that
extends through October 31, 2001 with its clearing broker under which
outstanding borrowings incur interest at LIBOR plus 2 points. As of June 30,
2001, no borrowings were outstanding.
MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rates, foreign exchange
rates, equity and commodity prices and also changes in the credit ratings of
either the issuer or its related country of origin. Market risk is inherent to
both derivative and non-derivative financial instruments, and accordingly, the
scope of LTS's market risk management procedures extends beyond derivatives to
include all market risk sensitive financial instruments.
Current and proposed underwriting, corporate finance, merchant banking and
other commitments are subject to due diligence reviews by LTS's senior
management, as well as professionals in the appropriate business and support
units involved. Credit risk related to various financing activities is reduced
by the industry practice of obtaining and maintaining collateral. LTS monitors
its exposure to counter party risk through the use of credit exposure
information, the monitoring of collateral values and the establishment of credit
limits.
LTS maintained inventories of trading securities at June 30, 2001 with fair
market values of $12,628 in long positions and $7,876 in short positions. LTS
performed an entity-wide analysis of its financial instruments and assessed the
related risk. Based on this analysis, in the opinion of management, the market
risk associated with LTS's financial instruments at June 30, 2001 will not have
a material adverse effect on the its consolidated financial position or results
of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.
-14-
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 6 to the condensed consolidated financial statements of the
Company included in Part I, Item 1 of this Report.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No securities of the Company which were not registered under the
Securities Act of 1933 have been issued or sold by the Company during
the quarter ended June 30, 2001, except on May 7, 2001; (i) the Company
granted to each of the five non-employee directors of the Company
options to purchase 20,000 shares of common stock at an exercise price
of $3.05 per share; (ii) the Company granted an option for 100,000
shares of common stock to the former Administrator of the Company at an
exercise price of $3.05; (iii) the Company granted an option of
1,000,000 shares of common stock to the President and Chief Executive
Officer of the Company at an exercise price of $3.05; and (iv) shares
of common stock and senior convertible notes were issued to the former
stockholders of Ladenburg and senior convertible notes were issued to
Frost-Nevada as described in Note 2 to the condensed consolidated
financial statements of the Company included in Part I, Item 1 of this
Report. The foregoing transactions were effected in reliance of the
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933 or did not involve a "sale" under the Securities Act of
1933.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
During the second quarter of 2001, the Company submitted certain
matters to a vote of security holders at its Annual Meeting of
Stockholders held on May 7, 2001. Proxies for the Annual Meeting were
solicited pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended.
At the Annual Meeting, every holder of record of common stock of the
Company at the close of business on March 23, 2001 was entitled to one
vote for each share held. As of the record date, the Company had
outstanding 18,806,612 shares of common stock.
The holders of a majority of the outstanding shares entitled to vote at
the Annual Meeting were either present in person or represented by
proxy, and constituted a quorum for the transaction of business at the
Annual Meeting, as indicated in the following table:
Present in Person or Represented by Proxy
-----------------------------------------
Shares No. of Percent
Outstanding Shares of Votes
----------- ------ --------
18,806,612 15,829,753 84.2%
-15-
1. To approve the issuance of the shares of common stock and senior
convertible promissory notes in connection with the purchase of the common
stock of Ladenburg.
FOR AGAINST ABSTAIN BROKER NON-VOTES
------------------ ----------------- ----------------- ------------------
No. of % of No. of % of No. of % of No. of % of
Votes Votes Votes Votes Votes Votes Votes Votes
------ ----- ----- ----- ------ ----- ------ -----
14,830,557 78.9% 7,700 0.0% 1,400 0.0% 3,966,955 21.1%
2. Nine nominees were elected as directors of the Company by a plurality of
the votes cast to serve until the next annual stockholders' meeting.
VOTED FOR DIRECTORS VOTE WITHHELD
--------------------------------- ----------------------------------
No. of Votes Percent of Votes No. of Votes Percent of Votes
------------ ---------------- ------------ ----------------
Richard Rosenstock 15,690,751 99.1% 139,002 0.01%
Mark Zeitchick 15,690,751 99.1% 139,002 0.01%
Vincent Mangone 15,690,751 99.1% 139,002 0.01%
Bennett S. LeBow 15,690,751 99.1% 139,002 0.01%
Howard M. Lorber 15,690,751 99.1% 139,002 0.01%
Victor M. Rivas 15,690,751 99.1% 139,002 0.01%
Phillip Frost, M.D. 15,690,751 99.1% 139,002 0.01%
Henry C. Beinstein 15,690,751 99.1% 139,002 0.01%
Robert J. Eide 15,690,751 99.1% 139,002 0.01%
3. To authorize an amendment to the Company's articles of incorporation,
conditional upon the consummation of the acquisition of the common stock of
Ladenburg, to change the Company's name from "GBI Capital Management Corp."
to "Ladenburg Thalmann Financial Services Inc."
FOR AGAINST ABSTAIN BROKER NON-VOTES
------------------ ----------------- ------------------ ------------------
No. of % of No. of % of No. of % of No. of % of
Votes Votes Votes Votes Votes Votes Votes Votes
------ ----- ----- ----- ------ ----- ------ -----
14,830,557 78.9% 7,700 0.0% 1,400 0.0% 3,966,955 21.1%
4. To authorize an amendment to the Company's 1999 Performance Equity Plan to
increase the number of shares of common stock available for issuance under
the plan from 3,000,000 to 5,500,000 shares and to allow the Compensation
Committee to grant an option under the plan to Victor M. Rivas to purchase
1,000,000 shares of common stock.
FOR AGAINST ABSTAIN BROKER NON-VOTES
------------------ ----------------- ------------------ ------------------
No. of % of No. of % of No. of % of No. of % of
VOTES VOTES VOTES VOTES VOTES VOTES VOTES VOTES
------ ----- ----- ----- ------ ----- ------ -----
14,830,959 78.9% 5,550 0.0% 3,200 0.0% 3,966,953 21.1%
-16-
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Stock Option Agreement, dated as of May 7, 2001, between
Ladenburg Thalmann Financial Services Inc. and Victor M.
Rivas.
10.2 Stock Option Agreement, dated as of May 7, 2001, between
Ladenburg Thalmann Financial Services Inc. and David Thalheim.
10.3 Form of Stock Option Agreement, dated as of May 7, 2001,
between Ladenburg Thalmann Financial Services Inc. and certain
directors.
10.3.1 Schedule of Stock Option Agreements in the form of Exhibit
10.3, including material detail in which such documents differ
from Exhibit 10.3.
(b) REPORTS ON FORM 8-K
DATE ITEMS FINANCIAL STATEMENTS
---- ----- --------------------
May 1, 2001 1, 2, 7 None
May 14, 2001 1, 2, 4, 7, 8 Ladenburg Thalmann & Co. Inc.
-17-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Registrant)
Date: August 13, 2001 By: /s/ J. BRYANT KIRKLAND III
-----------------------------------
J. Bryant Kirkland III
Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
-18-