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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 MARCH 31, 2002
COMMISSION FILE NUMBER 1-15799
LADENBURG THALMANN FINANCIAL SERVICES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0701248
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
590 MADISON AVENUE
NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 409-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 MAY 14, 2002, THERE WERE OUTSTANDING 42,025,211 SHARES OF THE
REGISTRANT'S COMMON STOCK, $.0001 PAR VALUE.
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LADENBURG THALMANN FINANCIAL SERVICES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial Condition
as of March 31, 2002 and December 31, 2001.................... 2
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2002 and 2001............ 3
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the three months ended
March 31, 2002................................................ 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2002 and 2001................ 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........ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 17
Item 2. Changes in Securities and Use of Proceeds......................... 17
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)
March 31, December 31,
2002 2001
--------- ------------
ASSETS
Cash and cash equivalents ...................................................... $ 6,046 $ 8,136
Trading securities owned ....................................................... 11,036 17,324
Due from affiliates ............................................................ 204 262
Receivables from clearing brokers .............................................. 25,265 27,920
Exchange memberships owned, at historical cost ................................. 1,505 1,505
Furniture and equipment, net of accumulated depreciation ....................... 9,622 9,959
Restricted assets .............................................................. 1,050 2,610
Income taxes receivable ........................................................ 854 499
Deferred tax assets ............................................................ 3,192 3,339
Goodwill, net of accumulated amortization ...................................... 18,762 18,762
Other assets ................................................................... 7,987 8,091
-------- --------
Total assets .......................................................... $ 85,523 $ 98,407
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Securities sold, not yet purchased ............................................. $ 9,724 $ 12,404
Accrued compensation ........................................................... 4,730 11,078
Accounts payable and accrued liabilities ....................................... 6,570 7,608
Deferred rent credit ........................................................... 7,837 7,189
Due to former parent, net ...................................................... -- 434
Notes payable .................................................................. 2,500 2,000
Senior convertible notes payable ............................................... 20,000 20,000
Subordinated note payable ...................................................... 2,500 2,500
-------- --------
Total liabilities ..................................................... 53,861 63,213
-------- --------
Commitments and contingencies .................................................. -- --
Shareholders' 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 shares issued and outstanding ................................ 4 4
Additional paid-in capital ................................................ 56,168 56,168
Accumulated deficit ....................................................... (24,510) (20,978)
-------- --------
Total shareholders' equity ............................................ 31,662 35,194
-------- --------
Total liabilities and shareholders' equity ............................ $ 85,523 $ 98,407
======== ========
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
March 31,
-------------------------------
2002 2001
------------ ------------
Revenues:
Commissions .................................. $ 13,950 $ 4,162
Principal transactions, net .................. 5,057 8,848
Investment banking fees ...................... 3,946 3,574
Dividends and interest ....................... 683 746
Syndications and underwritings ............... -- 46
Investment advisory fees ..................... 827 1,010
Other income ................................. 1,152 524
------------ ------------
Total revenues ........................... 25,615 18,910
------------ ------------
Costs and expenses:
Compensation and benefits .................... 17,590 12,269
Brokerage, communications and clearance fees . 4,489 3,051
Rent and occupancy ........................... 1,860 1,279
Depreciation and amortization ................ 609 299
Interest ..................................... 488 83
Other ........................................ 4,766 2,293
------------ ------------
Total costs and expenses ................. 29,802 19,274
------------ ------------
Loss before income taxes........................... (4,187) (364)
Income tax benefit ................................ (655) (92)
------------ ------------
Net loss .......................................... $ (3,532) $ (272)
============ ============
Loss per Common Share (basic and diluted):
Net loss per Common Share .................... $ (0.08) $ (0.01)
============ ============
Number of shares used in computation .............. 42,025,211 34,647,170
============ ============
See accompanying notes to condensed
consolidated financial statements
-3-
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------- -------- ------------- --------
Balance, December 31, 2001 ......... $ 4 $ 56,168 $(20,978) $ 35,194
Net loss ........................... -- -- (3,532) (3,532)
-------- -------- -------- --------
Balance, March 31, 2002 ............ $ 4 $ 56,168 $(24,510) $ 31,662
======== ======== ======== ========
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)
Three months ended
March 31,
---------------------
2002 2001
------- -------
Cash flows from operating activities:
Net loss .................................................. $(3,532) $ (272)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............................. 609 220
Amortization of deferred rent credit ...................... 648 322
Deferred taxes ............................................ 147 (290)
Decrease (increase) in operating assets:
Trading securities owned .................................. 6,288 9,783
Receivables from clearing brokers ......................... 2,655 (8,289)
Due from affiliates ....................................... 58 187
Other assets .............................................. (255) (307)
Decrease in operating liabilities:
Securities sold, not yet purchased ........................ (2,680) (885)
Accrued compensation ...................................... (6,348) (1,371)
Accounts payable and accrued liabilities .................. (1,038) (561)
Due to former parent, net ................................. (434) (47)
------- -------
NET CASH USED IN OPERATING ACTIVITIES ................. (3,882) (1,510)
------- -------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements (268) (1,379)
Decrease (increase) in restricted assets .................. 1,560 (36)
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ... 1,292 (1,415)
------- -------
Cash flows from financing activities:
Repayment of promissory notes payable ..................... (2,000) --
Issuance of promissory notes payable ...................... 2,500 --
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............. 500 --
------- -------
Net decrease in cash and cash equivalents ...................... (2,090) (2,925)
Cash and cash equivalents, beginning of period ................. 8,136 3,928
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD .............. $ 6,046 $ 1,003
======= =======
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"), Ladenburg Capital Management Inc., formerly known as
GBI Capital Partners Inc. ("Ladenburg Capital"), and Ladenburg Capital
Fund Management Inc., formerly known as GBI Fund Management Corp.
("Ladenburg Fund Management"). The interim financial data as of March 31,
2002 and for the three months ended March 31, 2002 and March 31, 2001 are
unaudited; however, in the opinion of the Company, the interim data
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
Prior to May 7, 2001, Ladenburg Capital and Ladenburg 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. 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
it took place on January 1, 2001 is included in Note 2 to these
consolidated financial statements.
Ladenburg was an indirect wholly owned subsidiary of New Valley
Corporation ("New Valley") until December 1999, when a minority stake in
the Company was sold leaving its former parent with an indirect 80.1%
ownership interest. In December 2001, New Valley distributed its shares of
LTS common stock to holders of New Valley common shares as a special
dividend.
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, National
Association of Securities Dealers, Inc. ("NASD"), Commodities Futures
Trading Commission and National Futures Association.
Ladenburg Capital is a broker-dealer subject to regulation by the SEC and
the NASD. Ladenburg Capital acts as an introducing broker, market maker,
underwriter and trader for its own account.
Ladenburg and Ladenburg Capital do not carry accounts for customers or
perform custodial functions related to customers' securities. Ladenburg
and Ladenburg 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 Ladenburg Capital's proprietary
securities transactions. These activities may expose Ladenburg and
Ladenburg Capital to off-balance-sheet risk in the event that customers do
not fulfill their obligations with the clearing broker, as Ladenburg and
Ladenburg Capital have agreed to indemnify their respective clearing
brokers for any resulting losses.
At March 31, 2002, all of the securities owned and securities sold, not
yet purchased, and the amount receivable from the clearing brokers
reflected on the consolidated statements of financial condition are
securities positions with and amounts due from these clearing brokers.
-6-
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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. Gains and losses (both realized and
unrealized) on securities transactions are included in principal
transactions in the 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
SFAS NO. 142
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets", which requires
that goodwill and other intangible assets with indefinite useful lives no
longer be amortized. This statement also requires that, within the first
interim period of adoption, intangible assets with indefinite lives be
tested for impairment as of the date of adoption. Additionally, SFAS No.
142 requires that, within six months of adoption, goodwill be tested for
impairment at the reporting unit level as of the date of adoption. If any
impairment is indicated to have existed upon adoption, it should be
measured and recorded before the end of the year of adoption. SFAS No. 142
requires that any goodwill impairment loss recognized as a result of
initial application be reported in the first interim period of adoption as
a change in accounting principle and that the loss per share effects of
the accounting change be separately disclosed.
Prior to January 1, 2002, the Company tested goodwill and other intangible
assets for impairment based on the recoverability of carrying value using
undiscounted future cash flows in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". The new criteria
provided in SFAS No. 142 require the testing of impairment based on fair
value.
Prior to performing the review for impairment, SFAS No. 142 required that
all goodwill deemed to be related to the entity as a whole be assigned to
all of the Company's reporting units, which differed from the previous
accounting rules where goodwill was assigned only to the businesses of the
acquired entity. As a result, a portion of the goodwill generated in the
Ladenburg acquisition has been reallocated from Ladenburg Capital to
Ladenburg.
-7-
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
A summary of changes of the Company's goodwill during the quarter ended
March 31, 2002 by entity is as follows:
DECEMBER 31, 2001
------------------------
ACCUMULATED
GROSS AMORTIZATION NET ADJUSTMENTS MARCH 31, 2002
----- ------------ --- ----------- --------------
Ladenburg ....... $ -- $ -- $ -- $ 5,546 $ 5,546
Ladenburg Capital 19,385 (623) 18,762 (5,546) 13,216
------- ------- ------- ------- -------
Total ........... $19,385 $ (623) $18,762 $ -- $18,762
======= ------- ======= ======= =======
For initial application of SFAS No. 142, an independent appraisal firm was
engaged to value the Company's goodwill as of January 1, 2002. Based on
this valuation, no goodwill impairment was indicated, since the fair value
of the reporting units was determined to be greater than its carrying
value using several valuation techniques, including discounted cash flow
analysis.
The goodwill of $19,385 arose as a result of the Ladenburg transaction on
May 7, 2001 and, as a result, there is no material goodwill amortization
charge recorded in the financial statements for the three months ended
March 31, 2001.
The following table reconciles net income for the quarter ended March 31,
2001 to its amount adjusted to exclude goodwill amortization expense.
Reported net loss............................... $ (272)
Goodwill amortization........................... --
------
Adjusted net loss............................... $ (272)
------
Reported net loss per share..................... $(0.05)
Goodwill amortization........................... --
------
Adjusted net loss per share..................... $(0.05)
======
2. LADENBURG TRANSACTION
On May 7, 2001, LTS acquired all of the outstanding common stock of
Ladenburg for 23,218,599 shares of common stock, $10,000 cash and $10,000
principal amount of senior convertible notes due December 31, 2005. The
actual number of shares of common stock may be further increased and the
conversion prices of the senior convertible notes payable may be further
decreased on or about May 7, 2003, pending a final resolution of LTS's
pre-closing litigation adjustments.
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.
Pro forma information for the three months ended March 31, 2001, giving
effect to the acquisition and the adoption of SFAS No. 142 as if they both
occurred on January 1, 2001, is presented below:
Revenues ................................ $ 29,279
========
Net Loss................................. $ (1,963)
========
Net Loss per share....................... $ (0.05)
========
3. NET CAPITAL REQUIREMENTS
As registered broker-dealers, Ladenburg and Ladenburg Capital are subject
to the SEC's Uniform Net Capital Rule 15c3-1, which requires the
maintenance of minimum net capital. Both Ladenburg and Ladenburg Capital
-8-
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
have elected to compute their net capital under the alternative method
allowed by these rules. At March 31, 2002, Ladenburg had net capital, as
defined, of $4,296, which exceeded minimum capital requirements of $1,000
by $3,296. At March 31, 2002, Ladenburg Capital had net capital, as
defined, of $3,001, which exceeded minimum capital requirements of $1,000
by $2,001.
4. NOTES PAYABLE
The components of notes payable at March 31, 2002 are as follows:
Senior convertible notes payable $20,000
Notes payable .................. 2,500
Subordinated note payable ...... 2,500
-------
Total .......................... $25,000
=======
In conjunction with the acquisition of Ladenburg, 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, Limited Partnership
("Frost-Nevada") bears interest at 8.5% per annum. The notes held by
Frost-Nevada are convertible into a total of 6,497,475 shares of common
stock and are collateralized by a pledge of the stock of Ladenburg. The
notes held by the former Ladenburg stockholders are convertible into a
total of 4,799,271 shares of common stock and are secured by a pledge of
Ladenburg stock. 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 with
its clearing broker that extends through October 31, 2002 under which
outstanding borrowings incur interest at LIBOR plus 2%.
On March 27, 2002, LTS borrowed $2,500 from New Valley. The loan, which
bears interest at 1% above the prime rate, is due on the earlier of June
30, 2002 or the completion of one or more equity financings where LTS
receives at least $5,000 in total proceeds. LTS may from time to time
borrow additional funds on a short-term basis from New Valley or other of
its shareholders in order to supplement the liquidity of our broker-dealer
operations.
5. SHAREHOLDERS' EQUITY
On January 10, 2002, the Company granted non-qualified stock options to
five executives pursuant to the Company's 1999 Performance Equity Plan
(the "Plan"). The options entitle the holders to purchase an aggregate of
1,200,000 shares of common stock at an exercise price of $0.88 per share,
the fair market value of a share of common stock on the date of grant. On
March 19, 2002, other employees of the Company or its subsidiaries were
awarded qualified and non-qualified options under the Plan to purchase a
total of 1,047,485 shares of common stock at a price of $0.60 per share,
the fair market value on the date of grant. All options granted in 2002
have a ten-year term and become exercisable as to one-third of the shares
on each of the first three anniversaries of the grant.
On January 10, 2002, the Company granted to a new non-employee director of
the Company a ten-year option to purchase 20,000 shares of common stock
under the Plan at an exercise price of $0.88 per share. The option will
become exercisable on the first anniversary of the grant.
-9-
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 our accounts
and the accounts of our wholly owned subsidiaries. Our subsidiaries include
Ladenburg Thalmann & Co. Inc., Ladenburg Capital Management Inc., and Ladenburg
Fund Management Inc.
Prior to May 7, 2001, Ladenburg Capital Management and Ladenburg Fund
Management were our only subsidiaries. On May 7, 2001, we acquired all of the
outstanding common stock of Ladenburg Thalmann & Co., and our name was changed
from GBI Capital Management Corp. to Ladenburg Thalmann Financial Services Inc.
The acquisition of Ladenburg Thalmann & Co. has been accounted for under the
purchase method of accounting as a reverse acquisition. For accounting purposes,
Ladenburg Thalmann & Co. has been treated as the acquirer of us as Ladenburg
Thalmann & Co.'s stockholders held a majority of our 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 Thalmann & Co.
and our financial results 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 Thalmann & Co. We have changed our
fiscal year-end from September 30 to December 31 to conform to the fiscal
year-end of Ladenburg Thalmann & Co.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
SEC, requires all companies to include a discussion of critical accounting
policies or methods used in the preparation of financial statements. Note 2 to
our consolidated financial statements filed with our Annual Report on Form 10-K
for the year ended December 31, 2001 includes a summary of the significant
accounting policies and methods used in the preparation of our consolidated
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by us.
GENERAL. 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,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
CLEARING ARRANGEMENTS. Ladenburg Thalmann & Co. and Ladenburg Capital
Management do not carry accounts for customers or perform custodial functions
related to customers' securities. Ladenburg Thalmann & Co. and Ladenburg Capital
Management 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
Thalmann & Co.'s and Ladenburg Capital Management's proprietary securities
transactions. These activities may expose Ladenburg Thalmann & Co. and Ladenburg
Capital Management to off-balance-sheet risk in the event that customers do not
fulfill their obligations with the clearing broker, as Ladenburg Thalmann & Co.
and Ladenburg Capital Management have agreed to indemnify their respective
clearing brokers for any resulting losses.
CUSTOMER CLAIMS. In the normal course of business, our operating
subsidiaries have been and continue to be the subject of numerous civil actions
and arbitrations arising out of customer complaints relating to our activities
as a broker-dealer, as an employer and as a result of other business activities.
In general, the cases involve various allegations that our employees had
mishandled customer accounts. Based on our historical experience and
consultation with counsel, we typically reserve an amount we believe will be
sufficient to cover any damages assessed against us. However, we have in the
past been assessed damages that exceeded our reserves. If we misjudged the
amount of damages that may be assessed against us from pending or threatened
claims, or if we are unable to adequately estimate the amount of damages that
will be assessed against us from claims that arise in the future and reserve
accordingly, our operating income would be reduced.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FAIR VALUE. "Trading securities owned" and "Securities sold, not yet
purchased" on our consolidated statements of financial condition are carried at
fair value or amounts that approximate fair value, with related unrealized gains
and losses recognized in our results of operations. The determination of fair
value is fundamental to our financial condition and results of operations and,
in certain circumstances, it requires management to make complex judgments.
Fair values are based on listed market prices, where possible. If
listed market prices are not available or if the liquidation of our positions
would reasonably be expected to impact market prices, fair value is determined
based on other relevant factors, including dealer price quotations. Fair values
for certain derivative contracts are derived from pricing models that consider
current market and contractual prices for the underlying financial instruments
or commodities, as well as time value and yield curve or volatility factors
underlying the positions.
Pricing models and their underlying assumptions impact the amount and
timing of unrealized gains and losses recognized, and the use of different
pricing models or assumptions could produce different financial results. Changes
in the fixed income and equity markets will impact our estimates of fair value
in the future, potentially affecting principal trading revenues. The illiquid
nature of certain securities or debt instruments also requires a high degree of
judgment in determining fair value due to the lack of listed market prices and
the potential impact of the liquidation of our position on market prices, among
other factors.
IMPAIRMENT OF GOODWILL AND VALUATION OF DEFERRED TAX ASSETS. At March
31, 2002, we had $18,762 of goodwill and other intangible assets, and $3,192 of
net deferred tax assets, accounting for approximately 26% of our total assets.
On January 1, 2002, we adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," and were required to analyze our
goodwill for impairment issues on January 1, 2002 and will be required to
analyze such goodwill on a periodic basis thereafter. We did not record an
impairment charge related to our goodwill in connection with the adoption of
SFAS No. 142 on January 1, 2002. If the assumptions used in analyzing goodwill
for impairment at January 1, 2002 change in the future, we may be required to
record an impairment charge in the future. In addition, SFAS No. 142 requires
that goodwill and other intangible assts with indefinite useful lives no longer
be amortized. See Note 1 to the Condensed Consolidated Financial Statements for
a discussion of the adoption of SFAS No. 142.
The carrying value of our net deferred tax assets assumes that we will
be able to generate sufficient future taxable income, based on estimates and
assumptions. If these estimates and related assumptions change in the future, we
may be required to record additional valuation allowances against our deferred
tax assets resulting in additional income tax expense in our consolidated
statement of operations. Management evaluates the realizability of the deferred
tax assets quarterly and assesses the need for additional valuation allowances
quarterly. During the year ended December 31, 2001, we recorded $4,565 of
valuation allowances related to our net deferred tax assets. The valuation
allowance related to our net deferred tax assets at March 31, 2002 is
approximately $5,500.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 VERSUS THREE MONTHS ENDED MARCH 31, 2001
Our revenues for the three months ended March 31, 2002 increased $6,705
from 2001 primarily as a result of increased commissions of $9,788 offset by
decreases in principal transactions of $3,791.
Our expenses for the three months ended March 31, 2002 increased $10,528
primarily as a result of increased employee compensation of $5,321 and increased
brokerage, communication and clearance fees of $1,438.
Our revenues for the three months ended March 31, 2002 consisted of
commissions of $13,950, principal transactions of $5,057, investment banking
fees of $3,946, dividends and interest of $683, investment advisory fees of $827
and other income of $1,152. Ladenburg Thalmann & Co.'s revenues in the 2001
period consisted of commissions of $4,162, principal transactions of $8,848,
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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)
investment banking fees of $3,574, syndicate and underwriting income of $46,
dividends and interest of $746, investment advisory fees of $1,010 and other
income of $524. Our expenses for the three months ended March 31, 2002 consisted
of employee compensation and benefits of $17,590 and other expenses of $12,212.
Expenses of Ladenburg Thalmann & Co. in the 2001 period consisted of employee
compensation and benefits of $12,269 and other expenses of $7,005.
The $9,788 (235.2%) increase in commissions was the result of the impact of
the Ladenburg Thalmann & Co. transaction, which provided additional commission
income of $11,318 offset by the significant decline in the market for equity
securities for the three months ended March 31, 2002.
The $372 (10.4%) increase in investment banking fees was primarily the
result of increased revenue from private placement and advisory assignments.
The $3,791 (42.8%) decrease in principal transactions was primarily the
result of the continued significant decline in the market for equity securities
offset by the Ladenburg Thalmann & Co. transaction, which added an additional
$1,073 of principal transactions from our acquired operations.
The increase in compensation expense of $5,321 was primarily the result of
an increase in compensation expense associated with our acquired operations,
offset by a decrease in performance-based compensation.
Income tax benefit for the three months ended March 31, 2002 was $655
compared to $92 in 2001. The income tax rate for both periods does not bear a
customary relationship to effective tax rates as a result of state and local
income tax expense and the utilitization of net operating loss carrybacks.
LIQUIDITY AND CAPITAL RESOURCES
Approximately 49.5% of our assets at March 31, 2002 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 our clearing brokers, turn over
rapidly. As a securities dealer, we may carry significant levels of securities
inventories to meet customer needs. Our 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 our 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.
Our brokerage subsidiaries, Ladenburg Thalmann & Co. and Ladenburg
Capital Management, 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. Ladenburg Thalmann & Co.'s net capital position, as defined, of
$4,296, exceeded minimum capital requirements of $1,000 by $3,296 at March 31,
2002. As of March 31, 2002, Ladenburg Capital Management had net capital, as
defined, of $3,001, which exceeded minimum capital requirements of $1,000 by
$2,001.
Cash used by operating activities for the three months ended March 31,
2002 was $3,882 as compared to $1,510 for 2001. The difference is primarily due
to the net loss of $3,532 in 2002 versus $272 in 2001 and the net decrease in
our net trading securities of $6,288 compared to $9,783 in 2001 and a decrease
of $7,386 in accrued compensation and expenses versus $1,932 in the 2001 period.
The amounts were offset by an decrease receivables from clearing brokers in 2002
of $2,655 versus an increase of $8,289 in 2001.
Cash flows provided by investing activities for the three months ended
March 31, 2002 were $1,292 compared to cash flows used in investing activities
of $1,415 for the 2001 period. The difference is primarily attributable to a
$1,560 reduction in a letter of credit that is used as collateral for a
long-term lease of commercial office space.
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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 capital expenditures of $268 in 2002 and $1,379 in 2001 related
principally to the enhancements and improvements to computer equipment and
furniture and fixtures. Capital expenditures in the 2001 period included the
purchase for $1,118 of computer equipment and furniture and fixtures previously
leased.
Cash flows provided from financing activities for the three months
ended December 31, 2002 were $500 compared to $0 for 2001.
On August 31, 2001, we borrowed $1,000 from each of New Valley and
Frost-Nevada. The loans, which bore interest at 1% above the prime rate, were
repaid in January 2002. On March 27, 2002, we borrowed $2,500 from New Valley.
The loan, which bears interest at 1% above the prime rate, is due on the earlier
of June 30, 2002 or the completion of one or more equity financings where we
receive at least $5,000 in total proceeds. We may from time to time borrow
additional funds on a short-term basis from New Valley or other of our
shareholders in order to supplement the liquidity of our broker-dealer
operations.
Ladenburg Thalmann & Co. has a $2,500 junior subordinated revolving
credit agreement that extends through October 31, 2002 with its clearing broker
under which outstanding borrowings incur interest at LIBOR plus 2%. As of March
31, 2002 borrowings of $2,500 were outstanding.
Our 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 our 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 Thalmann & Co. transaction, we 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 stockholders of
Ladenburg Thalmann & Co. 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 currently convertible into a total of 11,296,746 shares of
our common stock and are secured by a pledge of the stock of Ladenburg Thalmann
& Co.
Our overall capital and funding needs are continually reviewed to
ensure that our capital base can support the estimated needs of our business
units. These reviews take into account business needs as well as regulatory
capital requirements of our subsidiaries. Based upon these reviews, management
believes that our capital structure is adequate for current operations and
reasonably foreseeable future needs.
We are obligated under noncancellable lease agreements, which provide
for minimum lease payments, net of lease abatement and inclusive of escalation
charges, of $5,672 in 2002 and approximately $5,500 per year until 2015.
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 our 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 our senior
management, as well as professionals in the appropriate business and support
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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)
units involved. Credit risk related to various financing activities is reduced
by the industry practice of obtaining and maintaining collateral. We monitor our
exposure to counterparty risk through the use of credit exposure information,
the monitoring of collateral values and the establishment of credit limits.
We maintain inventories of trading securities at March 31, 2002 with
fair market values of $11,036 in long positions and $9,724 in short positions.
We performed an entity-wide analysis of our financial instruments and assessed
the related risk. Based on this analysis, in the opinion of management, the
market risk associated with our financial instruments at March 31, 2002 will not
have a material adverse effect on our consolidated financial position or results
of operations.
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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.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 6 to our condensed consolidated financial statements included
in Part I, Item 1 of this Report.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No securities of ours that were not registered under the Securities Act
of 1933 have been issued or sold by us during the quarter ended March
31, 2002, except as discussed in Note 5 to our condensed consolidated
financial statements. The foregoing transactions were effected in
reliance of the exemption from registration afforded by Section 4(2) of
the Securities Act of 1933.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
4.1 Promissory Note dated March 27, 2002 issued to New
Valley Corporation.
10.1 Form of Stock Option Agreement, dated as of January
10, 2002, between Ladenburg Thalmann Financial
Services Inc. and certain executive officers
(incorporated by reference to Exhibit 10.3 of the
Company's Registration Statement on Form S-3 (File
No. 333-81964)).
10.2 Schedule of Omitted Documents in the Form of Exhibit
10.1, including material detail in which such
documents differ from Exhibit 10.1 (incorporated by
reference to Exhibit 10.3.1 of the Company's
Registration Statement on Form S-3 No. 333-81964)).
10.3 Stock Option Agreement, dated January 10, 2002,
between Ladenburg Thalmann Financial Services Inc.
and Richard J. Lampen (incorporated by reference to
Exhibit 10.2 of the Company's Registration Statement
on Form S-3 (File No. 333-81964)).
(b) REPORTS ON FORM 8-K
None
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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: May 14, 2002 By: /s/ J. BRYANT KIRKLAND III
----------------------------------------
J. Bryant Kirkland III
Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
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