================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-K
---------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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, 34TH FLOOR
NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212) 409-2000
(Registrant's telephone number, including area code)
---------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock, par value $.0001 per share American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
As of June 30, 2003 (the last business day of the Registrant's most
recently completed second fiscal quarter), the aggregate market value of the
Registrant's Common Stock (based on the closing price on the American Stock
Exchange on that date) held by non-affiliates of the Registrant was
approximately $7,000,000.
As of March 26, 2004, there were 43,627,130 shares of the Registrant's
Common Stock outstanding.
LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 17
Item 3. Legal Proceedings............................................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 19
Item 6. Selected Financial Data...................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 33
Item 8. Financial Statements and Supplementary Data.................................................. 33
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................................... 33
Item 9A. Controls and Procedures...................................................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 35
Item 11. Executive Compensation....................................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.............................................................. 43
Item 13. Certain Relationships and Related Transactions............................................... 46
Item 14. Principal Accountant Fees and Services....................................................... 49
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 49
SIGNATURES............................................................................................. 58
2
PART I
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 1. BUSINESS.
GENERAL
We are engaged in retail and institutional securities brokerage,
investment banking services and investment activities through our principal
operating subsidiary, Ladenburg Thalmann & Co. Inc. ("Ladenburg"). We are
committed to establishing a significant presence in the financial services
industry by meeting the varying investment needs of our corporate, institutional
and retail clients.
Ladenburg is a full service broker-dealer that has been a member of the
New York Stock Exchange ("NYSE") 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, capital
markets, investment management, brokerage and trading professionals. Ladenburg
is subject to regulation by, among others, the Securities and Exchange
Commission ("SEC"), the NYSE and the National Association of Securities Dealers,
Inc. ("NASD") and is a member of the Securities Investor Protection Corporation
("SIPC"). Ladenburg currently has 179 registered representatives and 158 other
full time employees. Its private client services and institutional sales
departments serve approximately 70,000 accounts nationwide and its asset
management area provides investment management and financial planning services
to numerous individuals and institutions.
We were incorporated under the laws of the State of Florida in February
1996. Ladenburg was incorporated under the laws of the State of Delaware in
December 1971 and became our wholly owned subsidiary in May 2001. Our principal
executive offices, as well as those of Ladenburg, are located at 590 Madison
Avenue, New York, New York 10022 and both of our telephone numbers are (212)
409-2000. Ladenburg has branch offices located in Melville, New York, Boca
Raton, Florida, Great Neck, New York, Los Angeles, California, New York, New
York and Irvine, California. During the first quarter of 2003, we closed our
branch office in Cleveland, Ohio. During the second quarter of 2003, we closed
our branch office in Ft. Lauderdale, Florida, which constituted all of our
market making activity. Ladenburg Thalmann Europe, Ltd., a wholly-owned
subsidiary of Ladenburg, is a retail brokerage firm regulated by the Financial
Services Authority which maintained an office in London, England, but is
currently operating out of Ladenburg's principal executive office. Ladenburg
maintains a website located at www.ladenburg.com.
RECENT DEVELOPMENTS
EXECUTIVE CHANGES
On March 9, 2004, we entered into a Severance, Waiver and Release
Agreement with Victor M. Rivas, our president and chief executive officer. Under
the Severance Agreement, effective March 31, 2004, Mr. Rivas will retire from
all of his positions with us and our subsidiaries including Ladenburg. In
connection with Mr. Rivas' retirement, we entered into an Employment Agreement
with Charles I. Johnston pursuant to which Mr. Johnston will serve, effective
April 1, 2004, as president, chief executive officer and a member of our board
and as chairman and chief executive officer of Ladenburg. Most recently, Mr.
Johnston was a managing director and the global head of private client services
at Lehman Brothers, Inc. where he was responsible for all aspects of Lehman's
private client services business which included 440 brokers in 14 branches.
3
DEBT CONVERSION
On March 29, 2004, we entered into an agreement with New Valley
Corporation and Frost-Nevada Investments Trust, the holders of our outstanding
$18,010 aggregate principal amount of senior convertible promissory notes,
pursuant to which such parties agreed to convert their notes and accrued
interest into common stock, subject to shareholder approval. Pursuant to the
agreement, New Valley and Frost-Nevada will convert their notes into
approximately 26,000,000 shares of common stock at reduced conversion prices of
$1.10 per share and $0.70 per share, respectively. The agreement is subject to,
among other things, approval by our shareholders at a special meeting that is
expected to be held in the second quarter of 2004. As a result of the
conversion, New Valley and Frost-Nevada will beneficially own approximately
12.5% and 27.6%, respectively, of our common stock. Concurrently with this
agreement, we entered into an agreement with Berliner Effektengesellschaft AG,
the holder of the remaining $1,990 aggregate principal amount of senior
convertible promissory notes, pursuant to which we will repurchase the notes
held by Berliner, plus all accrued interest thereon, for $1,000 in cash.
We currently anticipate recording a pre-tax charge in 2004 of
approximately $10,900 in our statements of operations upon closing of these
transactions. The charge reflects expense attributable to the reduction in the
conversion price of the notes to be converted, offset partially by the gain on
the repurchase of the Berliner notes. The net balance sheet effect of the
transactions will be an increase in our shareholders' equity of approximately
$22,900.
RETAIL BUSINESS
An increasing percentage of our revenues during the last several years
have been generated from the retail business of Ladenburg and Ladenburg Capital
Management Inc. ("Ladenburg Capital"), one of our former operating subsidiaries
(77.0% in 2003, 64.9% in 2002 and 48.2% in 2001). Ladenburg's private client
services and institutional sales departments currently serve approximately a
total of 70,000 accounts nationwide. Ladenburg charges commissions to our
individual and institutional clients for executing buy and sell orders of
securities on national and regional exchanges.
INVESTMENT BANKING ACTIVITIES
Revenues generated from the investment banking activities of Ladenburg
and Ladenburg Capital, represent 4.6%, 11.4% and 12.5% of our total revenues in
2003, 2002 and 2001, respectively. Our investment banking professionals maintain
relationships with businesses and provide them with advisory and investor
relations support. Services include:
o merger and acquisition consulting;
o management of and participation in underwriting of public and
private equity and debt financings;
o rendering appraisals, financial evaluations and fairness
opinions; and
o providing general banking and corporate finance consulting
services.
In the investment banking area, our subsidiaries have been active as
underwriters or selling group members in numerous public equity transactions.
Participation as a managing underwriter or in an underwriting syndicate involves
both economic and regulatory risks. An underwriter may incur losses if it is
unable to resell the securities it is committed to purchase. In addition, under
the federal securities laws, other laws and court decisions with respect to
underwriters' liabilities and limitations on the indemnification of underwriters
by issuers, an underwriter is subject to substantial potential liability for
4
misstatements or omissions of material facts in prospectuses and other
communications with respect to such offerings. Acting as a managing underwriter
increases these risks. Underwriting commitments constitute a charge against net
capital and Ladenburg's ability to make underwriting commitments may be limited
by the requirement that it must at all times be in compliance with regulations
regarding its net capital.
INVESTMENT ACTIVITIES
Ladenburg also seeks to realize investment gains by purchasing, selling
and holding securities for its own account on a daily basis. Ladenburg engages
for its own account in the arbitrage of securities. We are required to commit
the capital necessary for use in these investment activities. The amount of
capital committed at any particular time will vary according to market, economic
and financial factors, including the other aspects of our business.
Additionally, in connection with our investment banking activities, Ladenburg
generally receives warrants that entitle it to purchase securities of the
corporate issuers for which it raises capital or provides advisory services.
LADENBURG ASSET MANAGEMENT PROGRAM
Ladenburg offers its customers an asset management program, the
Ladenburg Asset Management Program ("LAMP"), to assist its customers in
achieving their desired investment objectives. LAMP has the ability to formulate
mutual fund portfolios that are balanced, diversified and consistent with each
individual's short-term and long-term financial objectives. A variety of factors
are taken into consideration when building client portfolios with LAMP, such as
allocating investments into a blend of funds and creating portfolios that meet
each client's needs. The custom portfolios are monitored on a consistent basis
and updated periodically.
WEALTH MANAGEMENT STRATEGY
Ladenburg provides its customers with a broad range of wealth
management services in order to help them manage their financial resources.
Through our subsidiaries, Financial Partners Capital Management, Inc. and
Ladenburg Thalmann Asset Management, Inc., registered investment advisers, we
are able to provide clients with discretionary portfolio management and
financial planning.
Financial Partners Capital Management offers planning services
primarily to corporate executives and other high net-worth individuals. The
process includes a thorough evaluation of the client's current financial
position, income tax planning, estate and gift planning, comprehensive
retirement planning and cash flow analysis among other services.
Our subsidiaries also provide comprehensive investment management
services to high net-worth individuals, corporations and pension fund clients.
Through our subsidiary, Ladenburg Thalmann Asset Management Inc., a registered
investment adviser, we are able to give our clients the ability to invest with a
variety of money managers and investment funds. Ladenburg Thalmann Asset
Management's review process entails focusing on a client's tolerance for risk,
capital growth expectations and income requirements as well as analyzing whether
the client may benefit from investing in tax-advantaged products.
The Ladenburg Focus Fund, L.P. is an open ended private investment fund
that invests its capital in publicly traded equity securities and options
strategies for the benefit of a number of our clients. Our wholly owned
subsidiary, Ladenburg Capital Fund Management Inc., is the general partner of
this fund for which it receives an annual management fee based on the net assets
of the fund and an incentive fee based on the performance of the fund each year.
5
ADMINISTRATION, OPERATIONS, SECURITIES TRANSACTIONS PROCESSING AND CUSTOMER
ACCOUNTS
Ladenburg does not hold any funds or securities for its customers.
Instead, it uses the services of a clearing agent on a fully disclosed basis.
This clearing agent processes all securities transactions and maintains customer
accounts on a fee basis. Customer accounts are protected through the SIPC for up
to $500, of which coverage for cash balances is limited to $100. In addition,
all customer accounts are fully protected by an Excess Securities Bond issued by
the Radian Asset Assurance, Inc. providing protection for the account's entire
net equity (both cash and securities). The services of this clearing agent
include billing, credit control, and receipt, custody and delivery of
securities. The clearing agent provides operational support necessary to
process, record, and maintain securities transactions for Ladenburg's brokerage
activities. It provides these services to Ladenburg's customers at a total cost
which we believe is less than it would cost us to process such transactions on
our own. The clearing agent also lends funds to Ladenburg's customers through
the use of margin credit. These loans are made to customers on a secured basis,
with the clearing agent maintaining collateral in the form of saleable
securities, cash or cash equivalents. Ladenburg has agreed to indemnify the
clearing broker for losses it may incur on these credit arrangements.
In November 2002, we renegotiated a clearing agreement with one of our
clearing brokers whereby this clearing broker became our primary clearing
broker, clearing substantially all of our business (the "Clearing Conversion").
As part of the new agreement with this clearing broker, we are realizing
significant cost savings from reduced ticket charges and other incentives. In
addition, under the new clearing agreement, an affiliate of the clearing broker
loaned us an aggregate of $3,500 (the "Clearing Loans") in December 2002. The
Clearing Loans and the related accrued interest are forgivable over various
periods, up to four years from the date of the Clearing Conversion, provided we
continue to clear our transactions through this clearing broker. As scheduled,
in November 2003, $1,500 of the Clearing Loans was forgiven. The remaining
principal balance on the Clearing Loans is scheduled to be forgiven as follows:
$667 in November 2004, $667 in November 2005 and $666 in November 2006. Upon the
forgiveness of the Clearing Loans, the forgiven amount is accounted for as other
revenues. However, if the clearing agreement is terminated for any reason prior
to the loan maturity date, the loan, less any amount that has been forgiven
through the date of the termination, plus interest, must be repaid on demand.
COMPETITION
Ladenburg encounters intense competition in all aspects of its business
and competes directly with many other securities firms for clients, as well as
registered representatives. Many of its competitors have significantly greater
financial, technical, marketing and other resources than it does. National
retail firms such as Merrill Lynch Pierce, Fenner & Smith Incorporated,
Citigroup Global Markets Inc. and Morgan Stanley/Dean Witter & Co. dominate the
industry. Ladenburg also competes with numerous regional and local firms. In
addition, a number of firms offer discount brokerage services to retail
customers and generally effect transactions at substantially lower commission
rates on an "execution only" basis, without offering other services such as
investment recommendations and research. Moreover, there is substantial
commission discounting by full-service broker-dealers competing for
institutional and retail brokerage business. A growing number of brokerage firms
offer online trading which has further intensified the competition for brokerage
customers. Although Ladenburg offers on-line account access to its customers to
review their account balances and activity, it currently does not offer any
online trading services to its customers. The continued expansion of discount
brokerage firms and online trading could adversely affect the retail business.
Other financial institutions, notably commercial banks and savings and loan
associations, offer customers some of the same services and products presently
provided by securities firms. While it is not possible to predict the type and
extent of competing services which banks and other institutions ultimately may
offer to customers, Ladenburg may be adversely affected to the extent those
6
services are offered on a large scale basis. We try to compete through our
advertising and recruiting programs for registered representatives interested in
joining us.
GOVERNMENT REGULATION
The securities industry and our business is subject to extensive
regulation by the SEC, state securities regulators and other governmental
regulatory authorities. The principal purpose of these regulations is the
protection of customers and the securities markets. The SEC is the federal
agency charged with the administration of the federal securities laws. Much of
the regulation of broker-dealers, however, has been delegated to self-regulatory
organizations, principally the NASD Regulation, Inc., the regulatory arm of the
NASD, the NYSE and the Municipal Securities Rulemaking Board. These
self-regulatory organizations adopt rules, subject to approval by the SEC, which
govern its members and conduct periodic examinations of member firms'
operations. Securities firms are also subject to regulation by state securities
commissions in the states in which they are registered. Ladenburg is a
registered broker-dealer with the SEC and a member firm of the NYSE. It is
licensed to conduct activities as a broker-dealer in all 50 states.
Ladenburg Thalmann Europe is an authorized securities broker regulated
by the Financial Services Authority of the United Kingdom and, through the
European Community's passporting provisions, is authorized to conduct business
in all of the member countries of the European Community.
The regulations to which broker-dealers are subject cover all aspects
of the securities industry, including:
o sales methods and supervision;
o trading practices among broker-dealers;
o use and safekeeping of customers' funds and securities;
o capital structure of securities firms;
o record keeping; and
o the conduct of directors, officers and employees.
Additional legislation, changes in rules promulgated by the SEC and by
self-regulatory bodies or changes in the interpretation or enforcement of
existing laws and rules often directly affect the method of operation and
profitability of broker-dealers. The SEC and the self-regulatory bodies may
conduct administrative proceedings which can result in censure, fine, suspension
or expulsion of a broker-dealer, its officers, employees or registered
representatives.
NET CAPITAL REQUIREMENTS
As a registered broker-dealer and member of the NYSE, Ladenburg is
subject to the SEC's net capital rule, which is designed to measure the general
financial integrity and liquidity of a broker-dealer. Net capital is defined as
the net worth of a broker-dealer subject to certain adjustments. In computing
net capital, various adjustments are made to net worth which exclude assets not
readily convertible into cash. Additionally, the regulations require that
certain assets, such as a broker-dealer's position in securities, be valued in a
conservative manner so as to avoid over-inflation of the broker-dealer's net
capital. We compute net capital under the alternate method permitted by the net
capital rule. Under this method,
7
Ladenburg is required to maintain net capital equal to $250. Compliance with the
net capital rule limits those operations of broker-dealers which require the
intensive use of their capital, such as underwriting commitments and principal
trading activities.
In addition to the above requirements, funds invested as equity capital
may not be withdrawn, nor may any unsecured advances or loans be made to any
stockholder of a registered broker-dealer, if, after giving effect to the
withdrawal, advance or loan and to any other withdrawal, advance or loan as well
as to any scheduled payments of subordinated debt which are scheduled to occur
within six months, the net capital of the broker-dealer would fall below 120% of
the minimum dollar amount of net capital required or the ratio of aggregate
indebtedness to net capital would exceed 10 to 1. Further, any funds invested in
the form of subordinated debt generally must be invested for a minimum term of
one year and repayment of such debt may be suspended if the broker-dealer fails
to maintain certain minimum net capital levels. For example, scheduled payments
of subordinated debt are suspended in the event that the ratio of aggregate
indebtedness to net capital of the broker-dealer would exceed 12 to 1 or its net
capital would be less than 120% of the minimum dollar amount of net capital
required. The net capital rule also prohibits payments of dividends, redemption
of stock and the prepayment, or payment in respect of principal or subordinated
indebtedness if net capital, after giving effect to the payment, redemption or
repayment, would be less than the specified percent (120%) of the minimum net
capital requirement.
At December 31, 2003, Ladenburg had net capital of $6,745 which
exceeded its minimum net capital requirement of $250 by $6,495. Failure to
maintain the required net capital may subject a firm to suspension or expulsion
by the NYSE, the SEC and other regulatory bodies and ultimately may require its
liquidation. Compliance with the net capital rule could limit Ladenburg's
operations that require the intensive use of capital, such as underwriting and
trading activities, and also could restrict our ability to withdraw capital from
it, which in turn could limit our ability to pay dividends, repay debt and
redeem or purchase shares of our outstanding capital stock.
PERSONNEL
At December 31, 2003, we had a total of approximately 324 employees, of
which 172 are registered representatives and 152 are other full time employees.
These employees are not covered by a collective bargaining agreement. We
consider our relationship with our employees to be good.
RISK FACTORS
WE HAVE INCURRED, AND MAY CONTINUE TO INCUR, SIGNIFICANT OPERATING LOSSES.
We incurred significant losses from operations during each of the past
three years. We cannot assure you that we will be able to achieve or sustain
revenue growth, profitability or positive cash flow on either a quarterly or
annual basis or that profitability, if achieved, will be sustained. If we are
unable to achieve or sustain profitability, we may not be financially viable in
the future and may have to curtail, suspend or cease additional operations.
IF WE ARE UNABLE TO REPAY OUR OUTSTANDING INDEBTEDNESS OBLIGATIONS WHEN DUE, OUR
OPERATIONS MAY BE MATERIALLY ADVERSELY AFFECTED.
At December 31, 2003, we had an aggregate of $29,500 of indebtedness,
$20,000 (plus an additional $3,414 of accrued interest at December 31, 2003) of
which is secured by our stock of our principal operating subsidiary, Ladenburg,
and matures on December 31, 2005. Although the holders of our secured
indebtedness have agreed to forbear receiving interest on the debt until January
15, 2005 and recently agreed to convert such indebtedness into shares of our
common stock, subject to shareholder
8
approval, there is a risk that our shareholders will not approve the conversion
and the conversion will not occur. We cannot assure you that our operations will
generate funds sufficient to repay our other existing debt obligations as they
come due. Our failure to repay our indebtedness and make interest payments as
required by our debt obligations could have a material adverse affect on our
operations.
WE MAY INCUR SIGNIFICANT LOSSES FROM TRADING AND INVESTMENT ACTIVITIES DUE TO
MARKET FLUCTUATIONS AND VOLATILITY.
We generally maintain trading and investment positions in the equity
markets. To the extent that we own assets, i.e., have long positions, in those
markets, a downturn in those markets could result in losses from a decline in
the value of those long positions. Conversely, to the extent that we have sold
assets that we do not own, i.e., have short positions, in any of those markets,
an upturn in those markets could expose us to potentially unlimited losses as we
attempt to cover our short positions by acquiring assets in a rising market.
We may from time to time have a trading strategy consisting of holding
a long position in one security and a short position in another security from
which we expect to earn revenues based on changes in the relative value of the
two securities. If, however, the relative value of the two securities changes in
a direction or manner that we did not anticipate or against which we are not
hedged, we might realize a loss in those paired positions. In addition, we
maintain trading positions that can be adversely affected by the level of
volatility in the financial markets, i.e., the degree to which trading prices
fluctuate over a particular period, in a particular market, regardless of market
levels.
WE MAY NEED TO RAISE ADDITIONAL FUNDS IN THE NEAR FUTURE.
Our capital requirements continue to be adversely affected by our
inability to generate cash from operations. We have been forced to rely on
borrowings in order to generate working capital for our operations. Accordingly,
we may need to seek to raise additional capital through other available sources,
including through equity offerings or borrowing additional funds on a short-term
basis from third parties, including our current debtholders, shareholders and
clearing broker. As of December 31, 2003, we had cash and cash equivalents of
approximately $3,648. Accordingly, if we continue to be unable to generate cash
from operations and are unable to find sources of funding, it would have an
adverse impact on our liquidity and operations.
OUR EXPENSES MAY INCREASE DUE TO UNRESOLVED REAL ESTATE COMMITMENTS.
Ladenburg Capital may have potential liability under a terminated lease
for office space in New York City which it was forced to vacate during 2001 due
to the events of September 11, 2001. Ladenburg Capital no longer occupies the
space and believes it has no further lease obligation pursuant to the terms of
the lease. This lease, which, had it not terminated as a result of the events of
September 11, 2001, would have expired by its terms in March 2010, provides for
future minimum payments aggregating approximately $4,335, payable $644 in 2004,
$703 per year from 2005 through 2008 and $879 thereafter. Ladenburg Capital is
currently in litigation with the landlord in which it is seeking judicial
determination of the termination of the lease. If Ladenburg Capital is not
successful in this litigation, it plans to sublease the property. Ladenburg
Capital has provided for estimated costs in connection with this lease and has
recorded a liability at December 31, 2003 and 2002. Additional costs may be
incurred in connection with terminating this lease, or if not terminated, to the
extent of foregone rental income in the event Ladenburg Capital does not
sublease the office space for an amount at least equal to the lease obligations.
Such costs may have a material adverse effect on Ladenburg Capital's financial
position and liquidity.
9
In May 2003, Ladenburg relocated approximately 95 of its employees from
its New York City office to its Melville, New York office. As a result of this
move, Ladenburg ceased using one of the several floors it occupies in its New
York City office, and the net book value of the leasehold improvements was
written off. In accordance with SFAS No. 146, as estimated future sublease
payments that could be reasonably obtained for the property exceed related
rental commitments under the lease, no liability for costs associated with
vacating the space has been provided. Additional costs may be incurred, to the
extent of foregone rental income in the event Ladenburg does not sublease the
office space for an amount at least equal to the lease obligations. Such costs
may have a material adverse effect on Ladenburg's financial position and
liquidity.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A BREAKDOWN IN THE FINANCIAL
MARKETS.
As a securities broker-dealer, our business is materially affected by
conditions in the financial markets and economic conditions generally, both in
the United States and elsewhere around the world. Many factors or events could
lead to a breakdown in the financial markets including war, terrorism, natural
catastrophes and other types of disasters. These types of events could cause
people to begin to lose confidence in the financial markets and their ability to
function effectively. If the financial markets are unable to effectively prepare
for these types of events and ease public concern over their ability to
function, our revenues are likely to decline and our operations will be
adversely affected.
OUR REVENUES MAY DECLINE IN ADVERSE MARKET OR ECONOMIC CONDITIONS.
During the past several years, unfavorable financial and economic
conditions have reduced the number and size of the transactions in which we
provide underwriting services, merger and acquisition consulting and other
services. Our investment banking revenues, in the form of financial advisory and
underwriting fees, are directly related to the number and size of the
transactions in which we participate and therefore have been adversely affected
by the sustained downturn in the securities markets that prevailed through the
middle of 2003. Additionally, the downturn in market conditions led to a decline
in the volume of transactions that we executed for our customers and, therefore,
to a decline in the revenues we received from commissions and spreads. If these
adverse financial and economic conditions return and persist for any extended
period of time, we will incur a further decline in transactions and revenues
that we receive from commissions and spreads.
WE DEPEND ON OUR SENIOR EMPLOYEES AND THE LOSS OF THEIR SERVICES COULD HARM OUR
BUSINESS.
Our success is dependent in large part upon the services of several of
our senior executives and employees, including those of Ladenburg. We do not
maintain and do not intend to obtain key man insurance on the life of any
executive or employee. If our senior executives or employees terminate their
employment with us and we are unable to find suitable replacements in relatively
short periods of time, our operations may be materially and adversely affected.
WE FACE SIGNIFICANT COMPETITION FOR PROFESSIONAL EMPLOYEES.
From time to time, individuals we employ may choose to leave our
company to pursue other opportunities. We have experienced losses of registered
representatives, trading and investment banking professionals in the past, and
the level of competition for key personnel remains intense. We cannot assure you
that the loss of key personnel will not occur again in the future. The loss of a
registered representative or a trading or investment banking professional,
particularly a senior professional with a broad range of contacts in an
industry, could materially and adversely affect our operating results.
10
OUR PRINCIPAL SHAREHOLDERS INCLUDING OUR DIRECTORS AND OFFICERS CONTROL A LARGE
PERCENTAGE OF OUR SHARES OF COMMON STOCK AND CAN SIGNIFICANTLY INFLUENCE OUR
CORPORATE ACTIONS.
At the present time, our executive officers, directors and companies
that these individuals are affiliated with beneficially own approximately 22.0%
of our common stock. Accordingly, these individuals and entities will be able to
significantly influence most, if not all, of our corporate actions, including
the election of directors and the appointment of officers. Additionally, this
ownership of our common stock may make it difficult for a third party to acquire
control of us, therefore possibly discouraging third parties from seeking to
acquire us. A third party would have to negotiate any possible transactions with
these principal shareholders, and their interests may be different from the
interests of our other shareholders. This may depress the price of our common
stock.
THE AMERICAN STOCK EXCHANGE MAY DELIST OUR COMMON STOCK FROM QUOTATION ON ITS
EXCHANGE.
Our common stock is currently quoted on the American Stock Exchange
("Exchange"). In order to continue quotation of our common stock, we must
maintain certain financial, distribution and stock price levels. Generally, we
must maintain a minimum amount in shareholders' equity (usually between $2
million and $4 million) and a minimum number of public shareholders (usually 300
shareholders or 200,000 shares held by our non-affiliates). Additionally, our
common stock cannot have what is deemed to be a "low selling price" as
determined by the Exchange.
In November 2003, we received notice from the Exchange indicating that
we were below certain of the continued listing standards of the Exchange,
specifically that we had sustained losses in two of its three most recent fiscal
years with shareholders' equity of less than $2 million, as set forth in Section
1003(a)(i) of the Exchange's Company Guide. We were afforded an opportunity to
submit our plan to regain compliance with the continued listing standards to the
Exchange and did so in December 2003. Upon acceptance of the plan, the Exchange
provided us with the extension until May 13, 2005 to regain compliance and will
allow us to maintain our listing on the Exchange through the plan period,
subject to periodic review of our progress by the Exchange's staff. If we do not
make progress consistent with the plan or regain compliance with the continued
listing standards by the end of the extension period, the Exchange could
initiate delisting procedures.
Additionally, on March 29, 2004, the last reported sale price of our
common stock was $0.91. If the Exchange determines that this is a "low selling
price," it may require us to effect a reverse split or suspend or remove our
common stock from listing on the Exchange. In determining whether a reverse
split or suspension or removal is appropriate, the Exchange will consider all
pertinent factors including market conditions in general, the number of shares
outstanding, plans which may have been formulated by management, applicable
regulations of the state or country of incorporation or of any governmental
agency having jurisdiction over the company and the relationship to other
Exchange policies regarding continued listing.
If the Exchange delists our common stock from trading on its exchange,
we could face significant material adverse consequences including:
o a limited availability of market quotations for our common
stock;
o a determination that our common stock is a "penny stock" which
will require brokers trading in our common stock to adhere to
more stringent rules and possibly resulting in a reduced level
of trading activity in the secondary trading market for our
common stock;
o a limited amount of news and analyst coverage for our company;
and
o a decreased ability to issue additional securities or obtain
additional financing in the future.
11
WE MAY LOSE CUSTOMERS AND OUR REVENUES MAY DECLINE DUE TO OUR LACK OF INTERNET
BROKERAGE SERVICE CAPABILITY.
A growing number of brokerage firms offer Internet brokerage services
to their customers in response to increased customer demand for these services.
While we intend to offer Internet brokerage services in the future, we may not
be able to offer services that will appeal to our current or prospective
customers and these services may not be profitable. Our failure to commence
Internet brokerage services in the near future could have a material adverse
effect on our business including the loss of our existing customers to
competitors that do offer these services. Additionally, if we commence Internet
brokerage services but are unable to attract customers for those services, our
revenues will decline.
WE RELY ON ONE PRIMARY CLEARING BROKER AND THE TERMINATION OF THE AGREEMENT WITH
THIS CLEARING BROKER COULD DISRUPT OUR BUSINESS.
Ladenburg primarily uses one clearing broker to process its securities
transactions and maintain customer accounts on a fee basis. The clearing broker
also provides billing services, extends credit and provides for control and
receipt, custody and delivery of securities. In November 2002, we completed the
Clearing Conversion and renegotiated our clearing agreement with this clearing
broker. In addition, under the new clearing agreement, an affiliate of the
clearing broker provided us with the Clearing Loans, aggregating to $3,500, with
various terms and maturing at various dates through December 2006. As scheduled,
in November 2003, $1,500 of the Clearing Loans was forgiven. The remaining
principal balance of the Clearing Loans is scheduled to be forgiven as follows:
$667 in November 2004, $667 in November 2005 and $666 in November 2006. Upon the
forgiveness of the Clearing Loans, the forgiven amount is accounted for as other
revenue. However, if the clearing agreement is terminated for any reason prior
to the loan maturity date, the loan, less any amount that has been forgiven
through the date of the termination, plus interest, must be repaid on demand.
Ladenburg depends on the operational capacity and ability of the
clearing broker for the orderly processing of transactions. In addition, by
engaging the processing services of a clearing firm, Ladenburg is exempt from
some capital reserve requirements and other regulatory requirements imposed by
federal and state securities laws. If the clearing agreement is terminated for
any reason, we would be forced to find an alternative clearing firm. We cannot
assure you that we would be able to find an alternative clearing firm on
acceptable terms to us or at all.
OUR CLEARING BROKER EXTENDS CREDIT TO OUR CLIENTS AND WE ARE LIABLE IF THE
CLIENTS DO NOT PAY.
Ladenburg permits its clients to purchase securities on a margin basis
or sell securities short, which means that the clearing firm extends credit to
the client secured by cash and securities in the clients' account. During
periods of volatile markets, the value of the collateral held by the clearing
broker could fall below the amount borrowed by the client. If margin
requirements are not sufficient to cover losses, the clearing broker sells or
buys securities at prevailing market prices, and may incur losses to satisfy
client obligations. Ladenburg has agreed to indemnify the clearing broker for
losses it may incur while extending credit to its clients.
12
WE ARE SUBJECT TO VARIOUS RISKS ASSOCIATED WITH THE SECURITIES INDUSTRY.
As a securities broker-dealer, Ladenburg is subject to uncertainties
that are common in the securities industry. These uncertainties include:
o the volatility of domestic and international financial, bond
and stock markets, as demonstrated by recent disruptions in
the financial markets;
o extensive governmental regulation;
o litigation;
o intense competition;
o substantial fluctuations in the volume and price level of
securities; and
o dependence on the solvency of various third parties.
As a result, revenues and earnings may vary significantly from quarter to
quarter and from year to year. In periods of low volume, profitability is
impaired because certain expenses remain relatively fixed. Ladenburg is much
smaller and has much less capital than many competitors in the securities
industry. In the event of a market downturn, our business could be adversely
affected in many ways. Our revenues are likely to decline in such circumstances
and, if we are unable to reduce expenses at the same pace, our profit margins
would erode.
OUR RISK MANAGEMENT POLICIES AND PROCEDURES MAY LEAVE US EXPOSED TO UNIDENTIFIED
RISKS OR AN UNANTICIPATED LEVEL OF RISK.
The policies and procedures we employ to identify, monitor and manage
risks may not be fully effective. Some methods of risk management are based on
the use of observed historical market behavior. As a result, these methods may
not predict future risk exposures, which could be significantly greater than the
historical measures indicate. Other risk management methods depend on evaluation
of information regarding markets, clients or other matters that are publicly
available or otherwise accessible by us. This information may not be accurate,
complete, up-to-date or properly evaluated. Management of operational, legal and
regulatory risk requires, among other things, policies and procedures to
properly record and verify a large number of transactions and events. We cannot
assure you that our policies and procedures will effectively and accurately
record and verify this information.
We seek to monitor and control our risk exposure through a variety of
separate but complementary financial, credit, operational and legal reporting
systems. We believe that we effectively evaluate and manage the market, credit
and other risks to which we are exposed. Nonetheless, the effectiveness of our
ability to manage risk exposure can never be completely or accurately predicted
or fully assured. For example, unexpectedly large or rapid movements or
disruptions in one or more markets or other unforeseen developments can have a
material adverse effect on our results of operations and financial condition.
The consequences of these developments can include losses due to adverse changes
in inventory values, decreases in the liquidity of trading positions, higher
volatility in earnings, increases in our credit risk to customers as well as to
third parties and increases in general systemic risk.
13
CREDIT RISK EXPOSES US TO LOSSES CAUSED BY FINANCIAL OR OTHER PROBLEMS
EXPERIENCED BY THIRD PARTIES.
We are exposed to the risk that third parties that owe us money,
securities or other assets will not perform their obligations. These parties
include:
o trading counterparties;
o customers;
o clearing agents;
o exchanges;
o clearing houses; and
o other financial intermediaries as well as issuers whose
securities we hold.
These parties may default on their obligations owed to us due to bankruptcy,
lack of liquidity, operational failure or other reasons. This risk may arise,
for example, from:
o holding securities of third parties;
o executing securities trades that fail to settle at the
required time due to non-delivery by the counterparty or
systems failure by clearing agents, exchanges, clearing houses
or other financial intermediaries; and
o extending credit to clients through bridge or margin loans or
other arrangements.
Significant failures by third parties to perform their obligations owed to us
could adversely affect our revenues and perhaps our ability to borrow in the
credit markets.
INTENSE COMPETITION FROM EXISTING AND NEW ENTITIES MAY ADVERSELY AFFECT OUR
REVENUES AND PROFITABILITY.
The securities industry is rapidly evolving, intensely competitive and
has few barriers to entry. We expect competition to continue and intensify in
the future. Many of our competitors have significantly greater financial,
technical, marketing and other resources than we do. Some of our competitors
also offer a wider range of services and financial products than we do and have
greater name recognition and a larger client base. These competitors may be able
to respond more quickly to new or changing opportunities, technologies and
client requirements. They may also be able to undertake more extensive
promotional activities, offer more attractive terms to clients, and adopt more
aggressive pricing policies. We may not be able to compete effectively with
current or future competitors and competitive pressures faced by us may harm our
business.
THE PRECAUTIONS WE TAKE TO PREVENT AND DETECT EMPLOYEE MISCONDUCT MAY NOT BE
EFFECTIVE AND WE COULD BE EXPOSED TO UNKNOWN AND UNMANAGED RISKS OR LOSSES.
We run the risk that employee misconduct could occur. Misconduct by
employees could include:
o employees binding us to transactions that exceed authorized
limits or present unacceptable risks to us;
o employees hiding unauthorized or unsuccessful activities from
us; or
o the improper use of confidential information.
These types of misconduct could result in unknown and unmanaged risks or losses
to us including regulatory sanctions and serious harm to our reputation. The
precautions we take to prevent and detect these activities may not be effective.
If employee misconduct does occur, our business operations could be materially
adversely affected.
14
WE ARE CURRENTLY SUBJECT TO EXTENSIVE SECURITIES REGULATION AND THE FAILURE TO
COMPLY WITH THESE REGULATIONS COULD SUBJECT US TO PENALTIES OR SANCTIONS.
The securities industry and our business is subject to extensive
regulation by the SEC, state securities regulators and other governmental
regulatory authorities. We are also regulated by industry self-regulatory
organizations, including the NYSE, the NASD and the Municipal Securities
Rulemaking Board.
Ladenburg is a registered broker-dealer with the SEC and a member firm
of the NYSE. Broker-dealers are subject to regulations which cover all aspects
of the securities business, including:
o sales methods and supervision;
o trading practices among broker-dealers;
o use and safekeeping of customers' funds and securities;
o capital structure of securities firms;
o record keeping; and
o the conduct of directors, officers and employees.
Much of the regulation of broker-dealers has been delegated to self-regulatory
organizations, principally the NASD Regulation, Inc., the regulatory arm of the
NASD, and the NYSE, which are our primary regulatory agencies. NASD Regulation
and the NYSE adopt rules, subject to approval by the SEC, that govern its
members and conducts periodic examinations of member firms' operations.
Compliance with many of the regulations applicable to us involves a
number of risks, particularly in areas where applicable regulations may be
subject to varying interpretation. The requirements imposed by these regulators
are designed to ensure the integrity of the financial markets and to protect
customers and other third parties who deal with us. Consequently, these
regulations often serve to limit our activities, including through net capital,
customer protection and market conduct requirements. If we are found to have
violated an applicable regulation, administrative or judicial proceedings may be
initiated against us that may result in:
o censure;
o fine;
o civil penalties, including treble damages in the case of
insider trading violations;
o the issuance of cease-and-desist orders;
o the deregistration or suspension of our broker-dealer
activities;
o the suspension or disqualification of our officers or
employees; or
o other adverse consequences.
15
The imposition of any of these or other penalties could have a material adverse
effect on our operating results and financial condition.
The regulatory environment is also subject to change. We may be
adversely affected as a result of new or revised legislation or regulations
imposed by the SEC, other federal or state governmental regulatory authorities,
or self-regulatory organizations. We also may be adversely affected by changes
in the interpretation or enforcement of existing laws and rules by these
governmental authorities and self-regulatory organizations.
FAILURE TO COMPLY WITH NET CAPITAL REQUIREMENTS COULD SUBJECT US TO SUSPENSION
OR REVOCATION BY THE SEC OR SUSPENSION OR EXPULSION BY THE NASD AND THE NYSE.
Ladenburg is subject to the SEC's net capital rule which requires the
maintenance of minimum net capital. We compute net capital under the alternate
method permitted by the net capital rule. Under this method, Ladenburg is
required to maintain net capital equal to $250. The net capital rule is designed
to measure the general financial integrity and liquidity of a broker-dealer. In
computing net capital, various adjustments are made to net worth which exclude
assets not readily convertible into cash. Additionally, the regulations require
that certain assets, such as a broker-dealer's position in securities, be valued
in a conservative manner so as to avoid over-inflation of the broker-dealer's
net capital. The net capital rule requires that a broker-dealer maintain a
certain minimum level of net capital. The particular levels vary in application
depending upon the nature of the activity undertaken by a firm. Compliance with
the net capital rule limits those operations of broker-dealers which require the
intensive use of their capital, such as underwriting commitments and principal
trading activities. The rule also limits the ability of securities firms to pay
dividends or make payments on certain indebtedness such as subordinated debt as
it matures. A significant operating loss or any charge against net capital could
adversely affect the ability of a broker-dealer to expand or, depending on the
magnitude of the loss or charge, maintain its then present level of business.
The NASD and the NYSE may enter the offices of a broker-dealer at any time,
without notice, and calculate the firm's net capital. If the calculation reveals
a deficiency in net capital, the NASD may immediately restrict or suspend
certain or all of the activities of a broker-dealer, including its ability to
make markets. Ladenburg may not be able to maintain adequate net capital, or its
net capital may fall below requirements established by the SEC, and subject us
to disciplinary action in the form of fines, censure, suspension, expulsion or
the termination of business altogether.
RISK OF LOSSES ASSOCIATED WITH SECURITIES LAWS VIOLATIONS AND LITIGATION.
Many aspects of our business involve substantial risks of liability. An
underwriter is exposed to substantial liability under federal and state
securities laws, other federal and state laws, and court decisions, including
decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel. In recent years,
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. Our
underwriting activities will usually involve offerings of the securities of
smaller companies, which often involve a higher degree of risk and are more
volatile than the securities of more established companies. In comparison with
more established companies, smaller companies are also more likely to be the
subject of securities class actions, to carry directors and officers liability
insurance policies with lower limits or not at all, and to become insolvent.
Each of these factors increases the likelihood that an underwriter of a smaller
companies' securities will be required to contribute to an adverse judgment or
settlement of a securities lawsuit.
16
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. We believe that, based on our historical experience and the
reserves established by us, the resolution of the claims presently pending will
not have a material adverse effect on our financial condition. However, although
we typically reserve an amount we believe will be sufficient to cover any
damages assessed against us, 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 financial condition
may be materially adversely affected.
POSSIBLE ADDITIONAL ISSUANCES WILL CAUSE DILUTION.
While we currently have outstanding 43,627,130 shares of common stock,
options to purchase a total of 5,453,030 shares of common stock, warrants to
purchase a total of 200,000 shares of common stock and senior convertible
promissory notes initially convertible into 11,296,746 shares of common stock,
we are authorized to issue up to 200,000,000 shares of common stock and are
therefore able to issue additional shares without being required under corporate
law to obtain shareholder approval. If we issue additional shares, or if our
existing shareholders exercise or convert their outstanding options or notes,
our other shareholders may find their holdings drastically diluted, which if it
occurs, means that they will own a smaller percentage of our company.
WE MAY ISSUE PREFERRED STOCK WITH PREFERENTIAL RIGHTS THAT MAY ADVERSELY AFFECT
YOUR RIGHTS.
The rights of our shareholders will be subject to and may be adversely
affected by the rights of holders of any preferred stock that we may issue in
the future. Our articles of incorporation authorize our board of directors to
issue up to 2,000,000 shares of "blank check" preferred stock and to fix the
rights, preferences, privilege and restrictions, including voting rights, of
these shares without further shareholder approval.
ITEM 2. PROPERTIES.
Our principal executive offices and those of Ladenburg and other
subsidiaries of ours are located at 590 Madison Avenue, 34th Floor, New York,
New York 10022, where we lease approximately 82,000 square feet of office space
pursuant to a lease that expires in June 2015. We also operate several branch
offices located in New York, Florida and California. In January 2003, we closed
our office in Cleveland, Ohio and in June 2003, we closed our office in Ft.
Lauderdale, Florida.
Ladenburg Capital may have potential liability under a terminated lease
for office space in New York City which it was forced to vacate during 2001 due
to the events of September 11, 2001. Ladenburg Capital no longer occupies the
space and believes it has no further lease obligation pursuant to the terms of
the lease. This lease, which, had it not terminated as a result of the events of
September 11, 2001, would have expired by its terms in March 2010, provides for
future minimum payments aggregating approximately $4,335, payable $644 in 2004,
$703 per year from 2005 through 2008 and $879 thereafter. Ladenburg Capital is
currently in litigation with the landlord in which it is seeking judicial
determination of the termination of the lease. If Ladenburg Capital is not
successful in this litigation, it plans to sublease the property. Ladenburg
Capital has provided for estimated costs in connection with this lease and has
recorded a liability at December 31, 2003 and 2002. Additional costs may be
incurred in connection with terminating this lease, or if not terminated, to the
extent of foregone rental income in the event Ladenburg Capital does not
sublease the office space for an amount at least equal to the lease obligations.
Such costs may have a material adverse effect on Ladenburg Capital's financial
position and liquidity.
17
In December 2003, Ladenburg Capital terminated its lease obligations
relating to the office it previously occupied in Bethpage, New York. As a result
of its settlement with the Bethpage landlord, Ladenburg Capital adjusted its
liability and a recorded a corresponding reduction in rent expense of $1,175 in
the fourth quarter of 2003. This reduction in rent expense, less rent accrued in
previous quarters during 2003, resulted in a net credit of $200 for the fiscal
year ended December 31, 2003.
Ladenburg ceased using one of the several floors it occupies in its New
York City office and is currently seeking to sublet the property. In accordance
with SFAS No. 146, Ladenburg's management evaluates Ladenburg's liability with
respect to this space on a quarterly basis, taking into account estimated future
sublease payments that could be reasonably obtained for the property. In these
evaluations, Ladenburg's management concluded that a liability for this matter
did not exist as of December 31, 2003. Additional costs may be incurred, to the
extent of foregone rental income in the event Ladenburg does not sublease the
office space for an amount at least equal to the lease obligations. Such costs
may have a material adverse effect on Ladenburg's financial position and
liquidity.
ITEM 3. LEGAL PROCEEDINGS.
See Note 9 to our Consolidated Financial Statements included in Part
II, Item 8 of this Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
18
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On April 14, 2000, our common stock began trading on the Exchange under
the symbol "GBC." On May 7, 2001, we changed our name to Ladenburg Thalmann
Financial Services Inc. and on the same date our common stock began quotation on
the Exchange under the symbol "LTS." The following table sets forth the high and
low prices of the common stock for the periods specified.
HIGH($) LOW($)
------- ------
2004
First Quarter* 1.10 0.50
2003
Fourth Quarter 0.67 0.32
Third Quarter 0.43 0.22
Second Quarter 0.28 0.05
First Quarter 0.12 0.05
2002
Fourth Quarter 0.23 0.09
Third Quarter 0.35 0.13
Second Quarter 0.96 0.30
First Quarter 1.00 0.57
*Through March 29, 2004.
HOLDERS
On March 29, 2004, there were approximately 13,300 holders of record of
our common stock.
DIVIDENDS
To date, we have not paid or declared any dividends on our common
stock. The payment of future dividends, if any, will be at the discretion of our
board of directors after taking into account various factors, including our
financial condition, operating results, current anticipated cash needs as well
as any other factors that the board of directors may deem relevant. Our ability
to pay dividends in the future also may be restricted by our operating
subsidiaries' obligations to comply with the net capital requirements imposed on
broker-dealers by the SEC and the NASD. We do not intend to declare any
dividends in the foreseeable future, but instead intend on retaining all
earnings for use in our business.
RECENT SALES OF UNREGISTERED SECURITIES
On December 17, 2003, we issued ten-year options to various employees
to purchase an aggregate of 1,138,550 at $0.45 per share. The options vest in
three equal annual installments commencing on the first anniversary of the date
of grant. This transaction was effected in reliance on exemptions from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended.
19
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below is derived from our audited
financial statements. This selected financial data should be read in conjunction
with the section under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS: (a)
Total revenues ............................. $ 61,397 $ 79,573 $ 93,953 $ 89,584 $ 77,171
Total expenses ............................. 66,665 125,025 106,202 83,372 74,107
(Loss) income before income taxes .......... (5,420) (44,993) (12,249) 6,212 3,064
Net (loss) income .......................... (5,490) (46,393) (12,293) 5,090 4,006
Per common and equivalent share(b):
Basic and diluted:
(Loss) income per Common Share .......... $ (0.13) $ (1.10) $ (0.31) $ 0.15 $ 0.12
============ ============ ============ ============ ============
Basic and diluted weighted average
Common Shares (b) ....................... 42,567,798 42,025,211 39,458,057 34,647,170 34,647,170
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Total assets ............................... $ 44,232 $ 48,829 $ 98,407 $ 50,354 $ 49,139
Total liabilities, excluding subordinated
liabilities .......................... 34,768 32,620 40,713 20,054 23,930
Subordinated debt .......................... 22,500 22,500 22,500 -- --
Shareholders' equity (capital deficit) ..... (16,172) (10,894) 35,194 30,300 25,209
OTHER DATA:
Ratio of assets to shareholders'
equity ................................ N/A N/A 2.80 1.66 1.95
Return on average equity ................... (40.6)% (381.8)% (38.0)% 18.3% 20.0%
Return on average equity
before income taxes ................... (40.1)% (370.3)% (37.5)% 22.4% 15.3%
Book value per share (b) ................... -- -- $ 0.84 $ 1.67 $ 1.39
Average registered representatives ......... 196 399 540 250 171
(a) The financial data prior to May 7, 2001 reflects Ladenburg's financial
results and the financial data afterwards reflects Ladenburg Thalmann
Financial Services' financial results.
(b) All per share data prior to May 7, 2001 have been retroactively
adjusted to reflect the number of equivalent shares received by the
former stockholders of Ladenburg in the form of common stock,
convertible notes and cash.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
We are engaged in retail and institutional securities brokerage,
investment banking services and proprietary trading through our principal
operating subsidiary, Ladenburg. Ladenburg is a full service broker-dealer that
has been a member of the NYSE 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, capital markets,
investment management, brokerage and trading professionals. Ladenburg is subject
to regulation by, among others, the SEC, the NYSE and the NASD and is a member
of the SIPC. Ladenburg currently has 179 registered representatives and 158
other full time employees. Its private client services and institutional sales
departments serve approximately 70,000 accounts nationwide and its asset
management area provides investment management and financial planning services
to numerous individuals and institutions.
Our consolidated financial statements include our accounts and the
accounts of our wholly-owned subsidiaries. Our subsidiaries include, among
others, Ladenburg, Ladenburg Capital, Ladenburg Thalmann Europe, Ltd. and
Ladenburg Capital Fund Management Inc.
Ladenburg Capital Fund Management ("LCFM") is the sole general partner
of the Ladenburg Focus Fund, L.P., an open-ended private investment fund that
invests its capital in publicly traded equity securities and options strategies.
Through December 31, 2002, the Company accounted for its investment in the
limited partnership using the equity method. Commencing in 2003, due to the
controlling voting interest of LCFM, the accounts of the limited partnership
were consolidated with the Company's accounts. In addition, the prior year
financial statements were adjusted to reflect the consolidation of the limited
partnership. This adjustment had no effect on the capital deficit at December
31, 2002, or the net loss for the year then ended, as previously reported. In
addition, certain reclassifications have been made to prior period financial
information to conform to the current period presentation.
Prior to May 7, 2001, Ladenburg Capital and Ladenburg Capital Fund
Management were our only operating subsidiaries. On May 7, 2001, we acquired all
of the outstanding common stock of Ladenburg, and we changed our name from GBI
Capital Management Corp. to Ladenburg Thalmann Financial Services Inc. As part
of the consideration for the shares of Ladenburg, we issued the former
stockholders of Ladenburg a majority interest in our common stock. For
accounting purposes, the acquisition has been accounted for as a reverse
acquisition. Under reverse acquisition accounting, we were treated as the
acquired entity as Ladenburg's former stockholders held a majority of our common
stock following the transaction. As a result, our operating results were
included as of May 7, 2001, the date of the acquisition, with the historical
financial statements of Ladenburg. As appropriate, in the discussion of
operating results, increases in reported revenues and expenses as a result of
the acquired operations of Ladenburg Thalmann Financial Services Inc. will be
referred to as the "Ladenburg Capital operations." In connection with the
acquisition, all per share data has been restated to reflect retroactively the
number of shares of common stock, convertible notes and cash received by the
former stockholders of Ladenburg. For additional information concerning this
transaction, see Note 3 to our consolidated financial statements and Item 13
included in this report.
RECENT DEVELOPMENTS
EXECUTIVE CHANGES. On March 9, 2004, we entered into a Severance,
Waiver and Release Agreement with Victor M. Rivas, our president and chief
executive officer. Under the Severance Agreement, effective March 31, 2004, Mr.
Rivas will retire from all of his positions with us and our subsidiaries
including Ladenburg. In connection with Mr. Rivas' retirement, we entered into
an Employment Agreement with Charles I. Johnston pursuant to which Mr. Johnston
will serve, effective April 1, 2004, as president, chief executive officer and a
member of our board and chairman and chief executive officer of Ladenburg. Most
recently, Mr. Johnston was a managing director and the global head of private
client services at Lehman Brothers where he was responsible for all aspects of
Lehman's private client services business which included 440 brokers in 14
branches.
21
DEBT CONVERSION. On March 29, 2004, we entered into an agreement with
New Valley Corporation and Frost-Nevada Investments Trust, the holders of our
outstanding $18,010 aggregate principal amount of senior convertible promissory
notes, pursuant to which such parties agreed to convert their notes and accrued
interest into common stock, subject to shareholder approval. Pursuant to the
agreement, New Valley and Frost Nevada will convert their notes into
approximately 26,000,000 shares of common stock at reduced conversion prices of
$1.10 per share and $0.70 per share, respectively. The agreement is subject to,
among other things, approval by our shareholders at a special meeting that is
expected to be held in the second quarter of 2004. As a result of the
conversion, New Valley and Frost-Nevada will beneficially own approximately
12.5% and 27.6%, respectively, of our common stock. Concurrently with this
agreement, we entered into an agreement with Berliner, the holder of the
remaining $1,990 aggregate principal amount of senior convertible promissory
notes, pursuant to which we will repurchase the notes held by Berliner, plus all
accrued interest thereon, for $1,000 in cash.
We currently anticipate recording a pre-tax charge in 2004 of
approximately $10,900 in our statements of operations upon closing of these
transactions. The charge reflects expense attributable to the reduction in the
conversion price of the notes to be converted, offset partially by the gain on
the repurchase of the Berliner notes. The net balance sheet effect of the
transactions will be an increase in our shareholders' equity of approximately
$22,900.
RENEGOTIATION OF CLEARING AGREEMENT. In November 2002, we renegotiated
our clearing agreement with one of our clearing brokers whereby this clearing
broker became our primary clearing broker, clearing substantially all of our
business ("Clearing Conversion"). As part of the new agreement with this
clearing agent, we are realizing significant cost savings from reduced ticket
charges and other incentives. In addition, under the new clearing agreement, an
affiliate of the clearing broker loaned us the an aggregate of $3,500 (the
"Clearing Loans') in December 2002. The Clearing Loans and related accrued
interest are forgivable over various periods, up to four years from the date of
the Clearing Conversion, provided we continue to clear our transactions through
our primary clearing broker. As scheduled, in November 2003, $1,500 of the
Clearing Loans was forgiven. The remaining principal balance of the Clearing
Loans is scheduled to be forgiven as follows: $667 in November 2004, $667 in
November 2005 and $666 in November 2006. Upon the forgiveness of the Clearing
Loans, the forgiven amount is accounted for as other revenues. However, if the
clearing agreement is terminated for any reason prior to the loan maturity date,
the loan, less any amount that has been forgiven through the date of the
termination, plus interest, must be repaid on demand.
LADENBURG CAPITAL MANAGEMENT. From August 1999 through November 2002,
Ladenburg Capital was one of our principal operating subsidiaries in the
securities brokerage industry. Ladenburg Capital previously operated as a
broker-dealer subject to regulation by the SEC and the NASD. Ladenburg Capital
acted as an introducing broker, market maker, underwriter and trader for its own
account. In July 2002, the market making activities of Ladenburg Capital were
terminated. Certain employees working in Ladenburg Capital's market making area
were offered employment with Ladenburg. In November 2002, Ladenburg Capital
terminated its remaining broker-dealer operations but continued with its other
line of business. Ladenburg Capital voluntarily filed at that time to withdraw
as a broker-dealer, which withdrawal became effective in January 2004. In
conjunction with providing employment to certain former Ladenburg Capital
brokers, Ladenburg agreed to and is currently servicing these brokers' customer
accounts.
22
LITIGATION. On May 5, 2003, a suit was filed in the U.S. District Court
for the Southern District of New York by Sedona Corporation against Ladenburg,
former employees of the Ladenburg, Pershing LLC and a number of other firms and
individuals. The plaintiff alleges, among other things, that certain defendants
(not Ladenburg) purchased convertible securities from plaintiff and then
allegedly manipulated the market to obtain an increased number of shares from
the conversion of those securities. Ladenburg acted as placement agent and not
as principal in those transactions. Plaintiff has alleged that Ladenburg and the
other defendants violated federal securities laws and various state laws. The
plaintiff seeks compensatory damages from the defendants of at least $660,000
and punitive damages of $2,000,000. Our motion to dismiss the lawsuit is
currently pending. We believe the plaintiffs' claims in this action are without
merit and intend to vigorously defend against them.
In October 2003, an arbitration panel awarded $1,100 in a customer
arbitration. Although we have increased our reserves to reflect this award, we
have moved in court to vacate this award. The motion to vacate is currently
pending. We have several other various pending arbitrations claiming substantial
amounts of damages, including one which is seeking compensatory damages of
$6,000.
EMPLOYEE STOCK PURCHASE PLAN. In November 2002, our shareholders
approved the Ladenburg Thalmann Financial Services Inc. Employee Stock Purchase
Plan (the "Plan"), under which a total of 5,000,000 shares of common stock are
available for issuance. Under this stock purchase plan, as currently
administered by the compensation committee, all full-time employees may use a
portion of their salary to acquire shares of our common stock. Option periods
have been initially set at three months long and commence on January 1, April 1,
July 1 and October 1 of each year and end on March 31, June 30, September 30 and
December 31 of each year. The Plan became effective November 6, 2002 and the
first option period commenced April 1, 2003. During the year ended December 31,
2003, 1,601,919 shares of our common stock were issued to employees under the
Plan, at an average price of $.1325 per share, resulting in a capital
contribution of $212.
CLOSING OF BRANCH OFFICES. In January 2003, we closed our Cleveland,
Ohio retail sales office. Additionally, in June 2003, we closed our Ft.
Lauderdale office, which constituted all of our market making activities. As a
result of our decision to eliminate our market making activities, our minimum
net capital requirement decreased from $1,000 to $250.
WRITE-OFF OF LEASEHOLD IMPROVEMENTS. In May 2003, Ladenburg relocated
approximately 95 of its employees from its New York City office to its Melville,
New York office. As a result of this move, Ladenburg ceased using one of the
several floors it occupies in its New York City office, and the net book value
of the leasehold improvements was written off. In conjunction with the write-off
of these leasehold improvements, the unamortized deferred rent credit
representing reimbursement from the landlord of such leasehold improvements was
also written-off. The write-off of unamortized leasehold improvements of $1,592,
net of the unamortized deferred rent credit of $813, resulted in a net charge to
operations of $779 during 2003.
CRITICAL ACCOUNTING POLICIES
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 does not carry accounts for customers
or perform custodial functions related to customers' securities. Ladenburg
introduces all of its customer transactions, which are not reflected in these
financial statements, to its primary clearing broker, which maintains the
customers' accounts and clears such transactions. Additionally, the primary
clearing broker provides the clearing and depository operations for Ladenburg's
proprietary securities transactions. These activities may expose Ladenburg to
off-balance-sheet risk in the event that customers do not fulfill their
obligations with the
23
primary clearing broker, as Ladenburg has agreed to indemnify its primary
clearing broker for any resulting losses. We continually assess risk associated
with each customer who is on margin credit and record an estimated loss when we
believe collection from the customer is unlikely. We incurred losses from these
arrangements, prior to any recoupment from our financial consultants, of $184
and $233 for the years ended December 31, 2003 and 2002, respectively.
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, in addition to the litigation with the landlord discussed below, the
cases involve various allegations that our employees had mishandled customer
accounts. Due to the uncertain nature of litigation in general, we are unable to
estimate a range of possible loss related to lawsuits filed against us, but
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. We have accrued $4,999 and $6,201 for potential arbitration and
lawsuit losses as of December 31, 2003 and 2002, respectively. 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. Such costs may have a
material adverse effect on our future financial position, results of operations
or liquidity.
SEPTEMBER 11, 2001 EVENTS. On September 11, 2001, terrorists attacked
the World Trade Center complex in New York, which subsequently collapsed and
damaged surrounding buildings, including one occupied by a branch office of
Ladenburg Capital. These events resulted in the suspension of trading of U.S.
equity securities for four business days and precipitated the relocation of
approximately 180 employees to Ladenburg's mid-town New York headquarters. Some
of Ladenburg's and Ladenburg Capital's business was temporarily disrupted. We
are insured for loss caused by physical damage to property, including repair or
replacement of property. We are also insured for lost profits due to business
interruption, including costs related to lack of access to facilities. We will
record future reimbursements from insurance proceeds related to certain
September 11, 2001 expenses when the reimbursements are actually received.
Although the claim to the insurance carrier is significantly greater, the net
book value of the lost property, as well as the costs incurred to temporarily
replace some of the lost property, has been recorded as a receivable as of
December 31, 2003. We received insurance proceeds of $150 in July 2002
representing an advance relating to damaged property, which was applied against
our receivable. The receivable balance as of December 31, 2003, representing the
net book value of the damaged property and subsequent construction costs, was
$2,118. In October 2003, we filed a Proof of Loss with the insurance carrier,
for an amount in excess of the policy limits of approximately $7,800. There are
no assurances, however, that we will recover the full amount of insurance
available to Ladenburg and Ladenburg Capital as a result of this claim.
Ladenburg Capital is currently in litigation with its landlord seeking
a declaratory judgment that the lease in this building near the World Trade
Center be deemed terminated because, among other things, the premises were
unsafe and uninhabitable for a period of 270 days after September 11, 2001,
pursuant to a lease provision giving Ladenburg Capital the right to terminate in
those circumstances. We believe that Ladenburg Capital will prevail and intend
to pursue this claim vigorously. However, in the event that Ladenburg Capital
does not prevail, it may incur additional future expenses to terminate the
long-term commitment or, to the extent of foregone rental income in the event
Ladenburg Capital does not sublease the office space for an amount at least
equal to the lease obligations. Such costs may have a material adverse effect on
Ladenburg Capital's financial position and liquidity.
EXIT OR DISPOSAL ACTIVITY. During the fourth quarter of 2002, we early
adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". Under SFAS No. 146, a cost associated with an exit or disposal
activity shall be recognized and measured initially at its fair value in the
24
period in which the liability is incurred. For operating leases, a liability for
costs that will continue to be incurred under the lease for its remaining term
without economic benefit to the entity shall be recognized and measured at its
fair value when the entity ceases using the right conveyed by the lease (the
"cease-use date"). The fair value of the liability at the "cease-use date" shall
be determined based on the remaining lease rentals, reduced by estimated
sublease rentals that could be reasonably obtained for the property.
In May 2003, Ladenburg relocated approximately 95 of its employees from
its New York City office to its Melville, New York office. As a result of this
move, Ladenburg ceased using one of the several floors it occupies in its New
York City office, and the net book value of the leasehold improvements was
written off. In accordance with SFAS No. 146, as estimated future sublease
payments that could be reasonably obtained for the property exceed related
rental commitments under the lease, no liability for costs associated with
vacating the space has been provided. Additional costs may be incurred, to the
extent of foregone rental income in the event Ladenburg does not sublease the
office space for an amount at least equal to the lease obligations. Such costs
may have a material adverse effect on Ladenburg's financial position and
liquidity.
FAIR VALUE. "Trading securities owned" and "Securities sold, but 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
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. On January 1, 2002, we adopted SFAS No. 142,
"Goodwill and Other Intangible Assets," and were required to analyze our
goodwill for impairment issues on January 1, 2002 and on a periodic basis
thereafter. In connection with the reporting of results for the second quarter
of 2002, based on the overall declines in the U.S. equity markets and the
conditions prevailing in the broker-dealer industry, we engaged an independent
appraisal firm to value our goodwill as of June 30, 2002. Based on this
valuation, an impairment charge of $18,762 of goodwill was indicated and
recorded in September 2002. The goodwill was generated in the Ladenburg
acquisition in May 2001, and the charge reflected overall market declines since
the acquisition. See Note 2 to our consolidated financial statements for a
discussion of the adoption of SFAS No. 142.
VALUATION OF DEFERRED TAX ASSETS. We account for taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes," which requires the recognition
of tax benefits or expense on the timing differences between the tax basis and
book basis of its assets and liabilities. Deferred tax assets and liabilities
are measured using the enacted tax rates expected to apply to taxable income in
the years in which those timing differences are expected to be recovered or
settled. Deferred tax amounts as of December 31, 2003, which consist principally
of the tax benefit of net operating loss carryforwards
25
and accrued expenses, amount to $20,598. After consideration of all the
evidence, both positive and negative, especially the fact we have sustained
operating losses during 2002 and 2003 and that we continue to be affected by
conditions in the economy, we have determined that a valuation allowance at
December 31, 2003 was necessary to fully offset the deferred tax assets based on
the likelihood of future realization. At December 31, 2003, we had net operating
loss carryforwards of approximately $35,100, expiring in various years from 2015
through 2024, of which approximately $116 are subject to restrictions on
utilization.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Our revenues for 2003 decreased $18,176 from 2002 primarily as a result
of decreased commissions of $7,420, decreased net principal transactions of
$5,432, decreased investment banking fees of $6,337, net of increased other
revenues of 1,905. Our revenues were adversely affected by the decrease in our
number of registered representatives in 2003 versus 2002.
Our expenses for 2003 decreased $58,360 from 2002 primarily as a result
of the $18,762 impairment of goodwill in 2002, decreased compensation and
benefits of $16,205, decreased brokerage, communication and clearance fees of
$9,471, and decreased other expenses of $7,570.
Our revenues for 2003 consisted of commissions of $42,376, net
principal transactions of $5,159, investment banking fees of $2,804, investment
advisory fees of $2,459, interest and dividends of $1,773, syndicate and
underwriting income of $251 and other income of $6,575. Our revenues for 2002
consisted of commissions of $49,796, net principal transactions of $10,591,
investment banking fees of $9,141, investment advisory fees of $2,736, interest
and dividends of $2,381, syndicating and underwriting income of $258 and other
income of $4,670. Our expenses for 2003 consisted of compensation and benefits
of $40,671, write-off of leasehold improvements of $779 and various other
expenses of $25,215. Our expenses for 2002 consisted of compensation and
benefits of $56,876, impairment of goodwill of $18,762, write-off of furniture,
fixtures and leasehold improvements of $1,394 and other expenses of $47,993.
The $7,420 (14.9%) decrease in commission income was primarily a result
of a decrease in the number of registered representatives we employed during
2003 compared to 2002. We employed 172 registered representatives as of December
31, 2003 versus 239 as of December 31, 2002.
The $5,432 (51.3%) decrease in net principal transactions was primarily
the result of decreases in trading income of $3,979 in the 2003 period.
The $6,337 (69.3%) 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 in 2003 compared to 2002, as
well as a reduction in the number of professional staff in the corporate finance
area of the investment banking department, from 11 at December 31, 2002 to 8 at
December 31, 2003.
The decrease in compensation expense of $16,205 (28.5%) was primarily
due to the net decrease in revenues and various staff reductions in the third
and fourth quarters of 2002 as well as the first and second quarters of 2003.
The decrease of $9,471 (64.3%) decrease in brokerage, communication and
clearance fees is primarily due to the Clearing Conversion, the decrease in
proprietary trading activities and the decreased amount of agency commission
transactions in 2003 compared to 2002.
The $7,570 (52.3%) decrease in other expenses was primarily due to
decreases in advertising, customer arbitration settlements, insurance premiums
expense, license and registration fees, travel and valuation allowances relating
to receivables.
26
In connection with the reporting of the results for the second quarter
of 2002, based on the overall declines in the U.S. equity markets and the
conditions prevailing in the broker-dealer industry, the Company completed an
additional impairment review and recorded a $18,762 charge for the impairment of
goodwill, which was generated in the Ladenburg acquisition. The charge reflected
the overall market declines since the acquisition in May 2001. During this
review, an independent appraisal firm was engaged to value the Company's
goodwill as of June 30, 2002. The appraiser valued the businesses using a
weighted average of each unit's projected discounted cash flow, with a weighted
average cost of capital of 18.50%, and a fair market approach (using market
comparables for ten companies). The appraiser weighted the discounted cash flow
for each unit at 70% and the fair market approach at 30%. The discounted cash
flow was based on management's revised projections of operating results at June
30, 2002. Based on this valuation, an impairment charge of $18,762 of goodwill
was indicated and recorded for the second quarter of 2002.
In May 2003, Ladenburg relocated approximately 95 of its employees from
its New York City office to its Melville, New York office. As a result,
Ladenburg ceased using one of the several floors it occupies in its New York
City office. In accordance with SFAS No. 146, we have evaluated our liability
with respect to this space, taking into account estimated future lease payments
that could be reasonably obtained for the property. In this evaluation, we
concluded that the net book value of the leasehold improvements should be
written-off. Accordingly, the unamortized deferred rent credit representing
reimbursement from the landlord of such leasehold improvements was also
written-off. During the second quarter of 2003, the write-off of leasehold
improvements, net of accumulated amortization ($1,592) and the write-off of the
unamortized deferred rent credit ($813) resulted in a net charge to operations
of $779.
Income tax expense for 2003 was $70 compared to $1,400 in 2002. After
consideration of all the evidence, both positive and negative, especially the
fact we have sustained operating losses during 2002 and 2003 and that we
continue to be affected by conditions in the economy, management determined that
a valuation allowance at December 31, 2003 was necessary to fully offset the
deferred tax assets based on the likelihood of future realization. The income
tax rate for the 2003 and 2002 periods does not bear a customary relationship to
effective tax rates as a result of unrecognized net operating losses, the change
in valuation allowances, state and local income taxes and permanent differences.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Our revenues for 2002 decreased $14,380 from 2001 primarily as a result
of decreases in net principal transactions of $20,071 offset by an increase in
commissions of $10,040. Our revenues were adversely affected by the overall
declines in the U.S. equity markets and the continuing weak operating
environment for the broker-dealer industry. For comparative purposes, the 2002
period includes revenues generated by the Ladenburg Capital operations for the
full year while the 2001 period includes revenues generated by the Ladenburg
Capital operations from May 7, 2001 to December 31, 2001.
Our expenses for 2002, exclusive of the $18,762 goodwill impairment
charge, increased $61. The overall net increase includes an increase in rent and
occupancy of $3,050, an increase in professional services of $1,899 and a net
increase in various other expenses of $2,326, net of decreased employee
compensation of $5,865 and decreased brokerage, communication and clearance fees
of $1,349. For comparative purposes, the 2002 period includes expenses incurred
by the Ladenburg Capital operations for the full year while the 2001 period
includes expenses incurred by the Ladenburg Capital operations from May 7, 2001
to December 31, 2001.
27
Our revenues for 2002 consisted of commissions of $49,796, net
principal transactions of $10,591, investment banking fees of $9,141, syndicate
and underwriting income of $258, interest and dividends of $2,381, investment
advisory fees of $2,736 and other income of $4,670. Our revenues for 2001
consisted of commissions of $39,756, net principal transactions of $30,662,
investment banking fees of $11,698, syndicate and underwriting income of $652,
interest and dividends of $4,100, investment advisory fees of $2,696 and other
income of $4,389. Our expenses for 2002 consisted of employee compensation and
benefits of $56,876, impairment of goodwill of $18,762 and other expenses of
$49,387. Our expenses for 2001 consisted of employee compensation and benefits
of $62,741 and other expenses of $43,461.
The $10,040 (25.3%) increase in commissions was primarily the result of
the impact of the acquired Ladenburg Capital operations, which provided
additional commission income of $34,900 in 2002 versus $25,175 in the 2001
period.
The $2,557 (21.9%) 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 $20,071 (65.5%) decrease in principal transactions was primarily
the result of decreases in trading income of $14,662 in the 2002 period and a
decrease in sales credits caused by the continued significant decline in the
market for equity securities.
The decrease in compensation expense of $5,865 (9.3%) was primarily due
to the net decrease in revenues.
As discussed above, in 2002, we recorded a $18,762 charge for the
impairment of goodwill, which was generated in the acquisition of the Ladenburg
Capital operations.
Income tax expense for 2002 was $1,400 compared to $44 in 2001. The
income tax rate for 2002 did not bear a customary relationship to effective tax
rates primarily as a result of an increase in the valuation allowance of
$12,844, state and local taxes and permanent differences. The income tax rate
for 2001 did not bear a customary relationship to effective tax rates primarily
as a result of the establishment of a valuation allowance of $4,565, state and
local taxes and permanent differences.
After consideration of all the evidence, both positive and negative,
especially the fact we have sustained operating losses during 2001 and for the
year ended December 31, 2002 and that we continue to be affected by conditions
in the economy, management has determined that a valuation allowance at December
31, 2002 was necessary to offset the deferred tax assets based on the likelihood
of future realization. Accordingly, during 2002, we increased our valuation
allowance to fully offset the deferred tax assets based on the likelihood of
future realization. In addition, the income tax rate for the 2002 and 2001
periods does not bear a customary relationship to effective tax rates as a
result of state and local income tax expense and limitations on the utilization
of net operating loss carrybacks.
LIQUIDITY AND CAPITAL RESOURCES
Approximately 58.7% of our assets at December 31, 2003 are highly
liquid, consisting primarily of cash and cash equivalents, trading securities
owned and receivables from clearing brokers, all of which fluctuate, depending
upon the levels of customer business and trading activity. Receivables from
broker-dealers, which are primarily from our primary clearing broker, turn over
rapidly. As a securities dealer, we may carry significant levels of securities
inventories to meet customer needs. A relatively small percentage of our total
assets are fixed. The total assets or the individual components of total assets
may vary significantly from period to period because of changes relating to
economic and market conditions, and proprietary trading strategies.
Ladenburg is subject to the net capital rules of the SEC. Therefore, it
is subject to certain restrictions on the use of capital and its related
liquidity. Ladenburg's regulatory net capital, as defined, of $6,745, exceeded
minimum capital requirements of $250 by $6,495 at December 31, 2003. Failure to
maintain the required net capital may subject Ladenburg to suspension or
expulsion by the NYSE, the SEC
28
and other regulatory bodies and ultimately may require its liquidation. The net
capital rule also prohibits the payment of dividends, redemption of stock and
prepayment or payment of principal of subordinated indebtedness if net capital,
after giving effect to the payment, redemption or prepayment, would be less than
specified percentages of the minimum net capital requirement. Compliance with
the net capital rule could limit the operations of Ladenburg that requires the
intensive use of capital, such as underwriting and trading activities, and also
could restrict our ability to withdraw capital from it, which in turn, could
limit our ability to pay dividends and repay and service our debt. In June 2003,
we closed our Ft. Lauderdale office, which constituted all of our market making
activities. As a result of our decision to eliminate our market making
activities, effective June 13, 2003, our minimum net capital requirement
decreased from $1,000 to $250.
Ladenburg, as guarantor of its customer accounts to its primary
clearing broker, is exposed to off-balance-sheet risks in the event that its
customers do not fulfill their obligations with the clearing broker. In
addition, to the extent Ladenburg maintains a short position in certain
securities, it is exposed to future off-balance-sheet market risk, since its
ultimate obligation may exceed the amount recognized in the financial
statements.
Net cash flows used in operating activities for the year ended December
31, 2003 were $6,254 as compared to $195 for the 2002 period. Cash used in
operating activities increased to $6,254 for the year ended December 31, 2003
compared with $195 in the prior year. The increase was primarily due to an
increase in receivables from clearing brokers, of $9,867 in 2003 compared to a
decrease of $16,542 in 2002, decreases of net operating assets of limited
partnership of $1,406 in 2003 versus increases of net operating assets of
limited partnership of $3,183 in 2002 and a decrease in income taxes receivable
of $2,224 in 2003 versus an increase of $1,725 in 2002. These changes were
offset by a $40,903 decrease in net loss and decreases of net trading securities
owned of $6,204 in 2003 versus $1,773 in 2002. Non-cash charges in 2002
associated with the impairment of goodwill ($18,762), write-off of deferred tax
assets ($3,339) and write-off of furniture, fixtures and leasehold improvements
of $1,394 contributed significantly to the decrease in net loss of $46,393 in
2002 and $5,490 in 2003.
Net cash flows used in investing activities for the year ended December
31, 2003 were $434 compared to net cash flows provided by investing activities
of $1,521 for the 2002 period. The difference is due to a decrease in purchases
of furniture, equipment and leasehold improvements during the 2003 period.
There was $1,416 of cash flows used in financing activities for the
year ended December 31, 2003, primarily representing $1,796 of distributions to
limited partners of the Ladenburg Focus Fund. There was $5,332 of cash flows
provided by financing activities for the year ended December 31, 2002 period,
representing the issuance by us of $5,000 of promissory notes payable offset by
the repayment of $2,000 of outstanding promissory notes payable and a decrease
in the amount of collateral required under our letter of credit agreement with
one of our landlords in the 2002 period.
We are obligated under several noncancellable lease agreements for
office space, which provide for minimum lease payments, net of lease abatement
and exclusive of escalation charges, of $4,526 in 2004 and approximately $5,126
per year until 2015. Such amounts exclude the lease referred to in the following
paragraph. In addition, one of the leases obligates the Company to occupy
additional space at the landlord's option, which may result in aggregate
additional lease payments of up to $976 through June 2015.
Ladenburg Capital may have potential liability under a terminated lease
for office space in New York City which it was forced to vacate during 2001 due
to the events of September 11, 2001. Ladenburg Capital no longer occupies the
space and believes it has no further lease obligation pursuant to the terms of
the lease. This lease, which, had it not terminated as a result of the events of
September 11, 2001, would have expired by its terms in March 2010, provides for
future minimum payments aggregating approximately $4,335 payable $644 in 2004,
$703 per year from 2005 through 2008 and $879 thereafter. Ladenburg Capital is
currently in litigation with the landlord in which it is seeking judicial
determination of the termination of the lease. If Ladenburg Capital is not
successful in this litigation, it plans to sublease the property. Ladenburg
Capital has provided for estimated costs in connection with this lease and has
recorded a liability at December 31, 2003 and 2002. Additional costs may be
incurred in connection with terminating this lease, or if not terminated, to the
extent of foregone rental income in the event Ladenburg Capital does not
sublease the office space for an amount at least equal to the lease obligations.
Such costs may have a material adverse effect on Ladenburg Capital's financial
position and liquidity.
29
Ladenburg ceased using one of the several floors it occupies in its New
York City office and is currently seeking to sublet the property. In accordance
with SFAS No. 146, Ladenburg's management evaluates Ladenburg's liability with
respect to this space on a quarterly basis, taking into account estimated future
sublease payments that could be reasonably obtained for the property. In these
evaluations, Ladenburg's management concluded that no liability for this lease
was required to be recorded as of December 31, 2003. Additional costs may be
incurred, to the extent of foregone rental income in the event Ladenburg does
not sublease the office space for an amount at least equal to the lease
obligations. Such costs may have a material adverse effect on Ladenburg's
financial position and liquidity.
In conjunction with the May 2001 acquisition of Ladenburg, we issued a
total of $20,000 principal amount of senior convertible promissory notes due
December 31, 2005 to New Valley Corporation, Berliner Effektengesellschaft AG
and Frost-Nevada, Limited Partnership (which was subsequently assigned to
Frost-Nevada Investments Trust). The $10,000 principal amount of notes issued to
New Valley and Berliner, the former stockholders of Ladenburg, bear interest at
7.5% per annum, and the $10,000 principal amount of the note 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.
On August 31, 2001, we borrowed $1,000 from each of New Valley and
Frost-Nevada in order to supplement the liquidity of our broker-dealer
operations. 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, was due on the
earlier of December 31, 2003 or the completion of one or more equity financings
where we receive at least $5,000 in total proceeds. The terms of the loan
restrict us from incurring or assuming any indebtedness that is not subordinated
to the loan so long as the loan is outstanding. On July 16, 2002, we borrowed an
additional $2,500 from New Valley (collectively, with the March 2002 Loan, the
"2002 Loans") on the same terms as the March 2002 loan. In November 2002, New
Valley agreed in connection with the Clearing Loans, to extend the maturity of
the 2002 Loans to December 31, 2006 and to subordinate the 2002 Loans to the
repayment of the Clearing Loans.
On June 28, 2002, New Valley, Berliner and Frost-Nevada agreed with us
to forbear until May 15, 2003 payment of the interest due to them under the
senior convertible promissory notes held by these entities on the interest
payment dates of the notes commencing June 30, 2002 through March 2003 (the
"Forbearance Interest Payments"). On March 3, 2003, the holders of the senior
convertible promissory notes agreed to extend the interest forbearance period to
January 15, 2005 with respect to interest payments due through December 31,
2004. Interest on the deferred amounts accrues at 8% on the New Valley and
Berliner notes and 9% on the Frost-Nevada Investments Trust note. We also agreed
to apply any net proceeds from any subsequent public offerings to any such
deferred amounts owed to the holders of the notes to the extent possible. As of
December 31, 2003, accrued interest payments as to which a forbearance was
received amounted to $3,414. As discussed above, in March 2004, the holders of
our senior convertible promissory notes agreed to convert such notes into
approximately 26,000,000 shares of common stock at reduced conversion prices
ranging from $0.70 to $1.10 per share, subject to shareholder approval.
Concurrently with this agreement, we entered into an agreement with Berliner,
the holder of the remaining $1,990 aggregate principal amount of senior
convertible promissory notes, pursuant to which we will repurchase the notes
held by Berliner, plus all accrued interest thereon, for $1,000 in cash. We
currently anticipate recording a pre-tax charge in 2004 of approximately $10,900
in our statements of operations upon closing of these transactions. The charge
reflects expense attributable to the reduction in the conversion price of the
notes to be converted, offset partially by the gain on the repurchase of the
Berliner notes. The net balance sheet effect of the transactions will be an
increase in our shareholders' equity of approximately $22,900. Notwithstanding
the foregoing, we cannot assure you that our operations will generate funds
sufficient to repay our other existing debt obligations as they come due. Our
failure to repay our indebtedness and make interest payments as required by our
debt obligations could have a material adverse affect on our operations.
30
On October 8, 2002, we borrowed an additional $2,000 from New Valley.
The loan, which bore interest at 1% above the prime rate, matured on the
earliest of December 31, 2002, the next business day after we received our
federal income tax refund for the fiscal year ended September 30, 2002, and the
next business day after we received the Clearing Loans in connection with the
Clearing Conversion. This loan was repaid in December 2002 upon receipt of the
Clearing Loans.
Ladenburg also has $2,500 outstanding under a junior subordinated
revolving credit agreement with an affiliate of its primary clearing broker that
matures on October 31, 2004, under which borrowings incur interest at LIBOR plus
2%.
In November 2002, we consummated the Clearing Conversion whereby we now
clear substantially all of our business through one clearing agent, our primary
clearing broker. As part of the new agreement with this clearing agent, we are
realizing significant cost savings from reduced ticket charges and other
incentives. In addition, under the new clearing agreement, an affiliate of the
clearing broker loaned us the $3,500 of Clearing Loans. The Clearing Loans are
forgivable over various periods, up to four years from the date of the Clearing
Conversion. As scheduled, $1,500 of principal on the Clearing Loans was forgiven
in November 2003. The remaining principal balance of the Clearing Loans is
scheduled to be forgiven as follows: $667 in November 2004, $667 in November
2005 and $666 in November 2006. Upon the forgiveness of the Clearing Loans, the
forgiven amount is accounted for as other revenues. However, if the clearing
agreement is terminated for any reason prior to the loan maturity date, the
loan, less any amount that has been forgiven through the date of the
termination, plus interest, must be repaid on demand.
In December 2003, Ladenburg Capital settled its litigation with the
landlord and terminated its obligation under a lease expiring in 2007 relating
to office space in Bethpage, New York, which it vacated in 2002. As a result of
its settlement with the Bethpage landlord, Ladenburg Capital adjusted its
liability and recorded a corresponding reduction in rent expense of $1,175 in
the fourth quarter of 2003. This reduction in rent expense, less rent accrued in
previous quarters during 2003, amounted to a net credit of $200 for the fiscal
year ended December 31, 2003.
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. We believe that, based on our historical experience and the
reserves established by us, the resolution of the claims presently pending will
not have a material adverse effect on our financial condition. However, although
we typically reserve an amount we believe will be sufficient to cover any
damages assessed against us, 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 financial condition
may be materially adversely affected.
Our liquidity position continues to be adversely affected by our
inability to generate cash from operations. Accordingly, we have been forced to
cut expenses as necessary. In order to accomplish this, we have implemented
certain cost-cutting procedures throughout our operations including reducing the
size of our workforce. Additionally, during the fourth quarter of 2002, in order
to reduce future operating expenses, we terminated the operations of Ladenburg
Capital and withdrew it as a broker-dealer. Ladenburg Capital filed at that time
to withdraw as a broker-dealer, which withdrawal became effective in January
2004. Ladenburg has agreed to and is currently servicing the accounts of
Ladenburg Capital and many of the employees of Ladenburg Capital were offered
and have accepted employment with Ladenburg. The termination of Ladenburg
Capital's operations reduced support expenses, operating expenses and general
administrative expenses.
31
Our overall capital and funding needs are continually reviewed to
ensure that our liquidity and 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 the subsidiary. If, based on these reviews,
it is determined that we require additional funds to support our liquidity and
capital base, we would seek to raise additional capital through available
sources, including through borrowing additional funds on a short-term basis from
New Valley or from other parties, including our shareholders and clearing
brokers. Additionally, we may seek to raise money through a rights offering or
other type of financing. In May 2002, we filed a registration statement for a
proposed $10,000 rights offering to the holders of our outstanding common stock,
convertible notes, warrants and options in order to raise additional necessary
working capital. However, on August 6, 2002, we announced that we had decided to
postpone the rights offering due to market conditions. If additional funds were
needed, we could attempt to consummate the rights offering, although we do not
currently anticipate that a rights offering could be successfully completed
absent a material improvement in market conditions and a significant increase in
our stock price. In the circumstance where the rights offering were ultimately
consummated, we would be required to use the proceeds of the proposed rights
offering to repay the 2002 Loans as well as all accumulated Forbearance Interest
Payments, to the extent possible. If we continue to be unable to generate cash
from operations and are unable to find alternative sources of funding as
described above, it would have an adverse impact on our liquidity and
operations.
OFF-BALANCE SHEET ARRANGEMENTS
The table below summarizes information about our contractual
obligations as of December 31, 2003 and the effects these obligations are
expected to have on our liquidity and cash flow in the future years.
- ----------------------------------------- ----------------------------------------------------------------------------------------
Contractual Obligations Payments Due By Period ($)
- ----------------------------------------- ----------------------------------------------------------------------------------------
Total Less than 1 year 1-3 years 4-5 years After 5 years
- ----------------------------------------- ----------------- ------------------ ---------------- ------------------ --------------
Long-Term Debt 29,500 2,500 27,000 -- --
- ----------------------------------------- ----------------- ------------------ ---------------- ------------------ --------------
Capital Lease Obligations -- -- -- -- --
- ----------------------------------------- ----------------- ------------------ ---------------- ------------------ --------------
Operating Leases(1) 60,910 4,526 9,819 10,634 35,931
- ----------------------------------------- ----------------- ------------------ ---------------- ------------------ --------------
Employment Agreement Compensation(2) 878 698 180 -- --
- ----------------------------------------- ----------------- ------------------ ---------------- ------------------ --------------
Other Long-Term Liabilities Reflected on -- -- -- -- --
the Company's Balance Sheet under GAAP
- ----------------------------------------- ----------------- ------------------ ---------------- ------------------ --------------
Totals 91,288 7,724 36,999 10,634 35,931
- ----------------------------------------- ----------------- ------------------ ---------------- ------------------ --------------
(1) Excludes $4,335 related to lease for office space vacated in 2001 which is
being litigated with landlord.
(2) The employment agreements provide for bonus payments that are excluded from
these amounts.
In addition to the agreement entered into with Charles I Johnston
referred to above in Item 1, "Business - Recent Developments - Executive
Changes," Ladenburg entered into additional written employment agreements
subsequent to December 31, 2003 with several employees, which obligations
aggregate approximately $733 and $347 for 2004 and 2005, respectively.
32
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
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 December 31, 2003 the
fair market value of our inventories were $1,013 in long positions and $4,070 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 December 31, 2003 will not have a material adverse effect on our consolidated
financial position or results of operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We and our representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, including any statements that may be contained in
the foregoing discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations", in this report and in other filings with
the Securities and Exchange Commission and in our reports to shareholders, which
reflect our expectations or beliefs with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties and, in connection with the "safe-harbor" provisions of the
Private Securities Litigation Reform Act, we have identified under "Risk
Factors" in Item 1 above, important factors that could cause actual results to
differ materially from those contained in any forward-looking statement made by
or on behalf of us.
Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. We do not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
us.
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements and Notes thereto, together
with the reports thereon of Eisner LLP dated February 5, 2004 and
PricewaterhouseCoopers LLP dated March 22, 2002, beginning on page F-1 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective September 30, 2002, we changed our independent accountants as
described in our Current Report on Form 8-K dated September 30, 2002 and filed
with the SEC on October 2, 2002.
33
ITEM 9A. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report, and, based on that evaluation, our
principal executive officer and principal financial officer have concluded that
these controls and procedures are effective. There were no changes in our
internal control over financial reporting during the period covered by this
report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to its
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding disclosure.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of our
current directors, executive officers and other key employees as of March 26,
2004. Our directors are elected annually and serve until the next annual meeting
of shareholders and until their successors are elected and appointed. Our
executive officers serve until the election and qualification of their
successors or until their death, resignation or removal by our board of
directors.
Name Age Position
- ---- --- --------
Howard M. Lorber 55 Chairman of the Board
Victor M. Rivas 60 President and Chief Executive Officer
Vincent A. Mangone 38 Director
Mark Zeitchick 38 Director
Henry C. Beinstein 61 Director
Robert J. Eide 51 Director
Richard J. Lampen 50 Director
Richard J. Rosenstock 52 Director
Salvatore Giardina 42 Vice President and Chief Financial Officer
HOWARD M. LORBER has been chairman of our board of directors since May
2001. Since November 1994, he has been president, chief operating officer and a
member of the board of directors of New Valley, a company engaged in the real
estate business and seeking to acquire additional operating companies. From
January 1994 to January 2001, Mr. Lorber was a consultant to Vector Group Ltd.,
a New York Stock Exchange-listed holding company, with subsidiaries engaged in
the manufacture and sale of cigarettes and the principal shareholder of New
Valley, and since January 2001 has served as its president, chief operating
officer and a member of its board of directors. Mr. Lorber has been chairman of
the board of directors of Hallman & Lorber Associates Inc., consultants and
actuaries of qualified pension and profit sharing plans, and various of its
affiliates since 1975. Mr. Lorber has been a stockholder and a registered
representative of Aegis Capital Corp., a broker-dealer and a member firm of the
NASD since 1984. Since 1990, Mr. Lorber has been chairman of the board of
directors of Nathan's Famous, Inc., a chain of fast food restaurants, and has
been its chief executive officer since 1993. Mr. Lorber also serves as a
director of United Capital Corp., a real estate investment and diversified
manufacturing company, and of Prime Hospitality Corp., a company doing business
in the lodging industry. He is also a trustee of Long Island University.
VICTOR M. RIVAS has been our president and chief executive officer and
a member of our board of directors since May 2001. Mr. Rivas will retire from
all of his positions with us and our subsidiaries effective March 31, 2004. For
more information regarding Mr. Rivas' retirement, see Item 1, "Business - Recent
Developments - Executive Changes" above. Mr. Rivas has been affiliated with
Ladenburg, our primary operating subsidiary, since September 1997 and has been
its chairman and chief executive officer since July 1999. He has been
co-chairman of the board of directors of Ladenburg Capital Management Inc., one
of our previous operating subsidiaries, since November 2001. Since October 1999,
he has been a member of the board of directors of New Valley. Prior to joining
Ladenburg, Mr. Rivas served as an executive officer of the brokerage firms of
Rickel & Associates, Inc. from March 1997 to September 1997 and Janssen-Meyers
Associates, L.P. from January 1996 to March 1997. Mr. Rivas had previously
served as chairman of the board and chief executive officer of Conquest
Industries Inc. and its subsidiary, Conquest Airlines Corp.
35
VINCENT A. MANGONE has been a member of our board of directors since
August 1999. He also served as our executive vice president from August 1999
until December 2003. Mr. Mangone has been a registered representative with
Ladenburg since March 2001. Mr. Mangone has also been affiliated with Ladenburg
Capital since October 1993 and has been an executive vice president since
September 1995.
MARK ZEITCHICK has been a member of our board of directors since August
1999. He also served as our executive vice president from August 1999 until
December 2003. Mr. Zeitchick has been a registered representative with Ladenburg
since March 2001. Mr. Zeitchick has also been affiliated with Ladenburg Capital
since October 1993. Mr. Zeitchick has been Ladenburg Capital's co-chairman since
November 2001. From September 1995 until November 2001, he was an executive vice
president of Ladenburg Capital. From May 2001 until November 2001, he served as
chairman of Ladenburg Capital, and became co-chairman in November 2001.
HENRY C. BEINSTEIN has been a member of our board of directors since
May 2001. Mr. Beinstein has been a director of New Valley since 1994 and of
Vector Group since March 2004. Since August 2002, Mr. Beinstein has been a money
manager and an analyst and registered representative of Gagnon Securities, LLC,
a broker-dealer and a member firm of the NASD. He retired in August 2002 as the
executive director of Schulte Roth & Zabel LLP, a New York-based law firm, a
position he had held since August 1997. Before that, Mr. Beinstein had served as
the managing director of Milbank, Tweed, Hadley & McCloy LLP, a New York-based
law firm, commencing in November 1995. From April 1985 through October 1995, Mr.
Beinstein was the executive director of Proskauer Rose LLP, a New York-based law
firm. Mr. Beinstein is a certified public accountant in New York and New Jersey
and prior to joining Proskauer was a partner and national director of finance
and administration at Coopers & Lybrand.
ROBERT J. EIDE has been a member of our board of directors since May
2001. He has also been the chairman and treasurer of Aegis Capital Corp. since
before 1988. Mr. Eide also serves as a director of Nathan's Famous and Vector
Group.
RICHARD J. LAMPEN has been a member of our board of directors since
January 2002. He has been the executive vice president and general counsel of
New Valley since October 1995 and a member of its board of directors since July
1996. Since July 1996, Mr. Lampen has served as executive vice president of
Vector Group. Since January 1997, Mr. Lampen has served as a director of CDSI
Holdings Inc., a company with interests in the marketing services business, and
since November 1998 has been its president and chief executive officer. From May
1992 to September 1995, Mr. Lampen was a partner at Steel Hector & Davis, a law
firm located in Miami, Florida. From January 1991 to April 1992, Mr. Lampen was
a managing director at Salomon Brothers Inc., an investment bank, and was an
employee at Salomon Brothers from 1986 to April 1992. Mr. Lampen has served as a
director of a number of other companies, including U.S. Can Corporation, The
International Bank of Miami, N.A. and Spec's Music Inc., as well as a
court-appointed independent director of Trump Plaza Funding, Inc.
RICHARD J. ROSENSTOCK has been a member of our board of directors since
August 1999. From May 2001 until December 2002, Mr. Rosenstock served as vice
chairman of our board of directors and from August 1999 until December 2002,
served as our chief operating officer. He also served as our president from
August 1999 until May 2001. Since January 2003, Mr. Rosenstock has been a
registered representative of Ladenburg. Mr. Rosenstock was affiliated with
Ladenburg Capital from 1986 until December 2002, serving from May 2001 as
Ladenburg Capital's chief executive officer. From January 1994 until May 1998,
he served as an executive vice president of Ladenburg Capital and was its
president from May 1998 until November 2001.
36
OTHER EXECUTIVE OFFICER
SALVATORE GIARDINA has been our vice president and chief financial
officer since October 2002 and was our vice president of finance from June 2001
until October 2002. Mr. Giardina has been affiliated with Ladenburg since
February 1990. He has served as Ladenburg's chief financial officer since August
1998, and from February 1990 until August 1998, served as its controller. From
August 1983 until February 1990, Mr. Giardina was an auditor with the national
public accounting firm of Laventhol & Horwath. Mr. Giardina is a certified
public accountant.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers, directors and persons who beneficially own more than ten
percent of our common stock to file reports of ownership and changes in
ownership with the SEC. These reporting persons are also required to furnish us
with copies of all Section 16(a) forms they file. To our knowledge, based solely
on our review of the copies of these forms furnished to us and representations
that no other reports were required, all Section 16(a) reporting requirements
were complied with during the fiscal year ended December 31, 2003.
AUDIT COMMITTEE FINANCIAL EXPERT
Currently, our audit committee is comprised of Henry C. Beinstein,
Robert J. Eide and Richard J. Lampen, with Mr. Beinstein serving as the chairman
of the audit committee. Our board of directors believes that the audit committee
has at least one "audit committee financial expert" (as defined in Regulation
240.401(h)(1)(i)(A) of Regulation S-K) serving on its audit committee, such
"audit committee financial expert" being Mr. Beinstein. Our board of directors
also believes that Mr. Beinstein would be considered an "independent" director
under Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of
1934.
CODE OF ETHICS
In February 2004, our board of directors adopted a code of ethics that
applies to our directors, officers and employees as well as those of our
subsidiaries. A copy of our code of ethics has been filed as an exhibit to this
Annual Report on Form 10-K.
37
ITEM 11. EXECUTIVE COMPENSATION.
The following table shows the compensation paid or accrued by us to our
chief executive officer and to our most highly compensated executive officers
whose total 2003 compensation exceeded $100 (collectively, the "Named Executive
Officers") for the calendar years 2003, 2002 and 2001. All compensation figures
in this table and the notes thereto, are in dollars.
- ----------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
FISCAL ------------------------------ ----------------------- ALL OTHER
NAME AND PRINCIPAL POSITION PERIOD SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION
- ----------------------------------------------------------------------------------------------------------------------------------
Victor M. Rivas 2003 500,000 500,000(1) -0- 2,254(2)
President and Chief Executive 2002 500,000 595,678(3) 300,000 3,044(2)
Officer 2001 500,000(4) 867,826(5) 1,000,000 375,000(6)
- ----------------------------------------------------------------------------------------------------------------------------------
Mark Zeitchick 2003 90,000 307,981(7) -0- 79,580(2)
Former Executive Vice 2002 90,000 378,055(7) 250,000 32,357(2)
President 2001 66,500 379,681(7) -0- 15,458(2)
- ----------------------------------------------------------------------------------------------------------------------------------
Vincent A. Mangone 2003 90,000 307,981(7) -0- 85,378(2)
Former Executive Vice 2002 90,000 378,055(7) 250,000 40,341(2)
President 2001 66,500 379,681(7) -0- 10,752(2)
- ----------------------------------------------------------------------------------------------------------------------------------
Salvatore Giardina 2003 214,000 55,000(8) 30,000 -0-
Vice President and Chief 2002 214,000 -0- 35,000 70(9)
Financial Officer 2001 214,000 3,500(8) -0- 709(9)
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Represents a $500,000 bonus paid by us.
(2) Represents commissions earned from customer accounts for which the
individual is a designated account representative.
(3) Represents (i) a $500,000 bonus paid by us and (ii) a $95,678 bonus
paid by us under our Special Performance Incentive Plan.
(4) Represents $173,973 of salary paid by Ladenburg prior to the
consummation of the stock purchase agreement with New Valley, Berliner
and Ladenburg on May 7, 2001 and $326,027 of salary paid thereafter by
us.
(5) Represents (i) a $173,973 bonus paid by Ladenburg, (ii) a $326,027
bonus paid by us pursuant to his employment agreement and (iii) a
$367,826 bonus paid by us under our Special Performance Incentive Plan.
(6) Represents the portion of a fee paid by New Valley to Mr. Rivas which
was reimbursed by Ladenburg for his services in connection with the
closing of the stock purchase agreement with New Valley, Berliner and
Ladenburg
(7) Represents a bonus paid to the individual under our Special Performance
Incentive Plan.
(8) Represents a discretionary bonus received by the individual.
(9) Represents residual earnings from stock options surrendered with
respect to the 1995 merger of Ladenburg Thalmann and New Valley.
38
COMPENSATION ARRANGEMENTS FOR EXECUTIVE OFFICERS
Victor M. Rivas is currently employed by us as our president and chief
executive officer under an employment agreement with Ladenburg which expires in
August 2004. On March 9, 2004, we entered into a Severance, Waiver and Release
Agreement with Mr. Rivas. Under the Severance Agreement, effective March 31,
2004, Mr. Rivas will retire from all of his positions with us and all of our
subsidiaries including Ladenburg. Pursuant to the Severance Agreement, Mr. Rivas
will receive (i) a lump sum payment of approximately $449 (representing various
amounts owed to him under his existing employment agreement) and (ii) continued
health benefits under his existing employment agreement until the earlier of his
65th birthday or until he is covered on a comparable basis by another plan.
In connection with Mr. Rivas' retirement, we entered into an Employment
Agreement dated March 9, 2004 with Charles I. Johnston pursuant to which Mr.
Johnston will serve as our president and chief executive officer and as chairman
and chief executive officer of Ladenburg effective as of April 1, 2004. Under
the Employment Agreement, Mr. Johnston will receive (i) a base salary of $250
per year, (ii) a payment of approximately $10 on April 1, 2004, (iii) the right
to participate in an annual bonus plan for the benefit of our executives if we
adopt such a plan and (iv) options to purchase 2,500,000 shares of our common
stock at a price of $0.75 per share, 1,000,000 of which are under our 1999
Performance Equity Plan and 1,500,000 of which are outside the plan. The options
vest based on his continued employment in five annual installments commencing on
March 9, 2005 and expire on March 8, 2014. The options provide that if a "change
of control" (as defined in the Employment Agreement) occurs, all options not yet
vested will vest and become immediately exercisable. If Mr. Johnston is
terminated by us for any reason other than for cause within the first year of
the agreement, we are obligated to pay him $100 and 100,000 of his options will
vest. Thereafter, we will be required to pay him a full year's base salary upon
his termination by us. The employment agreement also provides that Mr. Johnston
will not compete with us or any of our subsidiaries in any company that is
materially involved in the retail brokerage business for a period of one year
from the date of his termination.
Salvatore Giardina is currently employed by us as our executive vice
president and chief financial officer until April 1, 2005 under an employment
agreement with Ladenburg. The employment agreement provides for an annual base
salary of approximately $214 subject to periodic increases and discretionary
bonuses as determined by our board of directors or our compensation committee.
If Mr. Giardina is terminated by us for any reason other than for cause during
the term of the agreement, we are obligated to pay him the remainder of his
salary during the term of the agreement as a lump sum payment. The agreement
provides that Mr. Giardina will not, for a period of one year from the date of
his termination, solicit or induce any director, officer or employee of us or
our subsidiaries to terminate such person's employment or to become employed by
any other corporation or business.
Effective December 31, 2002, we entered into an amendment to Richard
Rosenstock's employment agreement that provided for him to no longer be employed
by us. However, he will continue to be employed by Ladenburg as a registered
representative until December 31, 2005. Mr. Rosenstock, a member of our board of
directors and our former vice chairman and chief operating officer, received $25
upon signing of the amendment and received a monthly base salary of
approximately $17 for the first year of the agreement and will receive a monthly
base salary of $15 for the second and third years of the agreement.
Additionally, Mr. Rosenstock will receive 50% of all of his retail brokerage
production for the term of the agreement and 15% of any compensation received by
Ladenburg or any of its affiliates as a finders fee for any corporate finance
transactions entered into within 18 months after the introduction by Mr.
Rosenstock to Ladenburg. However, he will no longer be entitled to participate
in the Special Performance Incentive Plan and Annual Incentive Bonus Plan. The
agreement provides that Mr. Rosenstock will not compete with us or our
subsidiaries for a period of one year from the date of his termination, but
allows him to deal with any of his prior or then existing customers or clients
without any restriction. The signing bonus and base salary are considered a
buy-out for accounting purposes, and accordingly, a total of $590 was accrued as
of December 31, 2002 and included in operating expenses for 2002.
39
Messrs. Zeitchick and Mangone, our former executive vice presidents,
were previously employed by us and Ladenburg Capital pursuant to five-year
employment agreements dated August 24, 1999. Due to our financial condition,
Messrs. Zeitchick and Mangone voluntarily forfeited 25% of the compensation due
to them under the Special performance Incentive Plan for the period from
September 1, 2002 through December 31, 2002. Effective December 31, 2003, we
entered into amendments to each of Messrs. Zeitchick's and Mangone's agreements
that provided for them to terminate their employment with us as our executive
vice presidents. The amendments provides for each of them to be employed with
Ladenburg as a registered representative until August 31, 2004. Messrs.
Zeitchick and Mangone will each receive a monthly base salary of approximately
$4 for the duration of the agreement and be entitled to continue to participate
in our Annual Incentive Bonus Plan as well as receive an override (as defined in
our Special Performance Incentive Plan) at a rate of 0.25335%. They will also
receive a 50% payout on all of their retail brokerage production in accordance
with Ladenburg's standard procedures as well as 15% of any compensation received
by Ladenburg or any of its affiliates as a finders fee for any corporate finance
transactions entered into within 18 months after the introduction by them to
Ladenburg. Additionally, if Ladenburg Capital Fund Management, the general
partner of the Ladenburg Focus Fund, is paid any performance, management or
other fee in connection with the fund during or relating to the year ended
December 31, 2003, they shall receive 20% of such amount paid. The agreements
provide that Messrs. Zeitchick and Mangone will not compete with us or our
subsidiaries for a period of one year from the date of their termination, but
allows them to deal with any of their prior or then existing customers or
clients without any restriction. The remaining salary payable under these
amended employment agreements is considered a buy-out for accounting purposes,
and accordingly, a total of $60 was accrued as of December 31, 2003 and included
in operating expenses for 2003.
COMPENSATION ARRANGEMENTS FOR DIRECTORS
Directors who are employees of ours receive no cash compensation for
serving as directors. Our non-employee directors receive annual fees of $15,
payable in quarterly installments, for their services on our board of directors,
and members of our audit committee and compensation committee each receive an
additional annual fee of $10 and $5, respectively. In addition, each director
receives five hundred dollars per meeting that he attends. Additionally, upon
their election or re-election, as the case may be, we grant our non-employee
directors ten-year options under our 1999 Performance Equity Plan to purchase
20,000 shares of our common stock at fair market value on the date of grant. All
of our directors are reimbursed for their costs incurred in attending meetings
of the board of directors or of the committees on which they serve.
40
OPTION GRANTS
The following table represents the stock options granted in the fiscal
year ended December 31, 2003, to the Named Executive Officers.
- --------------------------------------------------------------------------------------------------------------------------------
STOCK OPTION GRANTS IN 2003
- --------------------------------------------------------------------------------------------------------------------------------
- ---------------------------- ------------------- ------------------------ ---------------- --------------- ---------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED TO EXERCISE PRICE GRANT DATE PRESENT
NAME OF EXECUTIVE OPTIONS GRANTED EMPLOYEES IN OF OPTIONS ($) EXPIRATION VALUE(1)($)
(#) FISCAL YEAR (%) DATE
- ---------------------------- ------------------- ------------------------ ---------------- --------------- ---------------------
Salvatore Giardina 30,000 2.6% 0.45 12/16/13 $12,300
- ---------------------------- ------------------- ------------------------ ---------------- --------------- ---------------------
(1) The estimated present value at grant date of the options granted to
such individual has been calculated using the Black-Scholes option
pricing model, based upon the following assumptions: volatility of
103.20%, a risk-free rate of 4.27%, an expected life of 10 years, a
dividend rate of 0% and no forfeiture. The approach used in developing
the assumptions upon which the Black-Scholes valuation was done is
consistent with the requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation."
The following table sets forth the fiscal year-end option values of
outstanding options at December 31, 2003, and the dollar value of unexercised,
in-the-money options for our Named Executive Officers. There were no stock
options exercised by any of the Named Executive Officers in 2003.
- ---------------------------------------------------------------------------------------------------------------------
AGGREGATED FISCAL YEAR-END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES UNDERLYING DOLLAR VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END: FISCAL YEAR END
- ---------------------------- ------------------------------------------- --------------------------------------------
NAME EXERCISABLE (#) UNEXERCISABLE (#) EXERCISABLE ($) UNEXERCISABLE ($)
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
Victor M. Rivas 766,666 533,334 -0- -0-
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
Mark Zeitchick 183,333 166,667 -0- -0-
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
Vincent A. Mangone 183,333 166,667 -0- -0-
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
Salvatore Giardina 11,667 53,333 -0- -0-
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
ANNUAL INCENTIVE BONUS PLAN
On August 23, 1999, our shareholders adopted the Annual Incentive Bonus
Plan, which is a performance-based compensation plan for our executive officers
and other key employees. The plan is administered by our compensation committee
and is intended to comply with the regulations issued under Section 162(m) of
the Internal Revenue Code. Under this plan, bonuses are paid to participants
selected by our compensation committee if performance targets established by our
compensation committee are met within the specified performance periods. For the
fiscal year ended December 31, 2003 and for the fiscal year ending December 31,
2004, our compensation committee determined that participating employees would
share in a bonus pool equal to 25% of our net income before taxes and before the
accrual of compensation payable under this plan provided that we achieve a 10%
return on equity before taxes at the end of the fiscal year. The maximum award
payable annually to any participant under this plan was limited to a percentage
of the bonus pool created and was subject to the maximum limit of $5,000 for any
person. The maximum award available to Victor M. Rivas under the Plan was
limited to 32.5% of the Pool and the maximum award available to any other
participant under the plan was limited to 22.5% of the Pool. No awards were made
under the Bonus Plan for fiscal 2003 to Messrs. Rivas, Zeitchick and Mangone,
the participants in the Bonus Plan for 2003. The compensation committee has
selected Messrs. Zeitchick and Mangone to participate in the Bonus Plan for
fiscal 2004.
SPECIAL PERFORMANCE INCENTIVE PLAN
On August 23, 1999, our shareholders adopted our Special Performance
Incentive Plan. The Special Performance Incentive Plan is similar in nature to
the Annual Incentive Bonus Plan in seeking to provide performance-based
compensation within the meaning of Section 162(m) of the Internal Revenue Code.
Executive officers and key employees selected by our compensation committee may
receive bonuses upon reaching performance targets established by our
compensation committee within specific performance periods, which performance
41
targets may be based upon one or more selected business criteria. For the fiscal
year ended December 31, 2003 and for the fiscal year ending December 31, 2004,
the compensation committee has determined that participants are entitled to
receive an incentive award that is based on our total consolidated revenues
provided that specified commission levels are achieved. Awards are payable
monthly, based on the average monthly revenues to such date. However, final
awards reflecting the performance for the last month of the fiscal period and
the fiscal period overall are not paid until all financial results for the year
are reconciled and the compensation committee has approved and certified that
the established performance requirements have been achieved. The maximum award
payable for any fiscal period to any participant is the lesser of $5,000 or a
set percentage for the individual participants as disclosed elsewhere in this
report. Messrs. Rivas, Zeitchick and Mangone received bonuses under the Special
Performance Incentive Plan for fiscal 2003 as disclosed in the Summary
Compensation table above. The compensation committee has determined that Messrs.
Zeitchick and Mangone will currently be entitled to participate in this plan for
fiscal 2004.
1999 PERFORMANCE EQUITY PLAN
On August 23, 1999, our shareholders adopted the 1999 Performance
Equity Plan covering 3,000,000 shares of our common stock, under which our
officers, directors, key employees and consultants are eligible to receive
incentive or non-qualified stock options, stock appreciation rights, restricted
stock awards, deferred stock, stock reload options and other stock based awards.
On May 7, 2001, our shareholders approved an amendment increasing the number of
shares available for issuance under the plan to 5,500,000 shares. On November 6,
2002, our shareholders approved another amendment increasing the number of
shares available for issuance under the plan to 10,000,000 shares. The
Performance Equity Plan will terminate when no further awards may be granted and
awards granted are no longer outstanding, provided that incentive options may
only be granted until May 26, 2009. The plan is intended to comply with the
regulations issued under Section 162(m) of the Internal Revenue Code and is
administered by our compensation committee. To the extent permitted under the
provisions of the plan, the compensation committee has authority to determine
the selection of participants, allotment of shares, price, and other conditions
of awards.
LADENBURG THALMANN FINANCIAL SERVICES INC. EMPLOYEE STOCK PURCHASE PLAN
In November 2002, our shareholders approved the "Ladenburg Thalmann
Financial Services Inc. Employee Stock Purchase Plan," under which a total of
5,000,000 shares of common stock are available for issuance. Under this stock
purchase plan, as currently administered by the compensation committee, all
full-time employees may use a portion of their salary to acquire shares of our
common stock. Option periods have been initially set at three months long and
commence on January 1st, April 1st, July 1st and October 1st of each year and
end on March 31st, June 30th, September 30th and December 31st of each year. On
the first day of each option period, known as the "date of grant," each
participating employee is automatically granted an option to purchase shares of
our common stock to be automatically exercised on the last trading day of the
three-month purchase period comprising an option period. The last trading day of
an option period is known as an "exercise date." On the exercise date, the
amounts withheld will be applied to purchase shares for the employee from us.
The purchase price will be the lesser of 85% of the last sale price of our
common stock on the date of grant or on the exercise date. The Plan became
effective November 6, 2002 and as of the date of this report, 1,601,919 shares
of common stock have been issued under it.
42
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee is comprised of Messrs. Lorber, Beinstein
and Eide. None of these individuals served as officers of ours or of our
subsidiaries. Mr. Lorber is the chairman of the board of a firm which receives
commissions from insurance policies written for us. See "Item 13 - Certain
Relationships and Related Transactions."
Victor M. Rivas, our president and chief executive officer, serves as a
member of New Valley's board of directors, of which Mr. Lorber is president,
chief operating officer and a director. Additionally, Richard J. Lampen, New
Valley's executive vice president, general counsel and director, is a member of
our board of directors. Prior to October 2002, New Valley's board of directors
did not have a separate compensation committee and acted on compensation matters
as an entire body. No individual who is an executive officer of ours currently
serves on the New Valley compensation committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information as of March 26, 2004
with respect to the beneficial ownership of our common stock by (i) those
persons or groups known to beneficially own more than 5% of our voting
securities, (ii) each of our directors, (iii) the Named Executive Officers and
(iv) all of our current directors and executive officers as a group. Except as
otherwise stated, the business address of each of the below listed persons is
c/o Ladenburg Thalmann Financial Services Inc., 590 Madison Avenue, 34th Floor,
New York, New York 10022.
AMOUNT AND NATURE OF PERCENT OF CLASS
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF VOTING SECURITIES
- ------------------------ ----------------------- --------------------
Phillip Frost, M.D. (2) 8,461,841(3) 16.8%
Berliner Effektengesellschaft AG(4) 5,575,556(5) 12.5%
Bennett S. LeBow 4,381,314(6) 10.0%
Richard J. Rosenstock 3,968,012(7) 9.0%
New Valley Corporation(8) 3,944,216(9) 8.3%
Carl C. Icahn(10) 3,396,258(11) 7.8%
Mark Zeitchick 1,692,977(12) 3.9%
Vincent Mangone 1,692,977(13) 3.9%
Howard M. Lorber 1,555,878(14) 3.6%
Victor M. Rivas 879,466(15) 2.0%
Richard J. Lampen 78,367(16) *
Robert J. Eide 51,367(17) *
Henry C. Beinstein 51,361(18) *
Salvatore Giardina 23,333(19) *
All directors and executive officers as a group 9,993,738(20) 22.0%
(9 persons)
- -----------------
* Less than 1 percent.
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934. The information concerning the
shareholders is based upon numbers reported by the owner in documents
publicly filed with the SEC, publicly available information or
information made known to us. Except as otherwise indicated, all of the
shares of common stock are owned of record and beneficially and the
persons identified have sole voting and investment power with respect
thereto.
43
(2) The business address of Dr. Frost is c/o IVAX Corporation, 4400
Biscayne Boulevard, Miami, Florida 33137.
(3) Represents (i) 1,844,366 shares of common stock held by Frost Gamma
Investments Trust, a trust organized under Nevada law, (ii) 100,000
shares of common stock issuable upon exercise of an immediately
exercisable warrant held by Frost Gamma, (iii) 6,497,475 shares of
common stock issuable upon conversion of a senior convertible
promissory note held by Frost-Nevada Investments Trust, a trust
organized under Nevada law, and (iv) 20,000 shares of common stock
issuable upon exercise of currently exercisable options held by Dr.
Frost. Does not include additional shares of common stock that will be
issuable, subject to shareholder approval, upon conversion of the
senior convertible promissory note held by Frost-Nevada pursuant to the
debt conversion agreement we entered into in March 2004. See Item 1,
"Business - Recent Developments - Debt Conversion" above. Dr. Frost is
the sole trustee of both Frost Gamma Investments Trust and Frost-Nevada
Investments Trust. Dr. Frost is also (a) the sole limited partner of
Frost Gamma Limited Partnership, the beneficiary of Frost Gamma
Investments Trust, and is the sole shareholder of Frost-Nevada
Corporation, the sole shareholder of Frost Gamma Inc., the general
partner of Frost Gamma Limited Partnership, (b) one of the three
limited partners of Frost-Nevada, Limited Partnership, the beneficiary
of Frost-Nevada Investments Trust, and is the sole shareholder of
Frost-Nevada Corporation, the general partner of Frost-Nevada, Limited
Partnership and (c) the sole shareholder of Frost Beta, Inc., the sole
general partner of Frost Beta, LLP, a limited partner of Frost-Nevada,
Limited Partnership. Record ownership of these shares may be
transferred from time to time among Dr. Frost and, in addition to other
entities that he may control, any or all of Frost Gamma Investments
Trust, Frost Gamma Limited Partnership, Frost Gamma Inc., Frost-Nevada
Investments Trust, Frost-Nevada, Limited Partnership, Frost Beta, Inc.,
Frost Beta, LLP and Frost-Nevada Corporation. Accordingly, solely for
purposes of reporting beneficial ownership of these shares pursuant to
Section 13(d) of the Exchange Act, each of these parties will be deemed
to be the beneficial owner of the shares held by any other of the
parties. The foregoing information was derived from an Amendment to
Schedule 13D filed with the SEC on September 10, 2001 as well as from
information made known to us.
(4) The business address for Berliner Effektengesellschaft AG is
Kurfustendamm 119, 10711 Berlin, Germany.
(5) Includes 955,055 shares of common stock issuable upon conversion of a
senior convertible promissory note held by Berliner. As described above
in Item 1, "Business -- Recent Developments -- Debt Conversion" we
agreed to repurchase this note held by Berliner.
(6) Represents (i) 758,205 shares of common stock held directly by Mr.
LeBow, (ii) 3,325,199 shares of common stock held by LeBow Gamma
Limited Partnership, a Nevada limited partnership, (iii) 110,336 shares
of common stock held by LeBow Alpha LLLP, a Delaware limited liability
limited partnership, (iv) 147,574 shares of common stock held by The
Bennett and Geraldine LeBow Foundation, Inc., a Florida not-for-profit
corporation, and (v) 40,000 shares of common stock issuable upon
exercise of currently exercisable options held by Mr. LeBow. Does not
include the shares of common stock beneficially owned by New Valley
Corporation of which Mr. LeBow serves as an executive officer and
director. Mr. LeBow indirectly exercises sole voting power and sole
dispositive power over the shares of common stock held by the
partnerships. LeBow Holdings, Inc., a Nevada corporation, is the sole
stockholder of LeBow Gamma, Inc., a Nevada corporation, which is the
general partner of LeBow Gamma Limited Partnership, and is the general
partner of LeBow Alpha LLLP. Mr. LeBow is a director, officer and sole
stockholder of LeBow Holdings, Inc. and a director and officer of LeBow
Gamma, Inc. Mr. LeBow and family members serve as directors and
executive officers of the Foundation and Mr. LeBow possesses shared
voting and shared dispositive power with the other directors of the
Foundation with respect to the Foundation's shares of common stock. The
foregoing information was derived from an Amendment to Schedule 13D
filed with the SEC on December 21, 2001 as well as from information
made known to us.
(7) Represents (i) 3,701,346 shares of common stock held of record by The
Richard J. Rosenstock Revocable Living Trust Dated 3/5/96, of which Mr.
Rosenstock is the sole trustee and beneficiary, and (ii) 266,666 shares
of common stock issuable upon exercise of currently exercisable options
held by Mr. Rosenstock. Does not include 83,334 shares of common stock
issuable upon exercise of options held by Mr. Rosenstock that are not
currently exercisable and that will not become exercisable within the
next 60 days.
(8) The business address for New Valley Corporation is 100 S. E. Second
Street, Miami, Florida 33131.
44
(9) Represents (i) 3,844,216 shares of common stock issuable upon
conversion of a senior convertible promissory note held by New Valley
and (ii) 100,000 shares of common stock issuable upon exercise of
immediately exercisable warrants held by New Valley. Does not include
additional shares of common stock that will be issuable, subject to
shareholder approval, upon conversion of the senior convertible
promissory note held by New Valley pursuant to the debt conversion
agreement we entered into in March 2004. See Item 1, "Business - Recent
Developments - Debt Conversion" above.
(10) The business address for Mr. Icahn is c/o Icahn Associates Corp., 767
Fifth Avenue, 47th Floor, New York, New York 10153.
(11) Represents (i) 2,148,725 shares of common stock held by High River
Limited Partnership, (ii) 1,227,773 shares of common stock held by
Tortoise Corp. and (iii) 19,760 shares of common stock held by Little
Meadow Corp. Each of these entities are either directly or indirectly
100% owned by Mr. Icahn. As such, Mr. Icahn is in a position to
directly and indirectly determine the investment and voting decisions
made by these entities. Accordingly, Mr. Icahn may be deemed to be the
beneficial owner of these shares for purposes of reporting beneficial
ownership pursuant to Section 13(d) of the Exchange Act. However, Mr.
Icahn disclaims beneficial ownership of these shares for all other
purposes. The foregoing information was derived from a Schedule 13D
filed with the SEC on December 28, 2001.
(12) Represents (i) 1,414,211 shares of common stock held of record by MZ
Trading LLC, of which Mr. Zeitchick is the sole managing member, (ii)
12,100 shares of common stock held of record by Mr. Zeitchick and (iii)
266,666 shares of common stock issuable upon exercise of currently
exercisable options held by Mr. Zeitchick. Does not include 83,334
shares of common stock issuable upon exercise of options held by Mr.
Zeitchick that are not currently exercisable and that will not become
exercisable within the next 60 days.
(13) Represents (i) 1,426,311 shares of common stock held of record by The
Vincent A. Mangone Revocable Living Trust Dated 11/5/96, of which Mr.
Mangone is the sole trustee and beneficiary, and (ii) 266,666 shares of
common stock issuable upon exercise of currently exercisable options
held by Mr. Mangone. Does not include 83,334 shares of common stock
issuable upon exercise of options held by Mr. Mangone that are not
currently exercisable and that will not become exercisable within the
next 60 days.
(14) Represents (i) 1,392,251 shares of common stock held directly by Mr.
Lorber, (ii) 118,560 shares of common stock held by Lorber Alpha II
Partnership, a Nevada limited partnership, (iii) 5,067 shares of common
stock held by the Lorber Charitable Fund, a New York not-for-profit
corporation, and (iv) 40,000 shares of common stock issuable upon
exercise of currently exercisable options held by Mr. Lorber. Does not
include (i) 20,000 shares of common stock issuable upon exercise of
options held by Mr. Lorber that are not currently exercisable and that
will not become exercisable within 60 days and (ii) the shares of
common stock beneficially owned by New Valley Corporation of which Mr.
Lorber serves as an executive officer and director. Mr. Lorber
indirectly exercises sole voting power and sole dispositive power over
the shares of common stock held by the partnership. Lorber Alpha II,
Inc., a Nevada corporation, is the general partner of Lorber Alpha II
Partnership. Mr. Lorber is the director, officer and principal
stockholder of Lorber Alpha II, Inc. Mr. Lorber and family members
serve as directors and executive officers of Lorber Charitable Fund,
and Mr. Lorber possesses shared voting power and shared dispositive
power with the other directors of the fund with respect to the fund's
shares of our common stock. The foregoing information was derived from
an Amendment to Schedule 13D filed with the SEC on December 21, 2001 as
well as from information made known to us.
(15) Includes 866,666 shares of common stock issuable upon exercise of
currently exercisable options held by Mr. Rivas. Does not include
433,334 shares of common stock issuable upon exercise of options held
by Mr. Rivas that are not currently exercisable and that will not
become exercisable within the next 60 days.
(16) Includes 40,000 shares of common stock issuable upon exercise of
currently exercisable options held by Mr. Lampen. Does not include (i)
20,000 shares of common stock issuable upon exercise of options held by
Mr. Lampen that are not currently exercisable and that will not become
exercisable within the next 60 days and (ii) the shares of common stock
beneficially owned by New Valley Corporation of which Mr. Lampen serves
as an executive officer and director.
45
(17) Includes 40,000 shares of common stock issuable upon exercise of
currently exercisable options held by Mr. Eide. Does not include 20,000
shares of common stock issuable upon exercise of options held by Mr.
Eide that are not currently exercisable and that will not become
exercisable within 60 days.
(18) Includes (i) 823 shares of common stock held of record in the
individual retirement account of Mr. Beinstein's spouse and (ii) 40,000
shares of common stock issuable upon exercise of currently exercisable
options held by Mr. Beinstein. Does not include 20,000 shares of common
stock issuable upon exercise of options held by Mr. Beinstein that are
not currently exercisable and that will not become exercisable within
60 days.
(19) Includes 23,333 shares of common stock issuable upon exercise of
currently exercisable options held by Mr. Giardina. Does not include
41,667 shares of common stock issuable upon exercise of options held by
Mr. Giardina that are not currently exercisable and that will not
become exercisable within the next 60 days.
(20) Includes 1,849,997 shares of common stock issuable upon exercise of
currently exercisable options and excludes 805,003 shares of common
stock issuable upon exercise of options that are not currently
exercisable and that will not become exercisable within the next 60
days. See notes 7, 12, 13, 14, 15, 16, 17, 18 and 19.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information at December 31, 2003
with respect to our equity compensation plans that provide for the issuance of
options, warrants or rights to purchase our securities.
- -------------------------------- ---------------------------- ------------------------- --------------------------------
NUMBER OF SECURITIES REMAINING
AVAILABLE FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE UNDER EQUITY COMPENSATION
ISSUED UPON EXERCISE OF EXERCISE PRICE OF PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN THE FIRST COLUMN)
- -------------------------------- ---------------------------- ------------------------- --------------------------------
Equity Compensation Plans
Approved by Security Holders 5,453,030 $1.76 4,546,970
- -------------------------------- ---------------------------- ------------------------- --------------------------------
Equity Compensation Plans Not
Approved by Security Holders 200,000 $1.00 -0-
- -------------------------------- ---------------------------- ------------------------- --------------------------------
On August 31, 2001, New Valley and Frost-Nevada each loaned us $1,000.
As consideration for the loans, we issued to each of them a five-year,
immediately exercisable warrant to purchase 100,000 shares of our common stock
at an exercise price of $1.00 per share. These two warrants are our only equity
compensation "plans" not approved by our shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On May 7, 2001, we consummated the stock purchase agreement, as
amended, with New Valley Corporation, Berliner Effektengesellschaft AG and
Ladenburg in which we acquired all of the outstanding common stock of Ladenburg.
As partial consideration for the common stock of Ladenburg, we issued:
o 18,598,098 shares of common stock and $8.01 million aggregate
principal amount of our senior convertible promissory notes,
convertible into 3,844,216 shares of common stock, to New
Valley; and
o 4,620,501 shares of common stock and $1.99 million aggregate
principal amount of our senior convertible promissory notes,
convertible into 955,055 shares of common stock, to Berliner.
46
We also paid New Valley and Berliner $8,010 and $1,990 in cash, respectively.
The cash portion of the consideration paid to New Valley and Berliner was
obtained pursuant to a loan agreement with Frost-Nevada, Limited Partnership
under which Frost-Nevada provided us with $10,000 in cash in exchange for
$10,000 aggregate principal amount of our senior convertible promissory notes,
currently convertible into 6,497,475 shares of common stock.
The notes issued to New Valley and Berliner bear interest at a rate of
7.5% per year, payable quarterly, and are secured by a pledge of the shares of
common stock of Ladenburg The notes are convertible, in whole or in part, at any
time, into that number of shares of common stock determined by dividing the
principal and interest to be converted by the "conversion price." The
"conversion price" is $2.0836498 and is subject to anti-dilution adjustment for
stock splits, dividends and other similar events. Additionally, if, during any
period of 20 consecutive trading days, the closing sale price of our 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 at the conversion
price then in effect. The notes also provide that if a change of control occurs,
as defined in the notes, we 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.
The note issued to Frost-Nevada has the same terms as the notes issued
to New Valley and Berliner, except that the conversion price of the note is
$1.5390594 and pays interest at a rate of 8.5% per year. The note issued to
Frost-Nevada is also secured by a pledge of the shares of common stock of
Ladenburg.
On June 28, 2002, New Valley, Berliner and Frost-Nevada agreed with us
to forbear until May 15, 2003 payment of the interest due to them under the
senior convertible promissory notes held by these entities on the interest
payment dates of the notes commencing on June 30, 2002 through March 2003. On
March 3, 2003, the holders of the senior convertible promissory notes agreed to
extend the interest forbearance period to January 15, 2005 with respect to
interest payments due through December 31, 2004. Interest on the deferred
amounts accrues at 8% on the New Valley and Berliner notes and 9% on the
Frost-Nevada note. We also agreed to apply any net proceeds from any subsequent
public offerings to any such deferred amounts owed to the holders of the notes
to the extent possible.
On March 29, 2004, we entered into an agreement with New Valley and
Frost-Nevada, the holders of our outstanding $18,010 aggregate principal amount
of senior convertible promissory notes, pursuant to which such parties agreed to
convert their notes and accrued interest into common stock, subject to
shareholder approval. Pursuant to the agreement, New Valley and Frost-Nevada
will convert their notes into approximately 26,000,000 shares of common stock at
reduced conversion prices of $1.10 per share and $0.70 per share, respectively.
The agreement is subject to, among other things, approval by our shareholders at
a special meeting that is expected to be held in the second quarter of 2004.
Concurrently with this agreement, we entered into an agreement with Berliner,
the holder of the remaining $1,990 aggregate principal amount of senior
convertible promissory notes, pursuant to which we will repurchase the notes
held by Berliner, plus all accrued interest thereon, for $1,000 in cash.
We currently anticipate recording a pre-tax charge in 2004 of
approximately $10,900 in our statements of operations upon closing of these
transactions. The charge reflects expense attributable to the reduction in the
conversion price of the notes to be converted, offset partially by the gain on
the repurchase of the Berliner notes. The net balance sheet effect of the
transactions will be an increase in our shareholders' equity of approximately
$22,900.
47
Prior to the consummation of the acquisition, New Valley maintained
office space at Ladenburg's principal offices. In connection with the
consummation of the transaction, New Valley entered into a license agreement
with Ladenburg in which New Valley will continue to occupy this space at no cost
to New Valley. The license agreement is for one year and is automatically
renewed for successive one-year periods unless terminated by New Valley. The
space, which is not currently occupied by New Valley, has been subleased on a
short-term basis by Ladenburg to an unaffiliated third party.
From June 2001 until October 2002, J. Bryant Kirkland III, the vice
president, treasurer and chief financial officer of New Valley, served as our
chief financial officer and New Valley did not allocate any expense to us for
his services. In December 2002, we accrued compensation for Mr. Kirkland's
services, in the amount of $100, which was paid in four quarterly installments
of $25, commencing April 1, 2003.
On March 27, 2002, we borrowed $2,500 from New Valley. The loan, which
bears interest at 1% above the prime rate, was due on the earlier of December
31, 2003 or the completion of one or more equity financings where we receive at
least $5,000 in total proceeds. The terms of the loan restrict us from incurring
or assuming any indebtedness that is not subordinated to the loan so long as the
loan is outstanding. On July 16, 2002, we borrowed an additional $2,500 from New
Valley on the same terms as the March 2002 loan. In November 2002, we completed
the Clearing Conversion in which we renegotiated our current clearing agreement
with one of our clearing brokers whereby this clearing broker became our primary
clearing broker, clearing substantially all of our business. As part of the new
agreement with this clearing broker, an affiliate of the clearing broker loaned
us the Clearing Loans. In connection with the Clearing Loans, New Valley agreed
to extend the maturity of the 2002 Loans to December 31, 2006 and to subordinate
the 2002 Loans to the repayment of the Clearing Loans.
On October 8, 2002, we borrowed an additional $2,000 from New Valley.
The loan, which bore interest at 1% above the prime rate, matured on the
earliest of December 31, 2002, the next business day after we received our
federal income tax refund for the fiscal year ended September 30, 2002, and the
next business day after we received a loan from an affiliate of our clearing
broker in connection with the conversion of additional clearing business to this
broker. This loan was repaid in December 2002 upon receipt of the Clearing
Loans.
We may from time to time borrow additional funds on a short-term basis
from New Valley or from other parties, including our shareholders and clearing
brokers, in order to supplement the liquidity of our broker-dealer operations.
Howard Lorber is chairman of the board of directors of Hallman & Lorber
Associates, Inc., a private consulting and actuarial firm, and related entities,
which receive commissions from insurance policies written for us. These
commissions amounted to approximately $48 in 2003.
Several members of the immediate families of our executive officers and
directors are employed as registered representatives of Ladenburg. As such, they
receive a percentage of commissions generated from customer accounts for which
they are designated account representatives and are eligible to receive bonuses
in the discretion of management. The arrangements we have with these individuals
are similar to the arrangements we have with our other registered
representatives. Richard Sonkin, the brother-in-law of Richard J. Rosenstock,
received approximately $248 in compensation during 2003. Steven Zeitchick, the
brother of Mark Zeitchick, received $329 in compensation during 2003. It is
anticipated that each of these individuals will receive in excess of $60 in
compensation from us in 2004.
48
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
For the fiscal years ended December 31, 2003 and 2002, the aggregate
fees billed for professional services rendered by our principal accountant for
the audit of our annual financial statements and review of financial statements
included in our quarterly reports on Form 10-Q or services that are normally
provided by the accountant in connection with statutory and regulatory filings
or engagements for those fiscal years were $178 and $150, respectively.
AUDIT-RELATED FEES
For the fiscal years ended December 31, 2003 and 2002, the aggregate
fees billed for assurance and related services by our principal accountant that
are reasonably related to the performance of the audit or review of our
financial statements and are not reported under the paragraph entitled "Audit
Fees" above were $34 and $41, respectively. These fees were for the audit of our
401(k) retirement plan and the audit and tax returns of the Ladenburg Focus
Fund, L.P.
TAX FEES
For the fiscal years ended December 31, 2003 and 2002, the aggregate
fees billed for professional services rendered by our principal accountant for
tax compliance, tax advice, and tax planning were $35 and $54, respectively. The
services performed include the preparation of our federal, state and local
income tax returns for the fiscal years ended September 30, 2003 and 2002, and
federal net operating loss carryback returns.
ALL OTHER FEES
For the fiscal years ended December 31, 2003 and 2002, the aggregate
fees billed for products and services provided by our principal accountant,
other than the services reported above were $9 and $-0-, respectively. The
services performed were agreed upon procedures relating to Ladenburg's
compliance with the anti-money laundering requirements of the PATRIOT Act of
2001.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
In accordance with Section 10A(i) of the Securities Exchange Act of
1934, before we engage our independent accountant to render audit or non-audit
services, the engagement is approved by our audit committee. Our audit committee
approved all of the fees referred to in the sections entitled "Audit Fees,"
Audit-Related Fee," "Tax Fees" and "All Other Fees" above.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1): Index to 2003 Consolidated Financial Statements
The Consolidated Financial Statements and the Notes thereto,
together with the report thereon of Eisner LLP dated February 5, 2004,
appear beginning on page F-1 of this report.
(a)(2): Financial Statement Schedules
Financial statement schedules not included in this report have
been omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or the
Notes thereto.
(a)(3): Exhibits Filed
The following is a list of exhibits filed herewith as part
of this Annual Report on Form 10-K.
49
EXHIBIT INDEX
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ----------------- -------- ----
2.1 Agreement and Plan of Merger, dated May 27, A 2.1 -
1999
3.1 Articles of Incorporation B 3.1 -
3.2 Articles of Amendment to the Articles of C 3.2 -
Incorporation, dated August 24, 1999
3.3 Bylaws B 3.2 -
4.1 Form of common stock certificate B 4.1 -
4.2 Form of Warrant Agreement between the Company B 4.2 -
and Cardinal Capital Management, Inc.
(including the form of Warrant Certificate).
4.3 Form of Senior Convertible Promissory Note, as D 4.2 -
amended, dated May 7, 2001, issued to New
Valley Capital Corporation and Berliner
Effektengesellschaft AG
4.4 Senior Convertible Promissory Note, as D 4.3 -
amended, dated May 7, 2001, issued to
Frost-Nevada, Limited Partnership
4.5 Promissory Note, dated March 27, 2002, issued E 4.1 -
to New Valley Corporation
10.1 Agreement of Lease, dated December 20, 1996, C 10.1 -
between the Company and Briarcliffe College,
Inc.
10.2 Standard Form of Office Lease, dated August 3, C 10.2 -
1999, between the Company and Mayore Estates
LLC and 80 Lafayette LLC, together with
Amendment, dated August 19, 1999.
50
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ----------------- -------- ----
10.3 Amended and Restated 1999 Performance Equity F 10.1 -
Plan*
10.4 Annual Incentive Bonus Plan* G Exhibit "D" -
10.5 Special Performance Incentive Plan* G Exhibit "E" -
10.6 Form of Employment Agreement, dated August 24, G Exhibit "F" -
1999, between the Company and certain
employees*
10.6.1 Schedule of Employment Agreements in the form C 10.7.1 -
of Exhibit 10.7, including material detail in
which such documents differ from Exhibit 10.7*
10.7 Form of Stock Option Agreement, dated August H 10.8 -
24, 1999, between the Company and certain
employees*
10.7.1 Schedule of Stock Option Agreements in the H 10.8.1 -
form of Exhibit 10.8, including material
detail in which such documents differ from
Exhibit 10.7*
10.8 Form of Stock Option Agreement, dated December H 10.9 -
13, 1999, between the Company and certain
directors*
10.8.1 Schedule of Stock Option Agreements in the H 10.9.1 -
form of Exhibit 10.9, including material
detail in which such documents differ from
Exhibit 10.9*
10.9 Form of Stock Option Agreement, dated December H 10.10 -
13, 1999, between the Company and Diane
Chillemi*
10.10 Stock Purchase Agreement, dated February 8, I Appendix A -
2001, by and among the Company, New Valley
Corporation, New Valley Capital Corporation,
Berliner Effektengesellschaft AG and Ladenburg
Thalmann & Co. Inc.
10.11 Proxy and Voting Agreement, dated as of I Appendix E -
February 8, 2001, among New Valley
Corporation, Ladenburg Thalmann Group Inc.,
Berliner Effektengesellschaft AG, the Company
and the individual shareholders listed on
Schedule A attached thereto
51
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ----------------- -------- ----
10.12 Loan Agreement, dated as of February 8, 2001, I Appendix C -
between the Company and Frost-Nevada, Limited
Partnership
10.13 Investor Rights Agreement, dated as of I Appendix G -
February 8, 2001, among the Company, New
Valley Corporation, New Valley Capital
Corporation, Berliner Effektengesellschaft
AG, Frost-Nevada, Limited Partnership and the
Principals
10.14 Form of Pledge and Security Agreement, dated J 10.2 -
as of February 8, 2001, between the Company,
Ladenburg Thalmann Group Inc., Berliner
Effektengesellschaft AG, Frost-Nevada, Limited
Partnership and U.S. Bank Trust National
Association
10.15 Employment Agreement, dated as of February 8, J 10.3 -
2001, between Ladenburg Thalmann & Co. Inc.
and Victor Rivas*
10.16 First Amendment to the Employment Agreement, J 10.4 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and Joseph
Berland*
10.17 First Amendment to the Employment Agreement, J 10.5 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and Richard
J. Rosenstock*
10.18 First Amendment to the Employment Agreement, J 10.6 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and Vincent
A. Mangone*
10.19 First Amendment to the Employment Agreement, J 10.7 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and Mark
Zeitchick*
10.20 First Amendment to the Employment Agreement, J 10.8 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and David
Thalheim*
10.21 Form of Guarantee Agreement, dated February 8, J 10.9 -
2001, between (A) each of (i) Joseph Berland,
(ii) Richard J. Rosenstock, (iii) Vincent A.
Mangone, (iv) Mark Zeitchick and (v) David
Thalheim and (B) the Company
52
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ----------------- -------- ----
10.22 Amendment No. 1 to Stock Purchase Agreement, K Appendix A -
dated February 8, 2001, by and among the
Company, New Valley Corporation, New Valley
Capital Corporation, Berliner
Effektengesellschaft AG and Ladenburg Thalmann
& Co. Inc.
10.23 Amendment No. 1 to Loan Agreement, dated as of K Appendix C -
February 8, 2001, between the Company and
Frost-Nevada, Limited Partnership
10.24 Second Amendment to the Employment Agreement, L 10.2 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and David
Thalheim*
10.25 Stock Option Agreement, dated May 7, 2001, M 10.1 -
between the Company and Victor M. Rivas*
10.26 Stock Option Agreement, dated as of May 7, M 10.2 -
2001, between the Company and David Thalheim*
10.27 Form of Stock Option Agreement, dated as of M 10.3 -
May 7, 2001, between the Company and certain
directors
10.27.1 Schedule of Stock Option Agreements in the M 10.3.1 -
form of Exhibit 10.31, including material
detail in which such documents differ from
Exhibit 10.31
10.28 Amendment No. 2 to Stock Purchase Agreement, D 4.1 -
dated February 8, 2001, by and among the
Company, New Valley Corporation, New Valley
Capital Corporation, Berliner
Effektengesellschaft AG and Ladenburg Thalmann
& Co. Inc.
10.29 Amendment No. 2 to Loan Agreement, dated as of D 10.1 -
February 8, 2001, between the Company and
Frost-Nevada, Limited Partnership
10.30 Second Amendment to the Employment Agreement, D 10.2 -
dated August 24, 1999, as amended, between the
Company, Ladenburg Capital Management Inc. and
Richard J. Rosenstock*
53
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ----------------- -------- ----
10.31 Second Amendment to the Employment Agreement, D 10.3 -
dated August 24, 1999, as amended, between the
Company, Ladenburg Capital Management Inc. and
Mark Zeitchick*
10.32 Second Amendment to the Employment Agreement, D 10.4 -
dated August 24, 1999, as amended, between the
Company, Ladenburg Capital Management Inc. and
Vincent A. Mangone*
10.33 Second Amendment to the Employment Agreement, D 10.5 -
dated August 24, 1999, as amended, between the
Company, Ladenburg Capital Management Inc. and
Joseph Berland*
10.34 Form of Warrant issued to New Valley D 10.6 -
Corporation and Frost-Nevada, Limited
Partnership
10.35 Letter Amendment to Investor Rights Agreement, D 10.7 -
dated as of February 8, 2001, among the
Company, New Valley Corporation, New Valley
Capital Corporation, Berliner
Effektengesellschaft AG, Frost-Nevada,
Limited Partnership and the Principals
10.36 Stock Option Agreement, dated as of January N 10.2 -
10, 2002, between the Company and Richard J.
Lampen
10.37 Form of Stock Option Agreement, dated January N 10.3 -
10, 2002, between the Company and each of
Victor M. Rivas, Richard J. Rosenstock, Mark
Zeitchick and Vincent A. Mangone*
10.37.1 Schedule of Stock Option Agreements in the N 10.3.1 -
form of Exhibit 10.41, including material
detail in which such documents differ from
Exhibit 10.41*
10.38 Ladenburg Thalmann Financial Services Inc. F 10.2 -
Qualified Employee Stock Purchase Plan
10.39 Letter Agreement, dated October 10, 2002, F 10.3 -
between the Company and Victor M. Rivas
10.40 Letter Agreement, dated October 10, 2002, F 10.4 -
between the Company and Richard J. Rosenstock
54
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ----------------- -------- ----
10.41 Letter Agreement, dated October 10, 2002, F 10.5 -
between the Company and Mark Zeitchick
10.42 Letter Agreement, dated October 10, 2002, F 10.6 -
between the Company and Vincent A. Mangone
10.43 Third Amendment to the Employment Agreement, O 10.47 -
dated August 24, 1999, as amended, between the
Company, Ladenburg Capital Management Inc. and
Richard J. Rosenstock*
10.44 Form of Stock Option Agreement, dated November O 10.48 -
15, 2002, between the Company and each of
Bennett S. LeBow, Howard M. Lorber, Henry C.
Beinstein, Robert J. Eide and Richard J.
Lampen*
10.44.1 Schedule of Stock Option Agreements in the O 10.48.1 -
form of Exhibit 10.48, including material
detail in which such documents differ from
Exhibit 10.48*
10.45 Form of Stock Option Agreement, dated P 10.1 --
September 17, 2003, between the Company and
each of Howard M. Lorber, Henry C. Beinstein,
Robert J. Eide and Richard J. Lampen*
10.45.1 Schedule of Stock Option Agreements in the P 10.1.1 --
form of Exhibit 10.49, including material
detail in which such documents differ from
Exhibit 10.49*
10.46 Stock Option Agreement, dated December 17, -- -- Filed
2003, between the Company and Salvatore Herewith
Giardina*
10.47 Third Amendment to the Employment Agreement, -- -- Filed
dated August 24, 1999, as amended, between the Herewith
Company, Ladenburg Capital Management Inc. and
Mark Zeitchick*
10.48 Third Amendment to the Employment Agreement, -- -- Filed
dated August 24, 1999, as amended, between the Herewith
Company, Ladenburg Capital Management Inc. and
Vincent A. Mangone*
55
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ----------------- -------- ----
10.49 Employment Agreement, dated March 1, 2004, -- -- Filed
between Ladenburg Thalmann & Co. Inc. and Herewith
Salvatore Giardina*
10.50 Severance, Waiver and Release Agreement, dated -- -- Filed
as of March 9, 2004, between Ladenburg Herewith
Thalmann Financial Services Inc. and Victor M.
Rivas *
10.51 Employment Agreement, dated as of March 9, -- -- Filed
2004, between Ladenburg Thalmann Financial Herewith
Services Inc. and Charles I. Johnston *
10.52 Stock Option Agreement, dated as of March 9, -- -- Filed
2004, between Ladenburg Thalmann Financial Herewith
Services Inc. and Charles I. Johnston *
10.53 Stock Option Agreement, dated as of March 9, -- -- Filed
2004, between Ladenburg Thalmann Financial Herewith
Services Inc. and Charles I. Johnston *
10.54 Indemnification Agreement, dated as of March -- -- Filed
9, 2004, between Ladenburg Thalmann Financial Herewith
Services Inc. and Charles I. Johnston*
10.55 Debt Conversion Agreement, dated as of March -- -- Filed
29, 2004, among Ladenburg Thalmann Financial Herewith
Services Inc., a Florida corporation, New
Valley Corporation and Frost-Nevada
Investments Trust
10.56 Note Purchase Agreement, dated as of March 29, -- -- Filed
2004, among Ladenburg Thalmann Financial Herewith
Services Inc. and Berliner
Effektengesellschaft AG
14 Ladenburg Thalmann Financial Services Inc. - - Filed
Code of Business Conduct and Ethics Herewith
21 List of Subsidiaries - - Filed
Herewith
23.1 Consent of Eisner LLP - - Filed
Herewith
23.2 Consent of PricewaterhouseCoopers LLP - - Filed
Herewith
31.1 Certification of Chief Executive Officer, - - Filed
Pursuant to 18 U.S.C. Section 1350, as Adopted Herewith
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
56
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ----------------- -------- ----
31.2 Certification of Chief Financial Officer, - - Filed
Pursuant to 18 U.S.C. Section 1350, as Adopted Herewith
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification of Chief Executive Officer, - - Filed
Pursuant to 18 U.S.C. Section 1350, as Adopted Herewith
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Chief Financial Officer, - - Filed
Pursuant to 18 U.S.C. Section 1350, as Adopted Herewith
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
- ---------------------
A. Quarterly report on Form 10-QSB filed on August 16, 1999.
B. Registration statement on Form SB-2 (File No. 333-31001).
C. Annual report on Form 10-K for the year ended August 24, 1999.
D. Current report on Form 8-K/A, dated February 8, 2001 and filed with the
SEC on September 10, 2001.
E. Quarterly report on Form 10-Q for the quarter ended March 31, 2002.
F. Quarterly report on Form 10-Q for the quarter ended September 30, 2002.
G. Definitive proxy statement relating to a special meeting of
shareholders held on August 23, 1999.
H. Annual report on Form 10-K for the year ended September 30, 2000.
I. Definitive proxy statement relating to our annual meeting of
shareholders held on May 7, 2001, filed March 28, 2001, as supplemented
on April 2, 2001 and April 26, 2001.
J. Current report on Form 8-K, dated February 8, 2001 and filed with the
SEC on February 21, 2001.
K. Second supplement to our definitive proxy statement dated April 26,
2001.
L. Current report on Form 8-K/A, dated February 8, 2001 and filed with the
SEC on May 1, 2001.
M. Quarterly report on Form 10-Q for the quarter ended June 30, 2001.
N. Registration statement on Form S-3 (File No. 333-81964).
O. Annual report on Form 10-K for the year ended December 31, 2003.
P. Quarterly report on Form 10-Q for the quarter ended September 30, 2003.
* Management Compensation Contract
(b) Reports on Form 8-K.
None.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Dated: March 30, 2004
By: /s/ Victor M. Rivas
-------------------------------------------
Name: Victor M. Rivas
Title: President and Chief Executive Officer
POWER OF ATTORNEY
The undersigned directors and officers of Ladenburg Thalmann Financial
Services Inc. hereby constitute and appoint Howard M. Lorber, Victor M. Rivas
and Salvatore Giardina, and each of them, with full power to act without the
other and with full power of substitution and resubstitution, our true and
lawful attorneys-in-fact with full power to execute in our name and behalf in
the capacities indicated below, this Annual Report on Form 10-K and any and all
amendments thereto and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
and hereby ratify and confirm all that such attorneys-in-fact, or any of them,
or their substitutes shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 2004.
SIGNATURES TITLE
/s/ Victor M. Rivas
- ------------------------------ President and Chief Executive Officer
Victor M. Rivas (Principal Executive Officer)
/s/ Salvatore Giardina
- ------------------------------ Vice President and Chief Financial Officer
Salvatore Giardina (Principal Financial Officer and Principal
Accounting Officer)
/s/ Henry C. Beinstein
- ------------------------------ Director
Henry C. Beinstein
/s/ Robert J. Eide
- ------------------------------ Director
Robert J. Eide
/s/ Richard J. Lampen
- ------------------------------ Director
Richard J. Lampen
/s/ Howard M. Lorber
- ------------------------------ Director
Howard M. Lorber
/s/ Vincent A. Mangone
- ------------------------------ Director
Vincent A. Mangone
/s/ Richard J. Rosenstock
- ------------------------------ Director
Richard J. Rosenstock
/s/ Mark Zeitchick
- ------------------------------ Director
Mark Zeitchick
58
LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003
ITEMS 8 AND 15(A) (1) AND (2)
INDEX TO FINANCIAL STATEMENTS
Financial Statements of the Registrant and its subsidiaries required
to be included in Items 8 and 16(a) (1) and (2) are listed below:
FINANCIAL STATEMENTS:
Page
----
LADENBURG THALMANN FINANCIAL SERVICES INC. CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Certified Public Accountants....................................... F-2
Consolidated Statements of Financial Condition as of December 31, 2003 and 2002........... F-4
Consolidated Statements of Operations
for the years ended December 31, 2003, 2002 and 2001............................... F-5
Consolidated Statements of Changes in Shareholders' Equity (Capital Deficit)
for the years ended December 31, 2003, 2002 and 2001............................... F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 2003, 2002 and 2001............................... F-7
Notes to the Consolidated Financial Statements............................................ F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Ladenburg Thalmann Financial Services Inc.
We have audited the accompanying consolidated statement of financial condition
of Ladenburg Thalmann Financial Services Inc. and its subsidiaries (the
"Company") as of December 31, 2003 and 2002, and the related consolidated
statements of operations, changes in shareholders' equity (capital deficit) and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ladenburg Thalmann
Financial Services Inc. and its subsidiaries as of December 31, 2003 and 2002
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 4 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Standards No. 142,
"Goodwill and Other Intangible Assets".
/s/ Eisner LLP
Eisner LLP
New York, New York
February 5, 2004, except for the fifth and sixth paragraphs of Note 13, as to
which the date is March 29, 2004
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Ladenburg Thalmann Financial Services Inc.
In our opinion, the accompanying consolidated statements of operations, changes
in shareholders' equity (capital deficit) and cash flows present fairly, in all
material respects, the results of operations and cash flows of Ladenburg
Thalmann Financial Services Inc. and its subsidiaries (the "Company") for the
year ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
March 22, 2002
F-3
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31,
---------------------------
2003 2002
-------- --------
ASSETS
Cash and cash equivalents ...................................................... $ 3,648 $ 11,752
Trading securities owned ....................................................... 1,013 4,365
Due from affiliates ............................................................ -- 60
Receivables from clearing brokers .............................................. 21,245 11,378
Assets of limited partnership .................................................. 6,472 4,936
Exchange memberships owned, at historical cost ................................. 1,505 1,505
Furniture, equipment and leasehold improvements, net ........................... 4,828 8,087
Restricted assets .............................................................. 1,063 1,054
Income taxes receivable ........................................................ -- 2,224
Other assets ................................................................... 4,363 3,429
-------- --------
Total assets .......................................................... $ 44,137 $ 48,790
======== ========
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIT
Securities sold, but not yet purchased ......................................... $ 4,070 $ 1,218
Accrued compensation ........................................................... 2,502 3,268
Accounts payable and accrued liabilities ....................................... 8,510 11,296
Liabilities of limited partnership ............................................. 3,230 288
Deferred rent credit ........................................................... 5,817 6,589
Accrued interest ............................................................... 1,999 788
Accrued interest to former parent .............................................. 1,545 634
Notes payable .................................................................. 7,000 8,500
Senior convertible notes payable ............................................... 20,000 20,000
Subordinated note payable ...................................................... 2,500 2,500
-------- --------
Total liabilities ..................................................... 57,173 55,081
-------- --------
Commitments and contingencies .................................................. -- --
Limited partners' interest in limited partnership ...................... 3,136 4,603
-------- --------
Shareholders' capital deficit:
Preferred stock, $.0001 par value; 2,000,000 shares authorized; none issued -- --
Common stock, $.0001 par value; 200,000,000 shares authorized; shares
issued and outstanding, 43,627,130 and 42,025,211 .................. 4 4
Additional paid-in capital ................................................ 56,685 56,473
Accumulated deficit ....................................................... (72,861) (67,371)
-------- --------
Total shareholders' capital deficit ................................... (16,172) (10,894)
-------- --------
Total liabilities and shareholders' capital deficit ................... $ 44,137 $ 48,790
======== ========
See accompanying notes to consolidated financial statements
F-4
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Year Ended December 31,
----------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUES:
Commissions ........................................ $ 42,376 $ 49,796 $ 39,756
Principal transactions, net ........................ 5,159 10,591 30,662
Investment banking fees ............................ 2,804 9,141 11,698
Investment advisory fees ........................... 2,459 2,736 2,696
Interest and dividends ............................. 1,773 2,381 4,100
Syndications and underwritings ..................... 251 258 652
Other income ....................................... 6,575 4,670 4,389
------------ ------------ ------------
Total revenues ................................ 61,397 79,573 93,953
------------ ------------ ------------
EXPENSES:
Compensation and benefits .......................... 40,671 56,876 62,741
Brokerage, communication and clearance fees ........ 5,262 14,733 16,082
Rent and occupancy ................................. 5,757 9,708 6,658
Professional services .............................. 3,982 5,029 3,130
Interest ........................................... 2,225 2,043 1,666
Depreciation and amortization ...................... 1,190 1,999 2,538
Impairment of goodwill ............................. -- 18,762 --
Write-off of furniture, fixtures and leasehold
improvements, net ............................. 779 1,394 --
Other .............................................. 6,799 14,481 13,387
------------ ------------ ------------
Total expenses ................................ 66,665 125,025 106,202
------------ ------------ ------------
Loss before income taxes and limited
partners' interest ........................... (5,268) (45,452) (12,249)
Limited partners' interest in (earnings) loss of limited
partnership............................................ (152) 459 --
------------ ------------ ------------
Loss before income taxes ...................... (5,420) (44,993) (12,249)
Income taxes ........................................... 70 1,400 44
------------ ------------ ------------
Net loss ...................................... $ (5,490) $ (46,393) $ (12,293)
============ ============ ============
Net loss per Common Share (basic and diluted) .......... $ (0.13) $ (1.10) $ (0.31)
============ ============ ============
Number of shares used in computation (basic and diluted) 42,567,798 42,025,211 39,458,057
============ ============ ============
See accompanying notes to consolidated financial statements
F-5
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY (CAPITAL DEFICIT)
(DOLLARS IN THOUSANDS)
Common Paid-in Accumulated
Stock Capital Deficit Total
-------- -------- ----------- --------
Balance, December 31, 2000 ......... $ 2 $ 38,983 $ (8,685) $ 30,300
Net loss ........................... -- -- (12,293) (12,293)
Issuance of warrants to note holders -- 154 -- 154
Effect of LTS Acquisition .......... 2 17,031 -- 17,033
-------- -------- -------- --------
Balance, December 31, 2001 ......... 4 56,168 (20,978) 35,194
Employee compensation .............. -- 305 -- 305
Net loss ........................... -- -- (46,393) (46,393)
-------- -------- -------- --------
Balance, December 31, 2002 ......... 4 56,473 (67,371) (10,894)
Issuance of common stock ........... -- 212 -- 212
Net loss ........................... -- -- (5,490) (5,490)
-------- -------- -------- --------
Balance, December 31, 2003 ......... $ 4 $ 56,685 $(72,861) $(16,172)
======== ======== ======== ========
See accompanying notes to consolidated financial statements
F-6
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the Year Ended December 31,
----------------------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net loss ................................. $ (5,490) $(46,393) $(12,293)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 1,190 1,999 2,538
Write-off of furniture, fixtures and
leasehold improvements, net ....... 779 1,394 --
Amortization of (adjustment to)
deferred rent credit .............. 40 (600) 450
Deferred taxes ........................... -- 3,339 1,397
Impairment of goodwill ................... -- 18,762 --
Loss on disposal of fixed assets ......... 3 -- --
Accrued interest ......................... 2,122 -- --
Forgiveness of promissory note payable.... (1,500) -- --
Employee compensation .................... -- 305 --
Issuance of warrants to note holders ..... -- -- 154
Limited partners' interest in limited
partnership ...................... 152 (459) --
(Increase) decrease in operating assets:
Trading securities owned ................ 3,352 12,959 3,843
Receivables from clearing brokers ....... (9,867) 16,542 (9,602)
Assets of limited partnership ........... (1,536) 3,544 --
Due from affiliates ..................... 60 176 --
Income taxes receivable ................. 2,224 (1,725) --
Other assets ............................ (25) 4,643 1,512
Increase (decrease) in operating liabilities:
Securities sold, but not yet purchased .. 2,852 (11,186) 5,434
Accrued compensation .................... (766) (7,810) 3,561
Accounts payable and accrued liabilities (2,786) 4,476 (75)
Liabilities of limited partnership ...... 2,942 (361) --
Payable to former parent and affiliate .. -- 200 385
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES .... (6,254) (195) (2,696)
-------- -------- --------
Cash flows from investing activities:
Purchases of furniture, equipment
and leasehold improvements ........... (527) (1,521) (2,735)
Net proceeds from sale of equipment ...... 93 -- --
Cash received in LTS acquisition ......... -- -- 5,151
-------- -------- --------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES ................. (434) (1,521) 2,416
-------- -------- --------
Cash flows from financing activities:
(Increase) decrease in restricted assets . (9) 1,556 (12)
Issuance of common stock ................. 212 -- --
Payments to Ladenburg stockholders ....... -- -- (10,000)
Issuance of subordinated notes payable ... -- 2,500 2,500
Issuance of other notes payable .......... -- 10,500 2,000
Convertible note proceeds ................ -- -- 10,000
Repayment of subordinated note payable ... -- (2,500) --
Repayment of other notes payable ......... -- (4,000) --
Distributions to limited partners ........ (1,801) (2,969) --
Contributions from limited partners ...... 182 245 --
-------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES ........................... (1,416) 5,332 4,488
-------- -------- --------
Net (decrease) increase in cash
and cash equivalents ..................... (8,104) 3,616 4,208
Cash and cash equivalents, beginning of year .. 11,752 8,136 3,928
-------- -------- --------
Cash and cash equivalents, end of year ........ $ 3,648 $ 11,752 $ 8,136
======== ======== ========
See accompanying notes to consolidated financial statements
F-7
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(DOLLARS IN THOUSANDS)
For the Year Ended December 31,
----------------------------------------------
2003 2002 2001
-------- -------- --------
Supplemental cash flow information:
Interest paid ............................ $ 103 $ 1,018 $ 246
Taxes paid ............................... 317 206 337
Supplemental disclosure of non-cash activity:
Detail of acquisition:
Assets acquired, including cash .......... $ -- $ -- $ 26,619
Goodwill ................................. -- -- 19,385
Liabilities assumed, including minority
interest ............................... -- -- (23,820)
Increase to paid in capital .............. -- -- (17,033)
Cash paid ................................ $ -- $ -- --
-------- -------- --------
Net cash received in acquisition ......... $ -- $ -- $ 5,151
======== ======== ========
See accompanying notes to consolidated financial statements
F-8
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. PRINCIPLES OF REPORTING
The 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 subsidiaries, all of which are
wholly-owned. The subsidiaries of LTS include, among others, Ladenburg
Thalmann & Co. Inc. ("Ladenburg"), Ladenburg Capital Management Inc.,
formerly known as GBI Capital Partners Inc. ("Ladenburg Capital"),
Ladenburg Thalmann Europe, Ltd. and Ladenburg Capital Fund Management
Inc., formerly known as GBI Fund Management Corp. ("LCFM"). All
significant intercompany balances and transactions have been eliminated.
Ladenburg is a registered broker-dealer in securities that clears its
customers' transactions through correspondent clearing brokers on a fully
disclosed basis. In November 2002, Ladenburg Capital, until it voluntarily
filed to withdraw its license in November 2002, which withdrawal became
effective in January 2004, also operated as a broker-dealer in securities.
Broker-dealer activities include principal and agency trading and
investment banking and underwriting activities. The Company's other
subsidiaries primarily provide asset management services.
Prior to May 7, 2001, Ladenburg Capital and LCFM 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. As
part of the consideration for the shares of Ladenburg, LTS issued the
former stockholders of Ladenburg a majority interest in LTS common stock.
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. For a more complete discussion of this transaction, including
pro forma information giving effect to the acquisition as if it took place
on January 1, 2000, see Note 3 to these consolidated financial statements.
Ladenburg was an indirect wholly-owned subsidiary of New Valley
Corporation ("New Valley") until December 23, 1999, when a minority stake
in Ladenburg was sold leaving New Valley with an indirect 80.1% ownership
interest. On December 21, 2001, New Valley distributed its shares of LTS
common stock to holders of New Valley common shares as a special dividend.
(See Note 3.)
LCFM is the sole general partner of the Ladenburg Focus Fund, L.P., an
open-ended private investment fund that invests its capital in publicly
traded equity securities and options strategies. Through December 31,
2002, the Company accounted for its investment in the limited partnership
using the equity method. Commencing in 2003, due to the controlling voting
interest of LCFM, the accounts of the limited partnership were
consolidated with the Company's accounts. In addition, the 2002 financial
statements were adjusted to reflect the consolidation of the limited
partnership. This adjustment had no effect on the capital deficit at
December 31, 2002, or the net loss for the two year period then ended, as
previously reported.
The assets of the limited partnership consist principally of a receivable
from clearing broker of $6,469 and $4,864 as of December 31, 2003 and
2002, respectively. The liabilities of the limited partnership consist
principally of securities sold, but not yet purchased of $3,215 and $116
as of December 31, 2003 and 2002, respectively..
In addition to the above, certain reclassifications have been made to
prior period financial information to conform to the current period
presentation.
F-9
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
ORGANIZATION
Ladenburg is a full service broker-dealer that has been a member of the
New York Stock Exchange ("NYSE") since 1879. Ladenburg clears its
customers' transactions through a correspondent clearing broker on a fully
disclosed basis. Broker-dealer activities include principal and agency
trading and investment banking and underwriting activities. Ladenburg
provides its services principally for middle market and emerging growth
companies and high net worth individuals through a coordinated effort
among corporate finance, capital markets, investment management, brokerage
and trading professionals. Ladenburg is subject to regulation by the
Securities and Exchange Commission ("SEC"), the NYSE, National Association
of Securities Dealers, Inc. ("NASD"), Commodities Futures Trading
Commission and National Futures Association. See Notes 6 and 13.
Ladenburg Capital previously operated as a broker-dealer subject to
regulation by the SEC and the NASD. Ladenburg Capital acted as an
introducing broker, market maker, underwriter and trader for its own
account. In July 2002, the market making activities of Ladenburg Capital
were terminated. Certain employees working in Ladenburg Capital's market
making area were offered employment with Ladenburg. In November 2002,
Ladenburg Capital terminated its remaining broker-dealer operations but
continues with its other line of business. Ladenburg Capital voluntarily
filed to withdraw as a broker-dealer at that time, which withdrawal became
effective at January 2004. In conjunction with providing employment to
certain former Ladenburg Capital brokers, Ladenburg agreed to and is
currently servicing these brokers' customer accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of these financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
The Company considers all highly liquid financial instruments with an
original maturity of less than three months to be cash equivalents.
Securities owned and securities sold, but not yet purchased, which are
traded on a national securities exchange or listed on Nasdaq are valued at
the last reported sales prices of the year. Futures contracts are also
valued at their last reported sales price. Securities owned, which have
exercise or holding period restrictions, are valued at fair value as
determined by the Company's management. Unrealized gains and losses
resulting from changes in valuation are reflected in net gain on principal
transactions.
Principal transactions, agency commissions and related clearing expenses
are recorded on a trade-date basis.
Investment banking revenues include fees earned from providing
merger-and-acquisition and financial restructuring advisory services and
from private and public offerings of debt and equity securities.
Investment banking fees are recorded upon the closing of the transaction,
when it can be determined that the fees have been irrevocably earned.
Investment advisory fees are received quarterly, in advance, but are
recognized as earned on a pro rata basis over the term of the contract.
Dividends are recorded on an ex-dividend date basis and interest is
recorded on an accrual basis.
Ladenburg and its former subsidiaries were included in the consolidated
federal income tax return filed by New Valley prior to May 7, 2001 and are
included in the consolidated federal income tax return and certain
combined state and local income tax returns filed by LTS commencing May 8,
2001. According to the tax sharing agreement formerly in effect with New
Valley, federal income taxes were calculated as if the companies filed on
a separate return basis and the amount of current tax or benefit
calculated was either remitted to or received from the former parent. The
amount of current and deferred taxes payable or refundable is recognized
F-10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
as of the date of the financial statements, utilizing currently enacted
tax laws and rates. Deferred tax expenses or benefits are recognized in
the financial statements for the changes in deferred tax liabilities or
assets between years. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized. As of
December 31, 2003 and December 31, 2002, the valuation allowance was
$20,638 and $17,409, respectively.
Depreciation of furniture and equipment is provided by the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements are amortized on a straight-line basis over the lease term.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") 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. 142 is
effective for fiscal years beginning after December 15, 2001. Upon the
adoption of SFAS No. 142, effective January 1, 2002, goodwill was
subjected to periodic assessments of impairment and no longer being
amortized. In 2002 the Company recorded an impairment charge of $18,762 of
goodwill. (See Note 4.)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", and requires (i) the recognition and
measurement of the impairment of long-lived assets to be held and used and
(ii) the measurement of long-lived assets to be disposed of by sale. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001.
The adoption of this statement in 2002 did not result in a material impact
on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The Company early adopted
SFAS No. 146 during the fourth quarter of 2002 and applied its provisions
to leased premises which were vacated during such period. Under SFAS No.
146, a cost associated with an exit or disposal activity shall be
recognized and measured initially at its fair value in the period in which
the liability is incurred. For operating leases, a liability for costs
that will continue to be incurred under the lease for its remaining term
without economic benefit to the entity shall be recognized and measured at
its fair value when the entity ceases using the right conveyed by the
lease (the "cease-use date"). The fair value of the liability at the
"cease-use date" shall be determined based on the remaining lease rentals,
reduced by estimated sublease rentals that could be reasonably obtained
for the property. (See Note 9.)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock- based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has adopted the disclosure
requirements of SFAS No. 148.
SFAS No. 123, "Accounting for Stock-Based Compensation," allows the use of
the fair value based method of accounting for stock-based employee
compensation. Alternatively, SFAS No. 123 allows entities to continue to
apply the intrinsic value method prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations and provide pro forma disclosures of net income
(loss) and income (loss) per share, as if the fair value based method of
accounting had been applied to employee awards. As permitted by SFAS No.
123, the Company continues to account for such compensation under APB No.
25 and related interpretations, pursuant to which no compensation cost has
been recognized in connection with the issuance of stock options, as all
options granted under the employee incentive plan had an exercise price
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on the Company's net
loss for the years ended December 31, 2003, 2002 and 2001 had the Company
elected to recognize compensation expense for the stock option plan,
consistent with the method prescribed by SFAS No. 123.
F-11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
2003 2002 2001
-------- -------- --------
Net loss, as reported ........................... $ (5,490) $(46,393) $(12,293)
Stock-based employee compensation determined
under the fair value based method ............ (1,517) (3,554) (998)
-------- -------- --------
Pro forma net loss .............................. $ (7,007) $(49,947) $(13,291)
======== ======== ========
Net loss per Common Share (basic and diluted), as
reported......................................... $ (0.13) $ (1.10) $ (0.31)
======== ======== ========
Pro forma net loss per Common Share (basic and
diluted) ........................................ $ (0.16) $ (1.19) $ (0.32)
======== ======== ========
The per share weighted average fair value of stock options granted during
2003, 2002 and for the period May 7, 2001 through December 31, 2001 (see
Note 3) of $0.44, $0.73 and $2.61, respectively, was estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2003 2002 2001
-------- --------- ---------
Risk free interest rate ........................ 4.27% 4.45% 4.88%
Volatility...................................... 102.48% 135.00% 83.58%
Dividend yield.................................. 0 0 0
Expected lives.................................. 10 years 10 years 10 years
3. LADENBURG TRANSACTION
On May 7, 2001, LTS consummated a stock purchase agreement (the
"Agreement") through which it acquired all of the outstanding common stock
of Ladenburg from New Valley and Berliner Effektengesellschaft AG
("Berliner"), the former stockholders of Ladenburg. The primary reason for
the acquisition was that 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 the current
financial markets. In order to acquire the stock of Ladenburg, LTS issued
to New Valley and Berliner an aggregate of 23,218,599 shares of common
stock and paid to them an aggregate of $10,000 cash and $10,000 principal
amount of senior convertible promissory notes due December 31, 2005. The
notes bear interest at the rate of 7.5% and are currently convertible into
a total of 4,799,271 shares of common stock at a conversion price of
approximately $2.08. The notes 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 the notes at a
purchase price equal to the unpaid principal amount of the notes and the
accrued interest.
Upon closing, New Valley, the previous 80.1% owner of Ladenburg, acquired
an additional 3,945,060 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. On December 21, 2001,
New Valley distributed its 22,543,158 shares of LTS common stock, a 53.6%
interest, to holders of New Valley common shares through a special
dividend. Following completion of the special dividend, New Valley
continued to hold $8,010 principal amount of LTS's senior convertible
promissory notes, convertible into 3,844,216 shares of LTS common stock,
and a warrant to purchase 100,000 shares of LTS common stock at $1.00 per
share.
F-12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
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 promissory notes due December 31, 2005. Dr. Frost, a
director of LTS from May 2002 until his resignation in July 2002, is the
sole stockholder of the general partner of Frost-Nevada, Frost-Nevada
Corporation. Dr. Frost, through several entities controlled by him, was
also one of LTS's principal shareholders prior to the time that it became
a public company in August 1999. The notes held by Frost-Nevada are
identical to the notes held by New Valley and Berliner, except for the
interest rate which is 8.5% per annum and the conversion price. The note
is currently convertible into a total of 6,497,475 shares of common stock
at a conversion price of approximately $1.54. These notes, together with
the notes issued to the Ladenburg stockholders, are collateralized by a
pledge of the Ladenburg stock. (See Note 13.) Following a final resolution
of LTS's pre-closing litigation adjustments, it was determined that the
number of shares of common stock paid to New Valley and Berliner and the
conversion prices of the senior convertible promissory notes payable held
by New Valley, Berliner and Frost-Nevada did not require adjustment.
Concurrently with the closing of the stock purchase agreement, New Valley
purchased 3,945,060 shares of common stock at $1.00 per share from Joseph
Berland, the former chairman and chief executive officer of LTS.
Additionally, on the same date, Frost-Nevada purchased a total of 550,000
shares of common stock at $1.00 per share from Richard J. Rosenstock, LTS'
former vice chairman and chief operating officer, Mark Zeitchick and
Vincent Mangone, LTS' executive vice presidents and David Thalheim, LTS'
former administrator.
As a result of the foregoing transactions, the former stockholders of
Ladenburg directly or indirectly held shares or other equity instruments,
representing 27,163,659 shares, or 64.6%, of LTS' common stock, and
Frost-Nevada directly or indirectly held shares or other equity
instruments, representing 7,935,441 shares, or 16.4%, of LTS' common
stock.
Prior to the consummation of the acquisition, New Valley maintained office
space at Ladenburg's principal offices. In connection with the
consummation of the transaction, New Valley entered into a license
agreement with Ladenburg in which New Valley will continue to occupy this
space at no cost to New Valley. The license agreement is for one year and
is automatically renewed for successive one-year periods unless terminated
by New Valley. The space, which is not currently occupied by New Valley,
has been subleased on a short-term basis by Ladenburg to an unaffiliated
third party.
In connection with these transactions, Howard M. Lorber, president and
chief operating officer of New Valley, became LTS' chairman. Additionally,
Victor M. Rivas, chairman and chief executive officer of Ladenburg, became
LTS' president and chief executive officer pursuant to an employment
agreement with a term expiring in August 2004. In addition to these
individuals, Bennett S. LeBow, Henry C. Beinstein, Robert J. Eide and Dr.
Frost became members of LTS' board of directors in May 2001. Messrs.
Lorber, Rivas, LeBow and Beinstein are also members of the board of
directors of New Valley and Mr. Eide is a member of the board of directors
of Vector Group Ltd., New Valley's parent.
Pursuant to the employment agreement with Mr. Rivas, Mr. Rivas is entitled
to receive an annual base salary of $500, subject to periodic increases as
determined by LTS' board of directors, as well as a minimum annual bonus
of $500. Mr. Rivas is also entitled to participate in LTS' Annual
Incentive Bonus Plan and Special Performance Incentive Plan in accordance
with the terms of the plan and Mr. Rivas' employment agreement. Due to the
current financial condition of the Company, Mr. Rivas voluntarily
forfeited the accrued compensation due him under the Special Performance
Incentive Plan for the period January 1, 2002 through August 31, 2002 and
the balance of the compensation due him under this Plan for the remainder
of the 2002 calendar year.
The shares of LTS common stock issued in the transaction were valued at
May 7, 2001 at $1.75 per share. LTS' common stock is very thinly traded,
and management considered a number of factors in addition to the average
trading price one week before and after closing of the transaction
($3.03). These other factors included the purchase price of the shares
concurrently purchased from LTS' executive officers, the terms of the
F-13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
convertible notes and the value implied by the previous negotiations
between the parties. No independent appraisal was obtained in connection
with the transaction.
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.
In determining the accounting treatment of the transaction, the Company
considered the shares of common stock and the senior convertible
promissory notes acquired by New Valley and Berliner on both a basic and
fully diluted basis, and the number of outstanding options. Although New
Valley later distributed its shares of common stock to its stockholders as
described above, the Company determined that it was still appropriate to
treat Ladenburg as the acquirer as New Valley's stockholders are in all
practical matters the actual former stockholders of Ladenburg.
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 available information. Goodwill of $19,385 was
recognized for the amount of the excess of the purchase price paid over
the fair market value of the net assets acquired and was amortized during
2001 on the straight line basis over 20 years. The final allocation of the
purchase price made during 2002 to the individual assets acquired and
liabilities assumed did not differ from preliminary estimates of fair
value reflected in the 2001 financial statements.
F-14
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
The 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
========
ALLOCATION OF PURCHASE PRICE:
Assets:
LTS's assets.................................... $ 26,619
Goodwill........................................ 19,385
Liabilities:
LTS's liabilities............................... (11,263)
--------
Total purchase price.......................... $ 34,741
========
The following adjustments, which increased shareholders' equity by
$17,033, were made to shareholders' 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 shareholders' equity of $1,422 to recognize the
value of 1,875,979 stock options outstanding at May 7, 2001 to
LTS employees, 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 life 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 shareholders' 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; and
o a decrease of $20,000 in shareholders' 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.
Pro forma information, giving effect to the acquisition as if it took
place on January 1, 2001 is presented below:
Year Ended December 31,
2001
---------
Revenues $ 112,855
=========
Net loss ......................... $ (16,873)
=========
Net loss per Common Share......... $ (0.40)
=========
F-15
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
4. IMPAIRMENT OF GOODWILL
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 intangible assets
with indefinite lives be tested for impairment as of the date of adoption.
Additionally, SFAS No. 142 requires that goodwill be tested for impairment
at the reporting unit level as of the date of adoption and that any
goodwill impairment loss recognized as a result of initial application be
reported as the effect of a change in accounting principle.
Prior to January 1, 2002, goodwill and other intangible assets were tested
for impairment based on the recoverability of carrying value using
undiscounted future cash flows. 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
its reporting units, which differed from the previous accounting rules
where goodwill was assigned only to the business of the acquired entity.
As a result, a portion of the goodwill generated in the acquisition has
been reallocated from Ladenburg Capital to Ladenburg (see Note 3).
A summary of the allocation by entity of the Company's goodwill, including
the impairment charge discussed below, is as follows:
December 31, 2001
------------------------------
Accumulated
Gross Amortization Net Adjustments December 31, 2002
------- ------------ ------ ----------- -----------------
Ladenburg............ $ -- $ -- $ -- $ 5,546 $ 5,546
Ladenburg Capital.... 19,385 (623) 18,762 (5,546) 13,216
------- ----- ------- ------- --------
$19,385 $(623) $18,762 $ -- $ 18,762
====== ===== ======= =======
Impairment loss...... $(18,762)
--------
Total................ $ --
========
The goodwill of $19,385 arose as a result of the Ladenburg transaction on
May 7, 2001. The following table reconciles net loss for the year ended
December 31, 2001 to its amount adjusted to exclude previously recorded
goodwill amortization expense.
Year Ended
December 31, 2001
-----------------
Reported net loss..................... $ (12,293)
Goodwill amortization................. 623
---------
Adjusted net loss..................... $ (11,670)
=========
Reported net loss per share........... $ (0.31)
Goodwill amortization................. 0.01
---------
Adjusted net loss per share........... $ (0.30)
=========
For initial application of SFAS No. 142, in connection with the reporting
of the results for the first quarter of 2002, an independent appraisal
firm was engaged to value the Company's goodwill as of January 1, 2002.
The appraiser valued the businesses using a weighted average of each
unit's projected discounted cash flow, with a weighted average cost of
capital of 17.40%, and a fair market approach (using market comparables
for ten companies). The appraiser weighted the discounted cash flow for
each unit at 70% and the fair market
F-16
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
approach at 30%. The discounted cash flow was based on management's
projections of operating results at 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.
Based on the overall market declines in the U.S. equity markets and the
conditions prevailing in the broker-dealer industry during 2002, the
Company completed an additional impairment review and recorded a $18,762
charge for the impairment of goodwill. The charge reflects overall market
decline since the Ladenburg acquisition in May 2001. During this review,
the same independent appraisal firm was engaged to value the Company's
goodwill as of June 30, 2002. The appraiser valued the Company's
businesses using a weighted average of each unit's projected discounted
cash flow, with a weighted average cost of capital of 18.50%, and a fair
market approach (using market comparables for ten companies). The
appraiser weighted the discounted cash flow for each unit at 70% and the
fair market approach at 30%. The discounted cash flow was based on
management's revised projections of operating results at June 30, 2002.
Based on this valuation, an impairment charge of $18,762 of goodwill was
indicated and recorded.
5. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET PURCHASED
The components of securities owned and securities sold, but not yet
purchased as of December 31, 2003 and 2002 are as follows:
Securities
Securities Sold, But Not
Owned Yet Purchased
---------- -------------
DECEMBER 31, 2003
Common stock $ 760 $4,065
Municipal obligations 56 --
Equity and index options 59 --
Corporate bonds 138 5
------ ------
$1,013 $4,070
====== ======
DECEMBER 31, 2002
Common stock $4,210 $1,188
Equity and index options -- --
Municipal obligations 33 --
Corporate bonds 122 30
------ ------
$4,365 $1,218
====== ======
As of December 31, 2003 and 2002 approximately $960 and $4,342,
respectively, of the securities owned are deposited with the Company's
clearing broker and pursuant to the agreement, the securities may be sold
or re-hypothecated by the clearing broker.
6. NET CAPITAL REQUIREMENTS
As a registered broker-dealer, Ladenburg is subject to the SEC's Uniform
Net Capital Rule 15c3-1 and the Commodity Futures Trading Commission's
Regulation 1.17, which require the maintenance of minimum net capital.
Ladenburg has elected to compute its net capital under the alternative
method allowed by these rules. Effective June 13, 2003, Ladenburg's
management decided to eliminate its market making activities. As a result,
Ladenburg's minimum net capital requirement decreased from $1,000 to $250.
At December 31, 2003, Ladenburg had net capital, as defined, of $6,745,
which exceeded its minimum capital requirement of $250 by $6,495.
Ladenburg claims an exemption from the provisions of the SEC's Rule 15c3-3
pursuant to paragraph (k)(2)(ii) as it clears its customer transactions
through its correspondent broker on a fully disclosed basis.
F-17
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
7. FINANCIAL INSTRUMENTS
The financial instruments of the Company and it subsidiaries are reported
in the consolidated statements of financial condition at market or fair
value or at carrying amounts that approximate fair values because of the
relatively short-term nature of the instruments or, with respect to notes
payable other than subordinated notes payable, because of their variable
interest rates which periodically adjust to reflect changes in overall
market interest rates. With respect to the $20,000 of fixed rate
subordinated notes payable, the Company's management believes that the
stated interest rates in the notes would not be substantially different
than what the Company could have obtained as of December 31, 2003 and
2002, based on the Company's financial position.
In the normal course of its business, Ladenburg enters into transactions
in financial instruments with off-balance sheet risk. These financial
instruments consist of financial futures contracts, written equity index
option contracts and securities sold, but not yet purchased.
Financial futures contracts provide for the delayed delivery of a
financial instrument with the seller agreeing to make delivery at a
specified future date, at a specified price. These futures contracts
involve elements of market risk that may exceed the amounts recognized in
the consolidated statement of financial condition. Risk arises from
changes in the values of the underlying financial instruments or indices.
Equity index options give the holder the right to buy or sell a specified
number of units of a stock market index, at a specified price, within a
specified time and are settled in cash. Ladenburg generally enters into
these option contracts in order to reduce its exposure to market risk on
securities owned. Credit and market risk arises from the potential
inability of the counterparties to perform under the terms of the
contracts and from changes in the value of a stock market index. Ladenburg
believes it mitigates the market risk of its option positions used for
trading purposes because they are generally hedged transactions. As a
writer of options, Ladenburg receives a premium in exchange for bearing
the risk of unfavorable changes in the price of the securities underlying
the option.
The table below discloses the gross contractual or notional amount of
these commitments.
Long Short
---- -----
As of December 31, 2003:
Equity and index options $ 59 $ --
Financial futures contracts 436 --
As of December 31, 2002:
Equity and index options $ -- $ --
Financial futures contracts 213 --
For the years ended December 31, 2003, 2002 and 2001, the net gain arising
from options and futures contracts without regard to the benefit derived
from market risk reduction was $50, $60, and $366, respectively. The
measurement of market risk is meaningful only when all related and
offsetting transactions are taken into consideration.
Ladenburg, and Ladenburg Capital prior to terminating its operations, sold
securities that they do not currently own and will therefore be obligated
to purchase such securities at a future date. These obligations have been
recorded in the financial statements at December 31, 2003 and 2002 at
market values of the related securities and the Company will incur a loss
if the market value of the securities increases subsequent to December 31,
2003.
F-18
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
8. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Components of furniture, equipment and leasehold improvements included in
the consolidated statements of financial condition were as follows:
As of December 31,
-------------------------------------
2003 2002
-------- --------
Cost
Leasehold improvements $ 4,984 $ 7,927
Computer equipment 3,336 4,039
Furniture and fixtures 1,235 1,237
Other 2,682 2,220
-------- --------
12,237 15,423
Less, accumulated depreciation and amortization (7,409) (7,336)
-------- --------
$ 4,828 $ 8,087
======== ========
See Note 9 - Operating Leases.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under several noncancelable lease agreements for
office space, expiring in various years through June 2015. Certain leases
have provisions for escalation based on specified increases in costs
incurred by the landlord. The Company is subleasing a portion of its
office space for approximately $1,509 per year plus expense escalations.
The subleases expire at various dates through August 31, 2009.
As of December 31, 2003, the leases, exclusive of the lease relating to
premises vacated by Ladenburg Capital referred to below, provide for
minimum lease payments, net of lease abatement and exclusive of escalation
charges, as follows:
Year Ending
December 31,
------------
2004.................................... $ 4,526
2005.................................... 4,975
2006.................................... 4,844
2007.................................... 5,080
2008.................................... 5,554
Thereafter............................. 35,931
-------
Total $60,910
=======
In addition to the above, one of the leases obligates the Company to
occupy additional space at the landlord's option, which may result in
aggregate additional lease payments of up to $976 through June 2015.
In May 2003, Ladenburg relocated approximately 95 of its employees from
its New York City office to its Melville, New York office. As a result of
this move, Ladenburg ceased using one of the several floors it occupies in
its New York City office, and the net book value of the leasehold
improvements was written-off. In accordance with SFAS No. 146, as
F-19
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
estimated future sublease payments that could be reasonably obtained for
the property exceed related rental commitments under the lease, amounting
to $15,421 as of December 31, 2003, no liability for costs associated with
vacating the space has been provided. Additional costs may be incurred, to
the extent of foregone rental income in the event Ladenburg does not
sublease the office space for an amount at least equal to the lease
obligations. Such costs may have a material adverse effect on Ladenburg's
financial position and liquidity. In conjunction with the write-off of
these leasehold improvements, the unamortized deferred rent credit
representing reimbursement from the landlord of such leasehold
improvements was also written-off. The write-off of unamortized leasehold
improvements of $1,592, net of the unamortized deferred rent credit of
$813, resulted in a net charge to operations of $779.
In December 2003, Ladenburg Capital settled its litigation with the
landlord and terminated its obligation under a lease expiring in 2007
relating to office space in Bethpage, New York, which it vacated in 2002.
As of December 31, 2003, Ladenburg Capital may have potential liability
under a terminated lease for office space in New York City which it was
forced to vacate during 2001 due to the events of September 11, 2001.
Ladenburg Capital no longer occupies the space and believes it has no
further lease obligation pursuant to the terms of the lease. This lease,
which, had it not terminated as a result of the events of September 11,
2001, would have expired by its terms in March 2010, provides for future
minimum payments aggregating approximately $4,335, payable $644 in 2004,
$703 per year from 2005 through 2008 and $879 thereafter. Ladenburg
Capital is currently in litigation with the landlord in which it is
seeking judicial determination of the termination of the lease. If
Ladenburg Capital is not successful in this litigation, it plans to
sublease the property. Ladenburg Capital has provided for estimated costs
in connection with this lease and has recorded a liability at December 31,
2003 and 2002. Additional costs may be incurred in connection with
terminating this lease, or if not terminated, to the extent of foregone
rental income in the event Ladenburg Capital does not sublease the office
space for an amount at least equal to the lease obligations. Such costs
may have a material adverse effect on Ladenburg Capital's financial
position and liquidity.
During 2002, Ladenburg Capital provided for costs of $3,031 in connection
with the above described leases, including the write-off of furniture,
fixtures and leasehold improvements of $1,117 and the recording of a
liability at December 31, 2002, which gives effect to estimated sublease
rentals. As a result of its settlement with the Bethpage landlord,
Ladenburg Capital adjusted its liability and recorded a corresponding
reduction in rent expense of $1,175 in the fourth quarter of 2003. This
reduction in rent expense, less rent accrued in previous quarters during
2003, amounted to a net credit of $200 for the fiscal year ended December
31, 2003.
Deferred rent credit at December 31, 2003 and 2002 of $5,817 and $6,589,
respectively, represents the difference between rent payable calculated
over the life of the leases on a straight-line basis (net of lease
incentives) and rent payable on a cash basis.
At December 31, 2003 and 2002, Ladenburg has utilized a letter of credit
in the amount of $1,000 that is collateralized by Ladenburg's marketable
securities, in the amount of $1,063 and $1,054, respectively, (shown as
restricted assets on the consolidated statement of financial condition) as
collateral for the lease of the Company's Madison Avenue (New York City)
office space. Pursuant to the lease agreement, the requirement to maintain
this letter of credit facility expires on December 31, 2006.
LITIGATION
The Company is a defendant in litigation, including the litigation with
the landlord discussed above, 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 October 2003, an arbitration panel awarded
$1,100 in a customer arbitration. Although the Company has increased its
liability to reflect this award, a motion to vacate is currently pending.
The Company's subsidiaries are defendants in several various pending
arbitrations claiming substantial amounts of damages, including one which
is seeking compensatory damages of $6,000.
F-20
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
With respect to certain arbitration and litigation matters, where the
Company believes that it is probable that a liability has been incurred
and the amount of loss can be reasonably estimated, the Company has
provided a liability for potential arbitration and lawsuit losses of
$4,999 at December 31, 2003 and $6,201 at December 31, 2002 (included in
accounts payable and accrued liabilities), of which $1,591 and $3,110 were
charged to operations as other expense for the fiscal years ended December
31, 2003 and 2002, respectively. With respect to other pending matters,
due to the uncertain nature of litigation in general, the Company is
unable to estimate a range of possible loss; however, in the opinion of
management, after consultation with counsel, the ultimate resolution of
these matters should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
On May 5, 2003, a suit was filed in the U.S. District Court for the
Southern District of New York by Sedona Corporation against Ladenburg,
former employees of Ladenburg, Pershing LLC and a number of other firms
and individuals. The plaintiff alleges, among other things, that certain
defendants (not Ladenburg) purchased convertible securities from plaintiff
and then allegedly manipulated the market to obtain an increased number of
shares from the conversion of those securities. Ladenburg acted as
placement agent and not as principal in those transactions. Plaintiff has
alleged that Ladenburg and the other defendants violated federal
securities laws and various state laws. The plaintiff seeks compensatory
damages from the defendants of at least $660,000 and punitive damages of
$2,000,000. Ladenburg's motion to dismiss the lawsuit is currently
pending. The Company believes the plaintiffs' claims in this action are
without merit and intends to vigorously defend against them.
10. INCOME TAXES
Prior to May 7, 2001, Ladenburg was included in the consolidated federal
income tax return of New Valley, and determined its income tax provision
on a separate company basis. As a result of the decrease in New Valley's
ownership of Ladenburg following the LTS acquisition, Ladenburg is no
longer permitted to be included in the filing of New Valley's consolidated
federal income tax return. Commencing May 8, 2001, the Company files a
consolidated federal income tax return and certain combined state and
local income tax returns with its subsidiaries.
F-21
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
Income taxes (benefit) consists of the following:
State and
Federal Local Total
------- --------- -----
2003
Current....... $ -- $ 70 $ 70
Deferred...... -- -- --
-------- ------- -------
$ -- $ 70 $ 70
======== ======= =======
2002:
Current....... $(2,187) $ 248 $(1,939)
Deferred...... 3,339 -- 3,339
------- ------- -------
$ 1,152 $ 248 $ 1,400
======= ======= =======
2001:
Current....... $(1,854) $ 501 $(1,353)
Deferred...... 512 885 1,397
------- ------- -------
$(1,342) $ 1,386 $ 44
======= ======= =======
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax
rate (34%) to pretax loss as a result of the following differences:
2003 2002 2001
-------- -------- ---------
Loss before income taxes ..................... $ (5,420) $(44,993) $(12,249)
-------- -------- --------
Benefit under statutory U.S. tax rates ....... (1,843) (15,298) (4,165)
Increase in taxes resulting from:
Nontaxable items ......................... 73 -- 380
Write-off of goodwill .................... -- 6,379 --
State taxes, net of Federal benefit ...... 46 164 915
Other, net ............................... -- -- (63)
Unrecognized net operating losses (income) 1,794 6,816 (1,588)
Increase in valuation reserve, net ....... -- 3,339 4,565
-------- -------- --------
Income tax provision ............... $ 70 $ 1,400 $ 44
======== ======== ========
The Company accounts for taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the recognition of tax
benefits or expense on the temporary differences between the tax basis
and book basis of its assets and liabilities. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those timing differences are
expected to be recovered or settled.
F-22
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
Deferred tax amounts are comprised of the following at December 31:
2003 2002
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 16,149 $ 12,663
Accrued expenses ............... 3,987 3,884
Compensation and benefits ...... 49 135
Depreciation and amortization .. 217 449
Unrealized losses .............. 196 278
-------- --------
20,598 17,409
Valuation allowance ................ (20,598) (17,409)
-------- --------
Net deferred taxes ................. $ -- $ --
======== ========
After consideration of all the evidence, both positive and negative,
especially the fact the Company has sustained operating losses during 2003
and 2002, and that the Company continues to be affected by conditions in
the economy, management has determined that a valuation allowance at
December 31, 2003 was necessary to fully offset the deferred tax assets
based on the likelihood of future realization. At December 31, 2003, the
Company had net operating loss carryforwards of approximately $35,100,
expiring in various years from 2015 through 2024, of which approximately
$116 are subject to restrictions on utilization.
11. BENEFIT PLANS
Ladenburg and Ladenburg Capital have a 401(k) retirement plan (the
"Plan"), which allows eligible employees to invest a percentage of their
pretax compensation, limited to the statutory maximum ($12,000 for 2003,
$11,000 for 2002 and $10,500 for 2001). The Plan also allows the Company
to make matching and/or discretionary contributions. Neither Ladenburg nor
Ladenburg Capital made matching contributions for 2003, 2002 or 2001.
12. OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Ladenburg does not carry accounts for customers or perform custodial
functions related to customers' securities. Ladenburg introduces all of
its customer transactions, which are not reflected in these financial
statements, to its primary clearing broker, which maintains the customers'
accounts and clears such transactions. Additionally, the primary clearing
broker provides the clearing and depository operations for Ladenburg's
proprietary securities transactions. These activities may expose the
Company to off-balance-sheet risk in the event that customers do not
fulfill their obligations with the clearing broker, as Ladenburg has
agreed to indemnify its clearing broker for any resulting losses. The
Company continually assesses risk associated with each customer who is on
margin credit and records an estimated loss when management believes
collection from the customer is unlikely.
The clearing operations for the Company's securities transactions are
provided by several clearing brokers. At December 31, 2003 and 2002,
substantially all of the securities owned and the amounts due from
clearing brokers reflected in the consolidated statement of financial
condition are positions held at and amounts due from one clearing broker,
a large financial institution. The Company is subject to credit risk
should this clearing broker be unable to fulfill its obligations.
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.
F-23
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
13. NOTES PAYABLE
The components of notes payable are as follows:
December 31,
--------------------
2003 2002
------- -------
Senior convertible notes payable ........... $20,000 $20,000
Notes payable (forgivable on terms described
below) in connection with clearing
agreement .............................. 2,000 3,500
Notes payable .............................. 5,000 5,000
Subordinated note payable .................. 2,500 2,500
------- -------
Total ...................................... $29,500 $31,000
======= =======
Aggregate maturities of the $29,500 of notes payable at December 31, 2003
are as follows:
Year Ending
December 31,
------------
2004....................... $ 2,500
2005....................... 20,000
2006....................... 7,000
--------
Total................... $ 29,500
========
SENIOR CONVERTIBLE NOTES PAYABLE
In conjunction with the acquisition of Ladenburg, LTS issued a total of
$20,000 principal amount of senior convertible notes due December 31,
2005, secured by a pledge of the stock of Ladenburg. 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"), which was subsequently
assigned to Frost-Nevada Investments Trust ("Frost Trust"), of which
Frost-Nevada is the sole and exclusive beneficiary, bears interest at 8.5%
per annum. The notes held by the former Ladenburg stockholders are
convertible into a total of 4,799,271 shares of common stock, and the note
held by Frost Trust are convertible into a total of 6,497,475 shares of
common 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.
On June 28, 2002, New Valley, Berliner and Frost-Nevada agreed with the
Company to forbear until May 15, 2003 payment of the interest due to them
under the senior convertible promissory notes held by these entities on
the interest payment dates of the notes commencing June 30, 2002 through
March 2003 (the "Forbearance Interest Payments"). On March 3, 2003, the
holders of the senior convertible promissory notes agreed to extend the
interest forbearance period to January 15, 2005 with respect to interest
payments due through December 31, 2004. Interest on the deferred amounts
accrues at 8% on the New Valley and Berliner notes and 9% on the Frost
Trust note. The Company also agreed to apply any net proceeds from any
subsequent public offerings to any such deferred amounts owed to the
holders of the notes to the extent possible. As of December 31, 2003 and
2002, accrued interest payments as to which a forbearance was received
amounted to $3,414 and $1,404, respectively.
On March 29, 2004, the Company entered into an agreement with New Valley
and Frost-Nevada pursuant to which such parties agreed to convert their
notes and accrued interest into common stock, subject to shareholder
F-24
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
approval. Pursuant to the agreement, New Valley and Frost-Nevada will
convert their notes into approximately 26,000,000 shares of common stock
at reduced conversion prices of $1.10 per share and $0.70 per share,
respectively. The agreement is subject to, among other things, approval by
the Company's shareholders at a special meeting that is expected to be
held in the second quarter of 2004. As a result of the conversion, New
Valley and Frost-Nevada will beneficially own approximately 12.5% and
27.6%, respectively, of the Company's common stock. Concurrently with this
agreement, the Company entered into an agreement with Berliner pursuant to
which the Company will repurchase the notes held by Berliner, plus all
accrued interest thereon, for $1,000 in cash.
The Company currently anticipates recording a pre-tax charge in 2004 of
approximately $10,900 in its statements of operations upon closing of
these transactions. The charge reflects expense attributable to the
reduction in the conversion price of the notes to be converted, offset
partially by the gain on the repurchase of the Berliner notes. The net
balance sheet effect of the transactions will be an increase in the
Company's shareholders' equity of approximately $22,900.
OTHER NOTES PAYABLE
On August 31, 2001, the Company borrowed $1,000 from each of New Valley
and Frost-Nevada, in order to supplement the liquidity of the Company's
broker-dealer operations. The loans, which bore interest at 1% above the
prime rate, were repaid in January 2002. As consideration for the loans,
the Company issued to each of New Valley and Frost-Nevada a five-year,
immediately exercisable, warrant to purchase 100,000 shares of the
Company's common stock at an exercise price of $1.00 per share. The
Company recorded an expense of $154 associated with the issuance of such
warrants based on the value determined by using the Black-Scholes
option-pricing model.
On March 27, 2002, the Company borrowed $2,500 from New Valley. The loan,
which bears interest at 1% above the prime rate, was due on the earlier of
December 31, 2003 or the completion of one or more equity financings where
the Company receives at least $5,000 in total proceeds. The terms of the
loan restrict the Company from incurring or assuming any indebtedness that
is not subordinated to the loan so long as the loan is outstanding. On
July 16, 2002, the Company borrowed an additional $2,500 from New Valley
(collectively with the March 2002 loan, the "2002 Loans") on the same
terms as the March 2002 loan. In November 2002, New Valley agreed in
connection with the Clearing Loans (defined below) to extend the maturity
of the 2002 Loans to December 31, 2006 and to subordinate the 2002 Loans
to the repayment of the Clearing Loans.
On October 8, 2002, LTS borrowed an additional $2,000 from New Valley. The
loan, which bore interest at 1% above the prime rate, was scheduled to
mature on the earliest of December 31, 2002, the next business day after
the Company received its federal income tax refund for the fiscal year
ended September 30, 2002, and the next business day after the Company
received the Clearing Loans. The loan was repaid in December 2002 upon the
receipt of the Clearing Loans.
In November 2002, the Company renegotiated a clearing agreement with one
of its clearing brokers whereby this clearing broker became Ladenburg's
primary clearing broker, clearing substantially all of Ladenburg's
business (the "Clearing Conversion"). As part of the new agreement with
this clearing agent, Ladenburg is realizing significant cost savings from
reduced ticket charges and other incentives. In addition, under the new
clearing agreement, an affiliate of the clearing broker loaned the Company
an aggregate of $3,500 (the "Clearing Loans") in December 2002. The
Clearing Loans and related accrued interest are forgivable over various
periods, up to four years from the date of the Clearing Conversion,
provided Ladenburg continues to clear its transactions through the primary
clearing broker. As scheduled, in November 2003, $1,500 of principal was
forgiven. The remaining $2,000 of principal is scheduled to be forgiven as
follows: $667 in November 2004, $667 in November 2005 and $666 in November
2006. Upon the forgiveness of the Clearing Loans, the forgiven amount is
accounted for as other revenues. However, if the clearing agreement is
terminated for any reason prior to the loan maturity date, the loan, less
any amount that has been forgiven through the date of the termination,
plus interest, must be repaid on demand.
As of December 31, 2003 and 2002, Ladenburg has a $2,500 junior
subordinated revolving credit agreement
F-25
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
with an affiliate of its primary clearing broker that matures on October
31, 2004, under which outstanding borrowings incur interest at LIBOR plus
2%. During 2002, Ladenburg repaid a $2,500 subordinated loan that was
outstanding from the prior year.
F-26
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
14. SHAREHOLDERS' EQUITY
AUTHORIZED SHARES
At the Company's annual meeting held on November 6, 2002, the shareholders
of the Company approved an amendment to the Company's articles of
incorporation to increase the number of authorized shares of common stock
from 100,000,000 to 200,000,000.
WEIGHTED AVERAGE SHARES OUTSTANDING
In connection with the LTS acquisition, all per share data have been
retroactively restated to reflect the number of equivalent shares received
by the former stockholders of Ladenburg in the form of common stock,
convertible notes and cash. During 2003, 2002 and 2001, respectively,
options and warrants to purchase 5,653,030, 4,856,813 and 3,112,104 common
shares, and during each of these years, 11,296,747 common shares issuable
upon the conversion of notes payable, were not included in the computation
of diluted loss per share as the effect would have been anti-dilutive.
STOCK OPTION PLAN
In 1999, the Company adopted the 1999 Performance Equity Plan (the "Plan")
which, as amended, provides for the grant of stock options and stock
purchase rights to certain designated employees, officers and directors
and certain other persons performing services for the Company, as
designated by the board of directors. In 2002, shareholders approved an
amendment to the Plan at the Company's annual meeting to increase the
number of shares of common stock available for issuance under the Plan
from 5,500,000 shares to 10,000,000 shares and to increase the limit on
grants to any individual from 300,000 shares to 1,000,000 shares per
calendar year. In connection with the LTS acquisition, shareholders'
equity was increased $1,422 to recognize the value of 1,875,979 stock
options outstanding at May 7, 2001 to LTS employees, 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 life of three years; a risk-free interest rate of 4.42%; and no
expected dividend yield or forfeiture.
A summary of the status of the Plan at December 31, 2003, and changes
during the years ended December 31, 2003 and 2002 and the period ended
December 31, 2001, are presented below:
Weighted-average
Shares Exercise Price
--------- ----------------
Options outstanding, May 7, 2001 ..... 1,875,979 $3.21
Granted .............................. 1,200,000 3.05
Forfeited ............................ (168,875) 3.00
---------
Options outstanding, December 31, 2001 2,907,104 3.16
Granted .............................. 2,367,485 .73
Forfeited ............................ (617,776) 1.96
---------
Options outstanding, December 31, 2002 4,656,813 2.08
Granted .............................. 1,218,550 .44
Forfeited ............................ (422,333) 1.51
---------
Options outstanding, December 31, 2003 5,453,030 1.76
=========
Options exercisable, December 31, 2003 2,711,743 2.62
=========
F-27
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
----------------------------------- -------------------------------------
Weighted-average
Number Remaining Weighted-average Number Weighted-average
Range of Exercise Outstanding At Contractual Life Exercise Exercisable At Exercise
Prices December 31, 2003 (Years) Price December 31, 2003 Price
----------------- ----------------- ---------------- ---------------- ----------------- ----------------
$4.47 200,000 .65 $4.47 200,000 $4.47
4.06 300,000 5.65 4.06 300,000 4.06
3.05 1,200,000 7.35 3.05 866,666 3.05
3.00 472,875 5.94 3.00 472,875 3.00
2.13 75,000 7.00 2.13 70,000 2.13
2.52 110,000 7.10 2.52 110,000 2.52
.88 1,220,000 8.03 .88 406,667 .88
.60 556,605 8.22 .60 185,535 .60
.22 100,000 8.88 .22 100,000 .22
.30 80,000 9.72 .30 -- --
.45 1,138,550 9.96 .45 -- --
--------- ---------
5,453,030 7.73 1.76 2,711,743 2.62
--------- ---------
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
under the Plan 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 five new non-employee
directors of the Company ten-year options to purchase 20,000 shares of
common stock at $3.05 per share. Each option became exercisable on the
first anniversary of the date of grant.
On January 10, 2002, the Company granted non-qualified stock options to
five executives, to purchase an aggregate of 1,220,000 shares of common
stock at an exercise price of $.88 per share, the fair market value of a
share of common stock on the date of grant. These options vest in three
equal annual installments commencing on the first anniversary of the date
of grant and expire ten years from the date of grant.
On March 19, 2002, the Company granted to other employees of the Company
and its subsidiaries qualified and non-qualified options under the Plan to
purchase a total of 1,047,485 shares of common stock at a price of $.60
per share, the fair market value on the date of grant. These options vest
in three equal annual installments commencing on the first anniversary of
the date of grant and expire ten years from the date of grant.
On November 15, 2002, the Company granted to the five non-employee
directors of the Company options to purchase a total of 100,000 shares of
common stock at $.22 per share, the fair market value on the date of
grant. These options vest in one year from the date of grant and expire
ten years from the date of grant.
On September 17, 2003, the Company granted to the four non-employee
directors of the Company options to purchase a total of 80,000 shares of
common stock at $.30 per share, the fair market value on the date of
grant. These options vest in one year from the date of grant and expire
ten years from the date of grant.
On December 17, 2003, the Company granted to employees of the Company and
its subsidiaries qualified and non-qualified options under the Plan to
purchase a total of 1,138,550 shares of common stock at a price of $.45
F-28
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
per share, the fair market value on the date of grant. These options vest
in three equal annual installments commencing on the first anniversary of
the date of grant and expire ten years from the date of grant.
EMPLOYEE STOCK PURCHASE PLAN
In November 2002, the Company's shareholders approved the Ladenburg
Thalmann Financial Services Inc. Employee Stock Purchase Plan (the
"Plan"), under which a total of 5,000,000 shares of common stock are
available for issuance. Under the Plan, as currently administered by the
Company's compensation committee, all full-time employees may use a
portion of their salary to acquire shares of the Company's common stock at
a discount of up to 15% below the market price of the Company's common
stock, on the beginning or end of such option period, whichever is lower.
Option periods have been initially set at three months long and commence
on January 1, April 1, July 1, and October 1 of each year and end on March
31, June 30, September 30 and December 31 of each year. The Plan is
intended to qualify as an "employee stock purchase plan" under Section 423
of the Internal Revenue Code. The Plan became effective November 6, 2002
and the first option period commenced April 1, 2003. During 2003,
1,601,919 shares of the Company's common stock were issued to employees
under this Plan, at an average price of $.1325 per share, amounting to
$212.
15. LIQUIDITY
The Company's liquidity position continues to be adversely affected by its
inability to generate cash from operations. Accordingly, the Company has
been forced to cut expenses as necessary. In order to accomplish this, the
Company has implemented certain cost-cutting procedures throughout its
operations. During the third and fourth quarters of 2002, as well as the
first and second quarters of 2003, the Company reduced the size of its
workforce. The Company decreased its total number of employees from 658 at
June 30, 2002 to 324 at December 31, 2003. During the fourth quarter of
2002, the Company terminated the operations of Ladenburg Capital.
Ladenburg Capital filed to withdraw as a broker-dealer at that time, which
withdrawal became effective in January 2004. Ladenburg has agreed to and
is currently servicing the Ladenburg Capital accounts, and many of the
Ladenburg Capital employees were offered and have accepted employment with
Ladenburg. This further reduced support staff expenses, operating expenses
and general administrative expenses.
The Company filed a registration statement in May 2002 for a proposed
$10,000 rights offering to the holders of the Company's outstanding common
stock, convertible notes, warrants and options in order to raise
additional necessary working capital. New Valley agreed to purchase up to
$5,000 of the Company's common stock in the proposed rights offering if
such shares were otherwise unsubscribed for. However, on August 6, 2002,
the Company announced that it had decided to postpone the rights offering
due to market conditions. The Company intends to review the situation in
the future to determine if conditions for the offering have improved,
although the Company does not currently anticipate that the rights
offering can be successfully completed absent a material improvement in
market conditions and a significant increase in the Company's stock price.
In the circumstance where the rights offering were ultimately consummated,
the Company would be required to use the proceeds of the proposed rights
offering to repay the 2002 Loans as well as all accumulated Forbearance
Interest Payments, to the extent possible.
The Company's overall capital and funding needs are continually reviewed
to ensure that its liquidity and 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 Company's
subsidiaries. If, based on these reviews, it is determined that the
Company requires additional funds to support its liquidity and capital
base, the Company would seek to raise additional capital through other
available sources, including through borrowing additional funds on a
short-term basis from the Company's significant shareholders or from other
parties, including the Company's clearing brokers, although there can be
no assurance such funding would be available. Additionally, the Company
may attempt to raise funds through a rights offering or other type of
financing. If the Company continues to be unable to generate cash from
operations and is unable to find alternative sources of funding as
described above, it would have an adverse impact on the Company's
liquidity and operations.
In November 2003, the Company received notice from the AMEX staff
indicating that the Company was below certain of the continued listing
standards of the AMEX, specifically that the Company had sustained losses
in two of its three most recent fiscal years with shareholders' equity of
less than $2 million, as set forth in Section 1003(a)(i) of the AMEX
Company Guide. The Company was afforded an opportunity to submit its plan
to regain compliance with the continued listing standards to the AMEX and
did so in December 2003. Upon acceptance of the plan, AMEX provided the
Company with the extension until May 13, 2005 to regain compliance with
the continued listing standards, and will allow the Company to maintain
its AMEX listing through the plan period, subject to periodic review of
the Company's progress by the AMEX staff. If the Company does not make
progress consistent with the plan or regain compliance with the continued
listing standards by the end of the extension period, the AMEX staff could
initiate delisting procedures.
16. RELATED PARTY TRANSACTIONS
Following the May 2001 acquisition of Ladenburg by LTS, certain officers
and directors of New Valley became affiliated with the Company. Various
directors of New Valley serve as directors of the Company, including
Victor M. Rivas, LTS's President and Chief Executive Officer. An executive
officer of New Valley served as Chief Financial Officer of LTS from June
2001 through September 2002. In 2002, the Company accrued compensation for
this executive officer in the amount of $100, which was paid in four
quarterly installments commencing April 1, 2003. See Note 14 regarding
options granted to the non-employee directors of LTS and to Mr. Rivas in
May 2001 and subsequently in 2002. For a more complete discussion of the
acquisition of Ladenburg, see Note 3.
In connection with the acquisition of Ladenburg, New Valley and
Frost-Nevada acquired LTS's senior convertible notes. In August 2001, New
Valley and Frost-Nevada each loaned the Company $1,000, which loans were
repaid in January 2002. During 2002, New Valley loaned the Company an
additional $7,000 of which $2,000 was repaid. (See Note 13.)
During 2001, New Valley paid a fee of $750 to the President of Ladenburg,
who serves as President and Chief Executive Officer of LTS. The fee was
paid for his services in connection with the closing of the acquisition of
Ladenburg by LTS. One-half of the fee was reimbursed by Ladenburg to the
former parent.
Howard Lorber, the Company's chairman of the board, is chairman of the
board of directors of Hallman & Lorber Associates, Inc., a private
consulting and actuarial firm, and related entities, which receive
commissions from insurance policies written for the Company. These
commissions amounted to approximately $48 and $106 in 2003 and 2002,
respectively.
Several members of the immediate families of LTS's executive officers and
directors are employed as registered representatives of Ladenburg (and may
have been previously employed by Ladenburg Capital Management) or hedge
fund managers of the Ladenburg Focus Fund LP. As such, they receive a
percentage of commissions generated from customer accounts for which they
are designated account representatives, and are eligible to receive
bonuses or other compensation at the discretion of management. Oscar
Sonkin, the father-in-law of Richard J. Rosenstock, received $13, $72 and
$104 of compensation in 2003, 2002 and 2001, respectively. Richard Sonkin,
the brother-in-law of Richard J. Rosenstock, received $248, $216 and $150
of compensation in 2003, 2002 and 2001, respectively. Steven Zeitchick,
the brother of Mark Zeitchick, received $329, $182 and $136 of
compensation during 2003, 2002 and 2001, respectively.
F-29
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in thousands, except per share amounts)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarters
------------------------------------------------------------------------------
1st 2nd 3rd 4th
------------ ------------ ------------ ------------
2003:
Revenues .............................. $ 11,906 $ 19,073 $ 15,160 $ 15,258
Expenses .............................. 14,929 19,799 17,641 14,296
------------ ------------ ------------ ------------
(Loss) income before income taxes and
minority interest .............. (3,023) (762)(b) (2,481) 962(c)
Net (loss) income ..................... $ (3,069) $ (762)(b) $ (2,521) $ 862(c)
Loss (income) per common share(d)
Basic.................................... $ (0.07) $ (0.02)(b) $ (0.06) $ 0.02(c)
Diluted.................................. $ (0.07) $ (0.02)(b) $ (0.06) $ 0.02(c)
Weighted average common shares
Basic.................................... 42,025,211 42,034,378 42,864,506 43,329,505
Diluted.................................. 42,025,211 42,034,378 42,864,506 43,414,089
2002:
Revenues .............................. $ 25,615 $ 20,413 $ 15,977 $ 17,568
Expenses .............................. 29,802 46,081(a) 23,726 25,416
------------ ------------ ------------ ------------
Loss before income taxes ............ (4,187) (25,668)(a) (7,749) (7,848)
Net loss .............................. $ (3,532) $ (25,452)(a) $ (10,014) $ (7,395)
Basic and diluted:
Loss per Common Share (d) ............... $ (0.08) $ (0.61)(a) $ (0.24) $ (0.18)
Basic and diluted weighted average
Common Shares ........................... 42,025,211 42,025,211 42,025,211 42,025,211
- -----------------
(a) Includes impairment charge for goodwill of $18,762 ($0.45 per common
share) (see Note 4).
(b) Includes $779 charge ($0.02 per common share) for write-off of
leasehold improvements (see Note 9 - Operating Leases.)
(c) Includes $1,175 ($0.03 per common share) of income relating to
adjustment of a liability in connection with settlement of litigation
(see Note 9 - Operating Leases), and $1,500 ($0.03 per common share)
of income on forgiveness of note payable (see Note 13).
(d) The sum of the quarterly loss per share may not equal the loss per
share for the year, because the per share data for each quarter and
for the year are independently computed.
F-30