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, 2005
Commission File Number 1-15799
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Exact Name Of Registrant As Specified In Its Charter)
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Florida
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65-0701248 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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153 East 53rd Street, 49th Floor |
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New York, New York
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10022 |
(Address of principal executive offices)
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(Zip Code) |
(212) 409-2000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on |
Title of each class |
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which registered |
Common Stock, par value $.0001 per share
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American Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act.
Yes o No x
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 o
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 Registrants 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. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes o No x
As of June 30, 2005 (the last business day of the Registrants most recently completed second
fiscal quarter), the aggregate market value of the Registrants Common Stock (based on the closing
price on the American Stock Exchange on that date) held by non-affiliates of the Registrant was
approximately $32,000,000.
As
of March 31, 2006, there were 141,590,529 shares of the Registrants Common Stock
outstanding.
LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K
T A B L E O F C O N T E N T S
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PART I
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Item 1.
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Business
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2 |
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Item 1A.
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Risk Factors
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Item 1B.
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Unresolved Staff Comments
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Item 2.
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Properties
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Item 3.
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Legal Proceedings
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Item 4.
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Submission of Matters to a Vote of Security Holders
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PART II
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Item 5.
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Market for Registrants Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities
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Item 6.
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Selected Financial Data
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Item 7.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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Item 8.
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Financial Statements and Supplementary Data
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Item 9.
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Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
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Item 9A.
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Controls and Procedures
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Item 9B.
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Other Information
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PART III
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Item 10.
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Directors and Executive Officers of the Registrant
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Item 11.
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Executive Compensation
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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Item 13.
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Certain Relationships and Related Transactions
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Item 14.
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Principal Accountant Fees and Services
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules
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SIGNATURES
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Stock Option Agreement Amendment |
List of Subsidiaries |
Consent of Eisner LLP |
Section 302 CEO Certification |
Section 302 CFO Certification |
Section 906 CEO Certification |
Section 906 CFO Certification |
1
PART I
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 approximately 85 registered
representatives and 75 other full time employees. Its private client services and institutional
sales departments serve approximately 80,000 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 153 East 53rd Street, 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, Los Angeles, California, New York, New York and Lincolnshire, Illinois. Ladenburg
maintains a website located at www.ladenburg.com.
Recent Developments
Private Equity Offering
On November 30, 2005, we completed a private equity offering and received gross proceeds of
approximately $6,221,000 (representing 13,824,331 shares at $0.45 per share) from various
investors unrelated to us. We also received binding subscriptions for aggregate gross proceeds of
approximately $3,779,000 (representing 8,397,891 shares at $0.45 per share) from certain
affiliates of ours and persons with direct or indirect relationships to us. The issuance of the
shares to be sold to certain of our affiliates and persons with direct or indirect relationships
to us is subject to shareholder approval which is anticipated to be obtained at a special meeting
of shareholders to be held on April 3, 2006. The funds received and to be received from the
private equity offering will be used for general corporate purposes.
The capital raised in this private equity offering is in addition to the approximately
$4,937,000 (representing 10,971,666 shares) that was raised by us during 2005 from newly hired
employees and the $10,000,000 (representing 22,222,222 shares) invested by two of our principal
shareholders in March
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2005. The investment by the two principal shareholders was made in connection with the conversion
of $18,010,000 principal amount of convertible debt into our common stock.
Relocation of Offices
In December 2005, we entered into an agreement to sublet the remaining floor of our New York
City office that we were occupying, commencing March 15, 2006 and for a term through the end of our
lease period. Accordingly, the remaining leasehold improvements were written-off. In conjunction
with the write-off of leasehold improvements, a portion of the unamortized deferred rent credit
representing reimbursement from the landlord of such leasehold improvements was also written-off in
2005. The write-off of unamortized leasehold improvements of $1,326,000, net of the write-off of
$1,264,000 of the $2,093,000 of unamortized deferred rent credit, resulted in a net charge of
$62,000, which was recorded in our statement of operations in 2005. The $829,000 balance of the
unamortized deferred rent credit was equivalent to the fair value of the Companys obligation with
respect to the lease.
In February 2006, we entered into an office sublease for our current location, 153 East
53rd Street, 49th floor, in New York City, with a term expiring on July 30,
2008. This new office space is for approximately 11,000 rentable square feet compared to the
previous location, which was approximately 25,000 rentable square feet. We determined to reduce
the size of our offices to cut unnecessary operating costs and to better suit our current
operations. The decrease in the amount of space and the lower rent per square foot will reduce the
future costs for our New York City office space by approximately $1,100,000 annually.
In August 2005, we entered into an office lease for our current location in Boca Raton,
Florida, which occupancy commenced in February 2006 when we relocated from our previous Boca Raton
office. This new office space is for approximately 3,800 rentable square feet compared to the
previous location which was approximately 7,600 rentable square feet. The decrease in the amount
of space and the lower rent per square foot will reduce the future costs for our Boca Raton office
space by approximately $92,000 annually.
Settlement with Ladenburg Capitals New York City Landlord
In February 2006, our subsidiary, Ladenburg Capital Management Inc. (Ladenburg Capital),
entered into a settlement agreement with the landlord for its office space in New York City which
Ladenburg Capital was forced to vacate during 2001 due to the events of September 11, 2001. The
terms of the settlement with the landlord (who had filed for bankruptcy reorganization) provided
for us to pay the landlord $1,900,000 and were approved by the bankruptcy court in March 2006. The
settlement agreement provides for the termination of all Ladenburg Capitals liabilities under the
lease in exchange for $1,900,000 in cash and the surrender by the landlord of Ladenburg Capitals
letter of credit of approximately $650,000. In February 2006, Ladenburg Capital deposited
$1,250,000 into escrow and the landlord relinquished the letter of credit. Ladenburg Capital will
liquidate the assets securing the letter of credit and deposit the remaining $650,000 into escrow.
The 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, provided for future minimum payments aggregating approximately
$2,988,000, payable $703,000 per year from 2006 through 2009 and $176,000 in 2010. The liability
provided at December 31, 2004 was increased by $240,000 with a corresponding increase in rent
expense for the year ended December 31, 2005 to reflect the settlement agreement.
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Retail Business
A significant percentage of our revenues during the last several years have been generated from the
retail business of Ladenburg (51.3% in 2005, 82.0% in 2004 and 77.0% in 2003). Ladenburgs private
client services and institutional sales departments currently serve approximately a total of 80,000
accounts nationwide. Ladenburg charges commissions to our individual and institutional clients for
executing buy and sell orders of securities on national and regional exchanges. In addition to
traditional commission-based accounts, Ladenburg offers a non-discretionary, fee in lieu of
commission program that allows the client to trade their portfolio under an all inclusive wrap fee.
Investment Banking Activities
Investment banking fees generated from the investment banking activities of Ladenburg
represent 14.6%, 4.3%, and 4.9% our total revenues in 2005, 2004 and 2003, respectively. Our
investment banking professionals maintain relationships with businesses, private equity firms,
other financial institutions as well as high net worth individuals. Our bankers provide them with
extensive corporate finance and investment banking services. These services include but are not
limited to:
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underwriting of public equity offerings; |
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merger, acquisition, and divestiture advisory services; |
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corporate restructuring services |
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placement of private debt and equity offerings; |
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rendering fairness opinions financial valuations; and |
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providing general investment banking and corporate finance consulting services. |
In the investment banking area, our subsidiaries have been active as lead and co-managing
underwriters, general underwriters and/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 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 Ladenburgs 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.
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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 Thalmann Asset Management
Ladenburg provides its customers with a broad range of wealth management services in order to
help them manage their financial investments. Its subsidiary, Ladenburg Thalmann Asset Management
Inc. (LTAM), a registered investment adviser, provides clients with discretionary portfolio
management and financial planning, access to money managers and investment funds.
Wealth Management
LTAM offers investment management and planning services primarily to high net-worth
individuals and corporations. A review is performed for each client that entails focusing on the
clients tolerance for risk, capital growth expectations, and current financial position and income
requirements. The review also analyzes whether the client may benefit from, among other services,
income tax planning, estate and gift tax planning, comprehensive retirement planning and cash flow
analysis.
Alternative Investments
LTAM provides high net worth clients and institutional investors the opportunity to invest in
proprietary and third party alternative investments. These include, but are not limited to, hedge
funds, funds of funds, private equity, venture capital and real estate. Ladenburg Thalmann also
employs professional fund raisers for these products to solicit such clients as state pension
funds, universities, foundations, endowments, family offices and high net worth individuals.
Ladenburg Asset Management Program
LTAM offers its customers, the Ladenburg Asset Management Program (LAMP), to assist them in
achieving their desired investment objectives through centralized management of mutual fund and
exchange-traded fund portfolios based on asset allocation models. Features of the program include
active rebalancing at the asset class and security level, minimum account balance, risk analysis,
customized investment policy statements and comprehensive performance reporting.
Private Investment Management
LTAM offers a few specialized programs to access professional money managers. The Private
Investment Management (PIM) program allows internal managers to provide portfolio services to
clients on a discretionary basis with specific styles of investing for an annual asset-based fee.
The Private Investment Management Program Accredited (PIMA) is offered for accredited investors.
The internal
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PIMA managers manage certain accounts using the same investment strategy used to manage LTAMs
private funds and other investment strategies involving short-selling and use of leverage. In
addition to the annual asset-based fee, certain customers are also charged an incentive fee, if
earned, at the end of each calendar year.
LTAMs Investor Consulting Services (ICS) is designed to provide clients with access to
proven independent managers usually only available to large institutions, across the spectrum of
major asset classes. LTAM performs due diligence on the managers to ensure that, by maintaining
them as a recommended manager, they may represent a suitable solution for the investor.
Retirement Plan Sponsor Services
LTAM provides investment consulting services to sponsors of certain retirement plans, such as
401(k) plans. These services include: identifying mutual funds for the plan sponsors review and
final selection based on the selection criteria stated in the plans investment policy statement;
assisting in the planning and coordination of and participating in enrollment and communication
meetings; providing the plan sponsor a written mutual-fund-by-mutual-fund quarterly performance
report for the purpose of meeting the plan fiduciarys obligation to monitor plan assets. Certain
plan participants may also engage LTAM to manage their plan assets on a discretionary basis.
Research Services
Our research department focuses on investigating investment opportunities by utilizing
fundamental, technical and quantitative methods to conduct in-depth analysis. Our research
department:
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reviews and analyzes general market conditions and other industry groups; |
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issues written reports on companies, with recommendations on specific
actions to buy, sell or hold; |
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furnishes information to retail and institutional customers; and |
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responds to inquires from customers and account executives. |
Additionally, our research analysts interface regularly with industry leaders and portfolio
managers in order to produce actionable evaluations and decisions. These recommendations are
communicated to clients and the firm via company and industry reports.
Administration, Operations, Securities Transactions Processing and Customer Accounts
Ladenburg does not hold 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
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maintains customer accounts on a fee basis. Customer accounts are protected through the SIPC
for up to $500,000, of which coverage for cash balances is limited to $100,000. In addition, all
customer accounts are fully protected by an excess securities bond, Excess SIPC, issued by
Customer Asset Protection Company, providing protection for the accounts 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 Ladenburgs brokerage
activities. It provides these services to Ladenburgs 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 Ladenburgs 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 $3,500,000 (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, $1,500,000, $667,000 and $667,000 of the Clearing Loans and related accrued interest
were forgiven in November 2003, 2004 and 2005, respectively. The remaining $666,000 principal
balance on the Clearing Loans and remaining accrued interest is scheduled to be forgiven in
November 2006. However, if the clearing agreement is terminated 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
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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, Ltd., a wholly-owned subsidiary of Ladenburg, is an authorized
securities broker regulated by the Financial Services Authority of the United Kingdom and, through
the European Communitys 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:
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sales methods and supervision; |
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trading practices among broker-dealers; |
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use and safekeeping of customers funds and securities; |
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capital structure of securities firms; |
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record keeping; and |
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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.
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Net Capital Requirements
As a registered broker-dealer and member of the NYSE, Ladenburg is subject to the SECs 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-dealers position in securities, be valued in a conservative manner so as
to avoid over-inflation of the broker-dealers 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 $250,000. 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, 2005, Ladenburg had regulatory net capital of $2,932,000 which exceeded its
minimum net capital requirement of $250,000 by $2,682,000. 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 Ladenburgs 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, 2005, we had a total of approximately 162 employees, of which 84 are
registered representatives and 78 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.
ITEM 1A. RISK FACTORS.
You should carefully consider all of the material risks described below regarding our company.
Our business, financial condition or results of operation could be materially adversely affected by
any of these risks.
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We have incurred, and may continue to incur, significant operating losses.
We incurred significant losses from operations during each of the past five 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. Although we believe that we have enough regulatory capital to sustain operating
activities through December 31, 2006, 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 operations.
If we are unable to repay our outstanding indebtedness obligations when due, our operations may be
materially adversely affected.
Currently, we have an aggregate of approximately $5,700,000 of indebtedness, of which
$5,000,000 owed to our former parent is due on December 31, 2006 and approximately $666,000 from
our clearing broker is scheduled to be forgiven in November 2006. 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. We cannot assure you that our operations will generate funds sufficient to repay these or
other future 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 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. The regulatory environment is also subject to change and 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.
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:
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sales methods and supervision; |
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trading practices among broker-dealers; |
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use and safekeeping of customers funds and securities; |
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capital structure of securities firms; |
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record keeping; and |
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the conduct of directors, officers and employees. |
10
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. 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.
If we are found to have violated an applicable regulation, administrative or judicial
proceedings may be initiated against us that may result in:
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censure; |
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fine; |
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civil penalties, including treble damages in the case of insider trading violations; |
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the issuance of cease-and-desist orders; |
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the deregistration or suspension of our broker-dealer activities; |
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the suspension or disqualification of our officers or employees; or |
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other adverse consequences. |
The imposition of any of these or other penalties could have a material adverse effect on our
operating results and financial condition.
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
11
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 and equity offerings 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 shareholders and clearing
broker. As of December 31, 2005, we had cash and cash equivalents of approximately $10,936,000.
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.
We may
be prohibited from underwriting securities due to capital limits.
From time to time, our underwriting activities may require that we temporarily receive an
infusion of capital for regulatory purposes. This is predicated on the amount of commitment
Ladenburg makes for each underwriting. In the past, we borrowed such funds from our current
shareholders or clearing firm. Should we no longer be able to receive such funding from these
sources, and if there are no other viable sources available, it would have an adverse impact on our
ability to generate profits, recruit financial consultants and retain existing customers.
Our expenses may increase due to unresolved real estate commitments.
We have ceased using our Madison Avenue (New York City) office space and have subleased the
entire premises to various sub-tenants. Should any of the sub-tenants not renew or renew for a
sub-rental less than Ladenburgs lease commitments, or not pay their rent for an extended period of
time, it may have a material adverse effect on Ladenburgs financial position and liquidity.
Our business could be adversely affected by a downturn 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 downturn 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.
In prior 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
12
directly related to the number and size of the transactions in which we participate and
therefore may be adversely affected by any downturn in the securities markets. Additionally,
downturn in market conditions may lead to a decline in the volume of transactions that we are able
to execute for our customers and, therefore, to a decline in the revenues that we would otherwise
receive from commissions and spreads. Should these adverse financial and economic conditions
appear and persist for any extended period of time, we will incur a 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.
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 49.3% 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. 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 $2,000,000 and
$4,000,000) 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.
13
On
March 27, 2006, the last reported sale price of our common stock
was $0.95. 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:
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a limited availability of market quotations for our common stock; |
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|
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; |
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|
a limited amount of news and analyst coverage for our company; and |
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a decreased ability to issue additional securities or obtain additional
financing in the future. |
We may lose customers and our revenues may decline due to our lack of online trading service
capability.
A growing number of brokerage firms offer online trading services to their customers in
response to increased customer demand for these services. Currently, we are unable to offer online
trading services, nor do we anticipate having such ability in the near future. Should we offer
such services in the future, the services may not appeal to our current or prospective customers
and these services may not be profitable. Our failure to commence online trading 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 online trading
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 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 $3,500,000, with various terms and maturing at
various dates through December 2006. As scheduled, $1,500,000, $667,000 and $667,000 of the
Clearing Loans were forgiven in November 2003, 2004 and 2005, respectively. The $666,000 remaining
principal balance of the Clearing Loans and related accrued
14
interest is scheduled to be forgiven 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. 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
$37,000 and $125,000 for the years ended December 31, 2005 and 2004, respectively.
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:
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the volatility of domestic and international financial, bond and stock markets; |
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extensive governmental regulation; |
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litigation; |
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intense competition; |
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substantial fluctuations in the volume and price level of securities; and |
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|
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
15
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.
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:
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trading counterparties; |
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|
customers; |
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|
clearing agents; |
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exchanges; |
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|
clearing houses; and |
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|
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:
16
|
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|
holding securities of third parties; |
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|
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 |
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|
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:
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|
|
employees binding us to transactions that exceed authorized limits or
present unacceptable risks to us; |
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|
employees hiding unauthorized or unsuccessful activities from us; or |
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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.
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 SECs 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
17
this method, Ladenburg is required to maintain net capital equal to $250,000. At December 31,
2005, Ladenburg had regulatory net capital of $2,932,000, which exceeded its minimum net capital
requirement by $2,682,000. 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-dealers position in securities, be
valued in a conservative manner so as to avoid over-inflation of the broker-dealers 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 firms 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.
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
18
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 141,590,529 shares of common stock (or 149,988,420 shares
if our private placement to certain affiliates of ours and persons with direct and indirect
relationships to us is approved by our shareholders on April 3, 2006), options to purchase a total
of 22,637,770 shares of common stock and warrants to purchase a total of 200,000 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. At the April 3, 2006 special shareholders meeting, our shareholders will also be asked
to approve an increase in the number of authorized shares of our common stock from 200,000,000 to
400,000,000. If we issue additional shares, or if our existing shareholders exercise their
outstanding options, 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 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Our principal executive offices and those of Ladenburg and other subsidiaries of ours are
located at 153 East 53rd Street, 49th Floor, New York, New York 10022, where we lease
approximately 11,000 square feet of office space pursuant to a lease that expires in July 2008.
Our previous New York City office located at 590 Madison Avenue representing approximately 90,000
rentable square feet of office space has been subleased to various non-related parties at various
terms and lease periods. The lease, which we are still obligated under as the main lessor, expires
in June 2015. We also operate several branch offices located in New York, Florida, Illinois and
California. In June 2005, we closed our office in Irvine, California.
In February 2006, Ladenburg Capital entered into a settlement agreement with the landlord for
its office space in New York City which Ladenburg Capital was forced to vacate during 2001 due to
the events of September 11, 2001. The terms of the settlement with the landlord (who had filed for
bankruptcy reorganization) provided for us to pay the landlord $1,900,000 and were approved by the
bankruptcy court in March 2006. The settlement agreement provides for the termination of all
Ladenburg Capitals liabilities under the lease in exchange for $1,900,000 in cash and the
surrender by the landlord of
19
Ladenburg Capitals letter of credit of approximately $650,000. In February 2006, Ladenburg
Capital deposited $1,250,000 into escrow and the landlord relinquished the letter of credit.
Ladenburg Capital will liquidate the assets securing the letter of credit and deposit the remaining
$650,000 into escrow. The 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, provided for future minimum
payments aggregating approximately $2,988,000, payable $703,000 per year from 2006 through 2009 and
$176,000 in 2010. The liability provided at December 31, 2004 was increased by $240,000 with a
corresponding increase in rent expense for the year ended December 31, 2005 to reflect the
settlement agreement.
ITEM 3. LEGAL PROCEEDINGS.
See Note 7 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
20
PART II
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ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES. |
Our common stock trades on the Exchange under the symbol LTS. The following table sets
forth the high and low prices of the common stock for the periods specified.
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High($) |
|
Low($) |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
|
0.63 |
|
|
|
0.42 |
|
|
|
Third Quarter |
|
|
0.66 |
|
|
|
0.45 |
|
|
|
Second Quarter |
|
|
0.79 |
|
|
|
0.52 |
|
|
|
First Quarter |
|
|
0.99 |
|
|
|
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
|
0.62 |
|
|
|
0.35 |
|
|
|
Third Quarter |
|
|
0.85 |
|
|
|
0.39 |
|
|
|
Second Quarter |
|
|
1.70 |
|
|
|
0.68 |
|
|
|
First Quarter |
|
|
1.10 |
|
|
|
0.50 |
|
Holders
On
March 27, 2006, there were approximately 19,400 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 subsidiarys 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
We did not effect the sale of any unregistered securities during the fourth quarter of 2005.
Issuer Purchases of Equity Securities
No securities of ours were repurchased by us or our affiliated purchasers during the fourth
quarter of 2005.
21
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
Managements 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:
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Year Ended December 31, |
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|
(in thousands, except per share amounts) |
Operating Results:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
30,690 |
|
|
$ |
38,441 |
|
|
$ |
57,420 |
|
|
$ |
76,801 |
|
|
$ |
93,953 |
|
Total expenses |
|
|
56,607 |
|
|
|
48,354 |
|
|
|
62,618 |
|
|
|
121,668 |
|
|
|
106,202 |
|
Loss from continuing operations
before income taxes |
|
|
(25,917 |
)(c) |
|
|
(9,913 |
) |
|
|
(5,198 |
) |
|
|
(44,867 |
)(d) |
|
|
(12,249 |
) |
Net loss |
|
|
(25,971 |
)(c) |
|
|
(9,854 |
) |
|
|
(5,490 |
) |
|
|
(46,393 |
)(d) |
|
|
(12,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common
and equivalent
share(b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per Common Share |
|
$ |
(0.24 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.13 |
) |
|
$ |
(1.10 |
) |
|
$ |
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
Common Shares |
|
|
108,948,623 |
|
|
|
45,144,481 |
|
|
|
42,567,798 |
|
|
|
42,025,211 |
|
|
|
39,458,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
39,299 |
|
|
$ |
21,631 |
|
|
$ |
44,644 |
|
|
$ |
48,829 |
|
|
$ |
98,407 |
|
Total liabilities, excluding
subordinated liabilities |
|
|
26,332 |
|
|
|
27,657 |
|
|
|
35,180 |
|
|
|
32,620 |
|
|
|
40,713 |
|
Subordinated debt |
|
|
|
|
|
|
18,010 |
|
|
|
22,500 |
|
|
|
22,500 |
|
|
|
22,500 |
|
Limited partners interest in
discontinued operations |
|
|
|
|
|
|
|
|
|
|
3,136 |
|
|
|
4,603 |
|
|
|
|
|
Shareholders equity (capital
deficit) |
|
|
12,967 |
|
|
|
(24,036 |
) |
|
|
(16,172 |
) |
|
|
(10,894 |
) |
|
|
35,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share (b) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average registered representatives |
|
|
97 |
|
|
|
145 |
|
|
|
196 |
|
|
|
399 |
|
|
|
540 |
|
|
|
|
(a) |
|
The financial data prior to May 7, 2001 reflects Ladenburgs 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. |
|
(c) |
|
Includes a $19,359 charge in connection with debt conversion. |
|
(d) |
|
Includes an $18,762 charge for impairment of goodwill. |
22
|
|
|
ITEM 7. |
|
MANAGEMENTS 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,
asset management 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
approximately 85 registered representatives and 75 other full time employees. Its private client
services and institutional sales departments serve approximately 80,000 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 Asset Management Inc.
Ladenburg Capital Fund Management (LCFM) was 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. Effective December 31, 2004, we sold LCFM to an entity
owned by three of our directors for $5. Accordingly, LCFM and the limited partnership are
presented as discontinued operations in our 2004 and 2005 consolidated statements of operations.
Recent Developments
Private Equity Offering
On November 30, 2005, we completed a private equity offering and received gross proceeds of
approximately $6,221 (representing 13,824,331 shares at $0.45 per share) from various investors
unrelated to us. We also received binding subscriptions for aggregate gross proceeds of
approximately $3,779 (representing 8,397,891 shares at $0.45 per share) from certain affiliates of
ours and persons with direct or indirect relationships to us. The issuance of the shares to be
sold to certain of our affiliates and persons with direct or indirect relationships to us is
subject to shareholder approval which is anticipated to be
obtained at a special meeting of shareholders to be held on April 3, 2006. The funds received and
to be received from the private equity offering will be used for general corporate purposes.
23
The capital raised in this private equity offering is in addition to the approximately $4,937
(representing 10,971,666 shares) that was raised by us during 2005 from newly hired employees and
the $10,000 (representing 22,222,222 shares) invested by two of our principal shareholders in
March 2005. The investment by the two principal shareholders was made in connection with the
conversion of $18,010 principal amount of convertible debt into our common stock.
Relocation of Offices
In December 2005, we entered into an agreement to sublet the remaining floor of our New York
City office that we were occupying, commencing March 15, 2006 and for a term through the end of our
lease period. Accordingly, the remaining leasehold improvements were written-off. In conjunction
with the write-off of leasehold improvements, a portion of the unamortized deferred rent credit
representing reimbursement from the landlord of such leasehold improvements was also written-off in
2005. The write-off of unamortized leasehold improvements of $1,326, net of the write-off of
$1,264 of the $2,093 of unamortized deferred rent credit, resulted in a net charge of $62, which
was recorded in our statement of operations in 2005. The $829 balance of the unamortized deferred
rent credit was equivalent to the fair value of the Companys obligation with respect to the lease.
In February 2006, we entered into an office sublease for our current location, 153 East
53rd Street, 49th floor, in New York City, with a term expiring on July 30,
2008. This new office space is for approximately 11,000 rentable square feet compared to the
previous location, which was approximately 25,000 rentable square feet. We determined to reduce
the size of our offices to cut unnecessary operating costs and to better suit our current
operations. The decrease in the amount of space and the lower rent per square foot will reduce the
future costs for our New York City office space by approximately $1,100 annually.
In August 2005, we entered into an office lease for our current location in Boca Raton,
Florida, which occupancy commenced in February 2006 when we relocated from our previous Boca Raton
office. This new office space is for approximately 3,800 rentable square feet compared to the
previous location which was approximately 7,600 rentable square feet. The decrease in the amount
of space and the lower rent per square foot will reduce the future costs for our Boca Raton office
space by approximately $92 annually.
Settlement with Ladenburg Capitals New York City Landlord
In February 2006, Ladenburg Capital entered into a settlement agreement with the landlord for
its office space in New York City which Ladenburg Capital was forced to vacate during 2001 due to
the events of September 11, 2001. The terms of the settlement with the landlord (who had filed for
bankruptcy reorganization) provided for us to pay the landlord $1,900 and were approved by the
bankruptcy court in March 2006. The settlement agreement provides for the termination of all
Ladenburg Capitals liabilities under the lease in exchange for $1,900 in cash and the surrender by
the landlord of Ladenburg Capitals letter of credit of approximately $650. In February 2006,
Ladenburg Capital deposited $1,250 into escrow and the landlord relinquished the letter of credit.
Ladenburg Capital will liquidate the assets securing the
24
letter of credit and deposit the remaining $650 into escrow. The 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, provided for future minimum payments aggregating approximately $2,988, payable $703 per
year from 2006 through 2009 and $176 in 2010. The liability provided at December 31, 2004 was
increased by $240 with a corresponding increase in rent expense for the year ended December 31,
2005 to reflect the settlement agreement.
Other Financing Activities
In December 2005, Ladenburg received a $15,000 temporary cash subordination from one of our
directors, Dr. Phillip Frost, to provide additional regulatory capital required for an underwriting
participation. Upon completion of the underwriting during the same month, the $15,000 was repaid
with interest at a fixed amount of $300.
Conversion of New York Stock Exchange Membership
On March 7, 2006, the NYSE merged with Archipelago Holdings, Inc. and formed NYSE Group, Inc.,
a publicly traded securities exchange. Ladenburg elected to continue being a member the NYSE. In
exchange for its NYSE membership seat, Ladenburg will receive $300 in cash, 80,177 shares of NYSE
Group, Inc. common stock and a dividend of approximately $70. The shares of NYSE Group, Inc.
common stock are subject to a lock-up period during which the shares may not be directly or
indirectly assigned, sold, transferred, pledged, hypothecated or otherwise disposed. The lock-up
period will expire in equal installments on the first, second and third anniversaries of the date
of the merger. The NYSE Group board of directors has the right to
shorten the lock-up period with respect to all or a portion of the shares subject to the lock-up.
As of December 31, 2005, Ladenburgs NYSE membership was reflected on our consolidated statement of
financial condition at $868 which represents its cost basis. We will record a gain on the exchange in the
first quarter of 2006.
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 Ladenburgs 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 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
25
arrangements, prior to any recoupment from our financial consultants, of $37 and $125 for the
years ended December 31, 2005 and 2004, respectively.
Customer Claims, Litigation and Regulatory Matters. 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 $1,958 and
$3,826 for potential arbitration and lawsuit losses as of December 31, 2005 and 2004, 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 Ladenburgs mid-town New York headquarters. Some of Ladenburgs and
Ladenburg Capitals 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. In
September 2005, Ladenburg and Ladenburg Capital settled their claim with the insurance carrier for
a total of $2,350. The excess of the insurance reimbursement over the $2,118 receivable previously
reflected in other assets, amounted to $232, which is included in other income in our statement of
operations. In addition, the insurance carrier agreed to reimburse Ladenburg Capital up to one third of
any payment Ladenburg Capital makes to its New York City landlord in settling its obligation
relating to the vacated premises, limited to $150.
In February 2006, Ladenburg Capital entered into a settlement agreement with the landlord for
its office space in New York City which Ladenburg Capital was forced to vacate during 2001 due to
the events of September 11, 2001. The terms of the settlement with the landlord (who had filed for
bankruptcy reorganization) provided for us to pay the landlord $1,900 and were approved by the
bankruptcy court in March 2006. The settlement agreement provides for the termination of all
Ladenburg Capitals liabilities under the lease in exchange for $1,900 in cash and the surrender by
the landlord of Ladenburg Capitals letter of credit of approximately $650. In February 2006,
Ladenburg Capital deposited $1,250 into escrow and the landlord relinquished the letter of credit.
Ladenburg Capital will liquidate the assets securing the letter of credit and deposit the remaining
$650 into escrow. The 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, provided for future minimum payments
aggregating approximately $2,988, payable $703 per year from 2006 through 2009 and $176 in 2010.
The liability provided at December 31, 2004 was increased by $240 with a corresponding increase in
rent expense for the year ended December 31, 2005 to reflect the settlement agreement.
Exit or Disposal Activities. 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
26
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.
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 September 2004, Ladenburg subleased this floor for the remaining
term of its lease. The fair value of Ladenburgs obligation with respect to the lease was
approximately $1,500 at inception of the sublease and approximated the balance of our deferred rent
liability relating to such space. Accordingly, no charge to operations was required in connection
with the sublease at the time of sublet. The obligation with respect to this lease was re-measured
as at December 31, 2005 due to changes in the timing and amount of estimated cash flows, resulting
in a credit to operations in the amount of $122.
In the third quarter of 2004, Ladenburg ceased using a portion of another floor of its New
York City office. Accordingly, the related leasehold improvements were 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 in the third quarter of 2004. The write-off of leasehold improvements, net of
accumulated amortization ($1,275) and the write-off of the unamortized deferred rent credit ($729)
resulted in a net charge to operations of $546. In November 2004, Ladenburg subleased the space
through June 30, 2009, for a sub-rental equal to its lease commitment with the landlord, through
the sublease period.
In December 2005, we entered into an agreement to sublet the remaining floor of our New York
City office that we were occupying, commencing March 15, 2006 and for a term through the end of our
lease period. Accordingly, the remaining leasehold improvements were written-off. In conjunction
with the write-off of leasehold improvements, a portion of the unamortized deferred rent credit
representing reimbursement from the landlord of such leasehold improvements was also written-off in
2005. The write-off of unamortized leasehold improvements of $1,326, net of the write-off of
$1,264 of the $2,093 of unamortized deferred rent credit, resulted in a net charge of $62, which
was recorded in our statement of operations in 2005. The $829 balance of the unamortized deferred
rent credit was equivalent to the fair value of the Companys obligation with respect to the lease.
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
27
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.
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, 2005, which consist principally of the tax benefit of net operating
loss carryforwards and accrued expenses, amount to $25,056. After consideration of all the
evidence, both positive and negative, especially the fact we have sustained recurring operating
losses, we have determined that a valuation allowance at December 31, 2005 was necessary to fully
offset the deferred tax assets based on the likelihood of future realization. At December 31, 2005,
we had net operating loss carryforwards of approximately $51,900, expiring in various years from
2015 through 2026. The Companys ability to use such carryforwards to reduce future taxable income
may be subject to future limitations attributable to the equity transactions that occurred in March
2005 (see Recent Developments Financing Activities Private Financing that have resulted in a
change of ownership as defined in Internal Revenue Code Section 382).
Expense Recognition of Employee Stock Options. In December 2004, the Financial Accounting
Standards Board issued Statement No. 123R, Shared-Based Payment (SFAS 123R), which requires
companies to measure and recognize compensation expense for all stock-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. That cost will be recognized as
compensation expense over the service period, which would normally be the vesting period. The
effective date of SFAS No. 123R for us is January 1, 2006. As permitted by SFAS No. 123, we
currently account for share-based payments to employees using APB Opinion No. 25s intrinsic value
method and, as such, recognize no compensation cost for employee stock options unless options
granted have an exercise price below the market value on the date of grant. Accordingly, the
adoption of SFAS No. 123Rs fair value method could have a significant impact on our results of
operations, although it will have no impact on our overall financial position. The impact of
adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future.
Results of Operations
Year ended December 31, 2005 compared to year ended December 31, 2004
For the fiscal year ended December 31, 2005, we had a net loss of $25,971, compared to a net
loss of $9,854 for the fiscal year ended December 31, 2004. For the fourth quarter of 2005, we had
a net
28
income of $213, resulting primarily from our completion of an underwriting relating to an
initial public offering, compared to a net loss of $543 for the fourth quarter of 2004.
Our revenues for 2005 decreased $7,751 from 2004 primarily as a result of decreased
commissions of $11,485, net of increased investment banking fees of $2,823 and increased net
principal transactions of $1,244. Our revenues were adversely affected by the decrease in our
number of registered representatives from an average of 145 in 2004 to an average of 97 in 2005.
Excluding debt conversion expense of $19,359 in 2005 (see Senior Convertible Notes Payable,
Debt Conversion and Private Financing below), our expenses for 2005 decreased $11,106 from 2004
primarily as a result of decreased compensation and benefits of $4,941, decreased interest of
$1,162, decreased rent and occupancy (net of sublease revenues) of $1,065 and decreased other
expenses of $2,807.
The $11,485 (41.9%) decrease in commission income was primarily a result of a decrease in the
number of registered representatives we employed during 2005 compared to 2004. We employed an
average of 97 registered representatives during 2005 versus an average of 145 during 2004.
The $1,244 (44.5%) increase in net principal transactions was primarily the result of
increased retail and institutional sales credits from greater participation in initial and
secondary public offerings, including those for which Ladenburg was a lead manager or co-manager of
the underwriting or was part of the selling group.
The $2,823 (170.8%) increase in investment banking fees was primarily the result of increased
lead-managed and co-managed initial and secondary public offerings in 2005 compared to 2004.
The $4,213 (15.2%) decrease in compensation expense was primarily due to the net decrease in
revenues, decreased compensation arrangements for our revenue-producing personnel and various staff
reductions.
The $810 (25.3%) decrease in brokerage, communication and clearance fees is primarily due to
the decrease in the amount of agency commission transactions in 2005 compared to 2004.
The $1,065 (28.8%) decrease in rent and occupancy (net of sublease revenue) was primarily due
to the subletting of the entire 33rd floor and the remaining un-sublet portion of the
35th floor of Ladenburgs New York City office during the third quarter of 2004. Due to
these sublets, our rent and occupancy expense decreased by approximately $1,750 per year.
The write-off of leasehold improvements, net is a result of subletting two floors of
Ladenburgs New York City office, one in 2004 and the other in 2005. During the third quarter of
2004, Ladenburg ceased using a portion of the 35th floor of its New York City office.
Accordingly, the related leasehold improvements were 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 in the third
quarter of 2004. The write-off of unamortized leasehold improvements of $1,275, net of the
write-off of the unamortized deferred rent credit of $729, resulted in a net charge to operations
of $546 in 2004. In December 2005, Ladenburg entered into an agreement to
29
sublet the 34th floor of its New York City office, commencing March 15, 2006, for a
term through the end of its lease period. Accordingly, the remaining leasehold improvements were
written-off as of December 31, 2005. In conjunction with the write-off of leasehold improvements,
a portion of 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 $1,326, net of the write-off of $1,264 of the $2,093 of unamortized deferred rent
credit, resulted in a net charge of $62.
We incurred an income tax expense of $54 in 2005. In 2004, we incurred an income tax benefit
of $127, primarily due to the filing of certain state and local income tax returns on combined
basis for the fiscal year ended September 30, 2003, which reduced our overall income tax liability.
After consideration of all the evidence, both positive and negative, especially the fact we have
sustained recurring operating losses, management determined that a valuation allowance at December
31, 2005 was necessary to fully offset the deferred tax assets based on the likelihood of future
realization. The income tax rate for the 2005 and 2004 periods does not bear a customary
relationship to effective tax rates primarily as a result of unrecognized tax benefits from net
operating losses.
Year ended December 31, 2004 compared to year ended December 31, 2003
For the fiscal year ended December 31, 2004, we had a net loss of $9,854, compared to a net
loss of $5,490 for the fiscal year ended December 31, 2003. For the fourth quarter of 2004, we had
a net loss of $3,714, compared to a net income of $862 for the fourth quarter of 2003 resulting
primarily from our decrease in reserves related to real estate litigation.
Our revenues for 2004 decreased $18,979 from 2003 primarily as a result of decreased
commissions of $14,954, decreased net principal transactions of $2,168 and decreased investment
banking fees of $1,151. Our revenues were adversely affected by the decrease in our number of
registered representatives in 2004 versus 2003.
Our expenses for 2004 decreased $14,264 from 2003 primarily as a result of decreased
compensation and benefits of $11,084 and decreased brokerage, communication and clearance fees of
$1,987.
The $14,954 (35.3%) decrease in commission income was primarily a result of a decrease in the
number of registered representatives we employed during 2004 compared to 2003. We employed an
average of 145 registered representatives during 2004 versus an average of 182 during 2003.
The $2,168 (43.7%) decrease in net principal transactions was primarily the result of
decreases in trading income of $1,531 in the 2004 period. We significantly decreased our
proprietary trading operations over the 2003 and 2004 periods.
The $1,151 (41.0%) decrease in investment banking fees was primarily the result of decreased
revenue from private placement and advisory assignments due to the decrease in capital markets
activity in 2004 compared to 2003. Investment banking activities decreased for several months
prior to the US Presidential election and then increased afterwards. In addition, we had fewer
senior bankers in 2004 compared to 2003.
30
The $11,084 (28.6%) decrease in compensation expense was primarily due to the net decrease in
revenues and various staff reductions. Our compensation to our revenue-producing personnel
decreased by approximately $8,645 due to decreased revenues and decreased compensation arrangements
for our registered representatives. In addition, we had various staff reductions in the first and
second quarters of 2003 and the second quarter of 2004, and a decreased compensation arrangement
for our new chief executive officer in April 2004.
The $1,987 (38.3%) decrease in brokerage, communication and clearance fees is primarily due to
the decrease in proprietary trading activities and the decreased amount of agency commission
transactions in 2004 compared to 2003.
The $155 (4.0%) decrease in rent and occupancy (net of sublease revenue) was primarily due to
the subletting of a floor of Ladenburgs New York City office in September 2004. Due to this
sublet, our rent and occupancy expense will decrease by approximately $1,700 annually through the
end of our lease, June 30, 2015.
In the third quarter of 2004, Ladenburg ceased using a portion of another floor of its New
York City office. Accordingly, the related leasehold improvements were 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 in the third quarter of 2004. The write-off of unamortized leasehold improvements of
$1,275, net of the write-off of the unamortized deferred rent credit of $729, resulted in a net
charge to operations of $546.
We incurred an income tax benefit of $127 in 2004 compared to an income tax expense of $70 in
2003, primarily due to the filing of certain state and local income tax returns on combined basis,
which reduced our overall income tax liability. After consideration of all the evidence, both
positive and negative, especially the fact we have sustained recurring operating losses, management
determined that a valuation allowance at December 31, 2004 was necessary to fully offset the
deferred tax assets based on the likelihood of future realization. The income tax rate for the
2004 and 2003 periods does not bear a customary relationship to effective tax rates primarily as a
result of unrecognized tax benefits from net operating losses.
Liquidity and Capital Resources
Approximately 86.0% of our assets at December 31, 2005 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. Ladenburgs regulatory net capital,
as defined, of $2,932, exceeded minimum capital requirements of $250 by $2,682 at December 31,
2005. Failure to maintain the required net capital may subject Ladenburg to suspension or
expulsion by the NYSE, the SEC
31
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.
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 used in operating activities for the year ended December 31, 2005 were $6,872 as
compared to $828 for the 2004 period. The increase in net cash used in operating activities was
primarily due to an increase in receivables from clearing brokers of $10,599 in 2005 compared to an
decrease of $10,987 in 2004 offset by an increase in securities sold, but not yet purchased of
$8,829 in 2005 compared to a decrease of $4,042 in 2004.
Net cash used in investing activities for the year ended December 31, 2005 was $237 compared
to net cash flows provided by investing activities of $32 for the 2004 period. The difference is
primarily due to a decrease in purchases of furniture, equipment and leasehold improvements during
the 2005 period and proceeds from the sale of discontinued operations during the 2004 period.
There was $16,325 of net cash provided by financing activities for the year ended December 31,
2005, compared to $896 of cash used in financing activities during the 2004 period. The 2005
activity primarily represents the issuance of $14,233 of common stock and $3,500 of notes payable,
net of the repurchase of $1,155 of common stock.
At December 31, 2005, we are obligated under several noncancellable lease agreements for
office space, which provide for future minimum lease payments aggregating approximately $52,000
through 2015, exclusive of escalation charges and have subleased vacant space under subleases which
entitle us to receive rents aggregating approximately $38,000 through such date. The obligation
excludes the lease referred to in the following paragraph. In addition, one of the leases
obligates the Company to occupy additional space at the landlords option, which may result in
aggregate additional lease payments of up to $701 through June 2015.
In February 2006, Ladenburg Capital entered into a settlement agreement with the landlord for
its office space in New York City which Ladenburg Capital was forced to vacate during 2001 due to
the events of September 11, 2001. The terms of the settlement with the landlord (who had filed for
bankruptcy reorganization) provided for us to pay the landlord $1,900 and were approved by the
bankruptcy court in March 2006. The settlement agreement provides for the termination of all
Ladenburg Capitals liabilities under the lease in exchange for $1,900 in cash and the surrender by
the landlord of Ladenburg Capitals letter of credit of approximately $650. In February 2006,
Ladenburg Capital deposited $1,250 into escrow and the landlord relinquished the letter of credit.
Ladenburg Capital will liquidate the assets securing the letter of credit and deposit the remaining
$650 into escrow. The lease, which, had it not terminated as a
32
result of the events of September 11, 2001, would have expired by its terms in March 2010,
provided for future minimum payments aggregating approximately $2,988 payable $703 per year from
2006 through 2009 and $176 in 2010. The liability provided at December 31, 2004 was increased by
$240 with a corresponding increase in rent expense for the year ended December 31, 2005 to reflect
the settlement agreement.
Senior Convertible Notes Payable, Debt Conversion and Private Financing
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 LLC
(formerly New Valley Corporation), Berliner Effektengesellschaft AG and Frost-Nevada (which was
subsequently assigned to Frost Trust). The $10,000 principal amount of notes issued to New Valley
and Berliner, the former stockholders of Ladenburg, bore interest at 7.5% per annum, and the
$10,000 principal amount of the note issued to Frost-Nevada bore interest at 8.5% per annum. The
notes were convertible into a total of 11,296,746 shares of our common stock and secured by a
pledge of the 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 June 30, 2002 through March
2003. The holders of the senior convertible promissory notes subsequently agreed to extend the
interest forbearance period to May 13, 2005 with respect to interest payments due through March 31,
2005. Interest on the deferred amounts accrued 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, 2004, accrued interest payments as to which a forbearance was
received, amounted to $4,429. During the second quarter of 2004, we repurchased from Berliner
$1,990 principal amount of the notes, plus $320 of accrued interest, for $1,000 in cash. As a
result, we recorded a gain on debt cancellation of $1,310 during the second quarter of 2004.
In November 2004, we entered into an amended debt conversion agreement with Frost Trust and
New Valley to convert their notes, with an aggregate principal amount of $18,010, together with
accrued interest, into our common stock. Pursuant to the conversion agreement, the conversion
price of notes held by Frost Trust was reduced from the prior conversion price of $1.54 to $0.40
per share, and the conversion price of the notes held by New Valley was reduced from the prior
conversion price of $2.08 to $0.50 per share. As part of the debt conversion agreement, each of
Frost Trust and New Valley agreed to purchase $5,000 of our common stock for $0.45 per share.
Frost Trust agreed that it would not sell, transfer or assign any shares it received as a
result of the foregoing transactions for a period of one year from the date of the agreement except
to its affiliated entities.
The debt conversion transaction was approved by our shareholders at the annual shareholder
meeting held on January 12, 2005 and closed on March 11, 2005. The transactions were effective as
of February 22, 2005 and resulted in the following:
33
|
|
|
The $10,000 senior convertible promissory note to Frost Trust and related accrued
interest through February 22, 2005 of $2,761 was converted at $0.40 per share into
31,902,320 shares of our common stock. |
|
|
|
|
The $8,010 senior convertible promissory note to New Valley and related accrued
interest through February 22, 2005 of $1,928 was converted at $0.50 per share into
19,876,358 shares of our common stock. |
|
|
|
|
Frost-Trust acquired 11,111,111 shares of our common stock at $0.45 per share in
exchange for a cash payment of $1,445 and the cancellation of our $3,500 of notes
payable and related accrued interest of $55 described below. |
|
|
|
|
New Valley acquired 11,111,111 shares of our common stock at $0.45 per share in
exchange for a cash payment of $1,445 and the cancellation of our $3,500 of notes
payable and related accrued interest of $55 described below. |
|
|
|
|
We recorded a pre-tax charge of $19,359 in 2005 reflecting the expense attributable
to the reduction in the conversion price of the notes that were converted. The net
effect on our balance sheet from the conversion, net of related expenses, was an
increase to shareholders equity of $22,699 (without giving effect to any sale of
common stock relating to the private financing). |
|
|
|
|
As a result of the debt conversion and private financing, the beneficial ownership
of Frost-Trust increased from 18.5% to 37.2% (31.8% as at December 31, 2005). |
|
|
|
|
As a result of the debt conversion and private financing, the beneficial ownership
of New Valley increased from 9.4% to 25.7%. New Valley subsequently distributed
19,876,358 shares of the stock it received from the conversion of its note to its
shareholders. New Valleys residual LTS shares equate to a beneficial ownership of
approximately 7.9% at December 31, 2005. |
Other Notes Payable
On March 27, 2002, we borrowed $2,500 from New Valley, our former parent. 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. We have engaged in discussions with New
Valley to restructure the terms of these notes.
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
34
the date of the Clearing Conversion. As scheduled, in November 2003, one of the loans
consisting of $1,500 of principal, together with accrued interest of approximately $90, was
forgiven; in November 2004, $667 of principal, together with accrued interest of approximately $54,
was forgiven; and in November 2005, $667 of principal, together with interest of approximately $97
was forgiven. The balance of the remaining loan, consisting of $666 of principal, is scheduled to
be forgiven in November 2006. Accrued interest on this loan as of December 31, 2005 was $101.
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.
We borrowed $1,750 from New Valley and $1,750 from Frost Trust in 2004 and an additional
$1,750 from each of them in the first quarter of 2005. These notes, together with accrued
interest, payable at 2% above the prime rate, were delivered for cancellation in March 2005 as
payment, along with $2,890 in cash, for New Valleys and Frost Trusts purchase of $10,000 of our
common stock discussed above.
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.
As of December 31, 2003, Ladenburg had a $2,500 junior subordinated revolving credit agreement
with an affiliate of its primary clearing broker that matured on November 1, 2004, under which
outstanding borrowings incurred interest at LIBOR plus 2%. This loan was repaid upon maturity.
In December 2004, Ladenburg received a $2,000 temporary cash subordination from each of Dr.
Phillip Frost, one of our directors, and New Valley, to provide additional regulatory capital
required for an underwriting participation. Upon completion of the underwriting during the same
month, the $4,000 was repaid with interest at the rate of prime plus 2%. Interest amounted to $2.
In December 2005, Ladenburg received a $15,000 temporary cash subordination from Dr. Phillip
Frost to provide additional regulatory capital required for an underwriting participation. Upon
completion of the underwriting during the same month, the $15,000 was repaid plus a $300 fixed
amount of interest. The interest paid to Dr. Frost was on terms
no less favorable than could have been obtained from an unaffiliated
third party.
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.
35
Our liquidity position continues to be adversely affected by our inability to generate cash
from operations and we continually re-examine our capital needs to support our liquidity
and capital base for the near term. We have been forced to cut expenses in the past as necessary
such as reducing the size of our workforce, subletting unnecessary office space as well as
implementing other cost-cutting procedures throughout our operations. As a result of decreased
revenues, we have continued to reduce expenses. Commencing in April 2005, as part of our new
business plan, we employed several new employees and in connection with their employment
agreements, have committed to incur certain expenses to grow our asset management, wealth
management and alternative investments areas of our business. After reviewing our current
operations and financial position, we believe we have adequate cash and regulatory capital to fund
our projected operating activities through December 31, 2006.
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 our principal shareholders or from
other parties, including our clearing brokers. Additionally, we may seek to raise money through a
rights offering or other type of financing. 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,
2005 and the effects these obligations are expected to have on our liquidity and cash flow in the
future years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period ($) |
|
|
Contractual Obligations |
|
|
Total |
|
|
Less than 1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
After 5 years |
|
|
Long-Term Debt, including
interest of $1,157(1) |
|
|
|
6,824 |
|
|
|
|
6,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases(2) |
|
|
|
51,892 |
|
|
|
|
4,932 |
|
|
|
|
10,748 |
|
|
|
|
10,775 |
|
|
|
|
25,437 |
|
|
|
Other Long-Term Liabilities
Reflected on our Balance
Sheet under GAAP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
58,716 |
|
|
|
|
11,756 |
|
|
|
|
10,748 |
|
|
|
|
10,775 |
|
|
|
|
25,437 |
|
|
|
(1) |
|
Interest is accrued at 1% above the prime rate on the $5,000 principal loans from our
former parent and at the prime rate on the $667 prinicpal loan to an affiliate of our
clearing broker. The interest is payable upon maturity of the loans. See Note 11 to our
consolidated financial statements. |
|
(2) |
|
Excludes sublease rentals. See Note 7 to our consolidated financial statements. |
36
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, 2005 the fair market value of
our inventories were $1,936 in long positions and $8,857 in short positions, principally
representing securities sold pursuant to an underwriters over-allotment option which was exercised
in January 2006. 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, 2005 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 Managements 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 1A 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.
37
|
|
|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
The information under the caption Managements 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 report thereon
of Eisner LLP dated February 16, 2006, beginning on page F-1 of this report.
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. |
None.
|
|
|
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 Commissions 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.
Our internal control over financial reporting is a process designed by, or under the
supervision of, our chief executive officer and chief financial officer and effected by our board
of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of our financial statements for external
purposes in accordance with generally accepted accounting principles. Internal control over
financial reporting includes policies and procedures that pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the transactions and dispositions of our
assets; provide reasonable assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with the
authorization of our board of directors and management; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
38
ITEM 9B. OTHER INFORMATION.
Settlement with Ladenburg Capitals New York City Landlord
In February 2006, our subsidiary, Ladenburg Capital Management Inc. (Ladenburg Capital),
entered into a settlement agreement with the landlord for its office space in New York City which
Ladenburg Capital was forced to vacate during 2001 due to the events of September 11, 2001. The
terms of the settlement with the landlord (who had filed for bankruptcy reorganization) provided
for us to pay the landlord $1,900,000 and were approved by the
bankruptcy court on March 24, 2006. The
settlement agreement provides for the termination of all Ladenburg Capitals liabilities under the
lease in exchange for $1,900,000 in cash and the surrender by the landlord of Ladenburg Capitals
letter of credit of approximately $650,000. In February 2006, Ladenburg Capital deposited
$1,250,000 into escrow and the landlord relinquished the letter of credit. Ladenburg Capital will
liquidate the assets securing the letter of credit and deposit the remaining $650,000 into escrow.
The 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, provided for future minimum payments aggregating approximately
$2,988,000, payable $703,000 per year from 2006 through 2009 and $176,000 in 2010. The liability
provided at December 31, 2004 was increased by $240,000 with a corresponding increase in rent
expense for the year ended December 31, 2005 to reflect the settlement agreement.
PART III
|
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|
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 31, 2006. 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
|
|
|
57 |
|
|
Chairman of the Board |
Mark D. Klein
|
|
|
44 |
|
|
President and Chief Executive Officer |
Henry C. Beinstein
|
|
|
63 |
|
|
Director |
Robert J. Eide
|
|
|
53 |
|
|
Director |
Phillip Frost, M.D.
|
|
|
69 |
|
|
Director |
Brian S. Genson
|
|
|
57 |
|
|
Director |
Richard J. Lampen
|
|
|
52 |
|
|
Director |
Vincent A. Mangone
|
|
|
40 |
|
|
Director |
Benjamin D. Pelton
|
|
|
54 |
|
|
Director |
Jeffrey S. Podell
|
|
|
65 |
|
|
Director |
Steven A. Rosen
|
|
|
60 |
|
|
Director |
Richard J. Rosenstock
|
|
|
54 |
|
|
Director |
Mark Zeitchick
|
|
|
40 |
|
|
Director |
Salvatore Giardina
|
|
|
44 |
|
|
Vice President and Chief Financial Officer |
Howard M. Lorber has been chairman of our board of directors since May 2001. Since January
2006, Mr. Lorber has been the president and chief executive officer of Vector Group Ltd., a New
York Stock Exchange-listed holding company, with subsidiaries engaged in the manufacture and sale
of cigarettes, and the sole member of New Valley LLC. Mr. Lorber also served as president and
chief operating officer of Vector Group from January 2001 to December 2005 and has served as a
director of Vector Group since January 2001. From November 1994 to December 2005, Mr. Lorber
served as president and chief operating officer of New Valley, where he also served as a director.
Mr. Lorber was 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 from
1975 to December 2004 and has been a consultant to these entities since January 2005. 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. Mr. Lorber has also been the chairman of the board of
Nathans Famous, Inc., a chain of fast food restaurants, since 1987 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 as a
trustee of Long Island University.
39
Mark D. Klein has been president, chief executive officer and a member of our board of
directors since April 2005. He has also been the chairman of the board and chief executive officer
of Ladenburg since April 2005. For the five years prior to joining our company, Mr. Klein served
as the president and chief executive officer of NBGI Asset Management Inc. and NBGI Securities
Inc., both affiliates of the National Bank of Greece, a leading financial institution in Greece.
Prior to joining NBGI Asset Management Inc. and NBGI Securities Inc., Mr. Klein founded Newbrook
Capital Management and Newbrook Securities in 1994 and served as the president and chief executive
officer of the two firms until they were acquired by the National Bank of Greece in July 2000. Mr.
Klein has also been a senior portfolio manager specializing in high net worth individuals for three
major brokerage firms, including PaineWebber and Smith Barney Shearson. In addition to his
traditional asset management experience, Mr. Klein founded Independence Holdings LLC, a private
equity fund of funds company, in 1997.
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 January
2005, Mr. Beinstein has been a partner of Gagnon Securities, LLC, a broker-dealer and a member firm
of the NASD and has been a money manager and an analyst and registered representative of such firm
since August 2002. 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 been the
chairman and chief executive officer of Aegis Capital Corp. since before 1988. Mr. Eide also
serves as a director of Nathans Famous and Vector Group.
Phillip Frost, M.D. has been a member of our board of directors since March 2004. He also
served as a member of our board of directors from May 2001 until July 2002. Dr. Frost has served
as vice chairman of the board of directors of Teva Pharmaceutical Industsries Ltd. (Teva), which
is among the top 20 pharmaceutical companies in the world and is the leading generic pharmaceutical
company, since January 2006. He has served since 1987 as chief executive officer of IVAX
Corporation, a company engaged in the research, development, manufacture and marketing of
pharmaceutical products which was acquired by Teva in January 2006. From July 1991 until January
1995, he also served as the president of IVAX and from 1987 to January 2006, served as chairman of
the board. He has also served as chairman of the board of directors of IVAX Diagnostics, Inc., an
American Stock Exchange-listed company that produces diagnostic reagent kits and is a subsidiary of
IVAX, since March 2001. Dr. Frost was the chairman of the Department of Dermatology at Mt. Sinai
Medical Center of Greater Miami, Miami Beach, Florida from 1972 to 1990. Dr. Frost was chairman of
the board of directors of Key Pharmaceuticals, Inc. from 1972 to 1986. He is a director of
Continucare Corporation, an American Stock Exchange-listed provider of outpatient healthcare and
home healthcare services, Northrop Grumman Corp., an aerospace
company, and Cellular Technical Services Company, Inc., a
telecommunications company. He is a member of the
board of trustees of the University of Miami and a member of the board of governors of the American
Stock Exchange.
40
Brian S. Genson has been a member of our board of directors since October 2004. Mr. Genson
has been president of Pole Position Investments, a company engaged in the motor sport
business, since 1989. Mr. Genson also serves as a managing director of F1 Action located in
Stanstead, England, which is engaged in investing in the motor sport industry. Mr. Genson was also
responsible for introducing Ben and Jerrys Ice Cream Company to the Japanese market. Mr. Genson
has also served as a director of Nathans Famous since 1999.
Richard J. Lampen has been a member of our board of directors since January 2002. Since July
1996, Mr. Lampen has served as executive vice president of Vector Group. From October 1995 to
December 2005, Mr. Lampen served as executive vice president and general counsel of New Valley
where he also served as a member of its board of directors. 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 Specs Music Inc., as well as a court-appointed
independent director of Trump Plaza Funding, Inc.
Vincent A. Mangone has been a member of our board of directors since August 1999. From August
1999 until December 2003, Mr. Mangone served as one of our executive vice presidents. Mr. Mangone
has also 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.
Benjamin D. Pelton has been a member of our board of directors since October 2004. Mr. Pelton
has been an attorney and has been a partner in the law firm of Pelton, Balland, Young, Demsky,
Baskin & OMalie, P.C. since 1978. Mr. Pelton served as a member of our board of directors from
August 1999 to May 2001.
Jeffrey S. Podell has been a member of our board of directors since October 2004. Mr. Podell
has been the chairman of the board and president of Newsote, Inc., a privately-held holding
company, since 1989. He has also been a director of Vector Group since November 1993.
Steven A. Rosen has been a member of our board of directors since October 2004. Dr. Rosen has
been a dentist and has been the owner and senior officer of Unique Dental Care, a corporation which
operates a multi professional dental practice, since 1971. Dr. Rosen served as a member of our
board of directors from August 1999 to May 2001.
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 Capitals 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.
41
Mark Zeitchick has been a member of our board of directors since August 1999. From August
1999 until December 2003, Mr. Zeitchick served as one of our executive vice presidents. Mr.
Zeitchick has also 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 Capitals 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.
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 Ladenburgs 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, 2005.
Audit Committee Financial Expert
Currently, our audit committee is comprised of Henry C. Beinstein, Robert J. Eide and Jeffrey
S. Podell, 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. Requests for copies of our
code of ethics should be sent in writing to Ladenburg Thalmann Financial Services Inc., 153 East
53rd Street, 49th Floor, New York, New York 10022.
42
ITEM 11. EXECUTIVE COMPENSATION.
The following table shows the compensation paid or accrued by us to the individuals that
served as our chief executive officer and to our most highly compensated executive officers whose
total 2005
compensation exceeded $100,000 (collectively, the Named Executive Officers) for the calendar
years 2005, 2004 and 2003. All compensation figures in this table and the notes thereto, are in
dollars.
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Annual |
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Long-Term |
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Compensation |
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Compensation |
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Fiscal |
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All Other |
Name and Principal Position |
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Period |
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Salary ($) |
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Bonus ($) |
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Options (#) |
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Compensation |
Mark D. Klein |
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2005 |
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374,000 |
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375,000 |
(1) |
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5,000,000 |
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President and Chief Executive |
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2004 |
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Officer |
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2003 |
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Charles I. Johnston |
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2005 |
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62,500 |
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150,000 |
(2) |
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Former President and Chief |
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2004 |
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Executive Officer |
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2003 |
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Bruce S. Mendelsohn |
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2005 |
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204,167 |
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2,000,000 |
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19,500 |
(3) |
Former Managing Director and |
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2004 |
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Senior Executive Vice President |
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2003 |
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Salvatore Giardina |
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2005 |
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213,800 |
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150,000 |
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872 |
(4) |
Vice President and Chief |
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2004 |
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214,000 |
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30,000 |
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Financial Officer |
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2003 |
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214,000 |
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55,000 |
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30,000 |
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70 |
(4) |
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(1) |
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Represents pro-rata accrual of bonus amounts provided for in Mr. Kleins employment
agreement. |
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(2) |
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Represents a lump sum payment pursuant to Mr. Johnstons Severance, Waiver and Release
Agreement. |
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(3) |
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Represents lodging expense incurred by Mr. Mendelsohn reimbursed pursuant to his employment
contract. |
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(4) |
|
Represents residual earnings from stock options surrendered with respect to the 1995 merger
of Ladenburg Thalmann and New Valley. |
Compensation Arrangements for Executive Officers
Charles I. Johnston was employed by us as our president and chief executive officer under an
employment agreement with Ladenburg. Effective March 4, 2005, we entered into a Severance, Waiver
and Release Agreement with Mr. Johnston. Under the Severance Agreement, effective March 31, 2005,
Mr. Johnston resigned from all of his positions with us and all of our subsidiaries including
Ladenburg. Pursuant to the Severance Agreement, Mr. Johnston received (i) a lump sum payment of
approximately $150,000 and (ii) continued health benefits under his existing employment agreement
until the earlier of the second anniversary of the Severance Agreement or until he is covered on a
comparable basis by another plan.
43
We entered into an Employment Agreement dated March 7, 2005 with Mark D. Klein pursuant to
which, effective April 1, 2005, Mr. Klein serves as our president and chief executive officer and
as chairman and chief executive officer of Ladenburg. Under the Employment Agreement, Mr. Klein
receives (i) a base salary of $500,000 per year, (ii) an annual bonus of $500,000 if certain
performance goals are met, (iii) a life insurance policy providing for death benefits of at least
$2,000,000 and a long-term disability insurance plan which provides Mr. Klein with disability
benefits equal to at least 60% of his average annual compensation until his 65th
birthday and (iv) options to purchase 5,000,000 shares of our common stock at a price of $0.465 per
share. The options vest as to ten percent of the options on the date of grant and as to 22.5% of
the options in four annual installments commencing on March 4, 2006 and expire on March 4, 2015.
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. In the event that Mr.
Kleins employment is terminated by reason of his death, disability, by us without cause or by
Mr. Klein for good reason (as such terms are defined in the employment agreement), any unvested
portion of the option that would have vested had he remained employed for the remainder of the then
current employment period shall immediately vest and such vested portion shall remain exercisable
for a period of one year following Mr. Kleins termination of employment or for the remainder of
the term of the option, whichever period is shorter. In the event that Mr. Kleins employment is
terminated for any other reason, the option shall immediately terminate.
In addition, Mr. Klein purchased 2,222,222 shares of our common stock at $0.45 in March 2005.
Bruce S. Mendelsohn was previously employed by us as our managing director and senior
executive vice president through July 1, 2007. Under the employment agreement with Mr. Mendelsohn,
he was entitled to receive a base salary of $350,000 for the first year of the agreement and
$400,000 for the second year of the agreement, subject to approval by our chief executive officer
and our board of directors. In connection with Mr. Mendelsohns employment, we granted him a
ten-year option to purchase 2,000,000 shares of our common stock at $0.645 per share. The option
vested as to 200,000 shares of common stock on the date of grant and vested as to the remainder of
the option in four equal annual installments of 450,000 shares commencing on June 1, 2006. In
addition, Mr. Mendelsohn was given the opportunity to purchase 225,000 shares of our common stock
at $0.45 per share and did so in June 2005. In January 2006, Mr. Mendelsohn determined to resign
his position with us to rejoin his prior employer but has agreed to remain as a member of our
advisory board. In connection with his resignation, we determined to allow him to continue to
exercise the vested portion of his option (200,000 shares of common stock) until the later of (1)
January 31, 2007, and (2) one year after he is no longer a member of our advisory board, but in no
event later than January 31, 2007. The remaining portion of his options were terminated.
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 $15,000, 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 $10,000 and $5,000, respectively. In addition, each
director receives five hundred dollars per meeting that he attends. Additionally, upon their
election or re-election, as the case may be, we grant our non-employee directors ten-year options
under our 1999 Performance Equity Plan to purchase 20,000 shares of our common stock at fair market
value on the date of grant. All of our directors
are reimbursed for their costs incurred in attending meetings of the board of directors or of
the committees on which they serve.
44
Option Grants
The following table represents the stock options granted in the fiscal year ended December 31,
2005, to the Named Executive Officers.
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STOCK OPTION GRANTS IN 2005 |
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Number of |
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Percent of Total |
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Securities |
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Options Granted to |
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Underlying Options |
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Employees in |
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Exercise Price of |
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Grant Date Present |
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Name of Executive |
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Granted (#) |
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Fiscal Year (%) |
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Options ($) |
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Expiration Date |
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Value(1)($) |
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Mark D. Klein |
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5,000,000 |
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28.5 |
% |
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0.465 |
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3/04/15 |
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$ |
2,150,000 |
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Bruce S. Mendelsohn |
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2,000,000 |
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11.4 |
% |
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0.645 |
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5/31/15 |
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$ |
1,000,000 |
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Salvatore Giardina |
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150,000 |
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0.9 |
% |
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0.580 |
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8/17/15 |
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$ |
102,200 |
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(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: |
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Expiration |
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|
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Risk-free |
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Expected |
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Dividend |
Date |
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Volatility |
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Rate |
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Life |
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Rate |
3/04/15 |
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103.210 |
% |
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4.50 |
% |
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10 years |
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-0- |
5/31/15 |
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67.630 |
% |
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4.00 |
% |
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10 years |
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-0- |
8/17/15 |
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26.940 |
% |
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4.26 |
% |
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10 years |
|
-0- |
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, 2005, 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 2005.
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AGGREGATED FISCAL YEAR-END OPTION VALUES |
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Number of Securities Underlying |
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Dollar Value of Unexercised |
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Unexercised Options at |
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in-the-money Options at |
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Fiscal Year End: |
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Fiscal Year End |
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Name |
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Exercisable (#) |
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Unexercisable (#) |
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Exercisable ($) |
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Unexercisable ($) |
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Mark D. Klein |
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500,000 |
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4,500,000 |
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232,500 |
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2,092,500 |
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Charles I. Johnston |
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100,000 |
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-0- |
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75,000 |
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-0- |
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Bruce S. Mendelsohn |
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200,000 |
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1,800,000 |
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129,000 |
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1,161,000 |
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Salvatore Giardina |
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65,000 |
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180,000 |
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40,000 |
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111,800 |
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45
1999 Performance Equity Plan
Our 1999 Performance Equity Plan (Option Plan) which was approved by our shareholders and
most recently amended on November 6, 2002, covers 10,000,000 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. The Option 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 Option 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. As of December 31, 2005, 9,236,265 shares of common stock are available
under this plan, and stock options for 8,637,770 shares of our common stock are outstanding.
Stock Options Issued Outside of Option Plan
As of December 31, 2005, stock options to purchase an aggregate of 14,000,000 shares of our
common stock at exercise prices ranging from $0.465 to $0.645 were outstanding. These options were
granted in connection with the recruitment and employment of various individuals. Due to
forfeitures subsequent to December 31, 2005, we currently have stock options issued outside of
the Option Plan to purchase an aggregate of 8,400,000 shares of our common stock at exercise prices
ranging from $0.465 to $0.645 outstanding.
Ladenburg Thalmann Financial Services Inc. Qualified Employee Stock Purchase Plan
In November 2002, our shareholders approved the Ladenburg Thalmann Financial Services Inc.
Qualified 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 was the lesser of 85% of the last sale price of our
common stock on the date of grant or on the exercise date. Effective January 1, 2006, the purchase
price will be 95% of the last sale price of our common stock on the exercise date. The Plan became
effective November 6, 2002 and as of the date of this report, 3,206,857 shares of common stock have
been issued under it.
Compensation Committee Interlocks and Insider Participation
Our compensation committee is comprised of Messrs. Beinstein, Eide and Genson. None of these
individuals served as officers of ours or of our subsidiaries.
Prior to January 12, 2005, Mr. Lorber was a member of our compensation committee. 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.
46
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS. |
The
following table sets forth certain information as of March 31, 2006 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., 153 East 53rd Street, 49th Floor, New York,
New York 10022.
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of |
|
|
|
|
Beneficial |
|
Percent of Class |
Name of Beneficial Owner |
|
ownership(1) |
|
of Voting Securities |
Phillip Frost, M.D.(2) |
|
|
44,997,797 |
(3) |
|
|
31.8 |
% |
New Valley LLC(4) |
|
|
11,211,111 |
(5) |
|
|
7.9 |
% |
Bennett S. LeBow(6) |
|
|
7,571,856 |
(7) |
|
|
5.4 |
% |
Richard J. Rosenstock |
|
|
4,005,650 |
(8) |
|
|
2.8 |
% |
Howard M. Lorber(9) |
|
|
3,321,607 |
(10) |
|
|
2.3 |
% |
Mark D. Klein |
|
|
2,722,222 |
(11) |
|
|
1.9 |
% |
Mark Zeitchick |
|
|
1,817,978 |
(12) |
|
|
1.3 |
% |
Vincent Mangone |
|
|
1,817,978 |
(13) |
|
|
1.3 |
% |
Bruce S. Mendelsohn |
|
|
425,000 |
(14) |
|
|
* |
|
Richard J. Lampen(15) |
|
|
188,781 |
(16) |
|
|
* |
|
Steven A. Rosen(17) |
|
|
100,000 |
(18) |
|
|
* |
|
Robert J. Eide(19) |
|
|
99,724 |
(20) |
|
|
* |
|
Henry C. Beinstein(21) |
|
|
101,155 |
(22) |
|
|
* |
|
Benjamin D. Pelton(23) |
|
|
80,000 |
(24) |
|
|
* |
|
Salvatore Giardina |
|
|
72,293 |
(25) |
|
|
* |
|
Brian S. Genson(26) |
|
|
20,000 |
(27) |
|
|
* |
|
Jeffrey S. Podell(28) |
|
|
42,013 |
(29) |
|
|
* |
|
All directors and executive
officers
as a group (15 persons) |
|
|
59,812,198 |
(30) |
|
|
41.5 |
% |
|
|
|
* |
|
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. |
|
(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 Florida law, (ii) 100,000 shares of common stock issuable upon exercise
of an |
47
|
|
|
|
|
immediately exercisable warrant held by Frost Gamma, (iii) 43,013,431 shares of common stock
held by Frost-Nevada Investments Trust (Frost Trust), a trust organized under Florida law,
and (iv) 40,000 shares of common stock issuable upon exercise of currently exercisable
options held by Dr. Frost. Does not include 2,420,112 shares of common stock to be
purchased by Frost Gamma Investments Trust in the private placement that we are seeking
shareholder approval for at a special meeting of shareholders to be held on April 3, 2006.
Dr. Frost is the sole trustee of both Frost Gamma Investments Trust and Frost Trust. As the
sole trustee of the Gamma Trust and the Frost Trust, Dr. Frost may be deemed the beneficial
owner of all shares owned by the Gamma Trust and the Frost Trust, respectively, by virtue of
his power to vote or direct the vote of such shares or to dispose or direct the disposition
of such shares owned by such trusts. Accordingly, solely for purposes of reporting
beneficial ownership of such shares pursuant to Section 13(d) of the Securities Exchange Act
of 1934, as amended, each of these persons will be deemed to be the beneficial owner of the
shares held by any other such person. The foregoing information was derived from an
Amendment to Schedule 13D filed with the SEC on April 1, 2005 as well as from information
made known to us. |
|
(4) |
|
New Valley LLC is wholly-owned by Vector Group Ltd. The business address for New Valley LLC
and Vector Group Ltd. is 100 S. E. Second Street, Miami, Florida 33131. |
|
(5) |
|
Includes 100,000 shares of common stock issuable upon exercise of immediately exercisable
warrants held by New Valley. The foregoing information was derived from an Amendment to
Schedule 13D filed with the SEC on April 1, 2005 as well as from information made known to us. |
|
(6) |
|
Mr. LeBows business address is c/o New Valley LLC, 100 S. E. Second Street, Miami, Florida
33131. |
|
(7) |
|
Represents (i) 1,363,526 shares of common stock held directly by Mr. LeBow, (ii) 5,799,612
shares of common stock held by LeBow Gamma Limited Partnership, a Nevada limited partnership,
(iii) 198,423 shares of common stock held by LeBlow Alpha LLLP, a Delaware limited liability
limited partnership, (iv) 170,295 shares held by The Bennett and Geraldine LeBow Foundation
Inc. (Foundation), 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 LLC, of which Mr. LeBow
serves as an executive officer and director of its parent, Vector Group Ltd. Mr. LeBow
indirectly possesses 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 the 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 power and shared dispositive power with
the other directors of the Foundation with respect to the Foundations shares of common stock.
The foregoing information was derived from an Amendment to Schedule 13D filed with the SEC on
April 1, 2005 as well as from information made known to us. |
|
(8) |
|
Represents (i) 54,304 shares of common stock held directly by Mr. Rosenstock, (ii) 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 (iii) 250,000
shares |
48
|
|
|
|
|
of common stock issuable upon exercise of currently exercisable options held by Mr.
Rosenstock. Does not include 100,000 shares of common stock to be purchased by Mr.
Rosenstock in the private placement that we are seeking shareholder approval for at a
special meeting of shareholders to be held on April 3, 2006. |
|
(9) |
|
Mr. Lorbers business address is c/o New Valley LLC, 100 S. E. Second Street, Miami,
Florida 33131. |
|
(10) |
|
Represents (i) 2,719,580 shares of common stock held directly by Mr. Lorber, (ii) 301,227
shares of common stock held by Lorber Epsilon 1999 Limited Partnership, a Delaware limited
partnership, (iii) 220,800 shares of common stock held by Lorber Alpha II Partnership, a
Nevada limited partnership and (iv) 80,000 shares of common stock issuable
upon exercise of currently exercisable options held by
Mr. Lorber. Mr. Lorber indirectly
exercises sole voting power and sole dispositive power over the shares of common stock held by
the partnerships. Lorber Epsilon 1999 LLC, a Delaware limited liability company, is the
general partner of Lorber Epsilon 1999 Limited Partnership. Lorber Alpha II Limited
Partnership, a Nevada limited partnership, is the sole member of, and Mr. Lorber is the
manager of, Lorber Epsilon 1999 LLC. 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. Does not include the shares
of common stock beneficially owned by New Valley LLC, of which Mr. Lorber serves as an
executive officer and director of its parent, Vector Group Ltd. Also
does not include 507,789 shares of common stock held by the Lorber
Charitable Fund, a New York not-for-profit corporation, of which
family members of Mr. Lorber serve as directors and executive
officers. Mr. Lorber disclaims beneficial ownership of such
shares. |
|
(11) |
|
Represents (i) 2,222,222 shares of common stock held by Mr. Kleins spouse and (ii) 500,000
shares of common stock issuable upon exercise of currently exercisable options held by Mr.
Klein. Does not include 4,500,000 shares of common stock issuable upon exercise of options
held by Mr. Klein that are not currently exercisable and that will not become exercisable
within the next 60 days. |
|
(12) |
|
Includes (i) 1,414,211 shares of common stock held of record by MZ Trading LLC, of which Mr.
Zeitchick is the sole managing member and (ii) 391,667 shares of common stock issuable upon
exercise of currently exercisable options held by MZ Trading. Does not include (i) 100,000
shares of common stock to be purchased by MZ Trading LLC in the private placement that we are
seeking shareholder approval for at a special meeting of shareholders to be held on April 3,
2006 and (ii) 233,333 shares of common stock issuable upon exercise of options held by MZ
Trading 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) 391,667 shares of common stock issuable upon exercise of currently
exercisable options held by Mr. Mangone. Does not include 83,333 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) |
|
Includes 200,000 shares of common stock issuable upon exercise of currently exercisable
options |
49
|
|
|
|
|
held by Mr. Mendelsohn. |
|
(15) |
|
Mr. Lampens business address is c/o New Valley LLC, 100 S. E. Second Street, Miami, Florida
33131. |
|
(16) |
|
Represents 108,781 shares of common stock held by Mr. Lampen and (ii) 80,000 shares of common
stock issuable upon exercise of currently exercisable options held by Mr. Lampen. Does not
include (i) 100,000 shares of common stock to be purchased by Mr. Lampen in the private
placement that we are seeking shareholder approval for at a special meeting of shareholders to
be held on April 3, 2006 and (ii) the shares of common stock beneficially owned by New Valley
LLC, of which Mr. Lampen serves as an executive officer of its parent, Vector Group Ltd. |
|
(17) |
|
Dr. Rosens business address is c/o Unique Dental Care, 16-26 Bell Blvd., Bayside, New York
11360. |
|
(18) |
|
Represents (i) 20,000 shares of common stock held by Dr. Rosen and (ii) 80,000 shares of
common stock issuable upon exercise of currently exercisable options held by Mr. Rosen. Does
not include 40,000 shares of common stock to be purchased by Dr. Rosen in the private
placement that we are seeking shareholder approval for at a special meeting of shareholders to
be held on April 3, 2006. |
|
(19) |
|
Mr. Eides business address is c/o Aegis Capital Corp., 810 Seventh Avenue, New York, New
York 10019. |
|
(20) |
|
Includes 80,000 shares of common stock issuable upon exercise of currently exercisable
options held by Mr. Eide. |
|
(21) |
|
Mr. Beinsteins business address is c/o Gagnon Securities, 1370 Avenue of the Americas, New
York, New York 10019. |
|
(22) |
|
Includes (i) 1,532 shares of common stock held of record in the individual retirement account
of Mr. Beinsteins spouse and (ii) 80,000 shares of common stock issuable upon exercise of
currently exercisable options held by Mr. Beinstein. |
|
(23) |
|
Mr. Peltons business address is c/o Pelton Ballard, et al., 2300 Clerenclon Blvd.,
Arlington, Virginia 22201. |
|
(24) |
|
Represents 80,000 shares of common stock issuable upon exercise of currently exercisable
options held by Mr. Pelton. |
|
(25) |
|
Includes 65,000 shares of common stock issuable upon exercise of currently exercisable
options held by Mr. Giardina. Does not include 180,000 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. |
|
(26) |
|
Mr. Gensons business address is 100 Crystal Court, Hewlett, New York 11557. |
|
(27) |
|
Includes 20,000 shares of common stock issuable upon exercise of currently exercisable
options
held by Mr. Genson. |
50
|
|
|
(28) |
|
Mr. Podells business address is 173 Doral Court, Roslyn, New York 11576. |
|
(29) |
|
Includes 20,000 shares of common stock issuable upon exercise of currently exercisable
options held by Mr. Podell. |
|
(30) |
|
Includes 2,458,334 shares of common stock issuable upon exercise of currently exercisable
options and warrants and excludes 6,796,666 common stock issuable upon exercise of options
that are not currently exercisable and that will not become exercisable within the next 60
days discussed in the foregoing footnotes, as applicable. Also does not include 2,760,112
shares of common stock to be purchased by certain of our directors in the private placement
that we are seeking shareholder approval for at a special meeting of shareholders to be held
on April 3, 2006. See notes 3, 6, 11, 12, 13, 14, 15, 16, 17, 18, 19, 21, 22, and 23. |
Equity Compensation Plan Information
The following table sets forth certain information at December 31, 2005 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 |
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
under Equity |
|
|
|
|
|
Number of Securities to |
|
|
Exercise Price of |
|
|
Compensation Plans |
|
|
|
|
|
be Issued upon Exercise |
|
|
Outstanding |
|
|
(excluding securities |
|
|
|
|
|
of Outstanding Options, |
|
|
Options, Warrants |
|
|
reflected in the |
|
|
Plan Category |
|
|
Warrants and Rights |
|
|
and Rights |
|
|
first column) |
|
|
Equity Compensation
Plans Approved by
Security Holders |
|
|
|
8,637,770 |
|
|
|
$ |
0.97 |
|
|
|
|
598,495 |
|
|
|
Equity Compensation
Plans Not Approved
by Security Holders |
|
|
|
14,200,000 |
(1) |
|
|
$ |
0.58 |
|
|
|
|
-0- |
|
|
|
|
|
|
(1) |
|
Due to various forfeitures subsequent to December 31, 2005, there are currently 8,400,000
shares of common stock reserved. |
In August 2001, New Valley and Frost-Nevada each loaned us $1,000,000. 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.
In March 2004, we granted Charles I. Johnston, our then new chief executive officer,
non-qualified options to purchase a total of 2,500,000 shares of common stock, 1,000,000 of which
were under the Option Plan and 1,500,000 which were outside of the Option Plan. The options were
exercisable at a
51
price of $.75 per share, the fair market value on the date of grant. These options vested in
five equal annual installments commencing on the first anniversary of the date of grant and expired
ten years from the date of grant. In March 2005, in connection with the resignation of Mr.
Johnston, 2,400,000 previously issued options (900,000 of which were under the Option Plan and
1,500,000 of which were outside the Option Plan) expired and 100,000 previously issued options
which would have expired under the under the Option Plan were extended to March 4, 2006. Such
options expired in March 2006 in accordance with their terms.
In March 2005, we granted Mark D. Klein, our chief executive officer, options to purchase
5,000,000 shares of our common stock at an exercise price of $0.465 per share. Ten percent of the
options vested immediately upon grant and the remainder of the options will vest in four equal
annual installments commencing on the first anniversary of the grant date.
In March 2005, Ladenburg entered into an employment agreement with a newly employed director
of institutional sales and in connection therewith granted him options to purchase 1,500,000 shares
of our common stock at an exercise price $0.64 per share. The option, which expires on March 28,
2015, will vest as to 250,000 shares on each of the first four anniversaries of the date of grant.
An additional 125,000 shares will vest on the third anniversary of the date of grant and an
additional 375,000 shares will vest on the fourth anniversary of the date of grant provided that
the Commission Shares (defined below) have been purchased. In addition, he committed to purchase
an additional 2,500,000 shares of our common stock at $0.64 per share solely through the use of
compensation to be earned by him.
In June 2005, Ladenburg entered into several employment agreements with newly employed
executives and in connection therewith granted the executives options to purchase an aggregate of
6,500,000 shares of our common stock at an exercise price $0.645 per share. The options, which
expire on June 1, 2015, will vest at various periods through June 30, 2009. In addition, one of
the executives committed to purchase up to an additional 500,000 shares of our common stock at
$0.645 per share solely through the use of compensation to be earned by him.
In July 2005, we hired an experienced portfolio manager and securities industry executive, as
chief investment strategist of our asset management subsidiary, Ladenburg Thalmann Asset Management
Inc. In connection with his employment, the individual purchased 1,000,000 shares of our common
stock at $0.45 per share (an aggregate purchase price of $450,000). In addition, the individual
has committed to purchase an additional 1,000,000 shares of our common stock at $0.58 per share,
solely through the use of compensation to be earned by him. Additionally, we granted an option to
the individual to purchase 1,000,000 shares of our common stock at $0.58 per share. The option,
which will expire ten years from the date of grant, will vest in four equal annual installments
commencing on the first anniversary of the date of grant.
At December 31, 2005, these warrants and options were our only equity compensation plans not
approved by our shareholders.
52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Senior Convertible Notes Payable, Debt Conversion and Private Financing
In conjunction with the May 2001 acquisition of Ladenburg, we issued a total of $20,000,000
principal amount of senior convertible promissory notes due December 31, 2005 to New Valley,
Berliner Effektengesellschaft AG and Frost-Nevada (which was subsequently assigned to Frost Trust).
The $10,000,000 principal amount of notes issued to New Valley and Berliner, the former
stockholders of Ladenburg, bore interest at 7.5% per annum, and the $10,000,000 principal amount of
the note issued to Frost-Nevada bore interest at 8.5% per annum. The notes were convertible into a
total of 11,296,746 shares of our common stock and secured by a pledge of the 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 June 30, 2002 through March
2003. The holders of the senior convertible promissory notes subsequently agreed to extend the
interest forbearance period to May 13, 2005 with respect to interest payments due through March 31,
2005. Interest on the deferred amounts accrued 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, 2004, accrued interest payments as to which a forbearance was
received, amounted to $4,429,000. During the second quarter of 2004, we repurchased from Berliner
$1,990,000 principal amount of the notes, plus $320,000 of accrued interest, for $1,000,000 in
cash. As a result, we recorded a gain on debt cancellation of $1,310,000 during the second quarter
of 2004.
In November 2004, we entered into an amended debt conversion agreement with Frost Trust and
New Valley to convert their notes, with an aggregate principal amount of $18,010,000, together with
accrued interest, into our common stock. Pursuant to the conversion agreement, the conversion
price of notes held by Frost Trust was reduced from the prior conversion price of $1.54 to $0.40
per share, and the conversion price of the notes held by New Valley was reduced from the prior
conversion price of $2.08 to $0.50 per share. As part of the debt conversion agreement, each of
Frost Trust and New Valley agreed to purchase $5,000,000 of our common stock for $0.45 per share.
Frost Trust agreed that it would not sell, transfer or assign any shares it received as a
result of the foregoing transactions for a period of one year from the date of the agreement except
to its affiliated entities.
The debt conversion transaction was approved by our shareholders at the annual shareholder
meeting held on January 12, 2005 and closed on March 11, 2005. The transactions were effective as
of February 22, 2005 and resulted in the following:
|
|
|
The $10,000,000 senior convertible promissory note to Frost Trust and related
accrued interest through February 22, 2005 of $2,761,000 was converted at $0.40 per
share into 31,902,320 shares of our common stock. |
|
|
|
|
The $8,010,000 senior convertible promissory note to New Valley and related accrued
interest through February 22, 2005 of $1,928,000 was converted at $0.50 per share into
19,876,358 shares of our common stock. |
|
|
|
|
Frost-Trust acquired 11,111,111 shares of our common stock at $0.45 per share in
exchange for a cash payment of $1,445,000 and the cancellation of our $3,500,000 of
notes payable and related accrued interest of $55,000 described below.
|
53
|
|
|
New Valley acquired 11,111,111 shares of our common stock at $0.45 per share in
exchange for a cash payment of $1,445,000 and the cancellation of our $3,500,000 of
notes payable and related accrued interest of $55,000 described below. |
|
|
|
|
We recorded a pre-tax charge of $19,359,000 in 2005 reflecting the expense
attributable to the reduction in the conversion price of the notes that were converted.
The net effect on our balance sheet from the conversion, net of related expenses, was
an increase to shareholders equity of $22,699,000 (without giving effect to any sale
of common stock relating to the private financing). |
|
|
|
|
As a result of the debt conversion and private financing, the beneficial ownership
of Frost-Trust increased from 18.5% to 37.2% (31.8% as at December 31, 2005). |
|
|
|
|
As a result of the debt conversion and private financing, the beneficial ownership
of New Valley increased from 9.4% to 25.7%. New Valley subsequently distributed
19,876,358 shares of the stock it received from the conversion of its note to its
shareholders. New Valleys residual LTS shares equate to a beneficial ownership of
approximately 7.9% at December 31, 2005. |
Other
On March 27, 2002, we borrowed $2,500,000 from New Valley, our former parent. 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 $5,000,000 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 $2,500,000 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. We have engaged in discussions with New
Valley to restructure the terms of these notes.
In December 2004, Ladenburg received a $2,000,000 temporary cash subordination from each of
Dr. Phillip Frost and New Valley to provide additional regulatory capital required for an
underwriting participation. Upon completion of the underwriting during the same month, the
$4,000,000 was repaid with interest at the rate of prime plus 2%. Interest amounted to $2,000.
In December 2005, Ladenburg received a $15,000,000 temporary cash subordination from one of
our directors, Dr. Phillip Frost, to provide additional regulatory capital required for an
underwriting participation. Upon completion of the underwriting during the same month, the
$15,000,000 was repaid plus a $300,000 fixed amount of interest. The
interest paid to Dr. Frost was on terms no less favorable than could
have been obtained from an unaffiliated third party.
We borrowed $1,750,000 from New Valley and $1,750,000 from Frost Trust in 2004 and an
additional $1,750,000 from each of them in the first quarter of 2005. These notes, together with
accrued interest, payable at 2% above the prime rate, were delivered for cancellation in March 2005
as payment,
54
along with $2,890,000 in cash, for New Valleys and Frost Trusts purchase of $10,000,000 of
our common stock discussed above.
We may from time to time borrow additional funds on a short-term basis from our shareholders
and clearing broker, 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 $92,000 in 2005.
Effective December 31, 2004, we sold LCFM to an entity owned by three of our directors,
Vincent A. Mangone, Richard J. Rosenstock, and Mark Zeitchick, for $5,000, resulting in a gain of
$5,000 which was recorded in our statement of operations for the year ended December 31, 2004, in
other revenues.
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, was re-hired by us in 2005 and
received approximately $82,000 in compensation during 2005. Richard Sonkins employment was
terminated during 2005. Steven Zeitchick, the brother of Mark Zeitchick, received $114,000 in
compensation during 2005. It is anticipated that Steven Zeitchick will receive in excess of
$60,000 in compensation from us in 2006.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
For the fiscal years ended December 31, 2005 and 2004, 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 $208,000 and $194,000, respectively.
Audit-Related Fees
For the fiscal years ended December 31, 2005 and 2004, 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 $22,000 and $44,000, respectively. These fees were for the audit of our
401(k) retirement plan for 2005 and 2004 and the audit and tax returns of the Ladenburg Focus Fund,
L.P. for 2004.
Tax Fees
For the fiscal years ended December 31, 2005 and 2004, the aggregate fees billed for
professional services rendered by our principal accountant for tax compliance, tax advice, and tax
planning were
55
$37,000 in each year. The services performed include the preparation of our federal, state
and local income tax returns for the fiscal years ended September 30, 2005 and 2004.
All Other Fees
For the fiscal years ended December 31, 2005 and 2004, the aggregate fees billed for products
and services provided by our principal accountant, other than the services reported above were
$19,000 and $21,000 respectively. The services performed were research of various accounting and
tax issues during both years and agreed upon procedures relating to Ladenburgs compliance with the
anti-money laundering requirements of the PATRIOT Act of 2001 for 2004.
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.
(a)(1): Index to 2005 Consolidated Financial Statements
The Consolidated Financial Statements and the Notes thereto, together with the report thereon
of Eisner LLP dated February 16, 2006, 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.
56
(a)(3): Exhibits Filed
The following is a list of exhibits filed herewith as part of this Annual Report on Form 10-K.
EXHIBIT INDEX
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Incorporated |
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Exhibit |
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By Reference from |
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No. in |
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Number |
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Description |
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Document |
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Document |
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Page |
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2.1 |
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Agreement and Plan of Merger, dated May 27,
1999
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A
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2.1 |
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3.1 |
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Articles of Incorporation
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B
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3.1 |
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3.2 |
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Articles of Amendment to the Articles of
Incorporation, dated August 24, 1999
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C
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3.2 |
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3.3 |
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Bylaws
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B
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3.2 |
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4.1 |
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Form of common stock certificate
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B
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4.1 |
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4.2 |
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Form of Warrant Agreement between the Company
and Cardinal Capital Management, Inc.
(including the form of Warrant Certificate).
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B
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4.2 |
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4.3 |
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Form of Senior Convertible Promissory Note, as
amended, dated May 7, 2001, issued to New
Valley Capital Corporation and Berliner
Effektengesellschaft AG
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D
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4.2 |
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4.4 |
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Senior Convertible Promissory Note, as
amended, dated May 7, 2001, issued to
Frost-Nevada, Limited Partnership
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D
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4.3 |
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4.5 |
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Promissory Note, dated March 27, 2002, issued
to New Valley Corporation
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E
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4.1 |
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10.1 |
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Agreement of Lease, dated December 20, 1996,
between the Company and Briarcliffe College,
Inc.
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C
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10.1 |
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10.2 |
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Standard Form of Office Lease, dated August 3,
1999, between the Company and Mayore Estates
LLC and 80 Lafayette LLC, together with
Amendment, dated August 19, 1999.
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C
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10.2 |
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10.3 |
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Amended and Restated 1999 Performance Equity
Plan*
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F
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10.1 |
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10.4 |
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Annual Incentive Bonus Plan*
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G
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Exhibit D
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10.5 |
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Special Performance Incentive Plan*
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G
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Exhibit E
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10.6 |
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Form of Stock Option Agreement, dated as of
May 7, 2001, between the Company and certain
directors
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H
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10.3 |
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10.6.1 |
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Schedule of Stock Option Agreements in the
form of Exhibit 10.31, including material
detail in which such documents differ from
Exhibit 10.31
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H
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10.3.1 |
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57
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Incorporated |
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Exhibit |
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By Reference from |
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No. in |
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Number |
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Description |
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Document |
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Document |
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Page |
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10.7 |
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Form of Warrant issued to New Valley
Corporation and Frost-Nevada, Limited
Partnership
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D
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10.6 |
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10.8 |
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Stock Option Agreement, dated as of January
10, 2002, between the Company and Richard J.
Lampen
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I
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10.2 |
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10.9 |
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Form of Stock Option Agreement, dated January
10, 2002, between the Company and each of
Victor M. Rivas, Richard J. Rosenstock, Mark
Zeitchick and Vincent A. Mangone*
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I
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10.3 |
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10.9.1 |
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Schedule of Stock Option Agreements in the
form of Exhibit 10.41, including material
detail in which such documents differ from
Exhibit 10.41*
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J
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10.3.1 |
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10.10 |
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Ladenburg Thalmann Financial Services Inc.
Qualified Employee Stock Purchase Plan
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F
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10.2 |
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10.11 |
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Form of Stock Option Agreement, dated November
15, 2002, between the Company and each of
Bennett S. LeBow, Howard M. Lorber, Henry C.
Beinstein, Robert J. Eide and Richard J.
Lampen*
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K
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10.48 |
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10.11.1 |
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Schedule of Stock Option Agreements in the
form of Exhibit 10.48, including material
detail in which such documents differ from
Exhibit 10.48*
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K
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10.48.1 |
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10.12 |
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Form of Stock Option Agreement, dated
September 17, 2003, between the Company and
each of Howard M. Lorber, Henry C. Beinstein,
Robert J. Eide and Richard J. Lampen*
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L
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10.1 |
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10.12.1 |
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Schedule of Stock Option Agreements in the
form of Exhibit 10.49, including material
detail in which such documents differ from
Exhibit 10.49*
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L
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10.1.1 |
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10.13 |
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Stock Option Agreement, dated December 17,
2003, between the Company and Salvatore
Giardina*
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M
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10.46 |
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58
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Incorporated |
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Exhibit |
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By Reference from |
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No. in |
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Number |
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Description |
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Document |
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Document |
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Page |
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10.14 |
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Debt Conversion Agreement, dated as of March
29, 2004, among Ladenburg Thalmann Financial
Services Inc., a Florida corporation, New
Valley Corporation and Frost-Nevada
Investments Trust
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M
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10.49 |
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10.15 |
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Severance, Waiver and Release Agreement, dated
as of March 4, 2005, between Ladenburg
Thalmann Financial Services Inc. and Charles
I. Johnston*
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N
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10.1 |
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10.16 |
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Employment Agreement, dated as of March 4,
2005, between Ladenburg Thalmann Financial
Services Inc. and Mark D. Klein*
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N
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10.2 |
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10.17 |
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Stock Option Agreement, dated as of March 4,
2005, between Ladenburg Thalmann Financial
Services Inc. and Mark D. Klein*
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N
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10.3 |
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10.17.1 |
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Stock Option Agreement Amendment, dated as of
March 20, 2006, between Ladenburg Thalmann
Financial Services Inc. and Mark D. Klein *
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Filed
Herewith
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10.18 |
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Indemnification Agreement, dated as of March
4, 2005, between Ladenburg Thalmann Financial
Services Inc. and Mark D. Klein*
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N
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10.4 |
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10.19 |
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Stock Option Agreement, dated as of March 25,
2005, between Ladenburg Thalmann Financial
Services Inc. and Michael Philipps*
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O
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10.1 |
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10.1 |
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10.20 |
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Subscription Agreement between Ladenburg
Thalmann Financial Services Inc. and Michael
Philipps*
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O
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10.2 |
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10.2 |
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10.21 |
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Stock Purchase Agreement between Ladenburg
Thalmann Financial Services Inc. and Michael
Philipps*
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O
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10.3 |
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10.3 |
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10.22 |
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Form of Subscription Agreement for investors
unrelated to us in the November 2005 Private
Placement
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P |
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10.1 |
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10.1 |
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10.23 |
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Form of Subscription Agreement for investors
related to us in the November 2005 Private
Placement
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P
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10.2 |
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10.2 |
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21 |
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List of Subsidiaries
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Filed
Herewith
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59
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Incorporated |
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Exhibit |
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By Reference from |
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No. in |
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Number |
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Description |
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Document |
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Document |
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Page |
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23.1 |
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Consent of Eisner LLP
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Filed
Herewith
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31.1 |
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Certification of Chief Executive Officer,
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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Filed
Herewith
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31.2 |
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Certification of Chief Financial Officer,
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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Filed
Herewith
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32.1 |
|
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Certification of Chief Executive Officer,
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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Filed
Herewith
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32.2 |
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Certification of Chief Financial Officer,
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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Filed
Herewith
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A. |
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Quarterly report on Form 10-QSB filed on August 16, 1999. |
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B. |
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Registration statement on Form SB-2 (File No. 333-31001). |
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C. |
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Annual report on Form 10-K for the year ended August 24, 1999. |
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D. |
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Current report on Form 8-K/A, dated February 8, 2001 and filed with the SEC on September 10, 2001. |
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E. |
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Quarterly report on Form 10-Q for the quarter ended March 31, 2002. |
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F. |
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Quarterly report on Form 10-Q for the quarter ended September 30, 2002. |
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G. |
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Definitive proxy statement relating to a special meeting of shareholders held on August 23, 1999. |
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H. |
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Current report on Form 8-K/A, dated February 8, 2001 and filed with the SEC on May 1, 2001. |
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I. |
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Quarterly report on Form 10-Q for the quarter ended June 30, 2001. |
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J. |
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Registration statement on Form S-3 (File No. 333-81964). |
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K. |
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Annual report on Form 10-K for the year ended December 31, 2002. |
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L. |
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Quarterly report on Form 10-Q for the quarter ended September 30, 2003. |
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M. |
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Annual report on Form 10-K for the year ended December 31, 2003. |
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N. |
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Current report on Form 8-K, dated March 4, 2005 and filed with the SEC on March 10, 2005. |
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O. |
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Current report on Form 8-K, dated March 25, 2005 and filed with the SEC on March 31, 2005. |
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P. |
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Current report on Form 8-K, dated November 30, 2005 and filed with the SEC on the same date. |
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* |
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Management Compensation Contract |
60
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.
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Dated: March 31, 2006 |
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Registrant)
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By: |
/s/ Mark D. Klein
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Name: |
Mark D. Klein |
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Title: |
President and Chief Executive Officer |
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POWER OF ATTORNEY
The undersigned directors and officers of Ladenburg Thalmann Financial Services Inc. hereby
constitute and appoint Howard M. Lorber, Mark D. Klein 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 31, 2006.
|
|
|
Signatures |
|
Title |
|
/s/ Mark D. Klein
Mark D. Klein |
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President and Chief Executive Officer (Principal
Executive Officer) |
/s/ Salvatore Giardina
Salvatore Giardina |
|
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer) |
/s/ Henry C. Beinstein
Henry C. Beinstein |
|
Director |
/s/ Robert J. Eide
Robert J. Eide |
|
Director |
/s/ Phillip Frost, M.D.
Phillip Frost, M.D. |
|
Director |
/s/ Brian S. Genson
Brian S. Genson |
|
Director |
/s/ Richard J. Lampen
Richard J. Lampen |
|
Director |
/s/ Howard M. Lorber
Howard M. Lorber |
|
Director |
/s/ Vincent A. Mangone
Vincent A. Mangone |
|
Director |
/s/ Benjamin D. Pelton
Benjamin D. Pelton |
|
Director |
/s/ Jeffrey S. Podell
Jeffrey S. Podell |
|
Director |
/s/ Steven A. Rosen
Steven A. Rosen |
|
Director |
/s/ Richard J. Rosenstock
Richard J. Rosenstock |
|
Director |
/s/ Mark Zeitchick
Mark Zeitchick |
|
Director |
61
LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005
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 |
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
F-2 |
|
|
|
|
|
|
Consolidated Statements of Financial Condition as of December 31, 2005 and 2004 |
|
|
F-3 |
|
|
|
|
|
|
Consolidated Statements of Operations
for the years ended December 31, 2005, 2004 and 2003 |
|
|
F-4 |
|
|
|
|
|
|
Consolidated Statements of Changes in Shareholders Equity (Capital Deficit)
for the years ended December 31, 2005, 2004 and 2003 |
|
|
F-5 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows
for the years ended December 31, 2005, 2004 and 2003 |
|
|
F-6 |
|
|
|
|
|
|
Notes to the Consolidated Financial Statements |
|
|
F-7 |
|
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Ladenburg Thalmann Financial Services Inc.
We have audited the accompanying consolidated statements of financial condition of Ladenburg
Thalmann Financial Services Inc. and its subsidiaries (the Company) as of December 31, 2005 and
2004, and the related consolidated statements of operations, changes in shareholders equity
(capital deficit) and cash flows for each of the three years in the period ended December 31, 2005.
These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those 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, 2005 and 2004, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Eisner LLP
New York, New York
February 16, 2006, except for Note 14 as to which the date is
March 7, 2006
F-2
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2005 |
|
2004 |
ASSETS
|
Cash and cash equivalents |
|
$ |
10,936 |
|
|
$ |
1,720 |
|
Trading securities owned |
|
|
1,904 |
|
|
|
153 |
|
Due from affiliates |
|
|
|
|
|
|
121 |
|
Receivables from clearing brokers |
|
|
20,947 |
|
|
|
10,348 |
|
Exchange memberships owned, at historical cost (Note 14) |
|
|
1,413 |
|
|
|
1,501 |
|
Furniture, equipment and leasehold improvements, net |
|
|
966 |
|
|
|
2,866 |
|
Restricted assets |
|
|
1,313 |
|
|
|
1,060 |
|
Other assets |
|
|
1,820 |
|
|
|
3,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
39,299 |
|
|
$ |
21,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (CAPITAL DEFICIT)
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased |
|
$ |
8,857 |
|
|
$ |
28 |
|
Accrued compensation |
|
|
2,488 |
|
|
|
2,009 |
|
Accounts payable and accrued liabilities |
|
|
6,634 |
|
|
|
6,399 |
|
Deferred rent |
|
|
1,529 |
|
|
|
4,096 |
|
Accrued interest |
|
|
101 |
|
|
|
2,750 |
|
Accrued interest to former parent |
|
|
1,056 |
|
|
|
2,542 |
|
Notes payable, including $5,000 to former parent |
|
|
5,667 |
|
|
|
9,833 |
|
Senior convertible notes payable |
|
|
|
|
|
|
18,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
26,332 |
|
|
|
45,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (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, 141,590,529 and 46,683,270 |
|
|
14 |
|
|
|
5 |
|
Additional paid-in capital |
|
|
122,532 |
|
|
|
58,674 |
|
Unearned employee stock-based compensation |
|
|
(893 |
) |
|
|
|
|
Accumulated deficit |
|
|
(108,686 |
) |
|
|
(82,715 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (capital deficit) |
|
|
12,967 |
|
|
|
(24,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity (capital deficit) |
|
$ |
39,299 |
|
|
$ |
21,631 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-3
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
2005 |
|
2004 |
|
2003 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
$ |
15,937 |
|
|
$ |
27,422 |
|
|
$ |
42,376 |
|
Principal transactions, net |
|
|
4,042 |
|
|
|
2,798 |
|
|
|
4,966 |
|
Investment banking fees |
|
|
4,476 |
|
|
|
1,653 |
|
|
|
2,804 |
|
Investment advisory fees |
|
|
1,265 |
|
|
|
193 |
|
|
|
69 |
|
Interest and dividends |
|
|
2,082 |
|
|
|
1,495 |
|
|
|
1,752 |
|
Syndications and underwritings |
|
|
491 |
|
|
|
496 |
|
|
|
251 |
|
Other income |
|
|
2,397 |
|
|
|
4,384 |
|
|
|
5,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
30,690 |
|
|
|
38,441 |
|
|
|
57,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
22,756 |
|
|
|
27,697 |
|
|
|
38,781 |
|
Non-cash compensation |
|
|
728 |
|
|
|
|
|
|
|
|
|
Brokerage, communication and clearance fees |
|
|
2,387 |
|
|
|
3,197 |
|
|
|
5,184 |
|
Rent and occupancy, net of sublease revenue |
|
|
2,635 |
|
|
|
3,700 |
|
|
|
3,855 |
|
Professional services |
|
|
3,054 |
|
|
|
3,393 |
|
|
|
3,927 |
|
Interest |
|
|
1,027 |
|
|
|
2,189 |
|
|
|
2,225 |
|
Depreciation and amortization |
|
|
811 |
|
|
|
1,037 |
|
|
|
1,187 |
|
Write-off of furniture, fixtures and leasehold
improvements, net |
|
|
62 |
|
|
|
546 |
|
|
|
779 |
|
Debt conversion expense |
|
|
19,359 |
|
|
|
|
|
|
|
|
|
Other |
|
|
3,788 |
|
|
|
6,595 |
|
|
|
6,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
56,607 |
|
|
|
48,354 |
|
|
|
62,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes (benefit) |
|
|
(25,917 |
) |
|
|
(9,913 |
) |
|
|
(5,198 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit) |
|
|
54 |
|
|
|
(127 |
) |
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(25,971 |
) |
|
|
(9,786 |
) |
|
|
(5,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of limited
partners interest and income taxes |
|
|
|
|
|
|
(68 |
) |
|
|
(222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(25,971 |
) |
|
$ |
(9,854 |
) |
|
$ |
(5,490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per Common Share (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.24 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.12 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.24 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computation (basic and diluted) |
|
|
108,948,623 |
|
|
|
45,144,481 |
|
|
|
42,567,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-4
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS EQUITY (CAPITAL DEFICIT)
(Dollars in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
|
|
|
|
Common Stock |
|
Additional |
|
Employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in |
|
Stock-based |
|
Accumulated |
|
|
|
|
Shares |
|
Amount |
|
Capital |
|
Compensation |
|
Deficit |
|
Total |
Balance, December 31, 2002 |
|
|
42,025,211 |
|
|
$ |
4 |
|
|
$ |
56,473 |
|
|
$ |
|
|
|
$ |
(67,371 |
) |
|
$ |
(10,894 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
under employee stock purchase plan |
|
|
1,601,919 |
|
|
|
|
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,490 |
) |
|
|
(5,490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003 |
|
|
43,627,130 |
|
|
|
4 |
|
|
|
56,685 |
|
|
|
|
|
|
|
(72,861 |
) |
|
|
(16,172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock in
connection with settlement of
arbitration claims |
|
|
2,000,000 |
|
|
|
1 |
|
|
|
1,419 |
|
|
|
|
|
|
|
|
|
|
|
1,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
under employee stock purchase plan |
|
|
918,842 |
|
|
|
|
|
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
137,298 |
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,854 |
) |
|
|
(9,854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
|
46,683,270 |
|
|
|
5 |
|
|
|
58,674 |
|
|
|
|
|
|
|
(82,715 |
) |
|
|
(24,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
under employee stock purchase plan |
|
|
686,096 |
|
|
|
|
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
44,767 |
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
under performance equity plan |
|
|
580,000 |
|
|
|
|
|
|
|
374 |
|
|
|
(113 |
) |
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock to
employees pursuant to stock purchase
agreements |
|
|
10,391,666 |
|
|
|
1 |
|
|
|
6,149 |
|
|
|
(1,474 |
) |
|
|
|
|
|
|
4,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted to Advisory Board |
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned employee
stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
694 |
|
|
|
|
|
|
|
694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of senior convertible debt |
|
|
51,778,678 |
|
|
|
5 |
|
|
|
42,053 |
|
|
|
|
|
|
|
|
|
|
|
42,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
pursuant to private equity offering to
former debtholders, net of expenses of
$87 |
|
|
22,222,222 |
|
|
|
2 |
|
|
|
9,911 |
|
|
|
|
|
|
|
|
|
|
|
9,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock to
unrelated parties pursuant to private
equity offering, net of expenses of
$56 |
|
|
13,824,331 |
|
|
|
1 |
|
|
|
6,164 |
|
|
|
|
|
|
|
|
|
|
|
6,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and retirement of shares of
common stock |
|
|
(4,620,501 |
) |
|
|
|
|
|
|
(1,155 |
) |
|
|
|
|
|
|
|
|
|
|
(1,155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,971 |
) |
|
|
(25,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
141,590,529 |
|
|
$ |
14 |
|
|
$ |
122,532 |
|
|
$ |
(893 |
) |
|
$ |
(108,686 |
) |
|
$ |
12,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-5
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
2005 |
|
2004 |
|
2003 |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(25,971 |
) |
|
$ |
(9,854 |
) |
|
$ |
(5,490 |
) |
Adjustments to reconcile net loss to net
cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
811 |
|
|
|
1,037 |
|
|
|
1,187 |
|
Write-off of furniture, fixtures and
leasehold improvements, net |
|
|
62 |
|
|
|
546 |
|
|
|
779 |
|
Amortization of (adjustment to)
deferred rent |
|
|
(1,305 |
) |
|
|
(992 |
) |
|
|
40 |
|
Accrued interest |
|
|
681 |
|
|
|
2,069 |
|
|
|
2,136 |
|
Forgiveness of promissory note payable |
|
|
(667 |
) |
|
|
(667 |
) |
|
|
(1,500 |
) |
Debt conversion expense |
|
|
19,359 |
|
|
|
|
|
|
|
|
|
Non-cash compensation expense |
|
|
728 |
|
|
|
|
|
|
|
|
|
Limited partners interest in discontinued
operations |
|
|
|
|
|
|
522 |
|
|
|
152 |
|
Gain on debt cancellation |
|
|
|
|
|
|
(1,310 |
) |
|
|
|
|
Gain on sale of discontinued operations |
|
|
|
|
|
|
(105 |
) |
|
|
|
|
Other |
|
|
88 |
|
|
|
337 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in operating assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities owned |
|
|
(1,751 |
) |
|
|
860 |
|
|
|
3,352 |
|
Receivables from clearing brokers |
|
|
(10,599 |
) |
|
|
10,897 |
|
|
|
(9,867 |
) |
Assets of discontinued operations |
|
|
|
|
|
|
|
|
|
|
(1,685 |
) |
Due from affiliates |
|
|
121 |
|
|
|
326 |
|
|
|
(194 |
) |
Income taxes receivable |
|
|
|
|
|
|
|
|
|
|
2,224 |
|
Other assets |
|
|
2,042 |
|
|
|
428 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased |
|
|
8,829 |
|
|
|
(4,042 |
) |
|
|
2,852 |
|
Accrued compensation |
|
|
479 |
|
|
|
(188 |
) |
|
|
(893 |
) |
Accounts payable and accrued liabilities |
|
|
255 |
|
|
|
(726 |
) |
|
|
(2,804 |
) |
Liabilities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
3,374 |
|
Due to affiliates |
|
|
(34 |
) |
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(6,872 |
) |
|
|
(828 |
) |
|
|
(6,347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of furniture, equipment
and leasehold improvements |
|
|
(237 |
) |
|
|
(398 |
) |
|
|
(527 |
) |
Net proceeds from sale of equipment |
|
|
|
|
|
|
29 |
|
|
|
93 |
|
Proceeds from sale of discontinued operations. |
|
|
|
|
|
|
401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing
activities |
|
|
(237 |
) |
|
|
32 |
|
|
|
(434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock other than private
equity offerings |
|
|
5,265 |
|
|
|
571 |
|
|
|
212 |
|
Repurchase of common stock |
|
|
(1,155 |
) |
|
|
|
|
|
|
|
|
Private equity offerings |
|
|
8,968 |
|
|
|
|
|
|
|
|
|
Issuance of subordinated notes payable |
|
|
15,000 |
|
|
|
4,000 |
|
|
|
|
|
Issuance of other notes payable |
|
|
3,500 |
|
|
|
3,500 |
|
|
|
|
|
Repayment of subordinated notes payable |
|
|
(15,000 |
) |
|
|
(6,500 |
) |
|
|
|
|
Repayment of senior convertible notes payable |
|
|
|
|
|
|
(1,000 |
) |
|
|
|
|
(Increase) decrease in restricted assets |
|
|
(253 |
) |
|
|
3 |
|
|
|
(9 |
) |
Distributions to limited partners of
discontinued operations |
|
|
|
|
|
|
(2,628 |
) |
|
|
(1,801 |
) |
Contributions from limited partners of
discontinued operations |
|
|
|
|
|
|
1,158 |
|
|
|
182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
16,325 |
|
|
|
(896 |
) |
|
|
(1,416 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents |
|
|
9,216 |
|
|
|
(1,692 |
) |
|
|
(8,197 |
) |
Cash and cash equivalents, beginning of year |
|
|
1,720 |
|
|
|
3,412 |
|
|
|
11,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
10,936 |
|
|
$ |
1,720 |
|
|
$ |
3,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
323 |
|
|
$ |
74 |
|
|
$ |
1,018 |
|
Taxes paid |
|
|
26 |
|
|
|
29 |
|
|
|
206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of senior convertible notes ($18,010)
and accrued interest ($4,689) into common
shares |
|
$ |
22,699 |
|
|
$ |
|
|
|
$ |
|
|
Common shares purchased pursuant to private
placement by exchanging notes payable
($7,000) and accrued interest ($110) |
|
|
7,110 |
|
|
|
|
|
|
|
|
|
Settlement of liability with shares of common
stock (Note 7) |
|
|
|
|
|
|
1,420 |
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-6
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
1. |
|
Description of Business |
|
|
|
The consolidated financial statements include the accounts of Ladenburg Thalmann Financial
Services Inc. (LTS or the Company), a holding company, and its subsidiaries, all of which
are wholly-owned. The principal operating subsidiary of LTS is Ladenburg Thalmann & Co. Inc.
(Ladenburg), which is a registered broker-dealer in securities. The Companys other
subsidiaries primarily provide asset management services. All significant intercompany
balances and transactions have been eliminated. |
|
|
|
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, research, investment banking, asset management 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, among others, the Securities and Exchange Commission (SEC), the NYSE, National
Association of Securities Dealers, Inc. (NASD), Commodities Futures Trading Commission and
National Futures Association. (See Note 4.) |
|
|
|
One of the Companys wholly-owned subsidiaries, Highland Fund Management Inc. (f/k/a Ladenburg
Capital Fund Management Inc.) (LCFM), was sold as of December 31, 2004 to an entity owned by
three of the Companys directors. LCFM is the general partner of a limited partnership
investment fund. The Company received $5 in exchange for all of the outstanding common stock
of LCFM. This resulted in a gain of $5 which is reflected in discontinued operations for 2004.
Accordingly, the accounts of the limited partnership are no longer consolidated with the
Companys accounts, effective December 31, 2004 and the results of operations of the limited
partnership for the two-year period then ended has been reclassified and presented as earnings
(loss) from discontinued operations in the accompanying statements of operations. The limited
partners equity in LCFM is shown as limited partners interest in discontinued operations. In
addition, in March 2004, the Company sold one of its registered investment advisor
subsidiaries, Financial Partners Capital Management, Inc. (FPCM), to one of its employees.
FPCM provided investment advisory and financial planning services. The Company received $396
in exchange for all of the outstanding common stock of FPCM and recorded a gain on sale of
$100. FPCMs results of operations through March 31, 2004, together with the gain on sale are
reflected as discontinued operations. Revenues attributable to discontinued operations
amounted to $1,425 and $2,291 in 2004 and 2003, respectively. |
|
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 Companys management. Unrealized gains and losses
resulting from changes in valuation are reflected in net gain on principal transactions. |
F-7
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
Exchange memberships owned, which include among others, seats on the New York Stock Exchange,
American Stock Exchange and Chicago Board Options Exchange, are valued at cost. |
|
|
|
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 subsidiaries file a consolidated federal income tax return and certain
combined state and local income tax returns. The amount of current and deferred taxes payable
or refundable is recognized 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, 2005 and December 31, 2004, the valuation allowance was
$25,056 and $22,841, 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. |
|
|
|
Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated
with Exit or Disposal Activities requires that a cost associated with an exit or disposal
activity 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 7.) |
|
|
|
SFAS No. 123, Accounting for Stock-Based Compensation, allows the use of the fair value based
method of accounting for stock-based employee compensation to be included in expense over the
period earned. 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 Companys 1999 Performance Equity Plan (the Option Plan) and
all options granted outside the Plan had an exercise price equal to the market value of the
underlying common stock on the date of grant. The table below illustrates the effect on the
Companys net loss for the years ended December 31, 2005, 2004 and 2003 had the Company elected
to recognize compensation expense for the stock option plan, consistent with the method
prescribed by SFAS No. 123. |
F-8
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Net loss, as reported |
|
$ |
(25,971 |
) |
|
$ |
(9,854 |
) |
|
$ |
(5,490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based employee compensation determined
under the fair value based method |
|
|
(2,314 |
) |
|
|
(1,269 |
) |
|
|
(1,517 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(28,285 |
) |
|
$ |
(11,123 |
) |
|
$ |
(7,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per Common Share (basic and
diluted), as reported |
|
$ |
(0.24 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per Common Share (basic
and diluted) |
|
$ |
(0.26 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 3,524,500 and 4,599,500 shares of common stock, during 2005 and 2004,
respectively, were granted under the Option Plan. Options to purchase 14,000,000 and
1,500,000 shares of common stock, during 2005 and 2004, respectively, were granted outside
of the Option Plan. The per share weighted average fair value of stock options granted
during 2005, 2004 and 2003 of $0.45, $0.77 and $0.40, respectively, was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Risk-free interest rate |
|
|
4.24 |
% |
|
|
4.27 |
% |
|
|
4.27 |
% |
Volatility |
|
|
74.71 |
% |
|
|
106.93 |
% |
|
|
102.48 |
% |
Dividend yield |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Expected lives |
|
10 years |
|
10 years |
|
10 years |
|
|
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which requires all
share-based payments to employees, including grants of employee stock options, to be
recognized in the income statement, as an operating expense, based on their fair values.
Pro forma disclosure is no longer an alternative. That cost will be recognized as
compensation expense over the service period, which would normally be the vesting period of
the options. The effective date of SFAS No. 123R for the Company is January 1, 2006. As
permitted by SFAS No. 123, the Company currently accounts for share-based payments to
employees using APB Opinion No. 25s intrinsic value method and, as such, recognizes no
compensation cost for employee stock options unless options granted have an exercise price
below the market value on the date of grant. Accordingly, the adoption of SFAS No. 123Rs
fair value method could have a significant impact on the Companys results of operations,
although it will have no impact on the Companys overall financial position. The impact of
adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels
of share-based payments granted in the future. |
|
|
|
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)
3. |
|
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, 2005 and 2004 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
Securities |
|
Sold, But Not |
|
|
Owned |
|
Yet Purchased |
December 31, 2005 |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
1,852 |
|
|
$ |
8,854 |
|
Municipal obligations |
|
|
45 |
|
|
|
|
|
U.S.Government obligations |
|
|
6 |
|
|
|
|
|
Corporate bonds |
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,904 |
|
|
$ |
8,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
71 |
|
|
$ |
23 |
|
Municipal obligations |
|
|
53 |
|
|
|
|
|
Corporate bonds |
|
|
29 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
153 |
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased at December 31, 2005 principally respresents securities
sold pursuant to an underwriters over-allotment option which was exercised in January 2006. |
|
|
|
As of December 31, 2005 and 2004, approximately $1,904 and $138, respectively, of the
securities owned are deposited with the Companys clearing broker and pursuant to the
agreement, the securities may be sold or hypothecated by the clearing broker. |
|
4. |
|
Net Capital Requirements |
|
|
|
As a registered broker-dealer, Ladenburg is subject to the SECs Uniform Net Capital Rule
15c3-1 and the Commodity Futures Trading Commissions 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. At December 31, 2005, Ladenburg had net capital, as
defined, of $2,932, which exceeded its minimum capital requirement of $250 by $2,682. |
|
|
|
Ladenburg claims an exemption from the provisions of the SECs Rule 15c3-3 pursuant to
paragraph (k)(2)(ii) as it clears its customer transactions through its correspondent broker on
a fully disclosed basis. |
|
5. |
|
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 $18,010 of fixed rate subordinated notes payable outstanding at December 31,
2004, the Companys management believes that the stated interest rates on the notes would not be
substantially different than what the Company could have obtained as of such date, based on the
Companys 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. |
F-10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
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. The Company enters into options transactions primarily as a hedge for
securities owned or securities sold, but not yet purchased. 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. |
|
|
|
As of December 31, 2005 and 2004, Ladenburg was not contractually obligated for any equity
index or financial futures contracts. |
|
|
|
For the years ended December 31, 2005, 2004 and 2003, the net gain arising from options and
futures contracts without regard to the benefit derived from market risk reduction was $-0-, $7
and $50, respectively. The measurement of market risk is meaningful only when all related and
offsetting transactions are taken into consideration. |
|
|
|
Ladenburg sold securities that it does 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, 2005 and 2004 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, 2005 (see Note 3). |
|
6. |
|
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, |
|
|
2005 |
|
2004 |
Cost |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
$ |
529 |
|
|
$ |
2,899 |
|
Computer equipment |
|
|
3,835 |
|
|
|
3,422 |
|
Furniture and fixtures |
|
|
1,272 |
|
|
|
1,197 |
|
Other |
|
|
2,377 |
|
|
|
2,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
8,013 |
|
|
|
10,231 |
|
|
|
|
|
|
|
|
|
|
Less, accumulated depreciation and amortization |
|
|
(7,047 |
) |
|
|
(7,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
966 |
|
|
$ |
2,866 |
|
|
|
|
|
|
|
|
|
|
|
|
See Note 7 Operating Leases. |
|
7. |
|
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. The subleases expire at various dates through June 2015. |
F-11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
As of December 31, 2005, the leases and subleases, exclusive of the lease relating to premises
vacated by a subsidiary, Ladenburg Capital Management Inc., due to the events of September 11,
2001 referred to below, provide for minimum lease payments and sublease rentals, net of lease
abatement and exclusive of escalation charges, as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending |
|
Lease |
|
Sublease |
|
|
December 31, |
|
Commitments |
|
Rentals |
|
Net |
2006 |
|
$ |
4,932 |
|
|
$ |
4,492 |
|
|
$ |
440 |
|
2007 |
|
|
5,155 |
|
|
|
4,645 |
|
|
|
510 |
|
2008 |
|
|
5,593 |
|
|
|
5,167 |
|
|
|
426 |
|
2009 |
|
|
5,386 |
|
|
|
5,167 |
|
|
|
219 |
|
2010 |
|
|
5,389 |
|
|
|
4,018 |
|
|
|
1,371 |
|
Thereafter |
|
|
25,437 |
|
|
|
14,635 |
|
|
|
10,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,892 |
|
|
$ |
38,124 |
|
|
$ |
13,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the above, one of the leases obligates the Company to occupy additional space at
the landlords option, which may result in aggregate additional lease payments of up to $701
through June 2015. |
|
|
|
Deferred rent shown in the consolidated statement of financial condition 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. |
|
|
|
In February 2006, Ladenburg Capital entered into a settlement agreement with the landlord
for its office space in New York City which Ladenburg Capital was forced to vacate during 2001
due to the events of September 11, 2001. The terms of the settlement with the landlord (who
had filed for bankruptcy reorganization) provided for us to pay the landlord $1,900 and were
approved by the bankruptcy court on March 24, 2006. The settlement agreement provided for the
termination of all Ladenburg Capitals liabilities under the lease in exchange for $1,900 in
cash and the surrender by the landlord of Ladenburg Capitals letter of credit of approximately
$650. In February 2006, Ladenburg Capital deposited $1,250 into escrow and the landlord
relinquished the letter of credit. Ladenburg Capital will liquidate the assets securing the
letter of credit and deposit the remaining $650 into escrow. The 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, provided for future minimum payments aggregating approximately $2,988 payable $703
per year from 2006 through 2009 and $176 in 2010. The liability provided at December 31, 2004
was increased by $240 with a corresponding increase in rent expense for the year ended December
31, 2005 to reflect the settlement agreement. |
|
|
|
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. In accordance with SFAS No. 146, as estimated future sublease
payments that could be reasonably obtained for the property exceeded related rental commitments
under the lease, amounting to $15,421 as of December 31, 2003, no liability for costs
associated with vacating the space was provided. In September 2004, Ladenburg subleased this
floor for the remaining term of its lease. The fair value of the Companys obligation with
respect to the lease computed in accordance with SFAS No. 146, was approximately $1,500 at
inception of the sublease and approximated the balance of the Companys deferred
rent liability relating to such space. Accordingly, no charge to operations was required in
connection with the sublease. The balance of this liability as of December 31, 2005 was
approximately $364 and is included in accrued expenses and other liabilities. The decrease in
this liability results from net cash outflows relating to the space, including certain costs
in connection with the sublease. |
F-12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
In the third quarter of 2004, Ladenburg ceased using a portion of another floor of its New York
City office. Accordingly, the related leasehold improvements were 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 $1,275, net of the
write-off of the unamortized deferred rent credit of $729, resulted in a net charge to
operations of $546. In November 2004, Ladenburg subleased the space through June 30, 2010, for
a sub-rental equal to its lease commitment with the landlord, through the sublease period. |
|
|
|
In December 2005, Ladenburg entered into an agreement to sublet the remaining floor of its New
York City office that it was occupying, commencing no later than March 15, 2006, for a term
through the end of its lease period. Accordingly, the remaining leasehold improvements were
written-off as of December 31, 2005. In conjunction with the write-off of leasehold
improvements, a portion of 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 $1,326, net of the write-off of $1,264 of the $2,093 of unamortized
deferred rent credit resulted in a net charge to $62. The $829 balance of the unamortized
deferred rent credit was equivalent to the fair value of the Companys obligation with respect
to the lease and is included in accounts payable and accrued liabilities. |
|
|
|
In December 2003, Ladenburg Capital settled its litigation with the landlord and terminated its
obligation under a lease expiring in 2007 relating to the office space in Bethpage, New York,
which it vacated in 2002. During 2002, Ladenburg Capital provided for costs in connection with
the litigation. In connection with the settlement, the Company 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. |
|
|
|
At December 31, 2005 and 2004, Ladenburg has utilized a letter of credit in the amount of
$1,000 which in both years was collateralized by $1,060 of Ladenburgs investment in a money
market fund that is classified as restricted assets on the consolidated statement of financial
condition. The letter of credit is used as collateral for the lease of the Companys 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 and Regulatory Matters |
|
|
|
The Company is a defendant in litigation and may be subject to unasserted claims or
arbitrations primarily in connection with its activities as a securities broker-dealer and
participation in public underwritings. Such litigation and claims involve substantial or
indeterminate amounts and are in varying stages of legal proceedings. As of December 31, 2005,
the Companys subsidiaries are involved in several pending arbitrations in which claimants are
seeking substantial amounts of damages. In June 2005, an arbitration panel granted Ladenburgs
motion to dismiss a pending claim with prejudice in which the claimaints were seeking
compensatory damages of $6,000.
|
|
|
|
In September 2005, Ladenburg and Ladenburg Capital settled their claim with the insurance
carrier relating to the events of September 11, 2001, for a total of $2,350. The excess of
the insurance reimbursement over the $2,118 receivable previously reflected in other assets,
amounted to $232 which is included in other income in the Companys statement of operations
for the year ended December 31, 2005. In addition, the insurance
carrier agreed to reimburse Ladenburg Capital up to one third of any payment Ladenburg Capital
makes to its New York City landlord in settling its obligation relating to the vacated
premises, limited to $150. |
|
|
|
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. In August 2005, Ladenburgs motion to
dismiss was granted in
part and denied in part; Ladenburgs motion to reconsider portions of that decision is
currently pending. The Company believes the plaintiffs claims in this action are without
merit and intends to vigorously defend against them. |
F-13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
In July 2005, a claim filed by Exotics.com, Inc. in the Superior Court of the State of
California for the County of Los Angeles naming Ladenburg as a defendant was dismissed with
prejudice. The amended complaint, which sought unspecified damages, alleged that defendants
other than Ladenburg converted the plaintiff companys licensing rights and other intellectual
property, and that Ladenburg was involved in a conspiracy to manipulate the companys stock,
apparently through purportedly improper short sales. The claims were for conspiracy,
conversion, breach of fiduciary duty, fraud, violations of California state securities law and
other related claims. |
|
|
|
In May 2004, the NASD contacted Ladenburg regarding an informal investigation into past
activities by it, Ladenburg Capital and certain of their employees involving potential
violations of NASD Rule 2440 and NASD Interpretive Memorandum 2440(c)(5) relating to fair
prices and commissions. On September 15, 2004, Ladenburg received a Wells Letter from the
staff of the NASD. The Wells Letter stated that the staff of the NASD intends to recommend
that disciplinary action be brought against Ladenburg for violating certain conduct rules of
the NASD, including NASD Conduct Rule 2440 and NASD Interpretive Memorandum 2440(c)(5) relating
to fair prices and commissions, and Section 10(b) of the Securities Exchange Act of 1934, as
amended. The NASD previously delivered similar Wells Letters to five employees of Ladenburg
generally alleging violations by them of the same NASD and SEC rules. Ladenburg and the NASD
have resolved this matter. On March 23, 2005, without admitting or denying the NASDs
allegations or findings, Ladenburg consented to entry of an Acceptance, Waiver and Consent in
which the NASD found that Ladenburg violated NASD Conduct Rule 2440, NASD Interpretive
Memorandum 2440(c)(5), and NASD Conduct Rules 2110 (by virtue of violating Sections 17(a)(2)
and (3) of the Securities Act of 1933), 3010 and 2110. In connection with the settlement,
Ladenburg reimbursed customers approximately $1,200, plus interest. Ladenburg was
also censured and agreed to a fine in the amount of $275. A liability of $1,555 related to the
settlement was provided at December 31, 2004 with a corresponding charge to operations for the
year then ended. The $275 fine was paid in March 2005, and in June 2005, Ladenburg reimbursed
these customers approximately $1,200 plus $153 of interest. In addition, Ladenburg has
implemented recommendations made by an independent consultant relating to Ladenburgs policies
and procedures concerning the above-mentioned NASD rules. |
|
|
|
In July 2004, the Company entered into settlement agreements with several individuals who had
brought arbitration claims against Ladenburg and Ladenburg Capital, arising out of customer
complaints relating to their activities as broker-dealers. Ladenburg Capital paid to the
plaintiffs a total of $1,500 in cash upon execution of the agreements and agreed to pay them a
total of $400 in cash due in four equal annual installments of $100 on each of July 15, 2005,
2006, 2007 and 2008. Additionally, the Company issued to the plaintiffs a total of 2,000,000
shares of its common stock valued at $1,420 ($0.71 per share). These agreements include the
settlement of a previously disclosed October 2003 arbitration award for $1,100 for which a loss
had been provided during 2003 and which the Company was seeking to have vacated. This
settlement resulted in a $2,220 charge to operations in 2004. |
|
|
|
In July 2004, a suit was filed in the U.S. District Court for the Eastern District of Arkansas
by Pet Quarters, Inc. against Ladenburg, a former employee of Ladenburg 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 $400,000.
Ladenburgs motion to dismiss this action is currently pending. The Company believes that the
plaintiffs claims are without merit and intends to vigorously defend against them. |
F-14
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
In July 2005, a claim filed by Alan Sporn and Trident Systems, Inc. in the United States
District Court for the Central District of California naming Ladenburg and Ladenburg Capital as
defendants was dismissed with prejudice pursuant to a court-ordered stipulation. The amended
complaint alleged that Ladenburg and Ladenburg Capital, as well as all other market makers in
the plaintiff companys stock, the Depository Trust Company and the National Securities
Clearing Corporation, violated various federal and California statutes and regulations, and
committed common law fraud and negligence, purportedly by engaging in improper short sales of
Tridents stock. The plaintiffs were seeking compensatory damages against all defendants
aggregating approximately $152,000 and unspecified punitive damages. |
|
|
|
On December 8, 2005, a lawsuit was filed in New York State Supreme Court, New York County, by
Digital Broadcast Corp. against Ladenburg, a Ladenburg employee, and another individual. The
plaintiff alleges, among other things, that in connection with plaintiffs retention of
Ladenburg to assist it in its efforts to obtain financing through a private placement of its
securities, Ladenburg committed fraud and breach of fiduciary duty, breach of contract, and
breach of the implied covenant of good faith and fair dealing. The plaintiff seeks
compensatory damages in excess of $2,000 and punitive damages of $10,000. Ladenburgs deadline
to answer or to move to dismiss has been extended pending the plaintiffs amendment of the
complaint. The Company believes that the plaintiffs claims are without merit and intends
vigorously to defend against them. |
|
|
|
With respect to certain arbitration, litigation and regulatory matters (including Ladenburg
Capitals claim with its New York City landlord), 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 of approximately $1,958 at December 31, 2005 and $3,826 at
December 31, 2004 including the settlement discussed above (included in accounts payable and
accrued liabilities). During the fiscal years ended December 31, 2005, 2004 and 2003,
respectively, various settlements, including the settlements described above, resulted in a net
charge to operations of $1,221, $2,987 and $1,591(included in other expenses). 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 Companys consolidated financial position, results of operations or
liquidity. |
|
8. |
|
Income Taxes |
|
|
|
The Company files a consolidated federal income tax return and certain combined state and local
income tax returns with its subsidiaries. The Company is on a fiscal tax year ending September
30th. |
F-15
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 |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
54 |
|
|
$ |
54 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
54 |
|
|
$ |
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
(127 |
) |
|
$ |
(127 |
) |
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
(127 |
) |
|
$ |
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
70 |
|
|
$ |
70 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
70 |
|
|
$ |
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 from continuing
operations as a result of the following differences: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Loss from continuing operations before
income taxes (benefit) |
|
$ |
(25,917 |
) |
|
$ |
(9,913 |
) |
|
$ |
(5,198 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit under statutory U.S. tax rates |
|
|
(8,812 |
) |
|
|
(3,370 |
) |
|
|
(1,767 |
) |
Increase in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductibility of debt conversion expense |
|
|
6,582 |
|
|
|
|
|
|
|
|
|
Unrecognized net operating losses |
|
|
2,012 |
|
|
|
3,337 |
|
|
|
1,718 |
|
Other nondeductible items |
|
|
236 |
|
|
|
70 |
|
|
|
73 |
|
State taxes, net of Federal benefit |
|
|
36 |
|
|
|
(84 |
) |
|
|
46 |
|
Other, net |
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
54 |
|
|
$ |
(127 |
) |
|
$ |
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-16
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: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
23,876 |
|
|
$ |
20,194 |
|
Accrued expenses |
|
|
1,141 |
|
|
|
2,122 |
|
Compensation and benefits |
|
|
330 |
|
|
|
30 |
|
Depreciation and amortization |
|
|
(90 |
) |
|
|
336 |
|
Unrealized (gains) losses |
|
|
(201 |
) |
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
25,056 |
|
|
|
22,841 |
|
Valuation allowance |
|
|
(25,056 |
) |
|
|
(22,841 |
) |
|
|
|
|
|
|
|
|
|
Net deferred taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
After consideration of all the evidence, both positive and negative, especially the fact the
Company has sustained operating losses during 2005, 2004 and 2003, management has determined
that a valuation allowance at December 31, 2005 and 2004 was necessary to fully offset the
deferred tax assets based on the likelihood of future realization. At December 31, 2005, the
Company had net operating loss carryforwards of approximately $51,900, expiring in various
years from 2015 through 2026. The Companys ability to use such carryforwards to reduce future
taxable income may be subject to limitations attributable to equity transactions in March 2005 (see
Note 11) that may have resulted in a change of ownership as defined in Internal Revenue Code
Section 382. |
|
9. |
|
Benefit Plans |
|
|
|
Ladenburg has a 401(k) retirement plan (the Plan), which allows eligible employees to invest
a percentage of their pretax compensation, limited to the statutory maximum: $14, $13 and $12
for 2005, 2004 and 2003, respectively, plus in each of these years, an additional catch-up
provision for employees greater than 50 years old of up to $4. The Plan also allows the
Company to make matching and/or discretionary contributions. Ladenburg did not make made
matching contributions for 2005, 2004 or 2003. |
|
10. |
|
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 Ladenburgs 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 Companys securities transactions are provided by primarily one
clearing broker. At December 31, 2005 and 2004, 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-17
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
11. |
|
Notes Payable |
|
|
|
The components of notes payable are as follows: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2005 |
|
2004 |
Senior convertible notes payable |
|
$ |
|
|
|
$ |
18,010 |
|
Notes payable (forgivable per terms see below)
in connection with clearing agreement |
|
|
666 |
|
|
|
1,333 |
|
Other notes payable |
|
|
5,000 |
|
|
|
8,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,666 |
|
|
$ |
27,843 |
|
|
|
|
|
|
|
|
|
|
|
|
The $5,666 of notes payable at December 31, 2005 mature during the year ending December 31,
2006. |
|
|
|
Senior Convertible Notes Payable |
|
|
|
In conjunction with the acquisition of Ladenburg in May 2001, 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 New Valley Corporation
(New Valley) and Berliner Effektengesellschaft AG (Berliner), the former Ladenburg
stockholders, bore 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, bore interest at 8.5% per annum. Dr. Phillip Frost, a director of the Company, is
the sole stockholder of the general partner of Frost-Nevada. The notes were convertible into a
total of 11,296,746 shares of common stock and secured by a pledge of the stock of Ladenburg. |
|
|
|
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 holders of the senior convertible promissory notes subsequently
agreed to extend the interest forbearance period to May 13, 2005 with respect to interest
payments due through March 31, 2005. Interest on the deferred amounts accrued at 8% on the New
Valley and Berliner notes and 9% on the Frost Trust note. As of December 31, 2004, accrued
interest payments as to which a forbearance was received from Frost Trust and New Valley,
amounted to $4,429. During the second quarter of 2004, the Company repurchased from Berliner
$1,990 principal amount of the notes, plus $320 of accrued interest, for $1,000 in cash. As a
result, the Company recorded a gain on debt cancellation of $1,310 (included in other income)
during the second quarter of 2004. |
|
|
|
In November 2004, the Company entered into an amended debt conversion agreement with Frost
Trust and New Valley to convert their notes, with an aggregate principal amount of $18,010,
together with accrued interest, into common stock of the Company. Pursuant to the conversion
agreement, the conversion price of notes held by Frost Trust was reduced from the prior
conversion price of $1.54 to $0.40 per share, and the conversion price of the notes held by New
Valley was reduced from the prior conversion price of $2.08 to $0.50 per share. As part of the
debt conversion agreement, each of Frost Trust and New Valley agreed to purchase $5,000 of the
Companys common stock for $0.45 per share. |
|
|
|
Frost Trust agreed that it would not sell, transfer or assign any shares it received as a
result of the foregoing transactions for a period of one year from the date of the agreement
except to its affiliated entities. |
|
|
|
The debt conversion transaction was approved by the Companys shareholders at the annual
shareholder meeting held on January 12, 2005 and closed on March 11, 2005. The transactions
were effective as of February 22, 2005 and resulted in the following: |
F-18
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
|
The $10,000 senior convertible promissory note to Frost Trust and related accrued
interest through February 22, 2005 of $2,761 was converted at $0.40 per share into
31,902,320 shares of the Companys common stock. |
|
|
|
|
The $8,010 senior convertible promissory note to New Valley and related accrued
interest through February 22, 2005 of $1,928 was converted at $0.50 per share into
19,876,358 shares of the Companys common stock. |
|
|
|
|
Frost-Trust acquired 11,111,111 shares of the Companys common stock at $0.45 per
share in exchange for a cash payment of $1,445 and the cancellation of the Companys
$3,500 of notes payable and related accrued interest of $55 described below. |
|
|
|
|
New Valley acquired 11,111,111 shares of the Companys common stock at $0.45 per
share in exchange for a cash payment of $1,445 and the cancellation of the Companys
$3,500 of notes payable and related accrued interest of $55 described below. |
|
|
|
|
The Company recorded a pre-tax charge of $19,359 in 2005 reflecting the expense
attributable to the reduction in the conversion price of the notes that were converted.
The net effect on the Companys balance sheet from the conversion, net of related
expenses, was an increase to shareholders equity of $22,699 (without giving effect to
any sale of common stock relating to the private financing). |
|
|
|
|
As a result of the debt conversion and private financing, the beneficial ownership
of Frost-Trust increased from 18.5% to 37.2% (31.8% as of December 31, 2005). |
|
|
|
|
As a result of the debt conversion and private financing, the beneficial ownership
of New Valley increased from 9.4% to 25.7%. New Valley subsequently distributed
19,876,358 shares of the stock it received from the conversion of its note to its
shareholders. New Valleys residual LTS shares equate to a beneficial ownership of
approximately 7.9% at December 31, 2005. |
|
|
Other Notes Payable |
|
|
|
On March 27, 2002, the Company borrowed $2,500 from New Valley, its former parent. 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. |
|
|
|
In November 2002, the Company renegotiated a clearing agreement with one of its clearing
brokers whereby this clearing broker became Ladenburgs primary clearing broker, clearing
substantially all of Ladenburgs 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, one of the loans consisting of $1,500 of principal, together with accrued
interest of approximately $90, was forgiven, in November 2004, $667 of principal, together with
accrued interest of approximately $54, was forgiven and in November 2005, $667 of principal,
together with accrued interest of approximately $97 was forgiven. The balance of the remaining
loan, consisting of $666 of principal, is scheduled to be forgiven in November 2006. |
F-19
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
Accrued interest on this loan as of December 31, 2005 was $101. 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. |
|
|
|
The Company borrowed $1,750 from New Valley and $1,750 from Frost Trust in 2004 and an
additional $1,750 from each of them in the first quarter of 2005. These notes, together with
accrued interest, payable at 2% above the prime rate, were delivered for cancellation in March
2005 as payment, along with $2,890 in cash, for New Valleys and Frost Trusts purchase of
$10,000 of the Companys common stock (see above). |
|
|
|
As of December 31, 2003, Ladenburg had a $2,500 junior subordinated revolving credit agreement
with an affiliate of its primary clearing broker that matured on November 1, 2004, under which
outstanding borrowings incurred interest at LIBOR plus 2%. On November 1, 2004, the Company
borrowed $1,250 from New Valley and $1,250 from Frost Trust (the November 2004 Loans), under
the same terms as the September 2004 Loans. The proceeds of the loans were used to repay the
$2,500 subordinated note payable to an affiliate of Ladenburgs primary clearing broker. In
March 2005, these loans and related accrued interest were applied against the $10,000 private
financing (see above). |
|
|
|
In December 2004, Ladenburg received a $2,000 temporary subordinated loan from each of Dr.
Phillip Frost and New Valley to provide additional regulatory capital required for an
underwriting participation. Upon completion of the underwriting during the same month, the
$4,000 was repaid with interest at the rate of prime plus 2%. Interest amounted to $2. |
|
|
|
In December 2005, Ladenburg received a $15,000 temporary subordinated loan from Dr. Phillip
Frost to provide additional regulatory capital required for an underwriting participation.
Upon completion of the underwriting during the same month, the $15,000 was repaid plus a $300
fixed amount of interest. |
|
12. |
|
Shareholders Equity |
|
|
|
Weighted Average Shares Outstanding |
|
|
|
Basic and diluted loss per common share is based on the weighted average number of common
shares outstanding during the year. During 2005, 2004 and 2003, options and warrants to
purchase 22,837,770, 9,137,431 and 5,653,030 common shares, respectively, and 1,640,350,
11,296,747 and 11,296,747 common shares issuable upon the conversion of notes payable,
respectively, were not included in the computation of diluted loss per share as the effect
would have been anti-dilutive |
|
|
|
Stock Option Plan |
|
|
|
The Companys 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. There are 10,000,000 shares of common stock available for issuance under
the Plan and the limit on grants to any individual per calendar year is 1,000,000 shares. |
F-20
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
A summary of the status of the Plan at December 31, 2005, and changes during the years
ended December 31, 2005, 2004 and 2003 are presented below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Shares |
|
Exercise Price |
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 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
4,599,500 |
|
|
|
.86 |
|
Exercised |
|
|
(137,298 |
) |
|
|
.66 |
|
Forfeited |
|
|
(2,277,801 |
) |
|
|
1.95 |
|
Expired |
|
|
(200,000 |
) |
|
|
4.47 |
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2004 |
|
|
7,437,431 |
|
|
|
1.09 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
3,524,500 |
|
|
|
.56 |
|
Exercised |
|
|
(44,767 |
) |
|
|
.47 |
|
Forfeited |
|
|
(2,279,394 |
) |
|
|
.69 |
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2005 |
|
|
8,637,770 |
|
|
|
.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2005 |
|
|
3,524,753 |
|
|
|
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about outstanding stock options under the Plan at
December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
Number |
|
Weighted-Average |
|
Weighted- |
|
Number |
|
Weighted- |
|
|
Outstanding at |
|
Remaining |
|
Average |
|
Exercisable at |
|
Average |
Exercise |
|
December 31, |
|
Contractual Life |
|
Exercise |
|
December 31, |
|
Exercise |
Price Range |
|
2005 |
|
(Years) |
|
Price |
|
2005 |
|
Price |
$0.22-$0.88 |
|
|
5,748,320 |
|
|
|
8.41 |
|
|
$ |
0.59 |
|
|
|
1,944,937 |
|
|
$ |
0.67 |
|
1.01- 2.52 |
|
|
2,149,450 |
|
|
|
8.11 |
|
|
|
1.13 |
|
|
|
839,817 |
|
|
|
1.31 |
|
3.00- 4.06 |
|
|
740,000 |
|
|
|
4.20 |
|
|
|
3.44 |
|
|
|
740,000 |
|
|
|
3.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,637,770 |
|
|
|
7.98 |
|
|
|
.97 |
|
|
|
3,524,753 |
|
|
|
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, three participants in the Option Plan exercised stock options to purchase a total
of 44,767 shares of common stock at prices ranging from $0.45 to $0.48 per share, resulting in
a capital contribution of $21. |
|
|
|
In March 2005, the Company granted to the nine non-employee directors of the Company options to
purchase an aggregate of 180,000 shares of common stock (20,000 shares each) at $0.48 per
share, the fair market value on the date of grant. These options vest in full one year from
the date of grant and expire ten years from the date of grant. |
|
|
|
In March 2005, in connection with the resignation of the Companys then current chief executive
officer, 900,000 unvested stock options previously granted to him under the Option Plan were
forfeited and the remaining 100,000 options, exercisable at $0.75, became fully-vested and
expire on March 3, 2006. No compensation charge was recorded in connection with the
modification of the 100,000 options as there was no intrinsic value at the modification date. |
|
|
|
On June 1, 2005, Ladenburg entered into several employment agreements with newly hired
employees, and in connection therewith, granted the employees options to purchase an aggregate
of 750,000 shares of the Companys common stock at an exercise price $0.645 per share. The
options, which expire on June 1, 2015, will vest 25% on each of the first four anniversaries of
the date of grant. In addition, the Company granted
these employees the opportunity to purchase an aggregate of 580,000 shares of its common stock,
under the Option Plan, at an exercise price of $0.45 per share, which they did in June 2005,
resulting in a capital contribution of $261. |
F-21
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
On August 18, 2005, the Company granted several of its employees stock options to purchase an
aggregate of 1,394,500 shares of the Companys common stock at an exercise price $0.58 per
share. The options, which expire on August 17, 2015, will vest 25% on each of the first four
anniversaries of the date of grant. |
|
|
|
On September 1, 2005, the Company granted its Advisory Board stock options to purchase an
aggregate of 1,200,000 shares of the Companys common stock at an exercise price $0.51 per
share. The options, which expire on August 31, 2015, will vest 25% on each of the first four
anniversaries of the date of grant. The Company recorded a charge of $34 for the fair value of
the options for the year ended December 31, 2005 based on the Black-Scholes option pricing
model utilizing the following assumptions: stock price of $0.61, risk-free interest rate of
4.20%, volatility of 100.50%, and term of ten years. The Company will record additional
expense relating to these options during their vesting period with a final
adjustment based on the options fair value on the vesting date. |
|
|
|
Non-Plan Options |
|
|
|
Commencing in 2004, the Company has also granted stock options to certain recruited employees
in conjunction with their employment agreements, which are outside of the Plan. A summary of
the status of these options at December 31, 2005, and changes during the years ended December
31, 2005 and 2004 are presented below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Shares |
|
Exercise Price |
Options outstanding, December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,500,000 |
|
|
|
.75 |
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2004 |
|
|
1,500,000 |
|
|
|
.75 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
14,000,000 |
|
|
|
.58 |
|
Forfeited |
|
|
(1,500,000 |
) |
|
|
.75 |
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2005 |
|
|
14,000,000 |
|
|
|
.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2005 |
|
|
700,000 |
|
|
|
.52 |
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about non-Plan stock options outstanding at December 31,
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
Number |
|
Weighted-Average |
|
Weighted- |
|
Number |
|
Weighted- |
|
|
Outstanding at |
|
Remaining |
|
Average |
|
Exercisable at |
|
Average |
Exercise |
|
December 31, |
|
Contractual Life |
|
Exercise |
|
December 31, |
|
Exercise |
Price Range |
|
2005 |
|
(Years) |
|
Price |
|
2005 |
|
Price |
$0.47-$0.65 |
|
|
14,000,000 |
|
|
|
9.32 |
|
|
$ |
0.58 |
|
|
|
700,000 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
Employee Stock Purchase Agreements and Non-Plan Option Grants |
|
|
|
On March 4, 2005, the Company entered into an employment agreement with a newly employed chief
executive officer and in connection therewith granted him options to purchase 5,000,000 shares
of the Companys common stock at an exercise price of $0.465 per share. 500,000 options vested
immediately upon grant and the remainder of the options will vest as to 1,125,000 shares on
each of the first four anniversaries of the grant date. The Company also sold to the officer
2,222,222 shares of its common stock for $1,000, or $0.45 per share, on March 11, 2005. |
|
|
|
On March 25, 2005, Ladenburg entered into an employment agreement with a newly employed
director of institutional sales and in connection therewith granted him options to purchase
1,500,000 shares of the Companys common stock at an exercise price $0.64 per share. The
option, which expires on March 28, 2015, will vest as to 250,000 shares on each of the first
four anniversaries of the date of grant. An additional 125,000 shares will vest on the third
anniversary of the date of grant and an additional 375,000 shares will vest on the fourth
anniversary of the date of grant provided that the Commission Shares (defined below) have been
purchased. In addition, the employee committed to purchase an additional 2,500,000 shares
(Commission Shares) of the Companys common stock at $0.64 per share solely through the use
of compensation, as defined, to be earned by him. In addition, the Company sold to the
employee 1,000,000 shares of its common stock at an exercise price of $0.45 per share, on March
28, 2005. No such compensation has been earned by the employee through December 31, 2005 that
would require the purchase of Commission Shares. |
|
|
|
In March 2005, in connection with the resignation of the Companys then current chief executive
officer, 1,500,000 unvested stock options previously granted to him (outside of the Option Plan
referred to above) were forfeited. |
|
|
|
On June 1, 2005, Ladenburg entered into several employment agreements with newly employed
executives and in connection therewith granted the executives options to purchase an aggregate
of 6,500,000 shares of the Companys common stock at an exercise price $0.645 per share. The
options, which expire on June 1, 2015, will vest at various periods through June 30, 2009. In
addition, one of the executives committed to purchase up to an additional 500,000 shares
(Commission Shares) of the Companys common stock at $0.645 per share solely through the use
of compensation, as defined, to be earned by him. No such compensation has been earned by the
executive through December 31, 2005 that would require the purchase of Commission Shares. In
addition, the Company sold to these executives an aggregate of 4,669,444 shares of its common
stock at an exercise price of $0.45 per share in June 2005, resulting in a capital contribution
of $2,101. |
|
|
|
On July 18, 2005, Ladenburg entered into an employment agreement with a newly employed
executive and in connection therewith granted him an option to purchase up to 1,000,000 shares
of the Companys common stock at an exercise price $0.58 per share. The option, which expires
on July 17, 2015, will vest as to 250,000 shares on each of the first four anniversary dates.
In addition, the executive committed to purchase up to an additional 1,000,000 shares of the Companys common stock at $0.58 per share solely through the use
of compensation, as defined, to be earned by him. No such compensation has been earned by the
executive through December 31, 2005 that would require the purchase of shares. In
addition, the Company sold to this executive 1,000,000 shares of its common stock at an
exercise price of $0.45 per share in July 2005, resulting in a capital contribution of $450. |
|
|
|
In August 2005, Ladenburg entered into employment agreements with two newly employed executives
and in connection therewith the Company sold to these executives an aggregate of 1,500,000
shares of its common stock at an exercise price of $0.45 per share in September 2005, resulting
in a capital contribution of $675. In addition, one of the executives committed to purchase up
to an aggregate amount of 3,500,000 shares of the
Companys common stock at $0.53 per share solely through the use of compensation, as defined,
to be earned by them. No such compensation has been earned by the executive through December
31, 2005 that would require the purchase of shares. |
|
|
|
For sales of the Companys common stock to new employees, where the
sales price was below the fair market value of the stock on the effective date of the
agreements, the Company recorded unearned stock-based compensation expense aggregating $1,587,
representing the difference between
fair market value of the common stock and the sales price. Such compensation is being
amortized over the initial term of the employees employment agreements, which are generally
one to two years. During the year ended December 31, 2005, the Company amortized non-cash
compensation expense of $694 relating to the sales of its common
stock to new employees at prices below fair market value. At December 31, 2005, unearned employee stock-based compensation
amounted to $893 and is presented as a reduction of shareholders equity in the consolidated
statement of financial condition. |
F-23
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
Employee Stock Purchase Plan |
|
|
|
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, is administered
by the Companys compensation committee. All full-time employees may use a portion of their
salary to acquire shares of the Companys common stock at a discount of up to 15% below the
market price of the Companys common stock, on the beginning or end of such option period,
whichever is lower. In order for the Plan to be accounted for as non-compensatory under SFAS
123R, effective January 1, 2006, the discount was decreased to 5% and the purchase price is
based on the Companys market price at the date of purchase at the end of each option period.
Option periods are 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 2005, 686,096 shares of the Companys common stock were issued to
employees under this Plan, at prices ranging from $0.39 to $0.50 per share; during 2004,
918,872 shares were issued at prices ranging from $0.43 to $0.73; and during 2003, 1,601,919
shares were issued at prices ranging from $0.04 to $0.30, resulting in a capital contribution
of $307, $479 and $212, for 2005, 2004 and 2003, respectively. |
|
|
|
Repurchase of Common Stock Outstanding |
|
|
|
On April 14, 2005, the Company repurchased 4,620,501 shares of the Companys common stock from
Berliner pursuant to a written agreement between the Company and Berliner. Pursuant to the
agreement, the Company paid Berliner $1,155, or $0.25 per share, for the shares. The shares
were returned to the status of authorized but unissued shares. |
|
|
|
Private Equity Offering to Former Debtholders |
|
|
|
In connection with the conversion of the Companys Senior Convertible Notes Payable which
closed on March 11, 2005, Frost Trust and New Valley each purchased $5,000 of the Companys
common stock for $0.45 per share (see Note 11). |
|
|
|
Private Equity Offering to Others |
|
|
|
On November 30, 2005, the Company completed a private equity offering and received gross
proceeds of approximately $6,221 (representing 13,824,331 shares at $0.45 per share) from
various investors unrelated to the Company and also received binding subscriptions for
aggregate proceeds of approximately $3,779 (representing 8,397,891 shares at $0.45 per share)
from certain of the Companys affiliates and persons with direct or indirect relationships to
it. The shares to be sold to these affiliates and persons with direct or indirect
relationships to the Company are subject to shareholder approval which is anticipated to be
obtained at a special meeting of shareholders to be held on April 3, 2006. The funds received
and to be received from the private equity offering will be used for general corporate
purposes. |
F-24
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
|
Warrants |
|
|
|
On August 31, 2001, New Valley and Frost-Nevada each loaned the Company $1,000. As
consideration for the loans, the Company issued to each of them a five-year immediately
exercisable warrant to purchase 100,000 shares of its common stock at an exercise price of
$1.00 per share. |
|
13. |
|
Related Party Transactions |
|
|
|
See Note 1 with respect to sale of subsidiary to related parties. |
|
|
|
See Note 11 with respect to loans from related parties. |
|
|
|
See Note 12 with respect to purchases of common stock by related parties. |
|
|
|
Howard Lorber, the Companys chairman of the board, is a consultant to (and, prior to January
2005, was the chairman 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 $92, $114 and $48 in 2005, 2004
and 2003, respectively. |
|
14. |
|
Subsequent Event |
|
|
|
On March 7, 2006, the New York Stock Exchange, Inc. (NYSE) merged with Archipelago Holdings,
Inc. and formed NYSE Group, Inc., a publicly traded securities exchange. Ladenburg elected to
continue being a member the NYSE. In exchange for its NYSE membership seat, Ladenburg will
receive $300 in cash, 80,177 shares of NYSE Group, Inc. common stock and a dividend of
approximately $70. The shares of NYSE Group, Inc. common stock are subject to a lock-up period
during which the shares may not be directly or indirectly assigned, sold, transferred, pledged,
hypothecated or otherwise disposed. The lock-up period will expire in equal installments on
the first, second and third anniversaries of the date of the merger. The NYSE Group board of directors has the right to shorten the lock-up period with
respect to all or a portion of the shares subject to the lock-up. As of December 31, 2005,
Ladenburgs NYSE membership was reflected on its consolidated statement of financial condition
at $868 which represents its cost basis. The Company will record a gain on the exchange in the
first quarter of 2006. |
F-25
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
15. |
|
Quarterly Financial Data (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters |
|
|
1st |
|
2nd |
|
3rd |
|
4th |
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
6,682 |
|
|
$ |
5,885 |
|
|
$ |
8,619 |
|
|
$ |
9,504 |
|
Expenses |
|
|
29,706 |
(b) |
|
|
7,864 |
|
|
|
9,760 |
|
|
|
9,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before
income taxes |
|
|
(23,024 |
) |
|
|
(1,979 |
) |
|
|
(1,141 |
) |
|
|
227 |
|
|
Net (loss) income |
|
$ |
(23,036 |
) |
|
$ |
(1,993 |
) |
|
$ |
(1,155 |
) |
|
$ |
213 |
|
Basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per Common Share(c) |
|
$ |
(0.42 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
Common Shares |
|
|
55,343,460 |
|
|
|
121,269,264 |
|
|
|
126,384,353 |
|
|
|
132,348,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(d) |
|
$ |
13,984 |
|
|
$ |
9,271 |
|
|
$ |
5,638 |
|
|
$ |
9,548 |
|
Expenses(d) |
|
|
16,187 |
|
|
|
11,783 |
|
|
|
10,258 |
|
|
|
10,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes |
|
|
(2,203 |
) |
|
|
(2,512 |
) |
|
|
(4,620 |
)(a) |
|
|
(578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,159 |
) |
|
$ |
(2,506 |
) |
|
$ |
(4,646 |
)(a) |
|
$ |
(543 |
) |
Basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per Common Share(c) |
|
$ |
(0.05 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.10 |
)(a) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
Common Shares |
|
|
43,631,642 |
|
|
|
44,144,139 |
|
|
|
46,232,704 |
|
|
|
46,542,124 |
|
|
|
|
(a) |
|
Includes $546 charge ($0.01 per common share) for write-off of leasehold improvements
(see Note 8 Operating Leases.) |
|
(b) |
|
Includes $19,359 charge ($0.35 per common share) for debt conversion expense (see Note
11 Notes Payable). |
|
(c) |
|
The sum of the quarterly loss per share does not equal the loss per share for the year,
because the per share data for each quarter and for the year are independently computed.
Loss per common share for the quarter ended March 31, 2005 is based on a lower number of
shares than the number of shares used in subsequent quarters and the full year due to the
large issuance of shares upon the conversion of debt and the private equity offering in
March 2005, resulting in a higher loss per common share (see
Notes 11 and 12). |
(d) |
|
Includes reclassification of figures previously reported.
|
F-26