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, 2007
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
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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4400 Biscayne Boulevard, 12th Floor
Miami, Florida
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33137
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(Address of principal executive
offices)
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(Zip Code)
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(212) 409-2000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common stock, par value $.0001 per share
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American Stock Exchange
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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 þ
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 þ
Indicate by check mark whether the
registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do
not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2007 (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 $200,000,000.
As of March 3, 2008, there were 161,740,406 shares of
the registrants common stock outstanding.
Documents
Incorporated by Reference:
Part III (Items 10, 11, 12, 13 and 14) from the
definitive Proxy Statement for the 2008 Annual Meeting of
Shareholders to be filed with the Securities and Exchange
Commission no later than 120 days after the end of the
Registrants fiscal year covered by this report.
LADENBURG
THALMANN FINANCIAL SERVICES INC.
Form 10-K
TABLE
OF CONTENTS
PART I
General
We are engaged in retail and institutional securities brokerage,
investment banking services, asset management services and
investment activities through our subsidiaries, Ladenburg
Thalmann & Co. Inc. (Ladenburg) and
Investacorp, Inc. (collectively with related companies,
Investacorp). 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,
asset management, brokerage and trading professionals.
Investacorp is a leading independent broker-dealer and
investment adviser that has been serving the independent
registered representative community since 1978. We acquired
Investacorp in October 2007.
Each of Ladenburg and Investacorp is subject to regulation by,
among others, the Securities and Exchange Commission
(SEC), the Financial Industry Regulatory Authority
(FINRA), and the Municipal Securities Rulemaking
Board (MSRB) and is a member of the Securities
Investor Protection Corporation (SIPC).
Ladenburgs private client services and institutional sales
departments serve approximately 12,000 accounts nationwide and
its asset management area provides investment management and
financial planning services to numerous individuals and
institutions. At December 31, 2007, Investacorps 500
registered representatives served approximately 200,000 accounts
nationwide and Investacorp had more than $8.5 billion in
client assets.
We were incorporated under the laws of the State of Florida in
February 1996. Our principal executive offices are located at
4400 Biscayne Boulevard, 12th Floor, Miami, Florida 33137. Our
telephone number is
(212) 409-2000.
Ladenburgs principal executive offices are located at 153
East 53rd Street, New York, New York 10022. Ladenburg has branch
offices located in Melville, New York, Miami and Boca Raton,
Florida, Lincolnshire, Illinois, Los Angeles, California,
Princeton, New Jersey, Columbus, Ohio and Houston, Texas.
Investacorps principal executive offices are located at
15450 New Barn Road, Miami Lakes, Florida 33014.
Investacorps independent registered representatives are
located in approximately 350 offices in 41 states.
Our corporate filings, including our annual report on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K,
our proxy statements and reports filed by our officers and
directors under Section 16(a) of the Securities Exchange
Act, and any amendments to those filings, are available, free of
charge, on Ladenburgs website, www.ladenburg.com,
as soon as reasonably practicable after we electronically file
or furnish such material with the SEC. We do not intend for
information contained in our website, or those of our
subsidiaries, to be a part of this annual report on
Form 10-K.
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., 4400 Biscayne Blvd., 12th Floor,
Miami, FL 33137, Attn: Corporate Counsel.
Caution
Concerning Forward-Looking Statements and Risk Factors
This annual report on
Form 10-K
includes certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. These statements are based on managements current
expectations or beliefs and are subject to uncertainty and
changes in circumstances. Actual results may vary materially
from the expectations contained herein due to changes in
economic, business, competitive, strategic
and/or
regulatory factors, and other factors affecting the operation of
our businesses. For more detailed information about these
factors, and risk factors with respect to our operations, see
Item 1A, Risk Factors, and
Managements Discussion and Analysis of Results of
Operations and Financial Condition Special Note
Regarding Forward-
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Looking Statements below. We are under no obligation to
(and expressly disclaim any obligation to) update or alter any
forward-looking statements, whether as a result of new
information, subsequent events or otherwise.
Recent
Developments
Punk,
Ziegel Acquisition
On March 4, 2008, we entered into a definitive merger
agreement to merge Punk, Ziegel & Company, L.P. into
Ladenburg. Punk Ziegel is a privately-held specialty investment
bank providing a full range of research, equity market making,
corporate finance, retail brokerage and asset management
services centered on high growth sectors within the healthcare
technology, biotechnology, life sciences and financial services
industries. Punk, Ziegel, which is based in New York City, has
approximately 45 employees and is known for its highly
focused, in-depth research and corporate finance advice,
particularly in the healthcare and financial services
industries. The transaction is expected to close in the second
quarter of 2008 and is subject to customary closing conditions,
including approval from FINRA.
Investacorp
Acquisition
On October 19, 2007, we acquired all of the outstanding
shares of privately-held Investacorp. At the closing, we paid
$25,000,000 to the sellers, Bruce A. Zwigard and an affiliated
trust. In addition, we issued a three-year, non-negotiable
promissory note in the aggregate principal amount of $15,000,000
to Mr. Zwigard. The note bears interest at 4.11% per annum
and is payable in 36 equal monthly installments. We have pledged
the stock of Investacorp to Mr. Zwigard as security for the
payment of the note. The note contains customary events of
default, which if uncured, entitle Mr. Zwigard to
accelerate the due date of the unpaid principal amount of, and
all accrued and unpaid interest on, the note. We also paid the
sellers an additional amount of approximately $5,200,000,
representing Investacorps retained earnings plus paid-in
capital.
In connection with his continued employment with Investacorp, we
granted Mr. Zwigard employee stock options to purchase a
total of 3,000,000 shares of our common stock at $1.91, the
closing price of our common stock on October 19, 2007. The
Zwigard options vest over a three-year period (subject to
certain exceptions), have a ten-year term and were issued
pursuant to a non-plan option agreement. Additionally we issued
to certain Investacorp employees options to purchase a total of
1,150,000 shares of common stock under our option plan.
These options vest in four equal annual installments and have an
exercise price of $1.91.
Frost
Gamma Revolving Credit Agreement
In connection with the Investacorp acquisition, on
October 19, 2007, we entered into a $30,000,000 revolving
credit agreement with Frost Gamma Investments Trust (Frost
Gamma), an entity affiliated with Dr. Phillip Frost,
our Chairman of the Board and our principal shareholder.
Borrowings under the credit agreement have a five-year term and
bear interest at a rate of 11% per annum, payable quarterly.
Frost Gamma received a one-time funding fee of $150,000. The
note issued under the credit agreement contains customary events
of default, which if uncured, entitle the holder to accelerate
the due date of the unpaid principal amount of, and all accrued
and unpaid interest on, such note. Pursuant to the credit
agreement, we granted to Frost Gamma a warrant to purchase
2,000,000 shares of our common stock. The warrant is
exercisable for a ten-year period and the exercise price is
$1.91. During the first quarter of 2008, we repaid approximately
$8,000,000 of the $30,000,000 of outstanding borrowings under
the credit agreement.
Debt
Exchange
In February 2007, we entered into a debt exchange agreement with
New Valley LLC. New Valley agreed to exchange the $5,000,000
principal amount of our promissory notes held by New Valley for
shares of our common stock at an exchange price of $1.80 per
share, representing the average closing price of our common
stock for the 30 trading days ending on the date of the debt
exchange agreement. Our shareholders approved the transaction at
our annual shareholders meeting on June 29, 2007. On that
date, we issued 2,777,778 shares of our common stock in
exchange for the $5,000,000 principal amount of notes and we
paid accrued interest on the notes of $1,732,000 to New Valley.
The exchange resulted in a loss of $1,833,000 representing the
excess of the quoted market value of the
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2,777,778 shares of stock at the date of the exchange
agreement ($2.46 per share) over the carrying amount of the
notes.
Acquisition
Strategy
We continue to explore opportunities to grow our businesses,
including through potential acquisitions of other securities and
investment banking firms, both domestically and internationally.
These acquisitions may involve payments of material amounts of
cash or debt or the issuance of significant amounts of our
equity securities, which may be dilutive to our existing
shareholders
and/or may
increase our leverage. We cannot assure you that we will be able
to consummate any such potential acquisitions on terms
acceptable to us or, if we do, that any acquired business will
be profitable. There is also a risk that we will not be able to
successfully integrate acquired businesses into our existing
business and operations.
Business
Segments
Effective as of October 19, 2007 (the date when we acquired
Investacorp), we have two operating segments which correspond to
our two principal broker-dealer subsidiaries, Ladenburg and
Investacorp. Financial and other information by segment for the
year ended December 31, 2007 is set forth in Note 17
to our consolidated financial statements.
Ladenburg
Ladenburgs principal business areas are: retail and
institutional brokerage, investment banking, investment
activities, asset management and research.
Retail
and Institutional Brokerage Business
A significant percentage of our revenues during the last several
years has been generated from Ladenburgs retail and
institutional brokerage business. Ladenburgs private
client services and institutional sales departments currently
serve a total of approximately 12,000 accounts nationwide.
Ladenburg charges commissions to our individual and
institutional clients for executing buy and sell orders of
securities on national and regional exchanges and over the
counter. In addition to traditional commission-based accounts,
Ladenburg, through its registered investment adviser subsidiary,
Ladenburg Thalmann Asset Management Inc., offers a
non-discretionary fee in lieu of commission program that allows
retail clients to establish a non-discretionary account within
which they may trade their portfolio under an all inclusive wrap
fee through Ladenburgs registered investment advisor.
Investment
Banking Activities
Investment banking revenues consist of underwriting revenues,
strategic advisory revenues and private placement fees.
Underwriting revenues arise from securities offerings in which
Ladenburg acts as an underwriter and include management fees,
selling concessions and underwriting fees, net of related
syndicate expenses. Revenues generated from the investment
banking activities of Ladenburg represented 58%, 40% and 26% of
our total revenues in 2007, 2006 and 2005, 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. At March 3, 2008, we had approximately 20
professionals in Ladenburgs investment banking group,
located in Miami, Florida, New York, New York, Columbus, Ohio
and Houston, Texas.
In addition to providing general investment banking and
corporate finance consulting services, Ladenburg provides the
following services:
Underwriting of public equity and debt
offerings. Ladenburg has been active as lead and
co-managing underwriter, general underwriter
and/or a
selling group member 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
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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.
SPAC underwritings. We are a leader in
underwriting offerings by blank check companies known as
Specified Purpose Acquisition Companies (SPACs). The revenues
associated with these offerings have been an important
contributor to our investment banking business since 2005. These
companies are formed for the purpose of raising funds in an
initial public offering, a significant portion of which is
placed in trust, and then acquiring a target business, thereby
making the target business public. In recent years,
there has been a surge of activity in this segment of the
market, although the number of new SPAC offerings, as well as
the equity capital markets generally, have declined
significantly during the first quarter 2008. Since 2005,
Ladenburg had lead or co-managed 35 SPAC offerings raising
approximately $7 billion, and our professionals provide
unique deal structures and a proprietary retail distribution
network that adds value and validity to the offering.
Compensation derived from these underwritings includes normal
discounts and commissions as well as deferred fees that will be
payable to us only upon the SPACs completion of a business
combination. Generally, these fees may be received within
24 months from the respective date of the offering, or not
received at all if no business combination transactions are
consummated during such time period. During the fourth quarter
of 2007, Ladenburg received deferred fees of $9,700,000
(included in investment banking revenues) and incurred
commissions and related expenses of $3,500,000. As of
December 31, 2007, we had unrecorded potential deferred
fees for our SPAC-related transactions of $39,500,000, which,
net of commissions and related expenses, amounted to
approximately $23,500,000.
Placement of private debt and equity
offerings. Ladenburg has extensive experience in
both the equity and debt capital markets and has developed
relationships with private equity firms, mezzanine, senior debt
and other institutional financing sources. Ladenburg undertakes
a process-oriented approach to targeting institutional sources.
When applicable, Ladenburg also works with its clients to target
other types of investors, including strategic parties with whom
a synergistic relationship might be formed.
Ladenburg has recently expanded its private placement activities
to include PIPE (private investment in public equity)
transactions and has added additional personnel dedicated to
this practice area. Ladenburg intends to use its relationships
with both public companies seeking to engage in PIPE
transactions, as well as hedge funds and other institutional
investors. We believe there is a significant opportunity for
continued growth in this area given issuers continuing
desire to identify and pursue faster and less costly financing
alternatives to traditional follow-on public offerings and
institutional investors continuing interest in
participating in these financing transactions.
Merger, acquisition, and divestiture advisory
services. A merger, acquisition or the sale of
all or part of a business can be a key factor in enhancing a
companys success and in advancing its corporate
and/or
shareholder objectives. Ladenburg reviews a merger or
acquisition clients individual situation and specific
needs and then provides that client with targeted services to
better suit the client. Ladenburg also acts as a financial
advisor and assists its clients with merger and acquisition
services in a variety of scenarios. Ladenburg is a member of
M&A International Inc., the worlds largest M&A
alliance, with 42 members that focus primarily on mid-market
acquisitions that have offices in 38 countries.
Rendering fairness and solvency
opinions. Fairness and solvency opinions are
issued through Ladenburg, which has developed a proven expertise
in the fairness and solvency opinion market. Ladenburg has also
been actively involved in rendering fairness opinions for SPACs
in connection with business combinations.
Fairness and solvency opinions are often necessary or requested
in a variety of situations, including mergers, acquisitions,
restructurings, financings and privatizations. Given recent
regulations and growing concerns regarding potential conflicts
of interest between a company and its shareholders, a fairness
opinion serves to mitigate the possible risks and associated
litigation. A fairness opinion from a qualified financial
advisor is one of the most effective risk management tools
available to assure sound business judgment has been exercised
in varying types of corporate transactions.
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Ladenburg provides both fairness and solvency opinions and
analyses to boards of directors, independent committees of
boards of directors and shareholders. In addition, the firm
provides objective advice on the valuation of businesses and
securities in connection with transactions involving mergers,
acquisitions, leveraged buyouts and restructurings,
going-private transactions and certain other market activities.
Due to the increased scrutiny and regulation arising from
inherent conflicts of interest where investment banks serve as a
clients exclusive financial advisor and assist in both the
sale of a company and provide a fairness opinion on the
transaction, there has been an increased need for
second fairness opinions from an independent party.
Ladenburg has experience in issuing these second
opinions and provides unbiased and independent evaluations to
assist in these situations.
Financial valuations. The value of a business
can become a matter of concern in a variety of transactions,
including but not limited to sale or purchase transactions and
recapitalizations. Valuations are also integral in tax planning
and for accounting compliance. Ladenburg has extensive valuation
expertise. Ladenburgs professionals are uniquely qualified
to determine the value of private companies, closely-held
business interests, limited partnership interests, intellectual
property and other intangible assets and corporate securities
with marketability concerns.
Investment
Activities
Ladenburg may from time to time seek to realize investment gains
by purchasing, selling and holding securities for its own
account on a daily basis. Ladenburg may also from time to time
engage 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 frequently receives warrants that entitle
it to purchase securities of the corporate issuers for which it
raises capital or provides advisory services.
Asset
Management
Ladenburg
Asset Management Program
Ladenburg Thalmann Asset Management, Inc. (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 specialized programs to access professional money
managers. The Private Investment Management 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 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 are 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
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selection criteria stated in the plans investment policy
statement; assisting in the planning and coordination of, and
participating in, enrollment and communication meetings; and
providing to 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.
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
Architect Program
LTAM provides its customers the Ladenburg Architect Program as a
non-discretionary, fee-based, advisory account that allows them
to maintain control over the management of the account and
choose from a diverse group of securities while partnering with
their Financial Consultant. The program features quarterly
performance monitoring, check writing, a debit card and online
account access.
Third
Party Advisory Services
Together with its affiliate, LTAM provides investment consulting
services to the clients of Investacorp Advisory Services, Inc.
(IAS), Investacorps registered investment
advisor. Under these arrangements, IAS provides certain services
to its clients and LTAM provides the remaining advisory and
account management services.
Research
Services
Ladenburgs research department takes a fresh, critical
approach to analyzing primary sources and developing proprietary
research. Many individuals, institutions, portfolio managers and
hedge fund managers, on all levels, have been neglected by
brokerage firms ignoring the demands for unbiased research.
Ladenburg provides a superior branded in-depth research product
geared only to action-oriented investment ideas.
Ladenburgs research department focuses on investigating
investment opportunities by utilizing fundamental, technical and
quantitative methods to conduct in-depth analysis. Currently,
our research department specializes in small- to mid-cap
companies in the power and electric utilities, exploration and
production, oil services, medical devices and restaurant sectors
and on a special situations basis and may expand to additional
sectors in the future. Research is provided on a fee basis to
certain institutional accounts. 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; 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.
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Upon completion of the pending Punk Ziegel acquisition,
Ladenburg will also provide research coverage in the healthcare
and financial institutions sectors.
Investacorp
Overview
Investacorp participates in the independent distribution channel
for financial services products and services. Investacorp
considers the independent distribution channel to include firms:
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that are not owned or controlled by a financial services
products manufacturer;
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that are not required to place all or a substantial portion of
their new business with a single financial services products
manufacturer; and
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in which the sales representatives are free to sell the products
of multiple manufacturers.
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Broker-dealers serving the independent channel, such as
Investacorp, often referred to as independent broker-dealers,
tend to offer extensive product and financial planning services
and heavily emphasize packaged products such as mutual funds and
variable annuities. We believe that the financial services
industry is witnessing an increase in the number of independent
broker-dealer representatives and registered investment advisors
as registered representatives are leaving large national firms
to form their own small firms. These new small firms need client
and back office support services and access to technology and
such firms typically become affiliated with an independent
broker-dealer. Further, individuals are increasingly
transferring their assets from mutual funds to other managed
products such as those offered by Investacorp. We expect these
trends to continue and possibly accelerate in the future.
Investacorp supports approximately 500 independent contractor
registered representatives in providing products and services to
their clients in approximately 350 branch offices located in
41 states. Approximately one-quarter of the registered
representatives are located in Florida. A significant number of
Investacorps registered representatives also are located
in New York. The number of registered representatives in these
offices ranges from one to 16. Many of Investacorps
registered representatives provide financial planning services
to their clients, wherein the financial advisor evaluates a
clients financial needs and objectives, develops a
detailed plan, and then implements the plan with the
clients approval. When the implementation of such
objectives involves the purchase or sale of securities
(including the placement of assets within a managed account)
such transactions may be effected through Investacorp, for which
Investacorp earns either a commission or a fee. Representatives
may be permitted to conduct other approved businesses unrelated
to their Investacorp activities such as offering fixed insurance
products, accounting, estate planning and tax services, among
others.
A registered representative who becomes affiliated with
Investacorp establishes his or her own office and is solely
responsible for the payment of all expenses associated with the
operation of the branch office (including rent, utilities,
furniture, equipment, stock quotations, and general office
supplies); although all of that branchs revenues from
securities brokerage transactions accrue to Investacorp. Because
Investacorps registered representatives bear the
responsibility for these expenses, Investacorp pays them a
significant percentage of the commissions they generate,
typically at least 80%. This compares with a payout rate of
approximately 25% to 50% to financial advisors working in a
traditional brokerage setting where the brokerage firm bears
substantially all of the costs of maintaining its sales forces,
including providing employee benefits, office space, sales
assistants, telephone service and supplies. The independent
brokerage model permits Investacorp to expand its base of
revenue and its network for the retail distribution of
investment products without the capital expenditures that would
be required to open company-owned offices and the additional
administrative and other costs of hiring financial advisors as
in-house employees.
Investacorps registered representatives must possess a
sufficient level of commission brokerage business and experience
to enable the individual to independently support his or her own
office. Financial professionals such as insurance agents,
financial planners, and accountants, who already provide
financial services to their clients, often affiliate with
Investacorp. These professionals then offer financial products
and services to their clients through Investacorp and earn
commissions and fees for these transactions and services.
Investacorps registered representatives have the ability
to structure their own practices and to specialize in different
areas of the securities business, subject to Investacorps
supervisory procedures as well as compliance with all applicable
regulatory requirements.
Investacorp provides full support services to each of its
registered representatives, including: access to stock and
options execution; products such as insurance, mutual funds,
unit trusts and investment advisory programs; and research,
compliance, supervision, accounting and related services.
Each representative is required to obtain and maintain in good
standing each license required by the SEC and FINRA to conduct
the type of securities business in which he or she engages, and
to register in the various states in which
he/she has
customers. Investacorp is ultimately responsible for supervising
all of its registered representatives wherever they are located.
We can incur substantial liability from improper actions of any
of Investacorps registered representatives.
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While an increasing number of clients are electing asset-based
fee alternatives to the traditional commission schedule, in most
cases Investacorp charges commissions on variable annuity,
mutual fund, equity and fixed income transactions. Investacorp
primarily derives revenue from commissions from the sale of
variable annuity products and mutual funds by its independent
registered representatives.
Investacorps
Asset Management Business
Third
Party Programs
IAS makes available to its clients various third-party,
non-proprietary timing services, non-proprietary asset
allocation services and non-proprietary wrap fee programs, which
use individual money managers. IASs solicitors and
servicing investment adviser representatives refer
and/or
recommend their clients to these programs based upon their
clients financial objectives or assist their clients in
choosing from an approved list of third-party investment advisor
sponsors that provide these particular types of services.
IAS
TARGET Account Series
The IAS TARGET Account Series offers clients accounts whereby
they can choose to invest in a diverse group of securities and
pay a fee for services which include advisory, administrative,
and processing functions. Alternatively, the client can employ a
third-party money manager to manage the clients TARGET
Account.
Financial
Planning Services
IAS through certain select IAS investment adviser
representatives may provide consultation and financial planning
services which may include: estate planning, retirement and
financial goal planning, educational funding, asset allocation
and insurance needs analysis, as well as general analysis and
planning. The IAS investment adviser representative prepares a
written financial plan based upon the clients stated
goals, needs and investment profile.
Investacorps
Insurance Business
Almost all of Investacorps financial planners are also
authorized agents of insurance underwriters. Investacorp has the
capability of processing insurance business through Valor
Insurance, our wholly-owned subsidiaries which are licensed
insurance brokers, as well as through other licensed insurance
brokers. The Valor Insurance entities hold insurance agency
licenses in 46 states for the purpose of facilitating the
sale of insurance and annuities for Investacorps
registered representatives to the retail customer. We retain no
risk of insurance related to the insurance and annuity products
Investacorps registered representatives sell.
Investacorps
Strategy
Investacorps business plan is focused on increasing its
network of registered representatives, its revenues and its
client assets as described below.
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Recruiting experienced financial
professionals. Investacorp actively recruits
experienced financial professionals. These efforts are supported
by advertising, targeted direct mail and inbound and outbound
telemarketing. Although Investacorp will continue to attempt to
recruit those financial advisors who serve as financial planners
(who sell primarily annuities, insurance and mutual funds), it
also intends to pursue financial advisors who focus on the sale
of different types of securities, namely equities and fixed
income products.
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Provide technological solutions to its employees and
independent representatives. Investacorp believes
that it is imperative that it continues to possess
state-of-the-art technology so that its employees and
independent registered representatives can effectively
facilitate, measure and record business activity in a timely,
accurate and efficient manner. By continuing its commitment to
provide a highly capable technology platform to process
business, Investacorp believes that it can achieve economies of
scale and potentially reduce the need to hire additional
personnel.
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Build recurring revenue. Over the past several
years, Investacorp has recognized the trend toward increased
investment advisory business and is focused on building its fee
based investment advisory business. Investacorp believes that
fee based investment advisory services may be better for certain
clients. While these fees generate substantially lower first
year revenue than most commission products, the recurring nature
of these fees provides a platform for accelerating future
revenue growth.
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Acquire other independent brokerage
firms. Investacorp may also pursue the
acquisition of other independent brokerage firms. The ability to
realize growth through acquisitions, however, will depend on the
availability of suitable broker-dealer candidates and
Investacorps ability to successfully negotiate favorable
terms. There can be no assurance that Investacorp will be able
to consummate any such acquisitions. Further, there are costs
associated with the integration of new businesses and personnel,
which may be more than anticipated.
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Assist registered representatives to increase their
sales. Investacorp is aligned with its registered
representatives in seeking to increase their sales and improve
productivity. Investacorp continues to undertake initiatives to
assist its registered representatives with client recruitment,
training, compliance and product support. In addition,
Investacorp continues to focus on improving back-office support
to allow its representatives more time to focus on recruiting
activity, training and increasing sales, rather than
administrative burdens.
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Administration,
Operations, Securities Transactions Processing and Customer
Accounts
Neither Ladenburg nor Investacorp holds funds or securities for
its customers. Instead, Ladenburg uses the services of National
Financial Services LLC, a Fidelity
Investments®
company, and Investacorp uses the services of National Financial
Services LLC, Bear Stearns Securities Corp. and Ridge Clearing
and Outsourcing Solutions, Inc. as their clearing agents on a
fully disclosed basis. The clearing agents process all
securities transactions and maintain 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, providing
protection for the accounts entire net equity (both cash
and securities). Clearing agent services 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 and Investacorps brokerage activities. It
provides these services to Ladenburgs and
Investacorps 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 and
Investacorps 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. We have agreed to
indemnify the clearing brokers for losses they may incur on
these credit arrangements.
Seasonality
and Cyclical Factors
Our revenues typically are affected by the traditional
U.S. vacation seasons, such as July, August and December.
Our revenues may be more adversely affected by cyclical factors,
such as the current financial market downturn as well as
problems or recessions in the U.S. or global economies.
These downturns may cause investor concern, which has
historically resulted in fewer investment banking transactions
and less investing by institutional and retail investors through
broker-dealers, thereby reducing our revenues and potential
profits. Such conditions might also expose us to the risk of
being unable to raise additional capital to offset related
significant reductions in revenues.
Competition
We encounter intense competition in all aspects of our business
and compete directly with many other providers of financial
services for clients as well as registered representatives. We
compete directly with many other national and regional full
service financial services firms, discount brokers, investment
advisers, broker-dealer subsidiaries of major commercial bank
holding companies, insurance companies and other companies
offering financial services in the U.S., globally, and through
the Internet. Many of our competitors have significantly greater
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financial, technical, marketing and other resources than we do.
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 and Investacorp offer
on-line account access to their customers to review their
account balances and activity, they currently do not offer any
online trading services to their customers. The continued
expansion of discount brokerage firms and online trading could
adversely affect our business. In addition, competition is
increasing from other financial institutions, notably banking
institutions, insurance companies and other organizations, which
offer customers some of the same services and products presently
provided by securities firms. We seek to compete through the
quality of our registered representatives and investment
bankers, our level of service, the products and services we
offer and our expertise in certain areas.
In the financial services industry, there is significant
competition for qualified personnel. Our ability to compete
effectively is substantially dependent on our continuing ability
to attract, retain and motivate qualified registered
representatives, investment bankers, trading professionals,
portfolio managers and other revenue-producing or specialized
personnel.
Government
Regulation
The securities industry, including 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 FINRA and the
Municipal Securities Rulemaking Board. These self-regulatory
organizations adopt rules, subject to approval by the SEC, which
govern their 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. Investacorp is a registered
broker-dealer with the SEC. Each of Ladenburg and Investacorp 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;
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conduct of directors, officers and employees; and
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advertising, including regulations related to telephone
solicitation.
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As registered investment advisors under the Investment Advisers
Act of 1940, LTAM and IAS are subject to the requirements of
regulations under both the Investment Advisers Act and certain
state securities laws and regulations. Such requirements relate
to, among other things:
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limitations on the ability of investment advisors to charge
performance-based or non-refundable fees to clients;
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record-keeping and reporting requirements;
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disclosure requirements;
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limitations on principal transactions between an advisor or its
affiliates and advisory clients; and
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general anti-fraud prohibitions.
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Additional legislation, changes in rules promulgated by the SEC
and by self-regulatory bodies or changes in the interpretation
or enforcement of existing laws and rules often directly affect
the method of operation and profitability of broker-dealers. The
SEC and the self-regulatory bodies may conduct administrative
proceedings which can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers, employees or
registered representatives.
Net
Capital Requirements
Our registered broker-dealer subsidiaries are 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.
Ladenburg is subject to the SECs Uniform Net Capital
Rule 15c3-1
and the Commodity Futures Trading Commissions
Regulation 1.17. Ladenburg has elected to compute its net
capital under the alternative method allowed by these rules. At
December 31, 2007, Ladenburg had net capital, as defined,
of approximately $26,659,000, which exceeded its minimum capital
requirement of $500,000 by $26,159,000. 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.
Investacorp is also subject to SEC
Rule 15c3-1,
which requires the maintenance of minimum net capital and
requires that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed 15 to 1. At
December 31, 2007, Investacorp had net capital of
approximately $2,496,000, which was $2,163,000 in excess of its
required net capital of $333,000. At December 31, 2007,
Investacorps net capital ratio was 2 to 1.
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 the past, Ladenburg has entered into, and from
time to time in the future may enter into, temporary
subordinated loan arrangements to borrow funds on a short-term
basis from our shareholders or clearing broker in order to
supplement the capital of our broker-dealers to facilitate
underwriting transactions.
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
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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.
Failure to maintain the required net capital may subject a firm
to suspension or expulsion by FINRA, 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.
In addition to regulatory net capital restrictions, Investacorp
also is contractually restricted from declaring a dividend to us
which would result in its retained earnings and paid-in capital
falling below the lesser of the then outstanding principal
balance of the Zwigard note and $5,000,000. At December 31,
2007, the outstanding principal balance of the Zwigard note was
$14,214,218.
Geographic
Area
We are domiciled in the United States and virtually all of our
revenue is attributed to activities in the United States. All of
our long-lived assets are located in the United States.
Personnel
At December 31, 2007, Ladenburg had a total of
approximately 173 employees, of which 107 are registered
representatives and 66 are other full time employees. In
addition, Investacorp had approximately 500 registered
representatives and 75 full time employees. None of our
employees are covered by a collective bargaining agreement. We
consider our relationship with our employees and independent
contractors to be good.
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. Additional risks and
uncertainties not currently known to us or that we currently
deem immaterial also may materially and adversely affect our
business operations.
Risk
Factors Relating to Our Business
We have
incurred in the past, and may incur in the future, significant
operating losses.
Although we had net income for the years ended December 31,
2007 and 2006, we did incur significant losses from operations
during each of the four years ended December 31, 2005. We
cannot assure you that we will be able to sustain revenue
growth, profitability or positive cash flow on either a
quarterly or annual basis. Although we believe that we have
adequate cash and regulatory capital to fund our current level
of operating activities through December 31, 2008, if we
are unable to sustain profitability, we may not be financially
viable in the future and may have to curtail, suspend or cease
operations.
A large
portion of our revenue for any period may result from a limited
number of underwriting transactions.
A large part of our revenue for any period may be derived from a
limited number of underwritings in which Ladenburg serves as
either the lead or co-manager. We cannot assure you that
Ladenburg will continue to serve as lead or co-manager of
similar underwritings in the future. If Ladenburg is not able to
do so, our revenue may significantly decrease and our results of
operations may be adversely affected.
Our
revenues may decline if the market for SPAC offerings
declines.
The number of new SPAC offerings, as well as the equity capital
markets generally, have declined significantly during the first
quarter 2008. A continued downturn in the market for SPAC
transactions could adversely affect our
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results of operations. Underwritings for SPAC transactions have
been an important source of revenues for us since 2005. SPAC
transactions are currently exempt from rules adopted by the SEC
to protect investors of blank check companies, such as
Rule 419 under the Securities Act of 1933. However, the SEC
may determine to adopt new rules relating to SPAC transactions
which could impact our ability to successfully underwrite these
transactions.
Deferred
underwriting fees may not be received by us in certain
situations.
At December 31, 2007, we were owed deferred fees from SPAC
underwritings that Ladenburg participated in of $39,500,000, or
approximately $23,500,000 after expenses. These deferred fees
are not included in our revenues, however, until a business
combination is completed by the SPAC and Ladenburg is paid.
Accordingly, if the SPACs from which we are owed deferred fees
are unable to consummate business combinations, we will not be
entitled to receive the deferred fees we are owed. SPACs face
significant competition in consummating business combinations.
Since August 2003, based upon publicly available information,
approximately 155 SPACs have completed initial public offerings
as of March 1, 2008. Of these companies, only
47 companies have consummated a business combination, while
23 other companies have announced they have entered into a
definitive agreement for a business combination, but have not
consummated such business combination and ten companies have
failed to complete business combinations and have dissolved and
returned trust proceeds to their stockholders. Accordingly, if
the SPACs that owe us deferred fees do not consummate business
combinations, we will not receive these fees and our results of
operations may be adversely affected.
We may
experience significant fluctuations in our quarterly operating
results due to the nature of our business and therefore may fail
to meet profitability expectations.
Our revenue and operating results may fluctuate from quarter to
quarter and from year to year due to a combination of factors,
including the level of underwritings and advisory transactions
completed by us and the level of fees we receive from those
underwritings and transactions. Accordingly, our results of
operations may fluctuate significantly due to an increased or
decreased number of transactions in any particular quarter or
year.
Our
financial leverage may impair our ability to obtain financing
and limits cash flow available for operations.
Our indebtedness may:
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limit our ability to obtain additional financing for working
capital, regulatory capital requirements, acquisitions or
general corporate purposes;
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require us to dedicate a substantial portion of cash flows from
operations to the payment of principal and interest on our
indebtedness, resulting in less cash available for operations
and other purposes; and
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increase our vulnerability to downturns in our business or in
general economic conditions.
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Our ability to satisfy our obligations and to reduce our total
debt depends on our future operating performance and prospects.
Our future operating performance is subject to many factors,
including economic, financial and competitive factors, which may
be beyond our control. As a result, we may not be able to
generate sufficient cash flow, and future financings may not be
available to provide sufficient net proceeds, to meet these
obligations.
Our
business is dependent on fees generated from the distribution of
financial products
An important portion of our revenues is derived from fees
generated from the distribution of financial products such as
mutual funds and variable annuities by the Investacorp
registered representatives, and to a lesser extent,
Ladenburgs registered representatives. Changes in the
structure or amount of the fees paid by the sponsors of these
products could directly affect our revenues and profits.
In addition, there have been suggestions from regulatory
agencies and other industry participants that
Rule 12b-1
distribution fees in the mutual fund industry should be
reconsidered and, potentially, reduced or eliminated. Any
reduction or restructuring of
Rule 12b-1
distribution fees could have a material adverse effect on our
results of operations.
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Our
business could be adversely affected by a downturn in the
financial markets.
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 results of
operations will be adversely affected.
Our investment banking revenues, in the form of financial
advisory and underwriting fees, are directly related to the
number and size of the transactions in which we participate and
therefore may be adversely affected by any downturn in the
securities markets. Additionally, downturn in market conditions
may lead to a decline in assets under management or the volume
of transactions that we execute for our customers and,
therefore, to a decline in the revenues we would otherwise
receive from commissions, fees and spreads. Should these adverse
financial and economic conditions appear and persist for any
extended period of time, we will incur a further decline in
transactions and revenues that we receive from commissions, fees
and spreads.
Misconduct
by our employees and independent registered representatives is
difficult to detect and deter and could harm our business,
results of operations or financial condition.
Misconduct by our employees and independent registered
representatives could result in violations of law by us,
regulatory sanctions
and/or
serious reputational or financial harm.
Misconduct could include:
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binding us to transactions that exceed authorized limits;
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hiding unauthorized or unsuccessful activities resulting in
unknown and unmanaged risks or losses;
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improperly using or disclosing confidential information;
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recommending transactions that are not suitable;
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engaging in fraudulent or otherwise improper activity;
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engaging in unauthorized or excessive trading to the detriment
of customers; or
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otherwise not complying with laws or our control procedures.
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We cannot always deter misconduct by our employees and
independent registered representatives, and the precautions we
take to prevent and detect this activity may not be effective in
all cases. Prevention and detection among our independent
registered representatives, who are not employees of our company
and tend to be located in small, decentralized offices, presents
additional challenges. We also cannot assure that misconduct by
our employees and independent registered representatives will
not lead to a material adverse effect on our business or results
of operations.
We may
incur significant losses from trading and investment activities
due to market fluctuations and volatility.
We may maintain trading and investment positions in the equity
markets. To the extent that we own assets, i.e., have long
positions, in those markets, a downturn in those markets could
result in losses from a decline in the value of those long
positions. Conversely, to the extent that we have sold assets
that we do not own, i.e., have short positions, in any of those
markets, an upturn in those markets could expose us to
potentially unlimited losses as we attempt to cover our short
positions by acquiring assets in a rising market.
We may from time to time have a trading strategy consisting of
holding a long position in one security and a short position in
another security from which we expect to earn revenues based on
changes in the relative value of the two securities. If,
however, the relative value of the two securities changes in a
direction or manner that we did not anticipate or against which
we are not hedged, we might realize a loss in those paired
positions. In addition, we
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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 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 entered
into temporary subordinated loan arrangements with our
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
capital markets and strategic advisory engagements are singular
in nature and do not generally provide for subsequent
engagements.
Ladenburgs investment banking clients generally retain it
on a short-term,
engagement-by-engagement
basis in connection with specific capital markets or mergers and
acquisitions transactions, rather than on a recurring basis
under long-term contracts. As these transactions are typically
singular in nature and our engagements with these clients may
not recur, Ladenburg must seek out new engagements when its
current engagements are successfully completed or are
terminated. As a result, high activity levels in any period are
not necessarily indicative of continued high levels of activity
in any subsequent period. If we are unable to generate a
substantial number of new engagements that generate fees from
new or existing clients, our business and results of operations
would likely be adversely affected.
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 and Investacorp. 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 business
and results of 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 results of operations.
Poor
performance of the investment products and services recommended
or sold to asset management clients may have a material adverse
effect on our business.
Investacorps and Ladenburgs investment advisory
contracts with their clients are generally terminable upon
30 days notice. These clients can terminate their
relationship, reduce the aggregate amount of assets under
management or shift their funds to other types of accounts with
different rate structures for any number of reasons, including
investment performance, changes in prevailing interest rates,
financial market performance and personal client liquidity
needs. Poor performance of the investment products and services
recommended or sold to such clients relative to the performance
of other products available in the market or the performance of
other investment management firms tends to result in the loss of
accounts. The decrease in revenue that could result from such an
event could have a material adverse effect on our results of
operations.
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Systems
failures could significantly disrupt our business.
Our business depends on our and our clearing firms ability
to process, on a daily basis, a large number of transactions
across numerous and diverse markets and the transactions we
process have become increasingly complex. We rely heavily on our
communications and financial, accounting and other data
processing systems, including systems provided by our clearing
brokers and service providers. We face operational risk arising
from mistakes made in the confirmation or settlement of
transactions or from transactions not being properly recorded,
evaluated or accounted.
If any of these systems do not operate properly or are disabled,
we could suffer financial loss, a disruption of our business,
liability to clients, regulatory intervention or reputational
damage. Any failure or interruption of our systems, the systems
of our clearing brokers, or third party trading systems could
cause delays or other problems in our securities trading
activities, which could have a material adverse effect on our
operating results. In addition, our clearing brokers provide our
principal disaster recovery system. We cannot assure you that we
or our clearing brokers will not suffer any systems failures or
interruption, including ones caused by earthquake, fire, other
natural disasters, power or telecommunications failure, act of
God, act of war, terrorism, or otherwise, or that our or our
clearing brokers
back-up
procedures and capabilities in the event of any such failure or
interruption will be adequate. The inability of our or our
clearing brokers systems to accommodate an increasing
volume of transactions could also constrain our ability to
expand our business.
Our
expenses may increase due to real estate commitments.
We have subleased office space in various locations to
subtenants. Should any of the sub-tenants not pay their rent for
an extended period of time, it may have a material adverse
effect on our results of operations.
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.
Risk
Factors Relating to Our Industry
Each of
Ladenburg and Investacorp rely on clearing brokers and the
termination of the agreements with any one of these clearing
brokers could disrupt our business.
Ladenburg primarily uses one clearing broker and Investacorp
currently uses three clearing brokers to process securities
transactions and maintain customer accounts on a fee basis. The
clearing brokers also provide billing services, extend credit
and provide for control and receipt, custody and delivery of
securities. Ladenburg and Investacorp depend on the operational
capacity and ability of the clearing brokers for the orderly
processing of transactions. In addition, by engaging the
processing services of a clearing firm, each of Ladenburg and
Investacorp
18
is exempt from some capital reserve requirements and other
regulatory requirements imposed by federal and state securities
laws. If any of these clearing agreements were 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.
In addition, the loss of any particular clearing firm could
hamper Investacorps ability to recruit and retain its
independent registered representatives.
Our
clearing brokers extend credit to our clients and we are liable
if the clients do not pay.
Each of Ladenburg and Investacorp 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. Each of Ladenburg and Investacorp has agreed to
indemnify the clearing broker for losses it may incur while
extending credit to its clients.
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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other broker-dealers;
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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.
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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:
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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.
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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.
19
Our
business and results of operations may be negatively affected by
errors and omissions claims.
Our subsidiaries are subject to claims and litigation in the
ordinary course of business resulting from alleged and actual
errors and omissions in placing insurance, effecting securities
transactions and rendering investment advice. These activities
involve substantial amounts of money. Since errors and omissions
claims against our subsidiaries or their registered
representatives may allege liability for all or part of the
amounts in question, claimants may seek large damage awards.
These claims can involve significant defense costs. Errors and
omissions could include, for example, failure, whether
negligently or intentionally, to effect securities transactions
on behalf of clients, to choose suitable investments for any
particular client, to supervise a registered representative or
to provide insurance carriers with complete and accurate
information. It is not always possible to prevent or detect
errors and omissions, and the precautions our subsidiaries take
may not be effective in all cases. Moreover, our subsidiaries do
not carry errors and omissions insurance coverage and many of
their registered representatives do not carry such coverage
either. Our liability for significant and successful errors and
omissions claims may materially and negatively affect our
results of operations.
We are
subject to various risks associated with the securities
industry.
We are 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.
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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. We are much smaller and have much less
capital than many competitors in the securities industry. In the
event of a market downturn, our business could be adversely
affected in many ways. Our revenues are likely to decline in
such circumstances and, if we are unable to reduce expenses at
the same pace, our profit margins would erode.
Legal
liability may harm our business.
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 often involve
offerings of the securities of smaller companies, which may
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 companys 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 or
as a result of other business activities. In general, the cases
involve various allegations that our employees or registered
representatives 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
20
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.
Risk
Factors Relating to the Regulatory Environment
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 FINRA 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.
Each of Ladenburg and Investacorp is a registered broker-dealer
with the SEC and FINRA. 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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conduct of directors, officers and employees.
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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 FINRA. FINRA adopts rules, subject to
approval by the SEC, that govern broker-dealers and conducts
periodic examinations of firms operations.
If we are found to have violated any applicable regulation,
formal 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.
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The imposition of any of these or other penalties could have a
material adverse effect on our operating results and financial
condition.
21
Implementation
of FINRA Rule 2821, which governs the sale of variable
annuity products, may impact our financial
performance.
FINRA recently adopted Rule 2821, which governs the sale of
variable annuity products. Rule 2821 currently is scheduled
to go into effect in May 2008. Investacorp will be required to
train its registered representatives on new processes for the
sale of these products and delays in completing annuity sales
may occur. Accordingly, our revenue may be negatively impacted
by delays in the sales process for annuities and our expenses
will increase as a result of compliance and technology costs
associated with the implementation of this new rule.
Legislative,
judicial or regulatory changes to the classification of
independent contractors could increase our operating
expenses.
From time to time, various legislative or regulatory proposals
are introduced at the federal or state levels to change the
status of independent contractors classification to
employees for either employment tax purposes (withholding,
social security, Medicare and unemployment taxes) or other
benefits available to employees. Currently, most individuals are
classified as employees or independent contractors for
employment tax purposes based on 20 common law
factors, rather than any definition found in the Internal
Revenue Code or Internal Revenue Service regulations.
Investacorp classifies its registered representatives as
independent contractors for all purposes, including employment
tax and employee benefit purposes. There can be no assurance
that legislative, judicial, or regulatory (including tax)
authorities will not introduce proposals or assert
interpretations of existing rules and regulations that would
change the employee/independent contractor classification of
Investacorps registered representatives. The costs
associated with potential changes, if any, with respect to these
independent contractor classifications could have a material
adverse effect on us, including our results of operations and
financial condition.
Failure
to comply with net capital requirements could subject us to
suspension or revocation by the SEC or suspension or expulsion
by FINRA.
Each of Ladenburg and Investacorp is subject to the SECs
net capital rule which requires the maintenance of minimum net
capital. In addition, Ladenburg is subject to the net capital
requirements of Commodity Futures Trading Commissions
Regulation 1.17. At December 31, 2007, each of
Ladenburg and Investacorp exceeded its minimum net capital
requirement. 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. FINRA 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,
FINRA may immediately restrict or suspend certain or all of the
activities of a broker-dealer, including its ability to make
markets. Ladenburg
and/or
Investacorp may not be able to maintain adequate net capital, or
their net capital may fall below requirements established by the
SEC or the CFTC, as applicable, and subject us to disciplinary
action in the form of fines, censure, suspension, expulsion or
the termination of business altogether.
A change
in the tax treatment of insurance products or a determination
that these products are not insurance contracts for federal tax
purposes could reduce the demand for these products, which may
reduce our revenue.
The market for many insurance products sold by
Investacorps registered representatives is based in large
part on the favorable tax treatment, including the tax-free
build up of cash values and the tax-free nature of death
benefits
22
that these products receive relative to other investment
alternatives. A change in the tax treatment of insurance
products or a determination by the IRS that certain of these
products are not insurance contracts for federal tax purposes
could remove many of the tax advantages policyholders seek in
these policies. In addition, the IRS from time to time releases
guidance on the tax treatment of products. If the provisions of
the tax code were changed or new federal tax regulations and IRS
rulings and releases were issued in a manner that would make it
more difficult for holders of these insurance contracts to
qualify for favorable tax treatment or subject holders to
special tax reporting requirements, the demand for the insurance
contracts could decrease, which may reduce our revenue and
negatively affect our business.
Risk
Factors Relating to Strategic Acquisitions and the Integration
of Acquired Operations
We may be
unable to successfully integrate acquired businesses into our
existing business and operations.
We made one acquisition in 2007 and two acquisitions in 2006 and
have agreed to make another in 2008. We continue to explore
opportunities to grow our businesses, including through
potential acquisitions of other securities firms, both
domestically and internationally. These acquisitions may involve
payments of material amounts of cash or debt or the issuance of
significant amounts of our equity securities, which may be
dilutive to our existing shareholders. We may experience
difficulty integrating the operations of these entities or any
other entities acquired in the future into our existing business
and operations. Furthermore, we may not be able retain all of
the employees we acquire as a result of these transactions. If
we are unable to effectively address these risks, we may be
required to restructure the acquired businesses or write-off the
value of some or all of the assets of the acquired business. If
we are unable to successfully integrate acquired businesses into
our existing business and operations in the future, it could
have a material adverse effect on our results of operations.
We may be
adversely affected if the firms we acquire do not perform as
expected.
Even if we are successful in completing acquisitions, we may be
adversely affected if the acquired firms do not perform as
expected. The firms we acquire may perform below expectations
after the acquisition for various reasons, including legislative
or regulatory changes that affect the products in which a firm
specializes, the loss of key clients, employees
and/or
registered representatives after the acquisition closing,
general economic factors and the cultural incompatibility of an
acquired firms management team with us. The failure of
firms to perform as expected at the time of acquisition may have
an adverse effect on our earnings and revenue growth rates, and
may result in impairment charges
and/or
generate losses or charges to earnings.
We face
numerous risks and uncertainties as we expand our
business.
We expect the growth of our business to come primarily from
internal expansion and through acquisitions. As we expand our
business, there can be no assurance that our financial controls,
the level and knowledge of our personnel, our operational
abilities, our legal and compliance controls and our other
corporate support systems will be adequate to manage our
business and our growth. The ineffectiveness of any of these
controls or systems could adversely affect our business and
prospects. In addition, as we acquire new businesses, we face
numerous risks and uncertainties integrating their controls and
systems into ours, including financial controls, accounting and
data processing systems, management controls and other
operations. A failure to integrate these systems and controls,
and even an inefficient integration of these systems and
controls, could adversely affect our business and prospects.
Risk
Factors Relating to Owning Our Stock
The price
of our common stock may fluctuate significantly, and this may
make it difficult for you to resell the shares of our common
stock at prices you find attractive.
The trading price of our common stock has ranged between $1.49
and $3.18 per share over the past 52 weeks. We expect that
the market price of our common stock will continue to fluctuate.
23
The market price of our common stock may fluctuate in response
to numerous factors, many of which are beyond our control. These
factors include the following:
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variations in quarterly operating results;
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general economic and business conditions, including conditions
in the securities brokerage and investment banking markets;
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our announcements of significant contracts, milestones or
acquisitions;
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our relationships with other companies;
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our ability to obtain needed capital commitments;
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additions or departures of key personnel;
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the initiation or outcome of litigation or arbitration
proceedings;
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sales of common stock, conversion of securities convertible into
common stock, exercise of options and warrants to purchase
common stock or termination of stock transfer restrictions;
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changes in financial estimates by securities analysts; and
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fluctuation in stock market price and volume.
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Many of these factors are beyond our control. Any one of the
factors noted herein could have an adverse effect on the value
of our common stock.
In addition, the stock market in recent years has experienced
significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many
companies and that often have been unrelated to the operating
performance of such companies. These market fluctuations have
adversely impacted the price of our common stock in the past and
may do so in the future. Furthermore, shareholders may initiate
securities class action lawsuits if the market price of our
stock drops significantly, which may cause us to incur
substantial costs and could divert the time and attention of our
management. These factors, among others, could significantly
depress the price of our common stock.
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.
As of March 3, 2008, our executive officers, directors and
companies that these individuals are affiliated with
beneficially owned approximately 48% 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.
Possible
additional issuances will cause dilution.
At December 31, 2007, we had outstanding
161,698,071 shares of common stock and options and warrants
to purchase a total of 28,233,417 shares of common stock.
We are authorized to issue up to 400,000,000 shares of
common stock and are therefore able to issue additional shares
without being required under corporate law to obtain shareholder
approval. If we issue additional shares, or if our existing
shareholders exercise their outstanding options and warrants,
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
24
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.
We do not
expect to pay any cash dividends in the foreseeable
future.
We intend to retain any future earnings to fund the development
and growth of our business. We therefore do not anticipate
paying cash dividends in the foreseeable future. Accordingly,
you must rely on sales of your shares of common stock after
price appreciation, which may never occur, as the only way to
realize any future gains on your investment. In addition, our
ability to pay dividends in the future also may be restricted by
the net capital requirements imposed on our broker-dealer
subsidiaries by the SEC and by covenants contained in our
outstanding debt agreements.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS.
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Not applicable.
Our principal executive offices are located at 4400 Biscayne
Boulevard, 12th Floor, Miami, Florida 33137, where we lease
approximately 15,800 square feet of office space. The
lessor is Frost Real Estate Holdings, LLC, an entity affiliated
with Dr. Phillip Frost, our Chairman of the Board and
principal shareholder. Our lease expires in January 2012.
Ladenburgs principal executive offices are located at 153
East 53rd Street, 49th Floor, New York, New York
10022, where it leases approximately 11,000 square feet of
office space pursuant to a lease that expires in July 2008. All
of the office space from Ladenburgs previous New York City
office located at 590 Madison Avenue has been subleased to
various non-related parties at various terms and lease periods.
The lease, which Ladenburg is still obligated under as the main
lessor, expires in June 2015. Ladenburg also operates several
branch offices located in California, Illinois, Florida, New
Jersey, New York, Ohio and Texas.
Investacorps principal executive offices are located at
15450 New Barn Road, Miami Lakes, Florida 33014, where it leases
approximately 15,100 square feet of office space under a
lease that expires in July 2011. Investacorps independent
registered representatives are responsible for the leases for
office space they occupy.
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ITEM 3.
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LEGAL
PROCEEDINGS.
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See Note 11 to our consolidated financial statements
included in Part II, Item 8 of this annual report on
Form 10-K.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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Not applicable.
25
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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Our common stock trades on the American Stock Exchange under the
symbol LTS. The following table sets forth the high
and low sales prices of our common stock for the periods
specified:
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2007
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2006
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Period
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High
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Low
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High
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Low
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First Quarter
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$
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3.74
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$
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1.18
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$
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1.54
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$
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0.44
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Second Quarter
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3.18
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2.11
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1.98
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0.81
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Third Quarter
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2.60
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1.49
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1.20
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0.76
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Fourth Quarter
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2.35
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1.72
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1.49
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0.91
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Holders
As of March 3, 2008, there were approximately 4,127 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
the net capital requirements imposed on our broker-dealer
subsidiaries by the SEC and by covenants contained in our
outstanding debt agreements.
Recent
Sales of Unregistered Securities
We did not effect the sale of any unregistered securities during
the fourth quarter of 2007 other than those described in current
reports on
Form 8-K.
Issuer
Purchases of Equity Securities
Our purchases of our common stock during the fourth quarter of
2007 were as follows:
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Maximum
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Number
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Total Number
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of Shares that
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of Shares
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May Yet Be
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Total
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Purchased as
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Purchased
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Number of
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Average Price
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Part of Publicly
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Under the
|
|
|
|
Shares
|
|
|
Paid
|
|
|
Announced Plans
|
|
|
Plans or
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
or Programs
|
|
|
Programs(1)
|
|
|
October 1 to October 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,235,010
|
|
November 1 to November 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,235,010
|
|
December 1 to December 31, 2007
|
|
|
67,539
|
|
|
$
|
1.92
|
|
|
|
67,539
|
|
|
|
2,167,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
67,539
|
|
|
$
|
1.92
|
|
|
|
67,539
|
|
|
|
2,167,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In March 2007, our board of directors authorized the repurchase
of up to 2,500,000 shares of our common stock from time to
time on the open market or in privately negotiated transactions
depending on market conditions. The repurchase program is being
funded using approximately 15% of our EBITDA, as adjusted. Since
inception through December 31, 2007, 332,529 shares
had been repurchased under the program. |
26
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA.
|
The selected financial data set forth below is derived from our
audited consolidated 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 and the notes thereto
included elsewhere in this annual report on
Form 10-K:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
95,826
|
(a)
|
|
$
|
46,858
|
|
|
$
|
30,690
|
|
|
$
|
38,441
|
|
|
$
|
57,420
|
|
Total expenses
|
|
|
85,922
|
|
|
|
42,010
|
|
|
|
56,607
|
|
|
|
48,354
|
|
|
|
62,618
|
|
Income (loss) from continuing operations before income taxes
|
|
|
9,904
|
(b)
|
|
|
4,848
|
(c)
|
|
|
(25,917
|
)(b)
|
|
|
(9,913
|
)
|
|
|
(5,198
|
)
|
Net income (loss)
|
|
|
9,391
|
(b)
|
|
|
4,659
|
(c)
|
|
|
(25,971
|
)(b)
|
|
|
(9,854
|
)
|
|
|
(5,490
|
)
|
Per common and equivalent share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share
|
|
$
|
0.06
|
|
|
$
|
0.03
|
|
|
$
|
(0.24
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
157,355,540
|
|
|
|
148,693,521
|
|
|
|
108,948,623
|
|
|
|
45,144,481
|
|
|
|
42,567,798
|
|
Diluted weighted average common shares
|
|
|
168,484,469
|
|
|
|
153,087,961
|
|
|
|
108,948,623
|
|
|
|
45,144,481
|
|
|
|
42,567,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
114,132
|
|
|
$
|
47,343
|
|
|
$
|
39,299
|
|
|
$
|
21,631
|
|
|
$
|
44,644
|
|
Total liabilities, excluding subordinated liabilities
|
|
|
60,029
|
|
|
|
19,009
|
|
|
|
26,332
|
|
|
|
27,657
|
|
|
|
35,180
|
|
Subordinated debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,010
|
|
|
|
22,500
|
|
Limited partners interest in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,136
|
|
Shareholders equity (capital deficit)
|
|
|
54,103
|
|
|
|
28,334
|
|
|
|
12,967
|
|
|
|
(24,036
|
)
|
|
|
(16,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
$
|
0.33
|
|
|
$
|
0.18
|
|
|
$
|
0.09
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(a) |
|
Includes $12,191 of revenue from Investacorp (acquired
October 19, 2007) and a charge of $6,694 for non-cash
compensation. |
|
(b) |
|
Includes losses on extinguishment of debt of $1,833 in 2007 and
$19,359 in 2005. |
|
(c) |
|
Includes $4,983 net gain on sale of NYSE and CBOE
memberships and a charge of $2,885 for non-cash compensation. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
(Dollars in thousands, except per share
amounts)
|
Overview
We are engaged in investment banking services, retail and
institutional securities brokerage, asset management services
and investment activities through our principal operating
subsidiaries, Ladenburg Thalmann & Co. Inc.
(Ladenburg) and, since October 19, 2007,
Investacorp, Inc. (collectively with related companies,
Investacorp). 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 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, asset management, brokerage and
trading professionals. Ladenburg is subject to regulation by,
among others, the SEC, FINRA and the MSRB and is a member of the
SIPC. Ladenburg had approximately 107 registered representatives
and 66 other full time employees at December 31, 2007. Its
private client services and institutional sales departments
serve approximately 22,000 accounts
27
nationwide and its asset management area provides investment
management and financial planning services to numerous
individuals and institutions.
Investacorp is an independent broker-dealer and investment
adviser, which had approximately 500 independent contractor
registered representatives, more than $8.5 billion in
client assets and approximately 75 other full time employees at
December 31, 2007. Investacorp, which is headquartered in
Miami-Lakes, Florida, is subject to regulation by, among others,
the SEC, the FINRA, the MSRB and state insurance regulators and
is a member of the SIPC. Investacorps national network of
independent registered representatives primarily serves retail
clients.
We are a leader in underwriting offerings by blank check
companies known as Specified Purpose Acquisition Companies
(SPACs). The revenues associated with these offerings have been
an important contributor to our investment banking business
since 2005. These companies are formed for the purpose of
raising funds in an initial public offering, a significant
portion of which is placed in trust, and then acquiring a target
business, thereby making the target business public.
In recent years, there has been a surge of activity in this
segment of the market, although the number of new SPAC
offerings, as well as the equity capital markets generally, have
declined significantly during the first quarter 2008. Since
2005, Ladenburg had lead or co-managed 35 SPAC offerings raising
approximately $7 billion, and our professionals provide
unique deal structures and a proprietary retail distribution
network that adds value and validity to the offering.
Compensation derived from these underwritings include normal
discounts and commissions as well as deferred fees that will be
payable to us only upon the SPACs completion of a business
combination. Generally, these fees may be received within
24 months from the respective date of the offering, or not
received at all if no business combination transactions are
consummated during such time period. During the fourth quarter
of 2007, Ladenburg received deferred fees of $9,700 (included in
investment banking revenues) and incurred commissions and
related expenses of $3,500. As of December 31, 2007, we had
unrecorded potential deferred fees for our SPAC-related
transactions of $39,500, which, net of commissions and related
expenses, amounted to approximately $23,500.
We have two operating segments which correspond to our two
principal broker-dealer subsidiaries, Ladenburg and Investacorp.
Recent
Developments
Punk,
Ziegel Acquisition
On March 4, 2008, we entered into a definitive merger
agreement to merge Punk, Ziegel & Company, L.P. into
Ladenburg. Punk Ziegel is a privately-held specialty investment
bank providing a full range of research, equity market making,
corporate finance, retail brokerage and asset management
services centered on high growth sectors within the healthcare
technology, biotechnology, life sciences and financial services
industries. Punk Ziegel, which is based in New York City, has
45 employees and is known for its highly focused, in-depth
research and corporate finance advice, particularly in the
healthcare and financial services industries. The transaction is
expected to close in the second quarter of 2008 and is subject
to customary closing conditions, including FINRA approval.
Investacorp
Acquisition
On October 19, 2007, we acquired all of the outstanding
shares of privately-held Investacorp. At the closing, we paid
$25,000 to the sellers, Bruce A. Zwigard and an affiliated
trust. In addition, we issued a three-year, non-negotiable
promissory note in the aggregate principal amount of $15,000 to
Mr. Zwigard. The note bears interest at 4.11% per annum and
is payable in 36 equal monthly installments. We have pledged the
stock of Investacorp to Mr. Zwigard as security for the
payment of the note. The note contains customary events of
default, which if uncured, entitle Mr. Zwigard to
accelerate the due date of the unpaid principal amount of, and
all accrued and unpaid interest on, the note. We also paid the
sellers an additional amount of approximately $5,200,
representing Investacorps retained earnings plus paid-in
capital.
In connection with his continued employment with Investacorp, we
granted Mr. Zwigard employee stock options to purchase a
total of 3,000,000 shares of our common stock at $1.91, the
closing price of our common stock on October 19, 2007. The
Zwigard options vest over a three-year period (subject to
certain exceptions), have a ten-year term and were issued
pursuant to a non-plan option agreement. Additionally we issued
to certain other
28
Investacorp employees options to purchase a total of
1,150,000 shares of common stock under our option plan.
These options vest in four equal annual installments and have an
exercise price of $1.91.
Frost
Gamma Revolving Credit Agreement
In connection with the Investacorp acquisition, on
October 19, 2007, we entered into a $30,000 revolving
credit agreement with Frost Gamma Investments Trust, an entity
affiliated with Dr. Phillip Frost, our Chairman of the
Board and our principal shareholder. Borrowings under the credit
agreement have a five-year term and bear interest at a rate of
11% per annum, payable quarterly. Frost Gamma received a
one-time funding fee of $150. The note issued under the credit
agreement contains customary events of default, which if
uncured, entitle the holder to accelerate the due date of the
unpaid principal amount of, and all accrued and unpaid interest
on, such note. Pursuant to the credit agreement, we granted to
Frost Gamma a warrant to purchase 2,000,000 shares of our
common stock. The warrant is exercisable for a ten-year period
and the exercise price is $1.91. During the first quarter of
2008, we have repaid $8,000 of the $30,000 of outstanding
borrowings under the credit agreement.
Debt
Exchange
In February 2007, we entered into a debt exchange agreement with
New Valley LLC. New Valley agreed to exchange the $5,000
principal amount of our promissory notes held by New Valley for
shares of our common stock at an exchange price of $1.80 per
share, representing the average closing price of our common
stock for the 30 trading days ending on the date of the debt
exchange agreement. Our shareholders approved the transaction at
our annual shareholders meeting on June 29, 2007. On that
date, we issued 2,777,778 shares of our common stock in
exchange for the $5,000 principal amount of notes and we paid
accrued interest on the notes of $1,732 to New Valley. The
exchange resulted in a loss of $1,833 representing the excess of
the quoted market value of the 2,777,778 shares of stock at
the date of the exchange agreement ($2.46 per share) over the
carrying amount of the notes.
Acquisition
Strategy
We continue to explore opportunities to grow our businesses,
including through potential acquisitions of other securities and
investment banking firms, both domestically and internationally.
These acquisitions may involve payments of material amounts of
cash or debt or the issuance of significant amounts of our
equity securities, which may be dilutive to our existing
shareholders
and/or may
increase our leverage. We cannot assure you that we will be able
to consummate any such potential acquisitions on terms
acceptable to us or, if we do, that any acquired business will
be profitable. There is also a risk that we will not be able to
successfully integrate acquired businesses into our existing
business and operations. See Item 1A. Risk
Factors Risk Factors Relating to Strategic
Acquisitions and the Integration of Acquired Operations.
Critical
Accounting Policies
General. The preparation of 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, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses.
Actual results could differ from those estimates.
Clearing Arrangements. Neither Ladenburg nor
Investacorp carries accounts for customers or performs custodial
functions related to customers securities. Each of
Ladenburg and Investacorp introduces all of its customer
transactions, which are not reflected in these financial
statements, to its clearing broker or brokers, which maintain
the customers accounts and clear such transactions.
Additionally, the clearing brokers provide the clearing and
depository operations for Ladenburgs and
Investacorps proprietary securities transactions. These
activities may expose us to off-balance-sheet risk in the event
that customers do not fulfill their obligations with the
clearing broker, as we have agreed to indemnify the clearing
brokers for any resulting losses. We continually assess risk
associated with each customer who is on margin credit and record
an estimated loss when we believe collection from the customer
is unlikely. We incurred losses from these arrangements, prior
to any recoupment from our registered representatives, of $58,
$18 and $37 for the years ended December 31, 2007, 2006 and
2005, respectively.
29
Customer Claims, Litigation and Regulatory
Matters. In the ordinary 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 their activities as a
broker-dealer, as an employer or supervisor and as a result of
other business activities. In general, the cases involve various
allegations that our employees or independent registered
representatives 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 $768 at December 31, 2007 and $483 at
December 31, 2006 for potential arbitration and lawsuit
losses. 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.
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
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.
Fair Value. Trading securities
owned and Securities sold, but not yet
purchased on our consolidated statements of financial
condition are carried at fair value or amounts that approximate
fair value, with related unrealized gains and losses recognized
in our results of operations. The determination of fair value is
fundamental to our financial condition and results of operations
and, in certain circumstances, it requires management to make
complex judgments.
Fair values are based on listed market prices, where possible.
If listed market prices are not available or if the liquidation
of our positions would reasonably be expected to impact market
prices, fair value is determined based on other relevant
factors, including dealer price quotations. Fair values for
certain derivative contracts are derived from pricing models
that consider market and contractual prices for the underlying
financial instruments or commodities, as well as time value and
yield curve or volatility factors underlying the positions.
Pricing models and their underlying assumptions impact the
amount and timing of unrealized gains and losses recognized, and
the use of different pricing models or assumptions could produce
different financial results. Changes in the fixed income and
equity markets will impact our estimates of fair value in the
future, potentially affecting principal trading revenues. The
illiquid nature of certain securities or debt instruments also
requires a high degree of judgment in determining fair value due
to the lack of listed market prices and the potential impact of
the liquidation of our position on market prices, among other
factors.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157, which defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements.
SFAS No. 157 clarifies that fair value should be based
on assumptions that market participants would use when pricing
an asset or liability and establishes a fair value hierarchy of
three levels that prioritizes the information used to develop
those assumptions. The provisions of SFAS No. 157
became effective for us beginning January 1, 2008.
Generally, the provisions of this statement are to be applied
prospectively. Certain situations, however, require
retrospective application as of the beginning of the year of
adoption through the recognition of a cumulative effect
adjustment to the opening balance of retained earnings. Such
retrospective application is required for positions in a
financial instrument that trades in a certain market held by a
broker-dealer that was measured at a fair value using a blockage
factor which is no longer permitted upon application of this
statement. We expect that the adoption of SFAS No. 157
will not have a material impact on our financial statements.
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
30
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, 2007, which consist
principally of the tax benefit of net operating loss
carryforwards and accrued expenses, amount to $18,050. After
consideration of all the evidence, both positive and negative,
especially the fact we sustained a cumulative pre-tax loss for
the periods 2005 through 2007, we have determined that a
valuation allowance at December 31, 2007 was necessary to
fully offset the deferred tax assets based on the likelihood of
future realization. At December 31, 2007, we had net
operating loss carryforwards of approximately $34,000, expiring
in various years from 2015 through 2026.
Expense Recognition of Employee Stock
Options. Effective January 1, 2006, we
adopted SFAS No. 123 (Revised 2004), Share-Based
Payment (SFAS No. 123R), which requires an
entity to measure the cost of employee, officer and director
services received in exchange for an award of equity
instruments, including stock options, based on the grant-date
fair value of the award. The cost is recognized as compensation
expense over the service period, which would normally be the
vesting period of the options. SFAS No. 123R
supersedes our previous accounting under SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123), which permitted us to
account for such compensation under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees
(APB No. 25). Pursuant to APB No. 25, and
related interpretations, no compensation cost had been
recognized in connection with the issuance of stock options, as
all options granted under our Amended and Restated 1999
Performance Equity Plan (the Option Plan) and all
options granted outside the Option Plan had an exercise price
equal to or greater than the market value of the underlying
common stock on the date of grant. We adopted
SFAS No. 123R using the modified prospective
transition method, which requires that compensation cost be
recorded as earned, (i) for all unvested stock options
outstanding at the beginning of the first fiscal year of
adoption of SFAS No. 123R based upon the grant- date
fair value estimated in accordance with the original provisions
of SFAS No. 123 and (ii) for all share-based
payments granted subsequent to the adoption, based on the
grant-date fair value estimated in accordance with the
provisions of SFAS No. 123R. In addition, balances of
unearned compensation attributable to awards granted prior to
the adoption of SFAS No. 123R were netted against
additional paid-in capital.
Intangible assets. Intangible assets are being
amortized over their estimated useful lives generally on a
straight-line basis. Intangible assets subject to amortization
are tested for recoverability whenever events or changes in
circumstances indicate that the carrying amount may be not
recoverable. We assess the recoverability of our intangible
assets by determining whether the unamortized balance can be
recovered over the assets remaining life through
undiscounted forecasted cash flows. If undiscounted forecasted
cash flows indicate that the unamortized amounts will not be
recovered, an adjustment will be made to reduce such amounts to
an amount consistent with forecasted future cash flows
discounted at a rate commensurate with the risk associated with
achieving future discounted cash flows. Future cash flows are
based on trends of historical performance and our estimate of
future performances, giving consideration to existing and
anticipated competitive and economic conditions.
Goodwill. Goodwill, which was recorded in
connection with the Investacorp acquisition, is not subject to
amortization and is tested for impairment annually, or more
frequently if events or changes in circumstances indicate that
the asset may be impaired. The impairment test consists of a
comparison of the fair value of the reporting unit with its
carrying amount. Fair value is typically based upon future cash
flows discounted at a rate commensurate with the risk involved
or market based comparables. If the carrying amount of the
reporting unit exceeds its fair value then an analysis will be
performed to compare the implied fair value of goodwill with its
carrying amount of goodwill. An impairment loss will be
recognized in an amount equal to excess of the carrying amount
over the implied fair value. After an impairment loss is
recognized, the adjusted carrying amount of goodwill is its new
accounting basis.
Results
of Operations
The following discussion provides an assessment of our results
of operations, capital resources and liquidity and should be
read in conjunction with our audited condensed consolidated
financial statements and related notes included elsewhere in
this report. Our consolidated financial statements include our
accounts and the accounts of Ladenburg, Investacorp (since
October 19, 2007) and our other wholly-owned
subsidiaries.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Total revenue
|
|
$
|
95,826
|
(1)
|
|
$
|
46,858
|
(3)
|
|
$
|
30,690
|
|
Total operating expenses
|
|
|
85,922
|
(2)
|
|
|
42,010
|
|
|
|
56,607
|
(2)
|
Operating income (loss)
|
|
|
9,904
|
|
|
|
4,848
|
|
|
|
(25,917
|
)
|
Net income (loss)
|
|
|
9,391
|
(2)
|
|
|
4,659
|
(3)
|
|
|
(25,971
|
)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, as adjusted
|
|
|
22,005
|
|
|
|
3,824
|
|
|
|
(4,082
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
221
|
|
|
|
220
|
|
|
|
152
|
|
Sale of exchange memberships
|
|
|
|
|
|
|
4,983
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,304
|
)
|
|
|
(499
|
)
|
|
|
(1,027
|
)
|
Income tax expense
|
|
|
(513
|
)
|
|
|
(189
|
)
|
|
|
(54
|
)
|
Depreciation and amortization
|
|
|
(1,491
|
)
|
|
|
(754
|
)
|
|
|
(811
|
)
|
Write-off of furniture, fixtures and leasehold improvements, net
|
|
|
|
|
|
|
(41
|
)
|
|
|
(62
|
)
|
Non-cash compensation
|
|
|
(6,694
|
)
|
|
|
(2,885
|
)
|
|
|
(728
|
)
|
Loss on extinguishment of debt
|
|
|
(1,833
|
)
|
|
|
|
|
|
|
(19,359
|
)
|
Net income (loss)
|
|
|
9,391
|
|
|
|
4,659
|
|
|
|
(25,971
|
)
|
|
|
|
(1) |
|
Includes $12,191 of revenue from Investacorp (acquired
October 19, 2007). |
|
(2) |
|
Includes losses on extinguishment of debt of $1,833 in 2007 and
$19,359 in 2005. |
|
(3) |
|
Includes $4,983 net gain in 2006 on NYSE Euronext common
stock, including NYSE merger transaction, and sale of our CBOE
membership. |
Earnings before interest, taxes, depreciation and amortization,
or EBITDA, adjusted for gains or losses on sales of assets,
non-cash compensation expense, and loss on extinguishment of
debt is a key metric we use in evaluating our financial
performance. EBITDA is considered a non-GAAP financial measure
as defined by Regulation G promulgated by the SEC under the
Securities Act of 1933, as amended. We consider EBITDA, as
adjusted, important in evaluating our financial performance on a
consistent basis across various periods. Due to the significance
of non-recurring items, EBITDA, as adjusted, enables our Board
of Directors and management to monitor and evaluate the business
on a consistent basis. We use EBITDA, as adjusted, as a primary
measure, among others, to analyze and evaluate financial and
strategic planning decisions regarding future operating
investments and potential acquisitions. We believe that EBITDA,
as adjusted, eliminates items that are not part of our core
operations, such as debt extinguishment expense, or do not
involve a cash outlay, such as stock-related compensation.
EBITDA should be considered in addition to, rather than as a
substitute for, pre-tax income, net income and cash flows from
operating activities.
Our EBITDA, as adjusted, increased $18,181 in 2007 compared to
2006 and increased $7,906 in 2006 compared to 2005.
As a result of the Investacorp acquisition on October 19,
2007, we had two operating segments. For periods prior to
October 19, 2007, we operated in only one segment. The
Ladenburg segment includes the retail and institutional
securities brokerage, investment banking services, asset
management services and investment activities conducted by
Ladenburg. The Investacorp segment includes the broker-dealer
and investment advisory services provided by Investacorp to the
independent registered representative community.
32
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
Ladenburg
|
|
|
83,313
|
|
Investacorp(1)
|
|
|
12,191
|
|
Corporate
|
|
|
322
|
|
|
|
|
|
|
Total revenues
|
|
|
95,826
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
Ladenburg
|
|
|
24,729
|
|
Investacorp(1)
|
|
|
1,158
|
|
Corporate
|
|
|
(3,882
|
)
|
|
|
|
|
|
Total operating income
|
|
|
22,005
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Investacorp from the date of its acquisition on
October 19, 2007. |
|
|
|
Year
ended December 31, 2007 compared to year ended December 31,
2006
|
For the fiscal year ended December 31, 2007, we had net
income of $9,391 compared to net income of $4,659 for the fiscal
year ended December 31, 2006. Net income for 2007 was
reduced by a $1,833 loss on extinguishment of debt and $6,694 of
non-cash compensation expense. Net income for 2006 included a
gain of $4,859 from the NYSE merger, offset by losses of $1,001
on the sale and decline in fair value of NYSE Euronext common
stock, a $1,125 gain from the sale of our CBOE membership and
$2,885 of non-cash compensation expense.
Our total revenues for 2007 increased $48,968, or 105%, from
2006 primarily as a result of increased investment banking of
$36,870, increased commissions and fees of $16,178, and
increased asset management of $647 offset by a net gain of
$4,983 on the sale of exchange memberships in 2006. The 2007
revenues also included $12,191 of revenue from Investacorp from
the date of acquisition (October 19, 2007), which were not
included in 2006.
Excluding non-cash compensation expense of $6,694 in 2007 and
$2,885 in 2006 and loss on extinguishment of debt of $1,833 in
2007, our expenses increased $38,270, or 98%, from 2006
primarily as a result of an increase in compensation and
benefits of $22,183, an increase in other expense of $3,011, an
increase in interest expense of $1,805, an increase in
professional fees of $1,386, an increase in brokerage,
communication and clearance fees of $1,053 and an increase in
depreciation and amortization of $737, offset by a decrease in
rent and occupancy expense of $876. The 2007 period included
expenses of $11,780 attributable to Investacorps
operations commencing with its acquisition on October 19,
2007. These expenses consisted primarily of commissions and fees
expense of $9,012.
The $36,870 (199%) increase in investment banking fees was
primarily the result of an increase in the size and number of
public offerings, primarily SPACs, where Ladenburg acted as
either a lead or co-manager from 16 offerings in 2006 to 29
offerings in 2007, and an increase in advisory and valuation
work resulting from the addition of the Capitalink investment
banking group in October 2006.
The $16,178 (103%) increase in commissions and fees revenue is
attributable to an additional $11,077 from Investacorp and an
increase in the number of institutional sales representatives at
Ladenburg.
The $647 (27%) increase in asset management revenue was
primarily the result of an increase in assets under management.
The $22,183 (83%) increase in compensation and benefits expense
was primarily due to a $17,774 increase in producers
compensation which is directly correlated to revenue production,
a $3,059 increase in salaries, payroll taxes and employee
benefits, an increase of $705 in discretionary bonuses which
vary with revenue, and $645 representing amortization of cash
held in escrow for former Telluride shareholders. (See
Note 3 to our consolidated
33
financial statements). The increase in salaries and bonuses is
due to an increase in the average headcount for salaried
Ladenburg employees and $1,202 is attributable to the additional
employees from Investacorp.
The $3,809 (132%) increase in non-cash compensation expense is
primarily a result of an increase of $2,482 for the amortization
of unearned compensation for our warrants and common stock held
in escrow for the principal shareholders of Capitalink which is
being amortized over 15 months beginning on
October 18, 2006, the date of acquisition, an increase in
employee compensation expense of $1,915 attributable to option
grants to employees and directors, and an increase of $125 for
options granted to the members of our former advisory board and
consultants. These amounts were offset by a $713 decrease in the
amortization of unearned compensation from stock issued to
employees in 2005 at below market prices.
The $1,053 (36%) increase in brokerage, communication and
clearance fee expense is primarily attributable to an increase
in clearing and execution charges of $536 and an increase in
third party trading platforms of $91, which corresponds to the
increase in institutional transactions, increased news and
quotes subscriptions of $339 and increased communications of $87
attributable to new institutional sales and investment banking
personnel.
The $1,386 (54%) increase in professional services expense
during 2007 is primarily due to an increase in legal, audit and
consulting fees and corporate development activities.
Interest expense increased to $2,304 in the 2007 period from
$499 in the 2006 period as a result of debt incurred in
connection with the Investacorp acquisition and subordinated
loans in connection with underwritings, offset by the debt
exchange described herein. We expect interest expense to
continue at an increased level in future periods due to the debt
relating to the Investacorp acquisition.
Depreciation and amortization expense increased $737 in the 2007
period from the 2006 period, primarily from increased
amortization of intangible assets of $960 offset by decreased
depreciation of fixed assets and amortization of leasehold
improvements of $223. Of this expense, $285 is attributable to
Investacorps operations.
The $3,011 (88%) increase in other expense is primarily due to
an $1,228 increase in travel and entertainment and office
expense, $159 increase in license, dues and regulatory fees,
$686 increase in reserve for legal settlements, $166 increase in
stock and bond errors, and a $283 increase in write-off of
receivables. Travel and entertainment expense primarily consists
of business development costs for our investment banking
business, and costs for our research analysts to visit the
companies they cover. In 2007 the average number of investment
bankers and research analysts increased significantly over the
prior year. In addition, $391 of other expenses is attributable
to the addition of Investacorps operations.
The $876 (40%) decrease in rent and occupancy, net of sublease
revenue is primarily due to Ladenburg entering into an agreement
with the landlord at its former NYC office space to amend the
lease and surrender a third floor which had been subleased by
it. In consideration, the landlord gave up an option to require
Ladenburg to occupy additional space and agreed to an annual
rent abatement of approximately $79 through June 2015, the
expiration of the lease term, with respect to the remaining
leased floors. As a result thereof, in 2007, the liability with
respect to the lease obligation, which amounted to $589 at
December 31, 2006, was reduced by $439 with a corresponding
reduction of occupancy expense.
We incurred income tax expense of $513 in 2007 as compared to
$189 in 2006. After consideration of all the evidence, both
positive and negative, management has determined that a
valuation allowance at December 31, 2007 was necessary to
fully offset the deferred tax assets based on the likelihood of
future realization. The income tax rate for the 2007 and 2006
periods does not bear a customary relationship to effective tax
rates primarily as a result of the decrease in the valuation
allowance in the 2007 and 2006 period and recognized tax
benefits from net operating loss carryforwards from prior years
utilized to offset taxable income in the 2007 and 2006 periods.
|
|
|
Year
ended December 31, 2006 compared to year ended December 31,
2005
|
For the fiscal year ended December 31, 2006, we had net
income of $4,659, compared to a net loss of $25,971 for the
fiscal year ended December 31, 2005. The net income for
2006 included a $4,859 gain from the NYSE Merger, $1,001
realized and unrealized losses on the NYSE Group shares, and a
$1,125 gain from the sale of our CBOE membership. In addition,
$2,885 of non-cash compensation expense was included in the
2006 net income,
34
including $823 relating to the Capitalink acquisition. The net
loss for 2005 included $19,359 of non-cash debt conversion
expense and $728 of non-cash compensation expense. (See
Note 10 to our consolidated financial statements.)
Our revenues for 2006 increased $16,168 or 53% from 2005,
primarily as a result of increased investment banking revenues
of $10,544 and increased asset management revenues of $1,116, In
addition we had a net gain on the sale of exchange memberships
of $4,983 in 2006.
Excluding the debt conversion expense of $19,359 in 2005 and
non-cash compensation of $2,885 in 2006 and $728 in 2005, our
expenses for 2006 increased $2,605 or 7% from 2005 primarily as
a result of increased variable costs, which corresponds with the
increase in revenues.
The $10,544 (132%) increase in investment banking revenues was
primarily the result of an increase in the number of public
offerings, primarily SPACs, where Ladenburg acted as either a
lead or co-manager from five offerings in 2005 to 16 offerings
in 2006.
The $1,116 (88%) increase in asset management revenues was due
to an increase in assets under management, primarily relating to
customers associated with the employees we hired in the second
and third quarters of 2005.
The $3,979 (17%) increase in compensation expense was primarily
due to an increase in producers compensation as a result of the
net increase in revenues.
The $536 (22%) increase in brokerage, communication and
clearance fees is primarily due to an increase in telephone and
data service charges of $262, which is a result of increased
headcount and the expansion of our offices, as well as higher
costs to upgrade our information technology infrastructure. In
addition, execution fees that we pay to floor brokers and
electronic communication networks increased $211. These expenses
are the result of an increase in our institutional desk
transactions.
The $452 (17%) decrease in rent and occupancy, net of sublease
revenue was primarily due to the subletting of the entire
34th floor of Ladenburgs former New York City office
during the first quarter of 2006 and moving to its current New
York City office.
We incurred income tax expense of $189 in 2006 as compared to
$54 in 2005. After consideration of all the evidence, both
positive and negative, management determined that a valuation
allowance at December 31, 2006 was necessary to fully
offset the deferred tax assets based on the likelihood of future
realization. The income tax rate for the 2006 and 2005 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 56% of our total assets at December 31, 2007
consisted of cash and cash equivalents, securities owned and
receivables from our clearing brokers and other broker-dealers,
all of which fluctuate, depending upon the levels of customer
business and trading activity. Receivables from broker-dealers,
which are primarily from our clearing brokers, turn over
rapidly. As a securities dealer, we may carry significant levels
of securities inventories to meet customer needs. 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.
Each of Ladenburg and Investacorp is subject to the net capital
rules of the SEC. Ladenburg is also subject to the net capital
rules of the CFTC. Therefore, they are subject to certain
restrictions on the use of capital and their related liquidity.
At December 31, 2007, Ladenburgs regulatory net
capital, as defined, of $26,659, exceeded minimum capital
requirements of $500, by $26,159. At December 31, 2007,
Investacorps regulatory net capital, as defined, of
$2,496, exceeded minimum capital requirements of $333, by
$2,163. Failure to maintain the required net capital may subject
Ladenburg and Investacorp to suspension or expulsion by FINRA,
the SEC 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 and
35
Investacorp that requires the intensive use of capital, such as
underwriting and trading activities, and also could restrict our
ability to withdraw capital from our subsidiaries, which in
turn, could limit our ability to pay dividends and repay and
service our debt.
In addition to regulatory net capital restrictions, Investacorp
also is contractually restricted from declaring a dividend to us
which would result in its retained earnings and paid-in capital
falling below the lesser of the then outstanding principal
balance of the Zwigard note and $5,000. At December 31,
2007, the outstanding principal balance of the Zwigard note was
$14,214.
Each of Ladenburg and Investacorp, as guarantor of its customer
accounts to its clearing brokers, 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 and Investacorp maintains a short
position in certain securities, they are exposed to future
off-balance-sheet market risk, since their ultimate obligation
may exceed the amount recognized in the financial statements.
Our primary sources of liquidity include our cash flow from
operations, the sale of our securities and other financing
activities, which includes borrowings under the Frost Gamma
credit agreement.
Net cash used in operating activities for 2007 was $2,860 as
compared to $8,997 for the 2006 period. The decrease in net cash
used in operating activities was primarily due to a decrease in
receivables from clearing brokers of $9,749 in 2007 compared to
a decrease of $3,904 in 2006, a decrease in receivables from
other broker-dealers of $9,559 in 2007 compared to a decrease of
$4,249 in 2006, a decrease in securities sold, but not yet
purchased of $1,096 in 2007 compared to a decrease of $6,820 in
2006, net of net income and adjustments to reconcile net income
of $20,209 in 2007 as compared to $6,048 in 2006.
Net cash used in investing activities for the year ended
December 31, 2007 was $24,393 compared to net cash provided
by investing activities of $440 for 2006. These investing
activities relate principally to the acquisition of Investacorp.
Net cash flows provided by financing activities amounted to
$28,865 for the year ended December 31, 2007 compared to
net cash flows provided of $4,604 in 2006. The increase in
financing activities related primarily to borrowings of $30,000
under the Frost Gamma credit agreement to finance the
Investacorp acquisitions, $407 provided by the issuance of our
common stock through our Employee Stock Purchase Plan, $977
provided by the exercise of employee stock options, $1,122 used
to pay withholding taxes related to the exercise of options, and
$612 used to repurchase shares for retirement under our stock
repurchase plan. Cash provided by financing activities for the
year ended December 31, 2006, reflected $3,675 of cash
provided by our private equity offering and $929 provided by the
issuance of our common stock other than private equity offering.
At December 31, 2007, we were obligated under several
non-cancelable lease agreements for office space, which provide
for future minimum lease payments aggregating approximately
$37,411 through 2015, exclusive of escalation charges. We have
subleased vacant space under subleases which entitle us to
receive rents aggregating approximately $28,041 through such
date.
In 2002, we borrowed a total of $5,000 from New Valley, our
former parent. The notes, which bore interest at 1% above the
prime rate, were due on March 31, 2007, as subsequently
extended. In February 2007, we entered into a debt exchange
agreement with New Valley, where New Valley agreed to exchange
the principal amount of the notes for shares of our common stock
at an exchange price of $1.80 per share, representing the
average closing price of our common stock for the 30 trading
days ending on the date of the agreement.
On June 29, 2007 after our shareholders approved the debt
exchange, we issued 2,777,778 shares for the principal
amount of the notes and paid $1,732 to New Valley for accrued
interest on the notes. The exchange resulted in extinguishment
of debt expense of $1,833 representing the excess of the quoted
market value of the 2,777,778 shares of stock at the date
of the debt exchange agreement ($2.46 per share) over the
carrying amount of the notes.
In March 2007, our board of directors authorized the repurchase
of up to 2,500,000 shares of our common stock from time to
time on the open market or in privately negotiated transactions
depending on market conditions.
36
The repurchase program is being funded using approximately 15%
of our EBITDA, as adjusted. As of December 31, 2007,
332,529 shares had been repurchased for $612 under the
program.
In October 2007, Ladenburg received a temporary cash
subordinated loan in the amount of $72,000 from an affiliate of
Dr. Frost to provide additional regulatory capital required
for additional underwriting participations. The loan was repaid
during the following month, with the interest at the rate of
LIBOR plus 2%, which amounted to $354. In addition, we paid the
lender a commitment fee of $420.
As discussed above under Recent Developments
Investacorp Acquisition and Frost Gamma
Revolving Credit Agreement, in connection with the
Investacorp acquisition, we entered into the Frost Gamma credit
agreement and issued the Zwigard note. During the first quarter
2008, we repaid $8,000 of the $30,000 of outstanding borrowings
under the Frost Gamma credit agreement.
Off-Balance
Sheet Arrangements and Contractual Obligations
The table below summarizes information about our contractual
obligations as of December 31, 2007 and the effects these
obligations are expected to have on our liquidity and cash flow
in the future years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
5 years
|
|
|
|
|
|
Note payable to former principal shareholder of Investacorp(1)
|
|
$
|
15,082
|
|
|
$
|
5,323
|
|
|
$
|
9,759
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Revolving credit agreement with affiliate of principal
shareholder of LTS(2)
|
|
|
45,675
|
|
|
|
3,300
|
|
|
|
6,600
|
|
|
|
35,775
|
|
|
|
|
|
|
|
|
|
Operating leases(3)
|
|
|
37,411
|
|
|
|
5,933
|
|
|
|
10,995
|
|
|
|
9,600
|
|
|
|
10,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
98,168
|
|
|
$
|
14,556
|
|
|
$
|
27,354
|
|
|
$
|
45,375
|
|
|
$
|
10,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Note bears interest at 4.11% per annum and is payable in 36
equal monthly installments. See Note 10 to our consolidated
financial statements. |
|
(2) |
|
Revolving credit agreement has a five-year term and bears
interest at a rate of 11% per annum, payable quarterly. Assumes
no payments of principal prior to maturity. See Note 10 to
our consolidated financial statements. |
|
(3) |
|
Excludes sublease rentals of $28,041. See Note 11 to our
consolidated financial statements. |
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, 2007, the fair market value of our inventories
was $3,139 in long positions and $946 in short positions. We
performed an entity-wide analysis of our financial instruments
and assessed the related risk. Based on this analysis, in the
opinion of management, the market risk associated with our
financial instruments at December 31, 2007 will not have a
material adverse effect on our consolidated financial position
or results of operations.
37
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.
|
|
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
March 13, 2008, 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.
|
Evaluation
of Disclosure Controls and Procedures
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.
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.
Managements
Report on Internal Control Over Financial Reporting
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
38
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.
We acquired Investacorp in October 2007. We have excluded
Investacorp from the scope of our annual report on internal
control over financial reporting as of December 31, 2007.
These operations represent approximately 44% of our total assets
at December 31, 2007 and approximately 13% and 3% of our
revenues and net income for the year ended December 31,
2007, respectively.
Under the supervision and with the participation of our
management, including our chief executive officer and chief
financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under the criteria established in Internal
Control Integrated Framework, our management
concluded that our internal control over financial reporting was
effective as of December 31, 2007.
Our internal control over financial reporting as of
December 31, 2007 has been audited by Eisner LLP, an
independent registered certified public accounting firm, as
stated in their report which is included below.
Attestation
Report of the Companys Independent Registered Public
Accounting Firm
To the Board of Directors and Shareholders of
Ladenburg Thalmann Financial Services Inc.
We have audited Ladenburg Thalmann Financial Services Inc. and
its subsidiaries (the Company) internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Companys management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting included in the
accompanying Managements Report on Internal Control over
Financial Reporting under Item 9A. Our responsibility is to
express an opinion on the effectiveness of the Companys
internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America. A companys internal control over financial
reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the United States of America, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.
39
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our audit did not include the internal controls over financial
reporting of Investacorp, Inc. and related companies
(collectively Investacorp) because they were
acquired by the Company in October 2007. Investacorp is included
in the 2007 consolidated financial statements and constituted
$50,643,799 of total assets as of December 31, 2007 and
$12,191,344 of total revenues and $322,608 of net income for the
year then ended.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on criteria established in
Internal Control- Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, changes in shareholders equity,
and cash flows for each of the three years in the period ended
December 31, 2007, and our report dated March 13, 2008
expressed an unqualified opinion thereon.
/s/ Eisner LLP
New York, New York
March 13, 2008
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting during the fourth quarter that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION.
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
This information will be contained in our definitive Proxy
Statement for our 2008 Annual Meeting of Shareholders, to be
filed with the SEC not later than 120 days after the end of
our fiscal year covered by this report pursuant to
Regulation 14A under the Securities Exchange Act of 1934,
and incorporated herein by reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION.
|
This information will be contained in the Proxy Statement and
incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
This information will be contained in the Proxy Statement and
incorporated herein by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
This information will be contained in the Proxy Statement and
incorporated herein by reference.
40
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
This information will be contained in the Proxy Statement and
incorporated herein by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
|
(a)(1): Index to 2007 Consolidated Financial Statements
The consolidated financial statements and the notes thereto,
together with the report thereon of Eisner LLP dated
March 13, 2008, appear beginning on
page F-1
of this report.
(a)(2): Financial Statement Schedules
Financial statement schedules not included in this report have
been omitted because they are not applicable or the required
information is shown in the consolidated financial statements or
the notes thereto.
(a)(3): Exhibits Filed
The following is a list of exhibits filed herewith as part of
this annual report on
Form 10-K.
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated
|
|
|
|
|
|
|
|
|
By Reference
|
|
|
|
|
|
|
|
|
from
|
|
No. in
|
|
|
Exhibit No.
|
|
Description
|
|
Document
|
|
Document
|
|
Page
|
|
|
3
|
.1
|
|
Articles of Incorporation
|
|
A
|
|
3.1
|
|
|
|
3
|
.2
|
|
Articles of Amendment to the Articles of Incorporation, dated
August 24, 1999
|
|
B
|
|
3.2
|
|
|
|
3
|
.3
|
|
Articles of Amendment to the Articles of Incorporation, dated
April 3, 2006
|
|
C
|
|
3.1
|
|
|
|
3
|
.4
|
|
Amended and Restated Bylaws
|
|
D
|
|
3.2
|
|
|
|
4
|
.1
|
|
Form of common stock certificate
|
|
A
|
|
4.1
|
|
|
|
4
|
.2
|
|
Credit Agreement, dated as of October 19, 2007, by and
between the Company and Frost Gamma Investments Trust, including
the form of note thereto
|
|
E
|
|
4.1
|
|
|
|
4
|
.3
|
|
Non-Negotiable Promissory Note, dated as of October 19,
2007, made by the Company in favor of Bruce A. Zwigard
|
|
E
|
|
4.2
|
|
|
|
4
|
.4
|
|
Pledge Agreement, dated as of October 19, 2007, by and
between the Company and Bruce A. Zwigard
|
|
E
|
|
4.3
|
|
|
|
10
|
.1
|
|
Amended and Restated 1999 Performance Equity Plan*
|
|
F
|
|
4.1
|
|
|
|
10
|
.2
|
|
Form of Stock Option Agreement, dated as of May 7, 2001,
between the Company and certain directors*
|
|
G
|
|
10.3
|
|
|
|
10
|
.2.1
|
|
Schedule of Stock Option Agreements in the form of
Exhibit 10.2, including material detail in which such
documents differ from Exhibit 10.2*
|
|
G
|
|
10.3.1
|
|
|
|
10
|
.3
|
|
Stock Option Agreement, dated as of January 10, 2002,
between the Company and Richard J. Lampen*
|
|
H
|
|
10.2
|
|
|
|
10
|
.4
|
|
Form of Stock Option Agreement, dated January 10, 2002,
between the Company and each of Richard J. Rosenstock and Mark
Zeitchick*
|
|
H
|
|
10.3
|
|
|
|
10
|
.4.1
|
|
Schedule of Stock Option Agreements in the form of
Exhibit 10.4, including material detail in which such
documents differ from Exhibit 10.4*
|
|
H
|
|
10.3.1
|
|
|
|
10
|
.5
|
|
Ladenburg Thalmann Financial Services Inc. Qualified Employee
Stock Purchase Plan*
|
|
I
|
|
Exhibit A
|
|
|
|
10
|
.6
|
|
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*
|
|
J
|
|
10.48
|
|
|
|
10
|
.6.1
|
|
Schedule of Stock Option Agreements in the form of
Exhibit 10.6, including material detail in which such
documents differ from Exhibit 10.6*
|
|
J
|
|
10.48.1
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated
|
|
|
|
|
|
|
|
|
By Reference
|
|
|
|
|
|
|
|
|
from
|
|
No. in
|
|
|
Exhibit No.
|
|
Description
|
|
Document
|
|
Document
|
|
Page
|
|
|
10
|
.7
|
|
Form of Stock Option Agreement, dated September 17, 2003,
between the Company and each of Howard M. Lorber, Henry C.
Beinstein and Richard J. Lampen*
|
|
K
|
|
10.1
|
|
|
|
10
|
.7.1
|
|
Schedule of Stock Option Agreements in the form of
Exhibit 10.7, including material detail in which such
documents differ from Exhibit 10.7*
|
|
K
|
|
10.1.1
|
|
|
|
10
|
.8
|
|
Office Lease dated March 30, 2007 between the Company and
Frost Real Estate Holdings, LLC
|
|
L
|
|
10.1
|
|
|
|
10
|
.9
|
|
Stock Option Agreement, dated July 13, 2006, issued to
Dr. Phillip Frost*
|
|
M
|
|
10.2
|
|
|
|
10
|
.10
|
|
Warrant issued to BroadWall Capital LLC
|
|
N
|
|
10.1
|
|
|
|
10
|
.11
|
|
Form of Stock Option Agreement issued to employees of BroadWall
|
|
N
|
|
10.2
|
|
|
|
10
|
.12
|
|
Letter Agreement, dated September 14, 2006, between
Ladenburg Thalmann Financial Services Inc. and Vector Group Ltd.
(Vector Agreement)
|
|
O
|
|
10.1
|
|
|
|
10
|
.13
|
|
First Amendment to Vector Agreement dated as of
December 20, 2007
|
|
P
|
|
10.1
|
|
|
|
10
|
.14
|
|
Agreement and Plan of Merger, dated as of September 6,
2006, between Ladenburg Thalmann Financial Services Inc.,
Telluride Acquisition, Inc., Telluride Holdings, Inc. and the
stockholders of Telluride Holdings, Inc.
|
|
Q
|
|
10.1
|
|
|
|
10
|
.15
|
|
Form of Warrant to be issued to the stockholders of Telluride
Holdings, Inc.
|
|
Q
|
|
10.2
|
|
|
|
10
|
.16
|
|
Amendment to Employment Agreement between Ladenburg Thalmann
Financial Services Inc., Ladenburg Thalmann & Co. Inc.
and Mark Zeitchick.*
|
|
R
|
|
10.3
|
|
|
|
10
|
.17
|
|
Stock Purchase Agreement, dated as of October 19, 2007, by
and among Ladenburg Thalmann Financial Services Inc., the
Investacorp Companies, the VIA Companies, Bruce A. Zwigard and
the Bruce A. Zwigard Grantor Retained Annuity Trust dated
June 20, 2007
|
|
E
|
|
10.1
|
|
|
|
10
|
.18
|
|
Non-Plan Option Agreement, dated as of October 19, 2007, by
and between Ladenburg Thalmann Financial Services Inc. and Bruce
A. Zwigard
|
|
E
|
|
10.2
|
|
|
|
10
|
.19
|
|
Warrant, dated as of October 19, 2007, issued to Frost
Gamma Investments Trust pursuant to Credit Agreement
|
|
E
|
|
10.3
|
|
|
|
21
|
|
|
List of Subsidiaries
|
|
|
|
|
|
Filed
Herewith
|
|
23
|
.1
|
|
Consent of Eisner LLP
|
|
|
|
|
|
Filed
Herewith
|
|
31
|
.1
|
|
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
|
|
|
|
|
|
Filed
Herewith
|
|
31
|
.2
|
|
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
|
|
|
|
|
|
Filed
Herewith
|
|
32
|
.1
|
|
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
|
|
|
|
|
|
Filed
Herewith
|
|
32
|
.2
|
|
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
|
|
|
|
|
|
Filed
Herewith
|
|
|
|
A. |
|
Registration statement on
Form SB-2
(File
No. 333-31001). |
|
B. |
|
Annual report on
Form 10-K
for the year ended August 24, 1999. |
|
C. |
|
Quarterly report on
Form 10-Q
for the quarter ended June 30, 2006. |
|
D. |
|
Current report on
Form 8-K,
dated September 20, 2007 and filed with the SEC on
September 21, 2007. |
|
E. |
|
Current report on
Form 8-K,
dated October 19, 2007 and filed with the SEC on
October 22, 2007. |
|
F. |
|
Registration statement on
Form S-8
(File
No. 333-139254). |
|
G. |
|
Quarterly report on
Form 10-Q
for the quarter ended June 30, 2001. |
|
H. |
|
Registration statement on
Form S-3
(File
No. 333-81964). |
42
|
|
|
I. |
|
Definitive proxy statement filed with the SEC on October 3,
2002 relating to the annual meeting of shareholders held on
November 6, 2002. |
|
J. |
|
Annual report on
Form 10-K
for the year ended December 31, 2002. |
|
K. |
|
Quarterly report on
Form 10-Q
for the quarter ended September 30, 2003. |
|
L. |
|
Current report on
Form 8-K,
dated March 30, 2007 and filed with the SEC on
April 2, 2007. |
|
M. |
|
Current report on
Form 8-K,
dated July 10, 2006 and filed with the SEC on
August 3, 2006. |
|
N. |
|
Current report on
Form 8-K,
dated September 11, 2006 and filed with the SEC on
September 12, 2006. |
|
O. |
|
Current report on
Form 8-K,
dated September 21, 2006 and filed with the SEC on
September 27, 2006. |
|
P. |
|
Current report on
Form 8-K,
dated December 20, 2007 and filed with the SEC on
December 20, 2007. |
|
Q. |
|
Current report on
Form 8-K,
dated September 6, 2006 and filed with the SEC on
September 7, 2006. |
|
R. |
|
Current report on
Form 8-K/A,
dated September 6, 2006 and filed with the SEC on
October 24, 2006. |
|
* |
|
Management Compensation Contract |
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LADENBURG THALMANN FINANCIAL
SERVICES INC.
(Registrant)
Dated: March 14, 2008
Name: Diane Chillemi
|
|
|
|
Title:
|
Vice President and Chief Financial Officer
|
POWER OF
ATTORNEY
The undersigned directors and officers of Ladenburg Thalmann
Financial Services Inc. hereby constitute and appoint Diane
Chillemi, Richard J. Lampen and Mark Zeitchick, 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 14, 2008.
|
|
|
|
|
Signatures
|
|
Title
|
|
/s/ Richard
J. Lampen
Richard
J. Lampen
|
|
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ Diane
Chillemi
Diane
Chillemi
|
|
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/ Saul
Gilinski
Saul
Gilinski
|
|
Director
|
|
|
|
/s/ Dr. Richard
M. Krasno
Dr. Richard
M. Krasno
|
|
Director
|
|
|
|
/s/ Howard
M. Lorber
Howard
M. Lorber
|
|
Director
|
|
|
|
/s/ Jeffrey
S. Podell
Jeffrey
S. Podell
|
|
Director
|
44
|
|
|
|
|
Signatures
|
|
Title
|
|
/s/ Richard
J. Rosenstock
Richard
J. Rosenstock
|
|
Director
|
|
|
|
/s/ Mark
Zeitchick
Mark
Zeitchick
|
|
Director
|
45
LADENBURG
THALMANN FINANCIAL SERVICES INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2007
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 15(a) (1) and
(2) are listed below:
FINANCIAL
STATEMENTS:
|
|
|
|
|
|
|
Page
|
|
Ladenburg Thalmann Financial Services Inc. Consolidated
Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
F-8
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
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, 2007 and 2006, and the related consolidated
statements of operations, changes in shareholders equity
and cash flows for each of the three years in the period ended
December 31, 2007. 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, 2007 and 2006, and
the consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial
statements, the Company changed its method of accounting for
stock-based compensation effective January 1, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 13, 2008 expressed
an unqualified opinion thereon.
/s/ Eisner LLP
New York, New York
March 13, 2008
F-2
LADENBURG
THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
8,595
|
|
|
$
|
6,983
|
|
Securities owned:
|
|
|
|
|
|
|
|
|
Marketable, at fair value
|
|
|
3,139
|
|
|
|
204
|
|
NYSE Euronext common stock, not readily marketable
|
|
|
1,158
|
|
|
|
1,228
|
|
Receivables from clearing brokers
|
|
|
35,881
|
|
|
|
24,851
|
|
Receivables from other broker-dealers
|
|
|
15,511
|
|
|
|
4,249
|
|
Accounts receivable, net
|
|
|
1,528
|
|
|
|
170
|
|
Exchange memberships owned, at historical cost
|
|
|
120
|
|
|
|
120
|
|
Investment in fund manager
|
|
|
386
|
|
|
|
448
|
|
Furniture, equipment and leasehold improvements, net
|
|
|
791
|
|
|
|
706
|
|
Restricted assets
|
|
|
545
|
|
|
|
1,398
|
|
Intangible assets
|
|
|
19,927
|
|
|
|
3,035
|
|
Goodwill
|
|
|
23,546
|
|
|
|
|
|
Other assets
|
|
|
3,005
|
|
|
|
3,951
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
114,132
|
|
|
$
|
47,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Securities sold, but not yet purchased, at market value
|
|
$
|
946
|
|
|
$
|
2,037
|
|
Accrued compensation
|
|
|
6,693
|
|
|
|
3,764
|
|
Commissions and fees payable
|
|
|
4,641
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
5,644
|
|
|
|
5,152
|
|
Deferred rent
|
|
|
1,566
|
|
|
|
1,552
|
|
Accrued interest
|
|
|
671
|
|
|
|
1,504
|
|
Notes payable, including $5,000 to former parent in 2006
|
|
|
39,868
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
60,029
|
|
|
|
19,009
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.0001 par value; 2,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value; 400,000,000 shares
authorized; shares issued and outstanding, 161,698,071 in 2007
and 155,972,805 in 2006
|
|
|
16
|
|
|
|
15
|
|
Additional paid-in capital
|
|
|
148,723
|
|
|
|
132,346
|
|
Accumulated deficit
|
|
|
(94,636
|
)
|
|
|
(104,027
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
54,103
|
|
|
|
28,334
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
114,132
|
|
|
$
|
47,343
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-3
LADENBURG
THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
55,401
|
|
|
$
|
18,531
|
|
|
$
|
7,987
|
|
Commissions and fees
|
|
|
31,958
|
|
|
|
15,780
|
|
|
|
16,694
|
|
Asset management
|
|
|
3,028
|
|
|
|
2,381
|
|
|
|
1,265
|
|
Principal transactions, net
|
|
|
251
|
|
|
|
326
|
|
|
|
265
|
|
Interest and dividends
|
|
|
2,970
|
|
|
|
2,790
|
|
|
|
2,082
|
|
Gain on NYSE merger transaction
|
|
|
|
|
|
|
4,859
|
|
|
|
|
|
Realized and unrealized loss on NYSE Euronext restricted common
stock
|
|
|
|
|
|
|
(1,001
|
)
|
|
|
|
|
Gain on sale of CBOE membership
|
|
|
|
|
|
|
1,125
|
|
|
|
|
|
Other income
|
|
|
2,218
|
|
|
|
2,067
|
|
|
|
2,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
95,826
|
|
|
|
46,858
|
|
|
|
30,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
48,918
|
|
|
|
26,735
|
|
|
|
22,756
|
|
Commissions and fees
|
|
|
9,012
|
|
|
|
|
|
|
|
|
|
Non-cash compensation
|
|
|
6,694
|
|
|
|
2,885
|
|
|
|
728
|
|
Brokerage, communication and clearance fees
|
|
|
3,976
|
|
|
|
2,923
|
|
|
|
2,387
|
|
Rent and occupancy, net of sublease revenue
|
|
|
1,307
|
|
|
|
2,183
|
|
|
|
2,635
|
|
Professional services
|
|
|
3,944
|
|
|
|
2,558
|
|
|
|
3,054
|
|
Interest
|
|
|
2,304
|
|
|
|
499
|
|
|
|
1,027
|
|
Depreciation and amortization
|
|
|
1,491
|
|
|
|
754
|
|
|
|
811
|
|
Write-off of furniture, fixtures and leasehold improvements, net
|
|
|
|
|
|
|
41
|
|
|
|
62
|
|
Loss on extinguishment of debt
|
|
|
1,833
|
|
|
|
|
|
|
|
19,359
|
|
Other
|
|
|
6,443
|
|
|
|
3,432
|
|
|
|
3,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
85,922
|
|
|
|
42,010
|
|
|
|
56,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
9,904
|
|
|
|
4,848
|
|
|
|
(25,917
|
)
|
Income tax expense
|
|
|
513
|
|
|
|
189
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,391
|
|
|
$
|
4,659
|
|
|
$
|
(25,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share (basic and diluted)
|
|
$
|
0.06
|
|
|
$
|
0.03
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
157,355,540
|
|
|
|
148,693,521
|
|
|
|
108,948,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
168,484,469
|
|
|
|
153,087,961
|
|
|
|
108,948,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-4
LADENBURG
THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS EQUITY
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stock-based
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance, December 31, 2004
|
|
|
46,683,270
|
|
|
$
|
5
|
|
|
$
|
58,674
|
|
|
$
|
|
|
|
$
|
(82,715
|
)
|
|
$
|
(24,036
|
)
|
Issuance of common stock under employee stock purchase plan
|
|
|
686,096
|
|
|
|
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
307
|
|
Exercise of stock options
|
|
|
44,767
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Issuance of common stock under performance equity plan
|
|
|
580,000
|
|
|
|
|
|
|
|
374
|
|
|
|
(113
|
)
|
|
|
|
|
|
|
261
|
|
Issuance 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 notes
|
|
|
51,778,678
|
|
|
|
5
|
|
|
|
42,053
|
|
|
|
|
|
|
|
|
|
|
|
42,058
|
|
Issuance of common stock to former debtholders pursuant to
private equity offering, net of expenses of $87
|
|
|
22,222,222
|
|
|
|
2
|
|
|
|
9,911
|
|
|
|
|
|
|
|
|
|
|
|
9,913
|
|
Issuance 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 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
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
248,298
|
|
|
|
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
Exercise of stock options, net of 451,585 shares tendered
in payment of exercise price
|
|
|
1,469,607
|
|
|
|
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
489
|
|
Stock options granted to Advisory Board
|
|
|
|
|
|
|
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
312
|
|
Elimination of unearned employee stock-based compensation to
additional paid-in capital upon adoption of
SFAS No. 123R
|
|
|
|
|
|
|
|
|
|
|
(893
|
)
|
|
|
893
|
|
|
|
|
|
|
|
|
|
Amortization of unearned employee stock-based compensation
issued in 2005
|
|
|
|
|
|
|
|
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
|
803
|
|
Stock-based compensation to employees in 2006
|
|
|
|
|
|
|
|
|
|
|
1,770
|
|
|
|
|
|
|
|
|
|
|
|
1,770
|
|
Issuance of common stock to affiliates pursuant to private
equity offering, net of expenses of $103
|
|
|
8,397,891
|
|
|
|
1
|
|
|
|
3,675
|
|
|
|
|
|
|
|
|
|
|
|
3,676
|
|
Warrants issued for acquisition of customer accounts
|
|
|
|
|
|
|
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
698
|
|
Warrants issued for interest in fund manager
|
|
|
|
|
|
|
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
399
|
|
Warrants and common stock issued for acquisition of Capitalink
|
|
|
4,000,000
|
|
|
|
|
|
|
|
2,122
|
|
|
|
|
|
|
|
|
|
|
|
2,122
|
|
Issuance of common stock to employees pursuant to stock purchase
agreements
|
|
|
266,480
|
|
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
172
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,659
|
|
|
|
4,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
155,972,805
|
|
|
|
15
|
|
|
|
132,346
|
|
|
|
|
|
|
|
(104,027
|
)
|
|
|
28,334
|
|
Issuance of shares of common stock under employee stock purchase
plan
|
|
|
183,308
|
|
|
|
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
407
|
|
Exercise of stock options, net of 400,702 shares tendered
in payment of exercise price and 355,355 options used in
cashless exercise
|
|
|
3,618,420
|
|
|
|
1
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
978
|
|
Shares acquired from an employee in satisfaction of withholding
taxes on exercise of options
|
|
|
(521,711
|
)
|
|
|
|
|
|
|
(1,122
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,122
|
)
|
Stock options granted to members of former Advisory Board and
consultants
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
Stock-based compensation to employees
|
|
|
|
|
|
|
|
|
|
|
6,257
|
|
|
|
|
|
|
|
|
|
|
|
6,257
|
|
Stock retired under stock repurchase plan
|
|
|
(332,529
|
)
|
|
|
|
|
|
|
(612
|
)
|
|
|
|
|
|
|
|
|
|
|
(612
|
)
|
Issuance of shares of common stock in exchange for promissory
notes payable to former parent
|
|
|
2,777,778
|
|
|
|
|
|
|
|
6,833
|
|
|
|
|
|
|
|
|
|
|
|
6,833
|
|
Warrant issued in connection with credit agreement
|
|
|
|
|
|
|
|
|
|
|
3,200
|
|
|
|
|
|
|
|
|
|
|
|
3,200
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,391
|
|
|
|
9,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
161,698,071
|
|
|
$
|
16
|
|
|
$
|
148,723
|
|
|
$
|
|
|
|
$
|
(94,636
|
)
|
|
$
|
54,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-5
LADENBURG
THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,391
|
|
|
$
|
4,659
|
|
|
$
|
(25,971
|
)
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
298
|
|
|
|
591
|
|
|
|
811
|
|
Write-off of furniture, fixtures and leasehold improvements, net
|
|
|
115
|
|
|
|
41
|
|
|
|
62
|
|
Adjustment to deferred rent
|
|
|
14
|
|
|
|
(149
|
)
|
|
|
(1,305
|
)
|
Amortization of debt discount
|
|
|
304
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
1,104
|
|
|
|
144
|
|
|
|
|
|
Amortization of investment in fund manager
|
|
|
89
|
|
|
|
19
|
|
|
|
|
|
Accrued interest
|
|
|
671
|
|
|
|
448
|
|
|
|
681
|
|
Forgiveness of promissory note payable
|
|
|
|
|
|
|
(666
|
)
|
|
|
(667
|
)
|
Non-cash compensation expense
|
|
|
6,694
|
|
|
|
2,885
|
|
|
|
728
|
|
Gain on NYSE merger transaction in excess of proceeds of sale of
$3,128
|
|
|
|
|
|
|
(1,732
|
)
|
|
|
|
|
Realized and unrealized loss on NYSE Euronext common stock
|
|
|
|
|
|
|
1,001
|
|
|
|
|
|
Gain on sale of CBOE membership
|
|
|
|
|
|
|
(1,125
|
)
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
1,833
|
|
|
|
|
|
|
|
19,359
|
|
Other
|
|
|
|
|
|
|
(68
|
)
|
|
|
88
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned
|
|
|
(2,386
|
)
|
|
|
1,735
|
|
|
|
(1,751
|
)
|
Receivables from clearing brokers
|
|
|
(9,749
|
)
|
|
|
(3,904
|
)
|
|
|
(10,599
|
)
|
Receivables from other broker-dealers
|
|
|
(9,559
|
)
|
|
|
(4,249
|
)
|
|
|
|
|
Accounts receivable, net
|
|
|
(1,358
|
)
|
|
|
(100
|
)
|
|
|
(39
|
)
|
Other assets
|
|
|
1,352
|
|
|
|
(521
|
)
|
|
|
2,202
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased
|
|
|
(1,096
|
)
|
|
|
(6,820
|
)
|
|
|
8,829
|
|
Accrued compensation
|
|
|
2,929
|
|
|
|
1,276
|
|
|
|
479
|
|
Commission and fees payable
|
|
|
646
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
(4,152
|
)
|
|
|
(2,462
|
)
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,860
|
)
|
|
|
(8,997
|
)
|
|
|
(6,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of relationships and customer accounts
|
|
|
(92
|
)
|
|
|
(1,026
|
)
|
|
|
|
|
Payment for acquisition, net of cash received
|
|
|
(25,044
|
)
|
|
|
|
|
|
|
|
|
Purchases of furniture, equipment and leasehold improvements
|
|
|
(395
|
)
|
|
|
(369
|
)
|
|
|
(237
|
)
|
Proceeds from sales of exchange memberships
|
|
|
|
|
|
|
1,920
|
|
|
|
|
|
Decrease (increase) in restricted assets
|
|
|
1,135
|
|
|
|
(85
|
)
|
|
|
(253
|
)
|
Other
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(24,393
|
)
|
|
|
440
|
|
|
|
(490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity offerings
|
|
|
|
|
|
|
3,675
|
|
|
|
8,968
|
|
Issuance of common stock other than private equity offerings
|
|
|
1,385
|
|
|
|
929
|
|
|
|
5,265
|
|
Shares acquired for withholding taxes on exercise of stock
options
|
|
|
(1,122
|
)
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(612
|
)
|
|
|
|
|
|
|
(1,155
|
)
|
Issuance of subordinated notes payable
|
|
|
72,000
|
|
|
|
20,000
|
|
|
|
15,000
|
|
Repayment of subordinated notes payable
|
|
|
(72,000
|
)
|
|
|
(20,000
|
)
|
|
|
(15,000
|
)
|
Issuance of other notes payable
|
|
|
30,000
|
|
|
|
|
|
|
|
3,500
|
|
Principal payments on other notes payable
|
|
|
(786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
28,865
|
|
|
|
4,604
|
|
|
|
16,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,612
|
|
|
|
(3,953
|
)
|
|
|
9,216
|
|
Cash and cash equivalents, beginning of year
|
|
|
6,983
|
|
|
|
10,936
|
|
|
|
1,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
8,595
|
|
|
$
|
6,983
|
|
|
$
|
10,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,766
|
|
|
$
|
139
|
|
|
$
|
323
|
|
Taxes paid
|
|
|
193
|
|
|
|
344
|
|
|
|
26
|
|
Non-cash financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant issued for acquisition of customer accounts
|
|
$
|
|
|
|
$
|
698
|
|
|
$
|
|
|
Warrant issued for interest in fund manager
|
|
|
|
|
|
|
399
|
|
|
|
|
|
Warrant and common stock issued for Capitalink acquisition
|
|
|
|
|
|
|
2,122
|
|
|
|
|
|
Lease commitment capitalized as part of Capitalink acquisition
|
|
|
463
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock in exchange for $5,000 of
promissory notes payable to former parent
|
|
|
6,833
|
|
|
|
|
|
|
|
|
|
Warrant issued in connection with credit agreement
|
|
|
3,200
|
|
|
|
|
|
|
|
|
|
Conversion of senior convertible notes ($18,010) and accrued
interest ($4,689) into common stock
|
|
|
|
|
|
|
|
|
|
|
22,699
|
|
Common stock purchased pursuant to private placement by
exchanging notes payable ($7,000) and accrued interest ($110)
|
|
|
|
|
|
|
|
|
|
|
7,110
|
|
Acquisition of Investacorp and affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
$
|
50,849
|
|
|
|
|
|
|
|
|
|
Liabilities assumed ($6,676) and note payable issued to former
principal shareholder ($13,550)
|
|
|
(20,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition
|
|
|
30,623
|
|
|
|
|
|
|
|
|
|
Cash acquired in acquisition
|
|
|
(5,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for acquisition
|
|
$
|
25,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-7
LADENBURG
THALMANN FINANCIAL SERVICES INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except 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 subsidiaries of LTS are Ladenburg Thalmann &
Co. Inc. (Ladenburg) and, since October 19,
2007, the date of acquisition, Investacorp, Inc., which are
registered broker-dealers in securities.
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,
investment banking and asset management. 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), Financial Industry
Regulatory Authority (FINRA), Commodities Futures
Trading Commission (CFTC), Municipal Securities
Rulemaking Board (MSRB) and National Futures
Association (NFA). (See Note 6.)
Investacorp, Inc. is a registered broker-dealer in securities,
serving the independent registered representative community.
Investacorp, Inc. clears its customers transactions
through correspondent clearing brokers on a fully disclosed
basis. Investacorp, Inc. derives revenue from commissions
primarily from the sale of variable annuity products, mutual
funds and other financial products and services. Investacorp,
Inc. is subject to regulation by, among others, the SEC, FINRA
and the MSRB. (See Note 6.)
All significant intercompany balances and transactions have been
eliminated.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates
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.
Reclassifications
Certain amounts in the 2005 and 2006 financial statements were
reclassified to conform with the 2007 financial statement
classifications.
Cash
Equivalents
The Company considers all highly liquid financial instruments
with an original maturity of three months or less to be cash
equivalents.
Securities
Securities owned and securities sold, but not yet purchased,
which are traded on a national securities exchange or
over-the-counter 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. Securities that
contain resale restrictions are stated at a discount to the
value of readily marketable securities. Stock warrants are
carried at a discount to fair value as determined by using the
Black-Scholes option pricing model due to illiquidity.
Unrealized gains and losses
F-8
resulting from changes in valuation are reflected in principal
transactions. See Note 5 for valuation of NYSE Euronext
common stock.
Revenue
Recognition
Investment banking revenue consists of underwriting revenue,
strategic advisory revenue and private placement fees.
Underwriting revenues arise from securities offerings in which
the Company acts as an underwriter and include management fees,
selling concessions and underwriting fees, net of related
syndicate expenses. Underwriting revenues are recorded at the
time the underwriting is completed and the income is reasonably
determined. Management estimates the Companys share of the
transaction-related expenses incurred by the syndicate, and
recognizes revenues net of such expense. On final settlement,
typically 90 days from the trade date of the transaction,
these amounts are adjusted to reflect the actual
transaction-related expenses and the resulting underwriting fee.
Strategic advisory revenue primarily consists of success fees on
completed merger and acquisition transactions, as well as
retainer and periodic fees, earned in connection with advising
on both buyers and sellers transactions. Fees are
also earned for related advisory work and other services such as
providing fairness opinions and valuation analyses. Strategic
advisory revenues are recorded when the transactions or the
services (or, if applicable, separate components thereof) to be
performed are substantially complete, the fees are determinable
and collection is reasonably assured. Private placement fees are
recorded on the closing date of the transaction. Expenses
associated with strategic advisory and private placement
transactions, net of client reimbursements, are recorded as
non-compensation expense.
Commissions and fees revenue results from transactions in equity
securities, mutual funds, variable annuities, and other
financial products and services. Revenue from such transactions,
executed as agent or principal, and related expenses are
recorded on a trade-date basis.
Asset management revenue consists of base management fees and
incentive fees. The Company recognizes base management fees on a
monthly basis over the period in which the investment services
are performed. Base management fees earned by the Company are
generally based on the fair value of assets under management.
Base management fees are calculated at the investor level and,
depending on the program, use their monthly, average monthly or
quarter-ending capital balances adjusted for any contributions
or withdrawals. Since base management fees are based on assets
under management, significant changes in the fair value of these
assets will have an impact on the fees earned by the Company in
future periods. The Company also earns incentive fees that are
based upon the performance of investment funds and accounts.
Incentive fees are either a specified percentage of the total
investment return of a fund or account or a percentage of the
excess of an investment return over a specified highwater mark
or hurdle rate over a defined performance period. For most
funds, the highwater mark is calculated using the greatest value
of a partners capital account as of the end of any
performance period, adjusted for contributions and withdrawals.
Incentive fees are recognized as revenue at the end of the
specified performance period.
Principal transactions revenue includes realized and unrealized
net gains and losses resulting from the Companys
investments in equity securities for the Companys account
and equity-linked warrants received from certain investment
banking assignments. Profit and loss arising from all securities
transactions entered into for the account and risk of the
Company are recorded on a trade-date basis.
Dividends are recorded on an ex-dividend date basis and interest
is recorded on an accrual basis.
Furniture,
Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are carried at
cost net of accumulated depreciation and amortization.
Depreciation 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, or their estimated useful lives, whichever is
shorter.
F-9
Share-Based
Compensation
Effective January 1, 2006, the Company has adopted
Statement of Financial Accounting Standards (SFAS)
No. 123 (Revised 2004), Share-Based Payment
(SFAS No. 123R), which requires an entity
to measure the cost of employee, officer and director services
received in exchange for an award of equity instruments,
including stock options, based on the grant-date fair value of
the award. The cost is recognized as compensation expense over
the service period, which would normally be the vesting period
of the options. SFAS No. 123R supersedes the
Companys previous accounting under SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123), which permitted the
Company to account for such compensation under Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25). Pursuant to
APB No. 25, and related interpretations, no compensation
cost had been recognized in connection with the issuance of
stock options, as all options granted under the Companys
1999 Performance Equity Plan and all options granted outside
this option plan had an exercise price equal to or greater than
the market value of the underlying common stock on the date of
grant. The Company adopted SFAS No. 123R using the
modified prospective transition method, which requires that
compensation cost be recorded as earned, (i) for all
unvested stock options outstanding at the beginning of the first
fiscal year of adoption of SFAS No. 123R based upon
the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123 and (ii) for
all share-based payments granted subsequent to the adoption,
based on the grant-date fair value estimated in accordance with
the provisions of SFAS No. 123R. In addition, balances
of unearned compensation attributable to awards granted prior to
the adoption of SFAS No. 123R were netted against
additional paid-in capital. As a result of adopting
SFAS No. 123R, the Companys income before income
taxes and net income for the year ended December 31, 2006
were $1,047, or $0.01 per share, lower than if it had continued
to account for share-based compensation under APB No. 25.
The table below illustrates the effect on the Companys net
loss for the year ended December 31, 2005 had the Company
elected to recognize compensation expense for stock options,
consistent with the method prescribed by SFAS No. 123. For
purposes of the pro forma disclosure, the value of options is
estimated using the Black-Scholes option pricing formula and
amortized to expense over the options vesting periods.
(See Note 15.)
|
|
|
|
|
|
|
2005
|
|
|
Net loss, as reported
|
|
$
|
(25,971
|
)
|
Stock-based employee compensation determined under the fair
value based method
|
|
|
(2,314
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(28,285
|
)
|
|
|
|
|
|
Net loss per common share (basic and diluted), as reported
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
Pro forma net loss per common share (basic and diluted)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
Intangible
Assets
Intangible assets are being amortized over their estimated
useful lives generally on a straight-line basis. Intangible
assets subject to amortization are tested for recoverability
whenever events or changes in circumstances indicate that the
carrying amount may be not recoverable. The Company assesses the
recoverability of its intangible assets by determining whether
the unamortized balance can be recovered over the assets
remaining life through undiscounted forecasted cash flows. If
undiscounted forecasted cash flows indicate that the unamortized
amounts will not be recovered, an adjustment will be made to
reduce such amounts to an amount consistent with forecasted
future cash flows discounted at a rate commensurate with the
risk associated with achieving future discounted cash flows.
Future cash flows are based on trends of historical performance
and the Companys estimate of future performances, giving
consideration to existing and anticipated competitive and
economic conditions.
Goodwill
Goodwill, which was recorded in connection with the acquisition
of Investacorp (see Note 3), is not subject to
amortization and is tested for impairment annually, or more
frequently if events or changes in circumstances
F-10
indicate that the asset may be impaired. The impairment test
consists of a comparison of the fair value of the reporting unit
with its carrying amount. Fair value is typically based upon
future cash flows discounted at a rate commensurate with the
risk involved or market based comparables. If the carrying
amount of the reporting unit exceeds its fair value then an
analysis will be performed to compare the implied fair value of
goodwill with its carrying amount of goodwill. An impairment
loss will be recognized in an amount equal to the excess of the
carrying amount over the implied fair value. After an impairment
loss is recognized, the adjusted carrying amount of goodwill is
its new accounting basis.
Recently
Issued Accounting Pronouncements
Effective January 1, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
(an interpretation of FASB Statement No. 109)
(FIN 48). This interpretation was issued in
July 2006 to clarify the accounting for uncertainty in income
taxes recognized in the financial statements by prescribing a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. As
required by FIN 48, the Company applied the
more-likely-than-not recognition threshold to all
tax positions, commencing at the adoption date, which resulted
in no unrecognized tax benefits as of such date or
December 31, 2007. Accordingly, the adoption of FIN 48
had no effect on the Companys 2007 financial statements.
Pursuant to FIN 48, the Company has opted to classify
interest and penalties that would accrue according to the
provisions of relevant tax law as interest and other expense,
respectively, on the consolidated statement of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements.
SFAS No. 157 clarifies that fair value should be based
on assumptions that market participants would use when pricing
an asset or liability and establishes a fair value hierarchy of
three levels that prioritizes the information used to develop
those assumptions. The provisions of SFAS No. 157
became effective for the Company beginning January 1, 2008.
Generally, the provisions of this statement are to be applied
prospectively. Certain situations, however, require
retrospective application as of the beginning of the year of
adoption through the recognition of a cumulative effect
adjustment to the opening balance of retained earnings. Such
retrospective application is required for positions in a
financial instrument that trades in an active market held by a
broker-dealer that was measured at fair value using a blockage
factor which is no longer permitted upon application of this
statement. The Company will adopt SFAS No. 157 in the
first quarter of 2008. Management expects that the adoption of
SFAS No. 157 will not have a material effect on the
Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value that are not currently required to be
measured at fair value. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007, with early
adoption permitted provided the entity also elects to apply the
provisions of SFAS No. 157. Management expects that
the adoption of SFAS No. 159 will not have a material
effect on the Companys consolidated financial statements.
Investacorp
On October 19, 2007, the Company acquired all of the
outstanding shares of privately-held Investacorp, Inc. and
related companies (collectively, Investacorp), an
independent broker-dealer and investment adviser serving the
independent registered representative community, for
approximately $30 million in cash and a promissory note in
the aggregate principal amount of $15,000. The note, which is
collateralized by the stock of Investacorp, bears interest at
4.11% and is payable in 36 monthly installments, was valued
at $13,550 based on an imputed interest rate of 11%. In
addition, the Company paid the sellers an additional amount of
approximately $5,000. subject to adjustment post-closing,
representing Investacorps retained earnings plus paid-in
capital.
F-11
In connection with financing the acquisition, the Company
entered into a $30,000 revolving credit agreement with Frost
Gamma. (See Note 10.)
The purchase price of $44,173, including acquisition costs, was
allocated to Investacorps tangible and identifiable
intangible assets acquired and liabilities assumed based on
their estimated fair values with the amount exceeding the fair
values being recorded in goodwill. The Company obtained third
party valuations in determining fair value for the intangibles.
The allocation of the purchase price is as follows:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,579
|
|
Securities owned
|
|
|
478
|
|
Receivables from brokers
|
|
|
2,984
|
|
Intangible assets(1)
|
|
|
17,441
|
|
Goodwill(2)
|
|
|
23,546
|
|
Other assets
|
|
|
821
|
|
|
|
|
|
|
Total assets acquired
|
|
|
50,849
|
|
|
|
|
|
|
Commissions and fees payable
|
|
|
3,995
|
|
Accounts payable and accrued liabilities
|
|
|
2,681
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,676
|
|
|
|
|
|
|
Purchase price
|
|
$
|
44,173
|
|
|
|
|
|
|
|
|
|
(1) |
|
Intangible assets have a weighted average useful life of
18 years and are expected to be deductible for tax purposes
over 15 years. (See Note 8.) |
|
(2) |
|
Goodwill is expected to be deductible for tax purposes over a
15 year period. |
The acquisition agreement provides that Investacorps
selling shareholders shall join with the Company in making a
Section 338(h)(10) election and the Company shall reimburse
the shareholders for any additional tax liability imposed upon
them as a result of the election. Any amounts paid by the
Company in connection therewith will be accounted for as
additional purchase price and reflected as additional goodwill.
In connection with his continued employment with Investacorp,
the Company granted the former principal shareholder stock
options to purchase a total of 3,000,000 shares of the
Companys common stock at $1.91 per share, the closing
price of the Companys common stock on the acquisition
date. The options, which were valued at a total of $5,130, using
the Black-Scholes option pricing model, vest over a three-year
period (subject to certain exceptions). Additionally, the
Company issued to certain other Investacorp employees options to
purchase 1,150,000 shares of common stock under the Option
Plan at $1.91 per share, which were valued at a total of
$1,967, and vest in four equal annual installments.
BroadWall
On September 11, 2006, Ladenburg acquired substantially all
of the securities brokerage accounts, registered representatives
and employees of BroadWall Capital LLC (BroadWall).
In connection with this acquisition, the Company issued to
BroadWall ten-year warrants to purchase 1,500,000 shares of
the Companys common stock at an exercise price of $0.94
per share. At December 31, 2007, the warrants are
exercisable as to 487,500 shares and will become
exercisable as to 337,500 shares on each of
September 11, 2008, 2009 and 2010, contingent upon the
continued employment of two former employees of BroadWall, both
of whom have entered into two-year employment agreements with
Ladenburg. Such individuals had a 40% ownership interest in
BroadWall. Accordingly, the Company has valued 825,000 of the
warrants that vest over the two-year term of the employment
agreements at $698 representing consideration for the
acquisition. The value of the warrants, together with legal
costs related to the acquisition, has been assigned to customer
accounts (included in intangible assets, net), which is being
amortized to expense over an estimated life of 10 years.
The remaining warrants, which were valued at $571, representing
contingent consideration, will be recorded as
F-12
additional purchase price and increase the carrying value of the
acquired customer accounts if and when Ladenburg renews the
employees employment agreements.
Capitalink
On October 18, 2006, the Company, for an aggregate
consideration amounting to $7,392, acquired Telluride Holdings,
Inc. (Telluride) through a merger into a
newly-formed subsidiary of the Company. Telluride owned 100% of
Capitalink L.C. (Capitalink), a registered
broker-dealer providing investment banking services. The
consideration consisted of $1,000 in cash, 4,000,000 shares
of the Companys common stock valued at $3,840 and ten-year
warrants to purchase 2,900,000 shares of the Companys
common stock at an exercise price of $0.96 per share valued at
$2,552. Warrants to purchase 966,666 shares of common stock
are immediately exercisable and the remaining warrants will
become immediately exercisable upon their release from escrow as
described below. In connection with the merger, Ladenburg
entered into three-year employment agreements with each of
Tellurides three shareholders.
In connection with the transaction, 2,666,667 of the shares of
common stock, warrants to purchase 1,933,333 shares of
common stock and $667 in cash were placed in escrow contingent
upon continued employment of the selling shareholders, one-half
of which was released to the shareholders on June 3, 2007
and the balance was released on January 18, 2008.
Accordingly, the fair value of the consideration placed in
escrow of $4,937 is being accounted for as compensation over the
15 month escrow period. Compensation expense of $3,948 and
$823 was recognized in 2007 and 2006, respectively, with an
additional $166 to be recognized in 2008. The remaining
consideration of $2,455 has been accounted for as purchase
price, of which $173 has been allocated to trade name with an
estimated 10 year life and $2,282 has been allocated to
relationships with an estimated 4 year life. The
transaction resulted in an increase of $2,122 to additional
paid-in capital resulting from the issuance of
4,000,000 shares of common stock and 966,666 vested
warrants. The shares of common stock placed in escrow have been
considered outstanding as the former Telluride shareholders are
entitled to voting rights.
In February 2007, the former Capitalink office was vacated and
the employees moved into the Companys Miami office, as
planned. The present value of the lease commitment and
additional acquisition related expenses amounting to $538 has
been accounted for as purchase price, of which $38 has been
allocated to trade name and $500 has been allocated to
relationships.
The consolidated financial statements include the results of
operations of Investacorp, Broadwall and Capitalink from the
dates of acquisition. The following unaudited pro forma
information represents the Companys consolidated results
of operations as if the acquisitions of Investacorp, Broadwall
and Capitalink had occurred at the beginning of 2006. The pro
forma amounts of net loss reflect amortization of the amounts
ascribed to intangibles acquired in the acquisitions,
amortization of unearned employee stock-based compensation and
interest expense on debt used to finance the Investacorp
acquisition.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Total revenue
|
|
$
|
150,440
|
|
|
$
|
111,973
|
|
Net loss
|
|
$
|
(2,594
|
)(1)
|
|
$
|
(450
|
)
|
Basic loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
Diluted loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
Weighted average shares outstanding basic
|
|
|
160,424,033
|
|
|
|
150,560,187
|
|
Weighted average shares outstanding diluted
|
|
|
171,721,283
|
|
|
|
156,306,354
|
|
|
|
|
(1) |
|
Includes a non-recurring charge of $9,200 for special bonuses
paid to Investacorp employees prior to the closing of the
acquisition. |
The unaudited proforma financial information is not intended to
represent or be indicative of the Companys consolidated
results of operations that would have been reported had the
acquisitions been completed as of the
F-13
beginning of the periods presented, nor should it be taken as
indicative of the Companys future consolidated results of
operations.
|
|
4.
|
Securities
Owned and Securities Sold, But Not Yet Purchased
|
The components of marketable securities owned and securities
sold, but not yet purchased as of December 31, 2007 and
2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
Securities
|
|
|
Sold, But Not
|
|
|
|
Owned
|
|
|
Yet Purchased
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Common stock and warrants
|
|
$
|
3,138
|
|
|
$
|
946
|
|
Corporate bonds
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,139
|
|
|
$
|
946
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
Common stock and warrants
|
|
$
|
197
|
|
|
$
|
2,032
|
|
U.S. Government obligations
|
|
|
6
|
|
|
|
|
|
Corporate bonds
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
204
|
|
|
$
|
2,037
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2006, approximately $3,112 and
$167, respectively, of securities owned are deposited with the
Companys subsidiaries clearing brokers. Pursuant to
the clearing agreements with such clearing brokers, the
securities may be sold or hypothecated by the clearing brokers.
|
|
5.
|
Sales of
Exchange Memberships
|
NYSE
As of December 31, 2005, Ladenburg owned one membership on
the NYSE, which had been accounted for at a cost of $868 in
accordance with industry practice. On April 20, 2005, the
NYSE and Archipelago Holdings, Inc. entered into a definitive
merger agreement, as amended and restated on July 20, 2005
(as so amended, the NYSE Merger Agreement), pursuant
to which Archipelago and NYSE agreed to combine their businesses
and become wholly-owned subsidiaries of NYSE Group, Inc.
(NYSE Group), a newly-created, for-profit and
publicly-traded holding company (collectively, the NYSE
Merger).
In March 2006, the NYSE Merger was consummated, and
Ladenburgs NYSE membership was converted into $371 in cash
and 80,177 shares of NYSE Group common stock. The shares of
NYSE Group common stock received in the NYSE Merger were subject
to a three-year restriction on transfer. The restriction was
scheduled to expire in three equal installments on each of
March 7, 2007, 2008 and 2009, unless removed earlier by the
NYSE Group in its sole discretion. Ladenburg accounted for its
investment in the NYSE Group restricted common stock at the
estimated fair value with changes in fair value reflected in
operations. The shares were valued at a discount from the
published market value as a result of the transfer restrictions.
In May 2006, Ladenburg sold in a secondary underwriting
51,900 shares of its restricted NYSE Group common stock for
an aggregate amount of $3,128, or average net proceeds of $60.27
per share, which was $440 less than the carrying value of such
shares. After the sale, Ladenburgs investment in NYSE
Group common stock consisted of 1,552 shares restricted
through March 7, 2008 and 26,725 shares restricted
through March 7, 2009.
On June 20, 2006, Ladenburg transferred its 28,277
remaining restricted shares to LTS at the estimated fair value
of $1,228 at such date. LTS, in accordance with
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, accounts for such
restricted investments at cost based on the value on the date of
transfer adjusted for any other than temporary impairment.
Restricted investments whose restriction lapses within one year
from the balance sheet date will be valued at quoted market
price.
F-14
Included in revenues for the year ended December 31, 2006
is a gain on the NYSE Merger of $4,859, representing the
difference between the estimated fair value of consideration
received in the merger of $5,727 and Ladenburgs carrying
value of its membership of $868, and losses of $1,001,
consisting of a loss of $440 on the sale of 51,900 shares
and a loss of $561 representing the decline in the fair value of
the 28,277 remaining NYSE Group restricted common shares on
June 20, 2006 as compared to March 7, 2006.
On March 7, 2007, 1,552 of the 28,277 shares began the
last year of the restriction and in June 2007, the transfer
restrictions on the 1,552 shares were removed by the
issuer. Accordingly, at December 31, 2007 such shares are
being classified as trading securities and valued at quoted
market price as opposed to cost, resulting in an unrealized gain
of $66 for the twelve months ended December 31, 2007, which
is included in principal transactions.
In April 2007, in connection with its acquisition of Euronext
N.V., NYSE Group was merged into a subsidiary of NYSE Euronext,
a newly-formed corporation, pursuant to which each share of NYSE
Group was converted into one share of NYSE Euronext. The
newly-issued NYSE Euronext shares are subject to the same
transfer restrictions which applied to the NYSE Group shares
prior to the merger. As NYSE Group was considered the acquiring
entity for accounting purposes, the Company continues to carry
its investment in the restricted NYSE Euronext shares at cost.
As of December 31, 2007, the estimated fair value of the
26,725 restricted NYSE Euronext shares which are classified as
not readily marketable on the consolidated statement of
financial condition was $2,010.
CBOE
On October 24, 2006, Ladenburg sold its membership on the
Chicago Board of Options Exchange (CBOE). The
membership cost $425 and was sold for $1,550, resulting in a
gain of $1,125.
|
|
6.
|
Net
Capital Requirements
|
As a registered broker-dealer, Ladenburg is subject to the
SECs Uniform Net Capital
Rule 15c3-1
and the CFTCs 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, 2007, Ladenburg had net
capital, as defined, of $26,659, which exceeded its minimum
capital requirement, as defined, of $500, by $26,159.
Investacorp, Inc. is also subject to the SECs Uniform Net
Capital Rule 15c3-1, which require the maintenance of minimum
net capital and requires that the ratio of aggregate
indebtedness to net capital, both as defined, shall not exceed
15 to 1. At December 31, 2007, Investacorp, Inc., had net
capital of $2,496, which was $2,163 in excess of its required
net capital of $333. Investacorp, Incs net capital ratio
was 2 to 1.
Ladenburg and Investacorp, Inc. claim exemptions from the
provisions of the SECs
Rule 15c3-3
pursuant to paragraph (k)(2)(ii) as they clear their customer
transactions through correspondent brokers on a fully disclosed
basis.
F-15
|
|
7.
|
Furniture,
Equipment and Leasehold Improvements
|
Components of furniture, equipment and leasehold improvements
included in the consolidated statements of financial condition
were as follows at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
567
|
|
|
$
|
606
|
|
Computer equipment
|
|
|
1,573
|
|
|
|
1,179
|
|
Furniture and fixtures
|
|
|
821
|
|
|
|
602
|
|
Other
|
|
|
1,381
|
|
|
|
1,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,342
|
|
|
|
3,775
|
|
Less accumulated depreciation and amortization
|
|
|
(3,551
|
)
|
|
|
(3,069
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
791
|
|
|
$
|
706
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, intangible assets subject to
amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Life (years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Technology
|
|
|
1
|
|
|
$
|
285
|
|
|
$
|
59
|
|
|
$
|
|
|
|
$
|
|
|
Relationships with registered representatives
|
|
|
20
|
|
|
|
14,921
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
Relationships with vendors
|
|
|
7
|
|
|
|
1,881
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
Covenants not to compete
|
|
|
5
|
|
|
|
354
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
Customer accounts
|
|
|
10
|
|
|
|
740
|
|
|
|
96
|
|
|
|
724
|
|
|
|
22
|
|
Relationships-Capitalink
|
|
|
4
|
|
|
|
2,783
|
|
|
|
841
|
|
|
|
2,282
|
|
|
|
119
|
|
Trade name
|
|
|
10
|
|
|
|
211
|
|
|
|
26
|
|
|
|
173
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,175
|
|
|
$
|
1,248
|
|
|
$
|
3,179
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense amounted to $1,103 and $144 for
the years ended December 31, 2007 and 2006, respectively.
The weighted-average amortization period for total amortizable
intangibles is 16.01 years. Estimated amortization expense
for each of the five succeeding years is as follows:
|
|
|
|
|
2008
|
|
$
|
2,102
|
|
2009
|
|
$
|
1,876
|
|
2010
|
|
$
|
1,731
|
|
2011
|
|
$
|
1,181
|
|
2012
|
|
$
|
1,166
|
|
2013 2027
|
|
$
|
11,871
|
|
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-16
Income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and
|
|
|
|
|
|
|
Federal
|
|
|
Local
|
|
|
Total
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
356
|
|
|
$
|
157
|
|
|
$
|
513
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
356
|
|
|
$
|
157
|
|
|
$
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
100
|
|
|
$
|
89
|
|
|
$
|
189
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100
|
|
|
$
|
89
|
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
|
$
|
54
|
|
|
$
|
54
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
54
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 income (loss) as a
result of the following differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income (loss) before income taxes
|
|
$
|
9,904
|
|
|
$
|
4,848
|
|
|
$
|
(25,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) under statutory U.S. tax rates
|
|
|
3,367
|
|
|
|
1,648
|
|
|
|
(8,812
|
)
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductibility of loss on conversion of debt
|
|
|
844
|
|
|
|
|
|
|
|
6,582
|
|
Unrecognized net operating losses
|
|
|
|
|
|
|
|
|
|
|
2,012
|
|
Utilization of net operating loss carryforward
|
|
|
(5,744
|
)
|
|
|
(1,346
|
)
|
|
|
|
|
Other nondeductible items
|
|
|
564
|
|
|
|
|
|
|
|
236
|
|
State taxes
|
|
|
104
|
|
|
|
89
|
|
|
|
36
|
|
Other, net
|
|
|
352
|
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
513
|
|
|
$
|
189
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 differences are
expected to be recovered or settled.
F-17
Deferred tax amounts are comprised of the following at December
31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
13,257
|
|
|
$
|
22,213
|
|
AMT credit carryforward
|
|
|
356
|
|
|
|
100
|
|
Accrued expenses
|
|
|
1,514
|
|
|
|
1,554
|
|
Compensation and benefits
|
|
|
3,398
|
|
|
|
510
|
|
Depreciation and amortization
|
|
|
194
|
|
|
|
151
|
|
Other
|
|
|
178
|
|
|
|
219
|
|
Unrealized gains
|
|
|
(455
|
)
|
|
|
(340
|
)
|
Goodwill
|
|
|
(143
|
)
|
|
|
|
|
Intangibles
|
|
|
(249
|
)
|
|
|
(613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
18,050
|
|
|
|
23,794
|
|
Valuation allowance
|
|
|
(18,050
|
)
|
|
|
(23,794
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
After consideration of all the evidence, both positive and
negative, management has determined that a valuation allowance
at December 31, 2007 and 2006 was necessary to offset fully
the deferred tax assets based on the likelihood of future
realization.
At December 31, 2007, the Company has an aggregate net
operating loss carryforward of approximately $34,000, expiring
in various years from 2015 through 2026.
The Companys tax years 2004 through 2007 remain open to
examination for most taxing authorities.
The components of notes payable are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Note payable to former principal shareholder of Investacorp, net
of $1,277 of unamortized discount
|
|
$
|
12,937
|
|
|
$
|
|
|
Note payable to affiliate of principal shareholder of LTS, net
of $3,069 of unamortized discount
|
|
|
26,931
|
|
|
|
|
|
Notes payable to former parent due March 31, 2007
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,868
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Investacorp
Note
On October 19, 2007, as part of the purchase price for the
Investacorp acquisition, the Company issued a three-year,
non-negotiable promissory note in the aggregate principal amount
of $15,000 to Investacorps principal shareholder. The note
bears interest at 4.11% per annum and is payable in 36 equal
monthly installments. The note has been recorded at $13,550
based on an imputed interest rate of 11%. The Company has
pledged the stock of Investacorp as security for the payment of
the note. The note contains customary events of default, which
if uncured, entitle the holder to accelerate the due date of the
unpaid principal amount of, and all accrued and unpaid interest
on, the note.
Frost
Gamma Credit Agreement
On October 19, 2007, in connection with the Investacorp
acquisition, the Company entered into a $30,000 revolving credit
agreement with Frost Gamma Investments Trust (Frost
Gamma), an entity affiliated with
F-18
Dr. Phillip Frost, the Chairman of the Board and the
principal shareholder of the Company and borrowed $30,000.
Borrowings under the credit agreement have a five-year term and
bear interest at a rate of 11% per annum, payable quarterly.
Frost Gamma received a one-time funding fee of $150. The note
issued under the credit agreement contains customary events of
default, which if uncured, entitle the holder to accelerate the
due date of the unpaid principal amount of, and all accrued and
unpaid interest on, such note. Pursuant to the credit agreement,
the Company granted to Frost Gamma a warrant to purchase
2,000,000 shares of common stock. The warrant is
exercisable for a ten-year period and the exercise price is
$1.91, the closing price of the Companys common stock on
the acquisition date. The warrant was valued at $3,200 based on
the Black-Scholes option pricing model, resulting in a discount
on the Frost note and an effective interest rate of 14.52%.
In February 2008, the Company repaid $8,000 of the $30,000 of
outstanding borrowings under the Frost Gamma credit agreement.
The Company may prepay outstanding amounts prior to the maturity
date of October 19, 2012 without penalties.
Notes
Payable to Former Parent
In 2002, the Company borrowed a total of $5,000 from New Valley
Corporation (New Valley), the Companys former
parent. The notes, which bore interest at 1% above the prime
rate, were due on March 31, 2007, as subsequently extended.
In February 2007, the Company entered into a debt exchange
agreement with New Valley, where New Valley agreed to exchange
the principal amount of the notes for shares of the
Companys common stock at an exchange price of $1.80 per
share, representing the average closing price of the
Companys common stock for the 30 trading days ending on
the date of the agreement.
On June 29, 2007, after the Companys shareholders
approved the debt exchange, the Company exchanged
2,777,778 shares for the principal amount of the notes and
paid $1,732 to New Valley for accrued interest on the loans. The
exchange resulted in a loss on extinguishment of debt of $1,833
representing the excess of the quoted market value of the
2,777,778 shares of stock at the date of the exchange
agreement ($2.46 per share) over the carrying amount of the
notes.
The Company estimates that, at December 31, 2007, the fair
value of fixed interest notes payable to the former principal
shareholder of Investacorp and to Frost Gamma approximates their
carrying values based on anticipated current rates at which
similar amounts of debt could currently be borrowed.
The carrying amount of notes payable to New Valley at
December 31, 2006 and to the clearing broker (described
below) approximate fair value because of their variable interest
rates which periodically adjust to reflect changes on overall
market interest rates.
Other
Notes Payable
In November 2004, the Company entered into an amended debt
conversion agreement with Frost-Nevada Investments Trust,
Limited Partnership (Frost Trust), an entity
affiliated with Dr. Frost, and New Valley, to convert the
senior convertible notes payable of the Company held by such
holders, with an aggregate principal amount of $18,010, together
with accrued interest, into common stock of the Company.
Pursuant to the 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 agreement, each of
Frost Trust and New Valley purchased $5,000 of the
Companys common stock for $0.45 per share. The debt
conversion transaction was approved by the Companys
shareholders on January 12, 2005 and closed on
March 11, 2005. 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.
In December 2002, an affiliate of Ladenburgs clearing
broker loaned the Company an aggregate of $3,500. The clearing
loans and related accrued interest were forgivable over a
four-year period, provided Ladenburg continued to clear its
transactions through this primary clearing broker. As scheduled,
$667 of principal, together with accrued interest of $97, was
forgiven in November 2005, and the remaining $666 of principal
and
F-19
$146 of accrued interest were forgiven in November 2006. Upon
the forgiveness of the clearing loans, the forgiven amount was
accounted for as other revenues.
Temporary
Subordinated Loans
In December 2005, Ladenburg received a $15,000 temporary
subordinated loan from Dr. Frost to provide additional
regulatory capital required for an underwriting participation.
The loan was repaid during the same month, with a $300 fixed
amount of interest.
In August 2006, Ladenburg received a $3,500 temporary
subordinated loan from LTS to provide additional regulatory
capital required for an underwriting participation. The loan was
repaid in September 2006 with interest at the rate of 9%, which
amounted to $22.
In December 2006, Ladenburg received a temporary subordinated
loan in the amount of $2,000 from LTS, $12,000 from
Dr. Frost and $8,000 from its clearing firm to provide
additional regulatory capital required for an underwriting
participation. The temporary subordinated loan from LTS and
Dr. Frost was subordinated by its terms to the loan from
the clearing broker. The loan was repaid during the same month,
with interest at the rate of LIBOR plus 2%, which amounted to
$49. In addition, Dr. Frost was paid a commitment fee of
$50.
In October 2007, Ladenburg received a temporary subordinated
loan in the amount of $72,000 from an affiliate of
Dr. Frost to provide additional regulatory capital required
for additional underwriting participations. The loan was repaid
during the following month, with interest at the rate of LIBOR
plus 2%, which amounted to $354. In addition, the Company paid
the lender a commitment fee of $420.
|
|
11.
|
Commitments
and Contingencies
|
Operating
Leases
The Company and certain of its subsidiaries are obligated under
several non-cancelable 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 a sublessor to third
parties for a portion of its office space as described below.
The subleases expire at various dates through June 2015. Minimum
lease payments (net of lease abatement and exclusive of
escalation charges) and sublease rentals are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending
|
|
Lease
|
|
|
Sublease
|
|
|
|
|
December 31,
|
|
Commitments
|
|
|
Rentals
|
|
|
Net
|
|
|
2008
|
|
$
|
5,933
|
|
|
$
|
4,695
|
|
|
$
|
1,238
|
|
2009
|
|
|
5,573
|
|
|
|
4,695
|
|
|
|
878
|
|
2010
|
|
|
5,422
|
|
|
|
4,017
|
|
|
|
1,405
|
|
2011
|
|
|
5,183
|
|
|
|
3,340
|
|
|
|
1,843
|
|
2012
|
|
|
4,417
|
|
|
|
3,340
|
|
|
|
1,077
|
|
Thereafter
|
|
|
10,883
|
|
|
|
7,954
|
|
|
|
2,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,411
|
|
|
$
|
28,041
|
|
|
$
|
9,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
In September 2004 and December 2005, the Company subleased two
of the floors it had occupied in its former New York City office
for the remaining term of its lease. In accordance with
SFAS No. 146, a liability was recorded for the fair
value of the Companys obligation with respect to the lease
of both floors. In November
F-20
2007, the Company entered into an agreement with the landlord to
amend the lease and surrender a third floor which had been
subleased by the Company. In consideration therefore, the
landlord gave up an option to require the Company to occupy
additional space and agreed to an annual rent abatement of
approximately $79 through June 2015, the expiration of the lease
term, with respect to the remaining leased floors. As a result
thereof, in 2007, the liability with respect to the lease
obligation, which amounted to $589 at December 31, 2006,
was reduced by $439 with a corresponding reduction of occupancy
expense. As of December 31, 2007, after reduction for rent
paid under the lease ($3,256), net of sublease income ($3,039)
received during the year, a prepaid asset balance of $57
resulted which is included in other assets. Such balance results
from the payment in a prior year of certain costs incurred in
connection with the sublease.
Deferred rent shown in the consolidated statements 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, the Companys subsidiary, Ladenburg
Capital Management Inc. (Ladenburg Capital), entered
into a settlement agreement with the landlord of its office
space in New York City which Ladenburg Capital was forced to
vacate during 2001 due to the events of September 11, 2001.
Under the terms of the settlement, the subsidiary paid the
landlord $1,900 in March 2006. The Company recognized $240 in
rent expense in 2005 to increase the liability provided in a
prior year to reflect the settlement agreement.
At December 31, 2006, Ladenburg had utilized a letter of
credit in the amount of $1,000 which was collateralized by
$1,094 of Ladenburgs investment in a money market fund
that was classified as restricted assets on the consolidated
statement of financial condition. The letter of credit was used
as collateral for the lease of the Companys former New
York City office space. Pursuant to the lease agreement, the
requirement to maintain this letter of credit facility expired
on December 31, 2006, and the restriction was removed from
the investment in February 2007.
Litigation
and Claims
In May 2003, a suit was filed in the U.S. District Court
for the Southern District of New York by Sedona Corporation
against the Company, former employees 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 $660,000 and punitive damages of $2,000,000. In August
2005, Ladenburgs motion to dismiss was granted in part and
denied in part; in July 2006, Ladenburgs motion to
reconsider portions of that decision was denied. A motion to
dismiss certain of the claims as re-pleaded by plaintiff is
currently pending. The Company believes the plaintiffs
claims are without merit and intends to vigorously defend
against them.
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. On April 9, 2007, the court issued an order
staying this action pending the final outcome of an arbitration
involving parties other than Ladenburg. The Company believes
that the plaintiffs claims are without merit and intends
to vigorously defend against them.
In December 2005, a suit was filed in New York State Supreme
Court, New York County, by Digital Broadcast Corp. against
Ladenburg, a Company 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 and
F-21
breach of contract. The plaintiff seeks compensatory damages in
excess of $100,000. In November 2006, Ladenburgs motion to
dismiss was granted in part and denied in part. The Company
believes that the plaintiffs claims are without merit and
intends to vigorously defend against them.
In the ordinary course of business, the Companys
subsidiaries are defendants in other litigation and arbitration
proceedings and may be subject to unasserted claims or
arbitrations primarily in connection with their activities as a
securities broker-dealer and participation in public
underwritings. Such litigation and claims may involve
substantial or indeterminate amounts and are in varying stages
of legal proceedings. 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. Such liability amounted to approximately $768 at
December 31, 2007 and $483 at December 31, 2006
(included in accounts payable and accrued liabilities). During
the fiscal years ended December 31, 2007, 2006 and 2005,
various settlements resulted in a net charge to operations of
$722, $35, and $1,221 (included in other expenses),
respectively. With respect to other pending matters, 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.
Deferred
Underwriting Compensation
Ladenburg is entitled to receive deferred investment banking and
underwriting fees from certain clients whose initial public
offerings Ladenburg managed or participated in. These clients
are Specified Purpose Acquisition Companies (SPACs) and the
payment of deferred fees is contingent upon the SPACs
consummating business combinations. Such fees and their related
expenses are not reflected in the Companys results of
operations until the underlying business combinations have been
completed and the fees have been irrevocably earned. Generally,
these fees may be received within 24 months from the
respective date of the offering, or not received at all if no
business combination transactions are consummated during such
time period. During the fourth quarter of 2007, Ladenburg
received deferred fees of $9,700 (included in investment banking
revenues) and incurred commissions and related expenses of
$3,500. As of December 31, 2007, Ladenburg had unrecorded
potential deferred fees for SPAC-related transactions of
$39,500, which, net of commissions and related expenses,
amounted to approximately $23,500.
|
|
12.
|
Off-Balance-Sheet
Risk and Concentrations of Credit Risk
|
The Companys two principal broker-dealer subsidiaries,
Ladenburg and Investacorp, Inc., do not carry accounts for
customers or perform custodial functions related to
customers securities. They introduce all of their customer
transactions, which are not reflected in these financial
statements, to their clearing brokers, which maintain the
customers accounts and clear such transactions.
Additionally, the clearing brokers provide the clearing and
depository operations for 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 brokers, as each of Ladenburg and
Investacorp, Inc. has agreed to indemnify their clearing brokers
for any resulting losses. Each of Ladenburg and Investacorp,
Inc. 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 Ladenburg and Investacorp, Inc.
securities transactions are primarily provided by one clearing
broker, a large financial institution. At December 31, 2007
and 2006, substantially all of the securities owned and the
amounts due from clearing brokers reflected in the consolidated
statements of financial condition are positions held at and
amounts due from this one clearing broker. The Company is
subject to credit risk should this clearing broker be unable to
fulfill its obligations.
In the normal course of its business, Ladenburg and Investacorp,
Inc. may enter 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. As of
December 31, 2007 and 2006, Ladenburg and Investacorp, Inc.
were not contractually obligated for any equity index or
financial futures contracts; however, Ladenburg sold securities
that it does not own and will therefore be obligated to
F-22
purchase such securities at a future date. These obligations
have been recorded in the statements of financial condition at
market values of the related securities and Ladenburg will incur
a loss if the market value of the securities increases
subsequent to December 31, 2007. (See Note 4.)
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.
Repurchase
Program
In March 2007, the Companys board of directors authorized
the repurchase of up to 2,500,000 shares of the
Companys common stock from time to time on the open market
or in privately negotiated transactions depending on market
conditions. The repurchase program is be funded using
approximately 15% of the Companys EBITDA, as adjusted. As
of December 31, 2007, 332,529 shares had been
repurchased for $612 under the program.
Warrants
As of December 31, 2007, outstanding warrants to acquire
the Companys common stock were as follows:
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Number
|
|
Expiration Date
|
|
Price
|
|
|
of Shares
|
|
|
2013
|
|
$
|
.95
|
|
|
|
500,000
|
(a)
|
2016
|
|
|
.94
|
|
|
|
825,000
|
(b)
|
2016
|
|
|
.96
|
|
|
|
1,933,334
|
(c)
|
2017
|
|
|
1.91
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,258,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Does not include unvested warrant to acquire 500,000 shares
held by one individual, the exercisability of which is
contingent upon the sole discretion of the Companys
Executive Committee. The Companys Executive Committee has
not yet made a determination on the exercisability of such
warrant. (See Note 16.) |
|
(b) |
|
Does not include unvested warrants to acquire
675,000 shares, the exercisability of which is contingent
upon the renewal of certain employment contracts. (See
Note 3.) |
|
(c) |
|
Does not include unvested warrants to acquire
966,666 shares placed in escrow, the exercisability of
which is contingent upon continued employment by certain
employees. (See Note 3.) |
F-23
Basic net income (loss) per share is computed using the
weighted-average number of common shares outstanding. The
dilutive effect of potential common shares outstanding is
included in diluted net earnings per share. The computations of
basic and diluted per share data for 2007, 2006 and 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income (loss)
|
|
$
|
9,391
|
|
|
$
|
4,659
|
|
|
$
|
(25,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares
|
|
|
157,355,540
|
|
|
|
148,693,521
|
|
|
|
108,948,623
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
8,343,776
|
|
|
|
3,826,008
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
1,354,148
|
|
|
|
127,754
|
|
|
|
|
|
Common stock held in escrow (see Note 3)
|
|
|
1,431,185
|
|
|
|
440,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
168,484,469
|
|
|
|
153,087,961
|
|
|
|
108,948,623
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
0.03
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.06
|
|
|
$
|
0.03
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2007, 2006 and 2005, options and warrants to purchase
10,569,166, 4,976,583, and 22,837,770 common shares,
respectively, and in 2005, 1,640,350 common shares issuable upon
the conversion of notes payable were not included in the
computation of diluted income (loss) per share as the effect
would have been anti-dilutive.
|
|
15.
|
Stock
Compensation Plans
|
Employee
Stock Purchase Plan
Under the Companys Qualified Employee Stock Purchase Plan
(the Purchase Plan), a total of
10,000,000 shares of common stock are available for
issuance. As currently 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 under the Purchase Plan at a 5% discount from the
market price of the Companys common stock at the end of
each option period. Option periods have been set at three month
periods 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 Purchase Plan is intended to qualify as an
employee stock purchase plan under Section 423
of the Internal Revenue Code. During 2007, 183,308 shares
of the Companys common stock were issued to employees
under this plan, at prices ranging from $1.862 to $2.537; during
2006, 248,298 shares were issued at prices ranging from
$0.95 to $1.368 per share; and during 2005, 686,096 shares
were issued at prices ranging from $0.39 to $0.50, resulting in
a capital contribution of $407, $267 and $307, for 2007, 2006
and 2005, respectively.
Amended
and Restated 1999 Performance Equity Plan
In 1999, the Company adopted the Performance Equity Plan (the
Option 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 and its
subsidiaries, as designated by the board of directors. On
November 1, 2006, the Companys shareholders approved
an amendment to the Option Plan to increase the number of shares
of common stock available for issuance under the plan from
10,000,000 to 25,000,000 and to increase the annual limit on
grants to any individual from 1,000,000 shares to
1,500,000 shares. Awards include stock options, stock
appreciation rights, restricted stock, deferred stock, stock
reload options
and/or other
stock-based awards. Dividends, if any, are not paid on
unexercised stock options. The Option Plan is administered by
the compensation committee of the Board of Directors of LTS.
Stock options granted under the Option Plan may be incentive
stock options and non-qualified stock options. An incentive
stock option may be granted only through May 27, 2009 and
may only be exercised within ten
F-24
years of the date of grant (or five years in the case of an
incentive stock option granted to an optionee (10%
Shareholder) who at the time of the grant possesses more
than 10% of the total combined voting power of all classes of
stock of LTS). The exercise price of both incentive and
non-qualified options may not be less than 100% of the fair
market value of LTSs common stock at the date of grant,
provided, that the exercise price of an incentive stock option
granted to a 10% Shareholder shall not be less than 110% of the
fair market value of LTSs common stock at the date of
grant. Options granted under the Option Plan generally vest in
equal amounts on each of the anniversaries over three or four
years. As of December 31, 2007, there were options to
purchase 8,558,850 shares of common stock available for
issuance under the Option Plan.
A summary of the status of the Option Plan at December 31,
2007 and changes during the years ended December 31, 2007,
2006 and 2005, are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2004
|
|
|
7,437,431
|
|
|
$
|
1.09
|
|
|
|
7.33
|
|
|
$
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,524,500
|
|
|
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(44,767
|
)
|
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,279,394
|
)
|
|
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2005
|
|
|
8,637,770
|
|
|
|
0.97
|
|
|
|
7.98
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,775,000
|
|
|
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(721,192
|
)
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(648,267
|
)
|
|
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2006
|
|
|
11,043,311
|
|
|
|
0.99
|
|
|
|
7.92
|
|
|
|
4,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,735,000
|
|
|
|
2.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,874,477
|
)
|
|
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(820,418
|
)
|
|
|
1.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2007
|
|
|
13,083,416
|
|
|
|
1.44
|
|
|
|
8.01
|
|
|
|
10,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest
|
|
|
11,886,430
|
|
|
|
1.43
|
|
|
|
7.91
|
|
|
|
9,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2007
|
|
|
4,543,350
|
|
|
|
1.21
|
|
|
|
6.16
|
|
|
|
4,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Plan
Options
The Company has granted stock options to newly-hired employees
in conjunction with their employment agreements or in connection
with acquisitions, which are outside of the Option Plan. A
summary of the status
F-25
of these options granted outside the Option Plan at
December 31, 2007, and changes during the years ended
December 31, 2007, 2006 and 2005, are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(Years)
|
|
|
Value
|
|
|
Options outstanding, December 31, 2004
|
|
|
1,500,000
|
|
|
$
|
0.75
|
|
|
|
9.19
|
|
|
$
|
0
|
|
Granted
|
|
|
14,000,000
|
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,500,000
|
)
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2005
|
|
|
14,000,000
|
|
|
|
0.58
|
|
|
|
9.32
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,500,000
|
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,200,000
|
)
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5,800,000
|
)
|
|
|
0.63
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2006
|
|
|
8,500,000
|
|
|
|
0.63
|
|
|
|
8.50
|
|
|
|
5,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,000,000
|
|
|
|
1.91
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,500,001
|
)
|
|
|
0.52
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,249,999
|
)
|
|
|
0.64
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2007
|
|
|
7,750,000
|
|
|
|
1.16
|
|
|
|
8.52
|
|
|
|
7,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest
|
|
|
5,936,321
|
|
|
|
1.16
|
|
|
|
8.53
|
|
|
|
5,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2007
|
|
|
487,501
|
|
|
|
1.05
|
|
|
|
8.70
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of employee options
granted during the years ended December 31, 2007, 2006 and
2005 was $1.70, $0.86 and $0.45, respectively. The fair value of
each option award was estimated on the date of grant using the
Black-Scholes option pricing model using the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
127.34
|
%
|
|
|
125.83
|
%
|
|
|
74.71
|
%
|
Risk-free interest rate
|
|
|
4.34
|
%
|
|
|
4.85
|
%
|
|
|
3.78
|
%
|
Expected life (in years)
|
|
|
6.2
|
|
|
|
6
|
|
|
|
10
|
|
During 2007 and 2006, the Company took into consideration
guidance contained in SFAS No. 123R and
SAB No. 107 when reviewing and developing assumptions
for the 2007 and 2006 grants. The weighted average expected life
for the 2007 and 2006 grants of 6.2 and 6 years,
respectively, reflects the alternative simplified method
permitted by SAB No. 107, which defines the expected
life as the average of the contractual term of the options and
the weighted-average vesting period for all option tranches.
Expected volatility for the 2007 and 2006 option grants is based
on historical volatility over the same number of years as the
expected life, prior to the option grant date.
As of December 31, 2007, there was $13,703 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements. This cost is expected to be
recognized over the vesting periods of the options, which on a
weighted-average basis is approximately 1.51 years.
F-26
The total intrinsic value of options exercised during the years
ended December 31, 2007, 2006, and 2005 amounted to $5,828,
$1,277 and $4, respectively. Tax benefits related to option
exercise were not deemed to be realized as net operating loss
carryforwards are available to offset taxable income computed
without giving effect to the deductions related to option
exercises and the deferred tax assets related to those net
operating losses have been fully reserved.
Non-cash compensation expense relating to stock options was
calculated using the Black-Scholes option pricing model,
amortizing the value calculated over the vesting period and
applying a forfeiture percentage as estimated by the
Companys management, using historical information. The
Company has elected to recognize compensation cost for option
awards that have graded vesting schedules on a straight line
basis over the requisite service period for the entire award.
For the years ended December 31, 2007 and 2006, the
non-cash compensation expense relating to stock option
agreements granted employees amounted to $2,862 and $762,
respectively. In addition, the non-cash compensation expense
related to warrants granted to employees in connection with the
Capitalink acquisition amounted to $854 and $285 in 2007 and
2006, respectively. (See Note 3.)
On September 1, 2005, the Company granted to certain
advisors options to purchase an aggregate of
1,200,000 shares of the Companys common stock at an
exercise price of $0.51 per share under the Option Plan. The
options, which expire on August 31, 2015, vest 25% on each
of the first four anniversaries of the date of grant. The
Company recorded a charge of $397, $312 and $34 for the fair
value of the options for the years ended December 31, 2007,
2006 and 2005, respectively, based on the Black-Scholes option
pricing model. 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.
Employee
Stock Purchase Agreements
In 2005, the Company had entered into several employment
agreements with newly hired employees, pursuant to which the
Company sold common stock to the 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 was
amortized over the initial term of the employees
employment agreements, which were generally one to two years.
During the years ended December 31, 2007, 2006 and 2005,
the Company recorded amortization of non-cash compensation
expense of $90, $803 and $694, respectively, relating to these
sales of its common stock to new employees at prices below fair
market value. At December 31, 2007, such compensation was
fully amortized.
|
|
16.
|
Investment
in Fund Manager
|
On August 31, 2006, the Company issued to an individual
seven-year warrants (FVF Warrants) to purchase
1,500,000 shares of the Companys common stock at an
exercise price of $0.95 per share. The FVF Warrants were issued
in connection with the Companys acquisition of a 10%
interest in FVF Partners, LLC (FVF), the general
partner of the Florida Value Fund LLP, a private equity
fund formed by this individual focused on mid-market companies
in Florida. FVF, in exchange for management services, is
entitled to a percentage of profits of the fund. The FVF
Warrants are exercisable as to 500,000 shares immediately
and were scheduled to become exercisable as to
500,000 shares on each of August 31, 2007 and 2008
provided that the second and third installments of shares shall
not vest if the Companys Executive Committee determines,
in its sole discretion, that the Companys investment was
not economically beneficial to the Company. Accordingly, the
Company has valued its investment in FVF at $399 based on the
value of the 500,000 vested warrants. Upon the vesting of the
contingent warrants, the Company will increase the cost of its
investment in FVF by the value of such warrants. In addition,
the Company earned an additional 1.7% interest in FVF valued at
$68 as compensation for introducing investors to FVF. In 2007
the Companys Executive Committee determined that the
warrant scheduled to become exercisable into 500,000 shares
on August 31, 2007 shall not vest. The investment in FVF is
accounted for under the equity method. The excess of the
carrying value of the investment over the Companys share
of the underlying book value of FVF is being amortized over an
estimated life of seven years.
F-27
As a result of the Investacorp acquisition on October 19,
2007, the Company had two operating segments. For periods prior
to October 19, 2007, the Company operated in only one
segment. The Ladenburg segment includes the retail and
institutional securities brokerage, investment banking services,
asset management services and investment activities conducted by
Ladenburg. The Investacorp segment includes the broker-dealer
and investment advisory services provided by Investacorp to the
independent registered representative community.
Segment information for the year ended December 31, 2007
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
Ladenburg
|
|
|
Investacorp
|
|
|
Corporate
|
|
|
Total
|
|
|
Revenues
|
|
$
|
83,313
|
|
|
$
|
12,191
|
|
|
$
|
322
|
|
|
$
|
95,826
|
|
Operating income (loss)
|
|
|
24,729
|
|
|
|
1,158
|
|
|
|
(3,882
|
)
|
|
|
22,005
|
|
Identifiable assets
|
|
|
61,309
|
|
|
|
50,644
|
|
|
|
2,179
|
|
|
|
114,132
|
|
Depreciation and amortization
|
|
|
1,109
|
|
|
|
285
|
|
|
|
97
|
|
|
|
1,491
|
|
Capital expenditures
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
395
|
|
Reconciliation of net income to segment information for the year
ended December 31, 2007:
|
|
|
|
|
Net income
|
|
$
|
9,391
|
|
Net of interest income and expense
|
|
|
2,083
|
|
Income tax expense
|
|
|
513
|
|
Depreciation and amortization
|
|
|
1,491
|
|
Non-cash compensation
|
|
|
6,694
|
|
Loss on extinguishment of debt
|
|
|
1,833
|
|
|
|
|
|
|
Operating income
|
|
$
|
22,005
|
|
|
|
18.
|
Related
Party Transactions
|
Commencing in 2006, the Company leased office space from an
entity affiliated with Dr. Frost, the Companys
Chairman of the Board, under a month-to-month lease. In 2007,
the Company entered into a lease with the affiliated entity
which expires in January 2012 and which provides for minimum
annual payments of $464. Rent expense under such leases amounted
to $392 and $33 in 2007 and 2006, respectively.
In September 2006, the Company entered into an agreement with
Vector Group Ltd. (Vector), where Vector agreed to
make available to the Company the services of Vectors
Executive Vice President to serve as the President and Chief
Executive Officer of the Company and to provide certain other
financial and accounting services, including assistance with
complying with Section 404 of the Sarbanes-Oxley Act of
2002. Various executive officers and directors of Vector and its
subsidiary New Valley serve as members of the Board of Directors
of the Company, and Vector and its subsidiaries own
approximately 8.6% of the Companys common stock. In
consideration for such services, the Company agreed to pay
Vector an annual fee of $250 plus reimbursement of expenses and
to indemnify Vector. The agreement is terminable by either party
upon 30 days prior written notice. In December 2007,
the Company and Vector amended the agreement to increase the
fees payable thereunder as follows: (i) a special
management fee payment of $150 for 2007 (resulting in a total
payment of $400 for 2007), (ii) an increase in the annual
fee from $250 to $400, effective January 1, 2008, and
(iii) an increase in the annual fee from $400 to $600,
effective July 1, 2008 (payment of $500 for 2008).
Howard Lorber, Vice Chairman of the Companys Board of
Directors, 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 $61,
$23 and $92 in 2007, 2006 and 2005, respectively.
See Note 10 with respect to loans from related parties.
F-28
|
|
19.
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,920
|
|
|
$
|
18,527
|
|
|
$
|
10,452
|
|
|
$
|
50,927
|
(c) (d)
|
Expenses
|
|
|
14,979
|
(a)
|
|
|
18,416
|
(a)(b)
|
|
|
12,665
|
(a)
|
|
|
39,862
|
(a) (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
941
|
|
|
|
111
|
|
|
|
(2,213
|
)
|
|
|
11,065
|
|
Net income (loss)
|
|
$
|
874
|
|
|
$
|
17
|
|
|
$
|
(2,098
|
)
|
|
$
|
10,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share(d)
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share(d)
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
|
|
|
154,092,696
|
|
|
|
155,103,973
|
|
|
|
159,826,786
|
|
|
|
160,303,297
|
|
Diluted weighted average common shares
|
|
|
167,542,100
|
|
|
|
167,742,762
|
|
|
|
159,826,786
|
|
|
|
169,016,762
|
|
|
|
|
(a) |
|
Includes $1,318, $1,406, $1,715 and $2,255 charge for non-cash
compensation in the first, second, third and fourth quarters
2007, respectively. |
(b) |
|
Includes loss on extinguishment of debt of $1,833 in the second
quarter 2007. |
(c) |
|
Includes $12,191 of Investacorp revenues in the fourth quarter
2007. |
(d) |
|
Includes $9,700 of revenue and $3,500 of expenses resulting from
deferred fees from SPAC transactions in the fourth quarter 2007.
(See Note 11.) |
(e) |
|
The sum of the quarterly income (loss) per share does not equal
the income (loss) per share for the year, because per share data
for each quarter and for the year are independently computed. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
14,794
|
(a)
|
|
$
|
7,457
|
(a)
|
|
$
|
10,179
|
|
|
$
|
14,428
|
(a)
|
Expenses
|
|
|
10,048
|
(b)
|
|
|
8,757
|
(b)
|
|
|
9,595
|
(b)
|
|
|
13,610
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
4,746
|
|
|
|
(1,300
|
)
|
|
|
584
|
|
|
|
818
|
|
Net income (loss)
|
|
$
|
4,732
|
|
|
$
|
(1,325
|
)
|
|
$
|
570
|
|
|
$
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share(c)
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
141,591,068
|
|
|
|
150,043,231
|
|
|
|
150,559,806
|
|
|
|
152,440,248
|
|
Diluted weighted average common shares
|
|
|
142,289,965
|
|
|
|
150,043,231
|
|
|
|
154,110,421
|
|
|
|
160,710,680
|
|
|
|
|
(a) |
|
Includes $3,858 gain on sale of NYSE membership in the first and
second quarters of 2006 ($4,859 gain in first quarter 2006 and
$1,001 loss in second quarter 2006) and $1,125 gain on sale
of CBOE membership in the fourth quarter 2006. |
(b) |
|
Includes $678, $463, $303, and $1,441 charge for non-cash
compensation in the first, second, third and fourth quarters of
2006, respectively. |
(c) |
|
The sum of the quarterly income (loss) per share does not equal
the income (loss) per share for the year, because per share data
for each quarter and for the year are independently computed. |
F-29