SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2005
Commission File Number 1-15799
Ladenburg Thalmann Financial Services Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Florida
(State or other jurisdiction of
incorporation or organization)
|
|
65-0701248
(I.R.S. Employer
Identification Number) |
|
|
|
590 Madison Avenue
New York, New York
(Address of principal executive offices)
|
|
10022
(Zip Code) |
(212) 409-2000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes Ö No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes
No Ö
As of August 11, 2005, there were outstanding 125,893,790 shares of the registrants Common
Stock, $.0001 par value.
LADENBURG THALMANN FINANCIAL SERVICES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
TABLE OF CONTENTS
1
PART I. FIANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,268 |
|
|
$ |
1,720 |
|
Trading securities owned |
|
|
231 |
|
|
|
153 |
|
Due from affiliates |
|
|
|
|
|
|
121 |
|
Receivables from clearing brokers |
|
|
10,135 |
|
|
|
10,348 |
|
Exchange memberships owned, at historical cost |
|
|
1,501 |
|
|
|
1,501 |
|
Furniture, equipment and leasehold improvements, net |
|
|
2,635 |
|
|
|
2,866 |
|
Restricted assets |
|
|
1,053 |
|
|
|
1,060 |
|
Other assets |
|
|
3,903 |
|
|
|
3,862 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
24,726 |
|
|
$ |
21,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (CAPITAL DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased |
|
$ |
4 |
|
|
$ |
28 |
|
Accrued compensation |
|
|
1,293 |
|
|
|
2,009 |
|
Accounts payable and accrued liabilities |
|
|
5,994 |
|
|
|
6,366 |
|
Deferred rent credit |
|
|
4,089 |
|
|
|
4,096 |
|
Accrued interest |
|
|
157 |
|
|
|
2,750 |
|
Accrued interest to former parent |
|
|
862 |
|
|
|
2,542 |
|
Due to affiliate |
|
|
|
|
|
|
33 |
|
Notes payable |
|
|
6,333 |
|
|
|
9,833 |
|
Senior convertible notes payable |
|
|
|
|
|
|
18,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
18,732 |
|
|
|
45,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (capital deficit): |
|
|
|
|
|
|
|
|
Preferred stock, $.0001 par value; 2,000,000 shares authorized; none issued |
|
|
|
|
|
|
|
|
Common stock, $.0001 par value; 200,000,000 shares authorized;
shares issued and outstanding, 124,893,790 and 46,683,270 |
|
|
12 |
|
|
|
5 |
|
Additional paid-in capital |
|
|
113,726 |
|
|
|
58,674 |
|
Accumulated deficit |
|
|
(107,744 |
) |
|
|
(82,715 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (capital deficit) |
|
|
5,994 |
|
|
|
(24,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity (capital deficit) |
|
$ |
24,726 |
|
|
$ |
21,631 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
2
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
$ |
3,646 |
|
|
$ |
6,448 |
|
|
$ |
7,515 |
|
|
$ |
17,551 |
|
Principal transactions, net |
|
|
542 |
|
|
|
259 |
|
|
|
1,123 |
|
|
|
1,445 |
|
Investment banking fees |
|
|
675 |
|
|
|
211 |
|
|
|
1,971 |
|
|
|
440 |
|
Investment advisory fees |
|
|
206 |
|
|
|
45 |
|
|
|
323 |
|
|
|
82 |
|
Interest and dividends |
|
|
444 |
|
|
|
416 |
|
|
|
823 |
|
|
|
859 |
|
Syndications and underwritings |
|
|
86 |
|
|
|
93 |
|
|
|
204 |
|
|
|
155 |
|
Gain on debt cancellation |
|
|
|
|
|
|
1,310 |
|
|
|
|
|
|
|
1,310 |
|
Other income |
|
|
286 |
|
|
|
490 |
|
|
|
608 |
|
|
|
1,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
5,885 |
|
|
|
9,272 |
|
|
|
12,567 |
|
|
|
23,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
4,547 |
|
|
|
6,242 |
|
|
|
9,938 |
|
|
|
17,102 |
|
Non-cash compensation |
|
|
43 |
|
|
|
|
|
|
|
266 |
|
|
|
|
|
Brokerage, communication and clearance fees |
|
|
624 |
|
|
|
880 |
|
|
|
1,225 |
|
|
|
1,918 |
|
Rent and occupancy, net of sublease revenues |
|
|
667 |
|
|
|
1,007 |
|
|
|
1,344 |
|
|
|
2,086 |
|
Professional services |
|
|
800 |
|
|
|
644 |
|
|
|
1,918 |
|
|
|
2,027 |
|
Interest |
|
|
114 |
|
|
|
529 |
|
|
|
553 |
|
|
|
1,073 |
|
Depreciation and amortization |
|
|
206 |
|
|
|
262 |
|
|
|
421 |
|
|
|
499 |
|
Debt conversion expense |
|
|
|
|
|
|
|
|
|
|
19,359 |
|
|
|
|
|
Other |
|
|
863 |
|
|
|
2,218 |
|
|
|
2,546 |
|
|
|
3,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
7,864 |
|
|
|
11,782 |
|
|
|
37,570 |
|
|
|
27,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes (benefit) |
|
|
(1,979 |
) |
|
|
(2,510 |
) |
|
|
(25,003 |
) |
|
|
(4,713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit) |
|
|
14 |
|
|
|
4 |
|
|
|
26 |
|
|
|
(99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(1,993 |
) |
|
|
(2,514 |
) |
|
|
(25,029 |
) |
|
|
(4,614 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of limited
partners interest and income taxes |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,993 |
) |
|
$ |
(2,506 |
) |
|
$ |
(25,029 |
) |
|
$ |
(4,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per Common Share (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.11 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computation (basic and diluted) |
|
|
121,269,264 |
|
|
|
44,144,139 |
|
|
|
88,306,362 |
|
|
|
43,887,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
3
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS EQUITY (CAPITAL DEFICIT)
(Dollars in Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In |
|
|
Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Total |
|
Balance, December 31, 2004 |
|
|
46,683,270 |
|
|
$ |
5 |
|
|
$ |
58,674 |
|
|
$ |
(82,715 |
) |
|
$ |
(24,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
under employee stock purchase plan |
|
|
343,455 |
|
|
|
|
|
|
|
158 |
|
|
|
|
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options |
|
|
15,000 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
under stock option plan |
|
|
580,000 |
|
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
pursuant to stock purchase rights |
|
|
7,891,666 |
|
|
|
|
|
|
|
3,551 |
|
|
|
|
|
|
|
3,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation relating to
stock purchase rights granted |
|
|
|
|
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of senior convertible debt |
|
|
51,778,678 |
|
|
|
5 |
|
|
|
42,053 |
|
|
|
|
|
|
|
42,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
pursuant to private equity offering,
net |
|
|
22,222,222 |
|
|
|
2 |
|
|
|
9,911 |
|
|
|
|
|
|
|
9,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of shares of common stock. |
|
|
(4,620,501 |
) |
|
|
|
|
|
|
(1,155 |
) |
|
|
|
|
|
|
(1,155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,029 |
) |
|
|
(25,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2005 |
|
|
124,893,790 |
|
|
$ |
12 |
|
|
$ |
113,726 |
|
|
$ |
(107,744 |
) |
|
$ |
5,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
4
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(25,029 |
) |
|
$ |
(4,665 |
) |
Adjustments to reconcile net loss to net cash
used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
421 |
|
|
|
502 |
|
Adjustment to deferred rent credit |
|
|
(7 |
) |
|
|
222 |
|
Accrued interest |
|
|
535 |
|
|
|
1,009 |
|
Limited partners interest in discontinued operations |
|
|
|
|
|
|
431 |
|
Debt conversion expense |
|
|
19,359 |
|
|
|
|
|
Non-cash compensation expense |
|
|
266 |
|
|
|
|
|
Gain on debt extinguishment |
|
|
|
|
|
|
(1,310 |
) |
|
|
|
|
|
|
|
|
|
Decrease (increase) in operating assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities owned |
|
|
(78 |
) |
|
|
(157 |
) |
Receivables from clearing brokers |
|
|
213 |
|
|
|
9,380 |
|
Assets of discontinued operations |
|
|
|
|
|
|
1,701 |
|
Due from affiliates |
|
|
121 |
|
|
|
364 |
|
Other assets |
|
|
(41 |
) |
|
|
(1,265 |
) |
|
|
|
|
|
|
|
|
|
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased |
|
|
(24 |
) |
|
|
(3,949 |
) |
Accrued compensation |
|
|
(716 |
) |
|
|
(766 |
) |
Accounts payable and accrued liabilities |
|
|
(380 |
) |
|
|
318 |
|
Due to affiliates |
|
|
(33 |
) |
|
|
|
|
Liabilities of discontinued operations |
|
|
|
|
|
|
(3,364 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(5,393 |
) |
|
|
(1,549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of furniture, equipment and leasehold improvements |
|
|
(191 |
) |
|
|
(306 |
) |
Proceeds from sale of equipment |
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(191 |
) |
|
|
(287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in restricted assets |
|
|
7 |
|
|
|
(1 |
) |
Repayment of senior convertible note payable |
|
|
|
|
|
|
(1,000 |
) |
Issuance of common stock |
|
|
3,977 |
|
|
|
430 |
|
Repurchase of common stock |
|
|
(1,155 |
) |
|
|
|
|
Issuance of promissory notes |
|
|
3,500 |
|
|
|
|
|
Private equity offering |
|
|
2,803 |
|
|
|
|
|
Distributions to limited partners of discontinued operations |
|
|
|
|
|
|
(308 |
) |
Contributions from limited partners of discontinued operations |
|
|
|
|
|
|
1,120 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
9,132 |
|
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
3,548 |
|
|
|
(1,595 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
1,720 |
|
|
|
3,412 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
5,268 |
|
|
$ |
1,817 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
5
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
1. |
|
Principles of Reporting |
The condensed consolidated financial statements include the accounts of Ladenburg Thalmann
Financial Services Inc. (LTS or the Company) and its subsidiaries, all of which are
wholly-owned. The subsidiaries of LTS include, among others, Ladenburg Thalmann & Co. Inc.
(Ladenburg), Ladenburg Capital Management Inc. (Ladenburg Capital) and Ladenburg Thalmann
Europe, Ltd. All significant intercompany balances and transactions have been eliminated.
Certain reclassifications have been made to prior period financial information to conform to
the current period presentation.
The interim financial data as of June 30, 2005 and for the six months ended June 30, 2005 and
2004 are unaudited and have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the
interim data includes all adjustments, consisting of normal recurring adjustments, necessary
for a fair statement of the results for the interim periods. Because of the nature of the
Companys business, the results of any interim period are not necessarily indicative of results
for the full year.
The condensed consolidated financial statements do not include all information and notes
necessary for a complete presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles. The balance sheet at
December 31, 2004 has been derived from the audited financial statements at that date, but does
not include all of the information and notes required by generally accepted accounting
principles for complete financial statement presentation. The notes to the consolidated
financial statements included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2004 filed with the Securities and Exchange Commission (SEC) provide additional
disclosures and a further description of accounting policies.
Ladenburg is a registered broker-dealer in securities that clears its customers transactions
through a correspondent clearing broker on a fully disclosed basis. Ladenburg Capital, until
it voluntarily filed to withdraw its license in November 2002, also operated as a broker-dealer
in securities. Broker-dealer activities include principal and agency trading and investment
banking and underwriting activities. The Companys other subsidiaries primarily provide asset
management services.
One of the Companys wholly-owned subsidiaries, Highland Fund Management Inc. (f/k/a Ladenburg
Capital Fund Management Inc.) (LCFM), was sold as of December 31, 2004 to an entity owned by
three of the Companys directors. LCFM is the general partner of a limited partnership
investment fund. Accordingly, the accounts of LCFM and its limited partnership are no longer
consolidated with the Companys accounts, effective December 31, 2004, and the results of
operations of the limited partnership for the three months and six months ended June 30, 2004
have been reclassified and presented as loss from discontinued operations in the accompanying
statement of operations. In addition, the limited partners equity in the fund is shown as
limited partners interest in discontinued operations. In addition, in March 2004, the Company
sold one of its registered investment advisor subsidiaries, Financial Partners Capital
Management, Inc. (FPCM), to one of its employees. FPCM provided investment advisory and
financial planning services. FPCMs results of operations are reflected as discontinued
operations. Revenues attributable to discontinued operations amounted to $920 in the six
months ended June 30, 2004.
Organization
Ladenburg is a full service broker-dealer that has been a member of the New York Stock Exchange
(NYSE) since 1879. Ladenburg clears its customers transactions through a correspondent
clearing broker on a fully disclosed basis. Broker-dealer activities include principal and
agency trading and investment banking and underwriting activities. Ladenburg provides its
services principally for middle market and emerging growth companies and high net worth
individuals through a coordinated effort among corporate finance, capital markets, investment
management, brokerage and trading professionals. Ladenburg is subject to regulation by, among
others, the SEC, the NYSE, National Association of Securities Dealers, Inc. (NASD),
Commodities Futures Trading Commission and National Futures Association. (See Note 5.)
6
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
Ladenburg Capital previously operated as a broker-dealer subject to regulation by the SEC and
the NASD. Ladenburg Capital acted as an introducing broker, market maker, underwriter and
trader for its own account. In November 2002, Ladenburg Capital terminated its broker-dealer
operations and it voluntarily filed to withdraw as a broker-dealer. In conjunction with
providing employment to certain former Ladenburg Capital brokers, Ladenburg agreed to and is
currently servicing these brokers customer accounts.
2. Summary of Significant Accounting Policies
The preparation of these financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
The Company considers all highly liquid financial instruments with an original maturity of
less than three months to be cash equivalents.
Securities owned and securities sold, but not yet purchased, which are traded on a
national securities exchange or listed on NASDAQ are valued at the last reported sales prices
of the period. Futures contracts are also valued at their last reported sales prices.
Securities owned, which have exercise or holding period restrictions, are valued at fair value
as determined by the Companys management. Unrealized gains and losses resulting from changes
in valuation are reflected in net gain on principal transactions.
Principal transactions, agency commissions and related clearing expenses are recorded on a
trade-date basis.
Investment banking revenues include fees earned from providing merger-and-acquisition and
financial restructuring advisory services and from private and public offerings of debt and
equity securities. Investment banking fees are recorded upon the closing of the transaction,
when it can be determined that the fees have been irrevocably earned.
Investment advisory fees are received quarterly, in advance, but are recognized as earned on a
pro rata basis over the term of the contract.
Dividends are recorded on an ex-dividend date basis and interest is recorded on an accrual
basis.
Ladenburg and its subsidiaries file a consolidated federal income tax return and certain
combined state and local income tax returns. The amount of current and deferred taxes payable
or refundable is recognized as of the date of the financial statements, utilizing currently
enacted tax laws and rates. Deferred tax expenses or benefits are recognized in the financial
statements for the changes in deferred tax liabilities or assets between periods. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected
to be realized. As of June 30, 2005 and December 31, 2004, the valuation allowance was
approximately $25,433 and $22,841, respectively.
Depreciation of furniture and equipment is provided by the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are amortized on a
straight-line basis over the lease term.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, requires that
a cost associated with an exit or disposal activity be recognized and measured initially at its
fair value in the period in which the liability is incurred. For operating leases, a liability
for costs that will continue to be incurred under the lease for its remaining term without
economic benefit to the entity shall be recognized and measured at its fair value when the
entity ceases using the right conveyed by the lease (the cease-use date). The fair value of
the liability at the cease-use date shall be determined based on the remaining lease rentals,
reduced by estimated sublease rentals that could be reasonably obtained for the property. (See
Note 6.)
SFAS No. 148, Accounting for Stock-Based Compensation, provides alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee
7
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
compensation and the effect of the method used on reported results. The Company has adopted
the disclosure requirements of SFAS No. 148.
SFAS No. 123, Accounting for Stock-Based Compensation, allows the use of the fair value based
method of accounting for stock-based employee compensation. Alternatively, SFAS No. 123 allows
entities to continue to apply the intrinsic value method prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations and provide pro forma disclosures of net income (loss) and income (loss) per
share, as if the fair value based method of accounting had been applied to employee awards. As
permitted by SFAS No. 123, the Company continues to account for such compensation under APB No.
25 and related interpretations, pursuant to which no compensation cost has been recognized in
connection with the issuance of stock options, as all options granted under the Companys 1999
Performance Equity Plan (the Option Plan) had an exercise price equal to the market value of
the underlying common stock on the date of grant. The table below illustrates the effect on
the Companys net loss for the three-month and six-month periods ended June 30, 2005 and 2004,
had the Company elected to recognize compensation expense for the Option Plan, consistent with
the method prescribed by SFAS No. 123.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net loss, as reported |
|
$ |
(1,993 |
) |
|
$ |
(2,506 |
) |
|
$ |
(25,029 |
) |
|
$ |
(4,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based employee compensation
determined under the fair value
based method |
|
|
(569 |
) |
|
|
(393 |
) |
|
|
(1,093 |
) |
|
|
(844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(2,562 |
) |
|
$ |
(2,899 |
) |
|
$ |
(26,122 |
) |
|
$ |
(5,509 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per Common Share (basic
and diluted), as reported |
|
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per Common
Share (basic and diluted) |
|
$ |
(0.02 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2005, options to purchase 930,000 shares of common stock
were granted under the Option Plan and 13,000,000 were granted outside of the Option Plan. The
per share weighted average fair value of stock options granted during the first and second
quarters of 2005 was $0.46 and $0.50, respectively, estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
|
2005 |
|
|
2005 |
|
Risk free interest rate |
|
|
4.50 |
% |
|
|
4.00 |
% |
Volatility |
|
|
102.05 |
% |
|
|
67.63 |
% |
Dividend yield |
|
|
0 |
|
|
|
0 |
|
Expected lives |
|
10 years |
|
10 years |
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which requires all
share-based payments to employees, including grants of employee stock options, to be recognized
in the income statement, as an operating expense, based on their fair values. Pro forma
disclosure is no longer an alternative. That cost will be recognized as compensation expense
over the service period, which would normally be the vesting period of the options. The
effective date of SFAS No. 123R for the Company was July 1, 2005 but in April 2005 the SEC
postponed the effective date to January 1, 2006. As permitted by SFAS No. 123, the Company
8
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
currently accounts for share-based payments to employees using APB Opinion No. 25s intrinsic
value method and, as such, recognizes no compensation cost for employee stock options unless
options granted have an exercise price below the market value on the date of grant.
Accordingly, the adoption of SFAS No. 123Rs fair value method could have a significant impact
on the companys results of operations, although it will have no impact on the Companys
overall financial position. The impact of adoption of SFAS No. 123R cannot be predicted at
this time because it will depend on levels of share-based payments granted in the future.
3. Securities Owned and Securities Sold, But Not Yet Purchased
The components of securities owned and securities sold, but not yet purchased, as of June 30,
2005 and December 31, 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Sold, |
|
|
Securities |
|
But Not |
|
|
Owned |
|
Yet Purchased |
June 30, 2005 |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
52 |
|
|
$ |
2 |
|
Municipal obligations |
|
|
50 |
|
|
|
|
|
Corporate bonds |
|
|
129 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
231 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
71 |
|
|
$ |
23 |
|
Municipal obligations |
|
|
53 |
|
|
|
|
|
Corporate bonds |
|
|
29 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
153 |
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 and December 31, 2004, approximately $231and $138, respectively, of
the securities owned are deposited with the Companys clearing broker and, pursuant to the
agreement, the securities may be sold or hypothecated by the clearing broker.
4. Shareholders Equity
Employee Stock Purchase Plan
In 2002, the Companys shareholders approved the Ladenburg Thalmann Financial Services Inc.
Qualified Employee Stock Purchase Plan (the Purchase Plan), under which a total of 5,000,000
shares of common stock became available for issuance. Under the Purchase Plan, 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. Option periods have been
initially set at three months long and commence on January 1, April 1, July 1, and October 1 of
each year and end on March 31, June 30, September 30 and December 31 of each year. The
Purchase Plan is intended to qualify as an employee stock purchase plan under Section 423 of
the Internal Revenue Code. During the six-month period ended June 30, 2005, 343,455 shares of
the Companys common stock were issued to employees under the Purchase Plan, at a weighted
average price of $0.46 per share, resulting in a capital contribution of $158.
1999 Performance Equity Plan
In 1999, the Company adopted 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, as designated by the board of
directors. There are 10,000,000 shares of common stock authorized for issuance under the
Option Plan and the limit on grants to any individual is 1,000,000 shares per calendar year.
As of June 30, 2005, there were 9,266,032 shares of common stock available for issuance under
the Option Plan, of which options to purchase 7,044,831 shares have been granted.
9
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
During the six-month period ended June 30, 2005, three participants in the Option Plan
exercised stock options to purchase a total of 15,000 shares of common stock $.45 per share,
resulting in a capital contribution of $7.
In March 2005, in connection with the resignation of the Companys then current chief executive
officer, 900,000 unvested stock options previously granted to him under the Option Plan expired
and the remaining 100,000 options, exercisable at $0.75, became fully-vested and expire on
March 3, 2006.
On June 1, 2005, Ladenburg entered into several employment agreements with newly hired
employees and in connection therewith granted the employees options to purchase an aggregate of
750,000 shares of the Companys common stock at an exercise price $0.645 per share. The
options, which expire on June 1, 2015, will vest 25% on each of the first four anniversaries of
the date of grant. In addition, the Company granted these employees the opportunity to
purchase an aggregate of 580,000 shares of its common stock, under the Option Plan, at an
exercise price of $0.45 per share, which they did in June 2005, resulting in a capital
contribution of $261. As the purchase price was below the fair market value of the stock on
the effective date of the agreements, the Company recognizes compensation expense over the
initial term of the respective employees contracts for the difference between fair market
value and the purchase price. During the three months and six months ended June 30, 2005,
compensation expense of $5 was recorded.
Other Stock Options
On March 4, 2005, the Company entered into an employment agreement with a newly employed chief
executive officer and in connection therewith granted him options to purchase 5,000,000 shares
of the Companys common stock at an exercise price of $0.465 per share. 500,000 options vested
immediately upon grant and the remainder of the options will vest as to 1,125,000 shares on
each of the first four anniversaries of the grant date. The Company also agreed to sell the
officer 2,222,222 shares of its common stock for $1,000, or $0.45 per share, which it did on
March 11, 2005. The Company recognized compensation expense of $33 with respect to this
purchase as the purchase price was below the fair market value of the stock on the effective
date of the agreement.
On March 25, 2005, Ladenburg entered into an employment agreement with a newly employed
director of institutional sales and in connection therewith granted him options to purchase
1,500,000 shares of the Companys common stock at an exercise price $0.64 per share. The
option, which expires on March 28, 2015, will vest as to 250,000 shares on each of the first
four anniversaries of the date of grant. An additional 125,000 shares will vest on the third
anniversary of the date of grant and an additional 375,000 shares will vest on the fourth
anniversary of the date of grant provided that the Commission Shares (defined below) have been
purchased. In addition, he committed to purchase an additional 2,500,000 shares (Commission
Shares) of the Companys common stock at $0.64 per share solely through the use of
compensation to be earned by him. In addition, the Company granted him the opportunity to
purchase 1,000,000 shares of its common stock at an exercise price of $0.45 per share, which he
did on March 28, 2005. The Company recognized compensation expense of $190 with respect to
this purchase as the purchase price was below the fair market value of the stock on the
effective date of the agreement.
In March 2005, the Company granted to the nine non-employee directors of the Company options to
purchase an aggregate of 180,000 shares of common stock (20,000 shares each) at $0.48 per
share, the fair market value on the date of grant. These options vest in full one year from
the date of grant and expire ten years from the date of grant.
In March 2005, in connection with the resignation of the Companys then current chief executive
officer, 1,500,000 unvested stock options previously granted to him (outside of the Option Plan
referred to above) expired.
On June 1, 2005, Ladenburg entered into several employment agreements with newly employed
executives and in connection therewith granted the executives options to purchase an aggregate
of 6,500,000 shares of the Companys common stock at an exercise price $0.645 per share. The
options, which expire on June 1, 2015, will vest at various periods through June 30, 2009. In
addition, one of the executives committed to purchase
10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
up to an additional 500,000 shares (Commission Shares) of the Companys common stock at
$0.645 per share solely through the use of compensation to be earned by him. In addition,
the Company granted these executives the opportunity to purchase an aggregate of 4,669,444
shares of its common stock at an exercise price of $0.45 per share, which they did in June
2005, resulting in a capital contribution of $2,101. The Company recognizes compensation
expense over the initial term of the respective employees contracts, as the purchase price was
below the fair market value of the stock on the effective date of the agreement. During the
six months ended June 30, 2005, compensation expense of $38 was recorded.
Repurchase of Common Stock Outstanding
On April 14, 2005, the Company repurchased 4,620,501 shares (Shares) of the Companys common
stock from Berliner Effektengesellschaft AG (Berliner) pursuant to a written agreement
between the Company and Berliner. Pursuant to the agreement, the Company paid Berliner $1,155,
or $0.25 per share, for the Shares. The Shares were returned to the status of authorized but
unissued shares.
5. Net Capital Requirements
As a registered broker-dealer, Ladenburg is subject to the SECs Uniform Net Capital Rule
15c3-1 and the Commodity Futures Trading Commissions Regulation 1.17, which require the
maintenance of minimum net capital. Ladenburg has elected to compute its net capital under the
alternative method allowed by these rules. In January 2005 and June 2005, LTS made capital
contributions to Ladenburg in the amount of $2,000 and $1,000, respectively. Also in January
2005, Ladenburg collected an aggregate of $1,177 of receivables from Ladenburg Capital and LTS.
These transactions, resulting in an increase to Ladenburgs regulatory net capital of $4,177,
were partially offset by Ladenburgs loss from operations for the six months ended June 30,
2005. At June 30, 2005, Ladenburg had net capital, as defined, of $2,620, which exceeded its
minimum capital requirement of $250 by $2,370. (See Note 11.)
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.
6. Commitments and Contingencies
Operating leases
The Company is obligated under several noncancelable lease agreements for office space,
expiring in various years through June 2015. Certain leases have provisions for escalation
based on specified increases in costs incurred by the landlord. The Company is subleasing a
portion of its office space. The subleases expire at various dates through June 2015.
As of June 30, 2005, the leases and subleases, exclusive of the lease relating to premises
vacated by Ladenburg Capital due to the events of September 11, 2001 referred to below, provide
for minimum lease payments and sublease rentals, net of lease abatement and exclusive of
escalation charges, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending |
|
Lease |
|
|
Sublease |
|
|
|
|
December 31, |
|
Commitments |
|
|
Rentals |
|
|
Net |
|
2005 |
|
$ |
2,485 |
|
|
$ |
1,772 |
|
|
$ |
713 |
|
2006 |
|
|
4,858 |
|
|
|
3,543 |
|
|
|
1,315 |
|
2007 |
|
|
5,080 |
|
|
|
3,332 |
|
|
|
1,748 |
|
2008 |
|
|
5,554 |
|
|
|
3,415 |
|
|
|
2,139 |
|
2009 |
|
|
5,305 |
|
|
|
3,415 |
|
|
|
1,890 |
|
Thereafter |
|
|
30,626 |
|
|
|
9,015 |
|
|
|
21,611 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
53,908 |
|
|
$ |
24,492 |
|
|
$ |
29,416 |
|
|
|
|
|
|
|
|
|
|
|
11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
In addition to the above, one of the leases obligates the Company to occupy additional space at
the landlords option, which may result in aggregate additional lease payments of up to $701
through June 2015.
The deferred rent credit shown in the consolidated statement of financial condition primarily
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.
As of June 30, 2005, Ladenburg Capital may have potential liability under a terminated lease
for office space in New York City which it was forced to vacate during 2001 due to the events
of September 11, 2001. Ladenburg Capital no longer occupies the space and believes it has no
further lease obligation pursuant to the terms of the lease. This lease, which, had it not
terminated as a result of the events of September 11, 2001, would have expired by its terms in
March 2010, provides for future minimum payments at June 30, 2005, aggregating approximately
$3,339, payable $351 in 2005, $703 per year from 2006 through 2009 and $176 thereafter. In
addition, minimum payments for the period from September 11, 2001 through June 30, 2005 which
were not paid by Ladenburg Capital amounted to $2,473. Ladenburg Capital is currently in
litigation with the landlord in which it is seeking judicial determination of the termination
of the lease. This lawsuit is pending in bankruptcy court due to the landlords bankruptcy
filing. If Ladenburg Capital is not successful in this litigation, it plans to sublease the
property. Ladenburg Capital has provided for estimated costs in connection with this lease and
has recorded a liability at June 30, 2005 and December 31, 2004. Additional costs may be
incurred in connection with terminating this lease, or if not terminated, to the extent of
foregone rental income in the event Ladenburg Capital does not sublease the office space for an
amount at least equal to the lease obligations. Such costs may have a material adverse effect
on Ladenburg Capitals financial position and liquidity.
At June 30, 2005 and December 31, 2004, Ladenburg has utilized a letter of credit in the amount
of $1,000 that is collateralized by Ladenburgs marketable securities, in the amount of $1,053
and $1,060, respectively, (shown as restricted assets on the condensed consolidated statement
of financial condition) as collateral for the lease of the Companys Madison Avenue (New York
City) office space. Pursuant to the lease agreement, the requirement to maintain this letter
of credit facility expires on December 31, 2006.
Litigation and Regulatory Matters
On September 11, 2001, terrorists attacked the World Trade Center complex in New York, which
subsequently collapsed and damaged surrounding buildings, including one occupied by a branch
office of Ladenburg Capital. These events resulted in the suspension of trading of U.S. equity
securities for four business days and precipitated the relocation of approximately 180
employees to Ladenburgs mid-town New York headquarters. Some of Ladenburgs and Ladenburg
Capitals business was temporarily disrupted. Ladenburg Capital and Ladenburg are insured for
loss caused by physical damage to property, including repair or replacement of property and
lost profits due to business interruption, including costs related to lack of access to
facilities. Although the claim to the insurance carrier is significantly greater, the net book
value of the lost property, as well as the costs incurred to temporarily replace some of the
lost property, has been recorded as a receivable (included in other assets) amounting to $2,118
at June 30, 2005 and December 31, 2004. In October 2003, a Proof of Loss was filed with the
insurance carrier, for an amount in excess of the policy limits of approximately $7,800 and in
July 2004, Ladenburg and Ladenburg Capital filed a lawsuit against the insurance carrier for
failure to pay for damages Ladenburg and Ladenburg Capital incurred. Although there are no
assurances that a settlement will be reached, the Company is currently in settlement discussions with the insurance carrier and
anticipates that there will be a settlement for an amount that approximates the amount of the
receivable.
The Company is a defendant in litigation and may be subject to unasserted claims or
arbitrations primarily in connection with its activities as a securities broker-dealer and
participation in public underwritings. Such litigation and claims involve substantial or
indeterminate amounts and are in varying stages of legal proceedings. As of June 30, 2005, the
Companys subsidiaries are defendants in several various pending arbitrations claiming
substantial amounts of damages. One claim pending as of March 31, 2005, was seeking
12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
compensatory damages of $6,000. The claimants in this customer case have withdrawn their
claims. In June 2005, the arbitration panel granted Ladenburgs motion to dismiss the claims
with prejudice.
On May 5, 2003, a suit was filed in the U.S. District Court for the Southern District of
New York by Sedona Corporation against Ladenburg, former employees of Ladenburg, Pershing LLC
and a number of other firms and individuals. The plaintiff alleges, among other things, that
certain defendants (not Ladenburg) purchased convertible securities from plaintiff and then
allegedly manipulated the market to obtain an increased number of shares from the conversion of
those securities. Ladenburg acted as placement agent and not as principal in those
transactions. Plaintiff has alleged that Ladenburg and the other defendants violated federal
securities laws and various state laws. The plaintiff seeks compensatory damages from the
defendants of at least $660,000 and punitive damages of $2,000,000. In August 2005,
Ladenburgs motion to dismiss was granted in part and denied in part. The Company believes the
plaintiffs claims in this action are without merit and intends to vigorously defend against
them.
In March 2004, Ladenburg was served with an amended complaint in a lawsuit filed by
Exotics.com, Inc. in the Superior Court of the State of California for the County of Los
Angeles adding Ladenburg and a number of other parties as defendants. The amended complaint,
which seeks unspecified damages, alleges that defendants other than Ladenburg converted the
plaintiff companys licensing rights and other intellectual property, and that Ladenburg was
involved in a conspiracy to manipulate the companys stock, apparently through purportedly
improper short sales. The claims are for conspiracy, conversion, breach of fiduciary duty,
fraud, violations of California state securities law and other related claims. Ladenburgs
motion to dismiss was granted in part and the plaintiff was given leave to file an amended
complaint. The plaintiff filed a new amended complaint; Ladenburg moved to dismiss the new
amended complaint, which was dismissed as to Ladenburg with prejudice in July 2005.
In May 2004, the NASD contacted Ladenburg regarding an informal investigation into past
activities by it, Ladenburg Capital and certain of their employees involving potential
violations of NASD Rule 2440 and NASD Interpretive Memorandum 2440(c)(5) relating to fair
prices and commissions. On September 15, 2004, Ladenburg received a Wells Letter from the
staff of the NASD. The Wells Letter stated that the staff of the NASD intends to recommend
that disciplinary action be brought against Ladenburg for violating certain conduct rules of
the NASD, including NASD Conduct Rule 2440 and NASD Interpretive Memorandum 2440(c)(5) relating
to fair prices and commissions, and Section 10(b) of the Securities Exchange Act of 1934, as
amended. The NASD previously delivered similar Wells Letters to five employees of Ladenburg
generally alleging violations by them of the same NASD and SEC rules. Ladenburg and the NASD
have resolved this matter. On March 23, 2005, without admitting or denying the NASDs
allegations or findings, Ladenburg consented to entry of an Acceptance, Waiver and Consent in
which the NASD found that Ladenburg violated NASD Conduct Rule 2440, NASD Interpretive
Memorandum 2440(c)(5), and NASD Conduct Rules 2110 (by virtue of violating Sections 17(a)(2)
and (3) of the Securities Act of 1933), 3010 and 2110. In connection with the settlement,
Ladenburg has agreed to reimburse customers approximately $1.2 million, plus interest.
Ladenburg was also censured a fine in the amount of $275. A liability of $1,555 related to the
settlement was provided at December 31, 2004. The $275 fine was paid in March 2005, and in
June 2005, Ladenburg reimbursed these customers approximately $1.2 million plus $153 of
interest. In addition, Ladenburg is currently implementing recommendations made by an
independent consultant relating to Ladenburgs policies and procedures concerning the above
mentioned NASD rules.
In July 2004, a suit was filed in the U.S. District Court for the Eastern District of Arkansas
by Pet Quarters, Inc. against Ladenburg, a former employee of Ladenburg and a number of other
firms and individuals. The plaintiff alleges, among other things, that certain defendants (not
Ladenburg) purchased convertible securities from plaintiff and then allegedly manipulated the
market to obtain an increased number of shares from the conversion of those securities.
Ladenburg acted as placement agent and not as principal in those transactions. Plaintiff has
alleged that Ladenburg and the other defendants violated federal securities laws and various
state laws. The plaintiff seeks compensatory damages from the defendants of at least $400,000.
Ladenburgs motion to dismiss this action is currently pending. The Company believes that the
plaintiffs claims are without merit and intends to vigorously defend against them.
In November 2004, Ladenburg and Ladenburg Capital were served with an amended complaint in a
lawsuit filed by Alan Sporn and Trident Systems, Inc. in the United States District Court for
the Central District of
13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
California adding Ladenburg, Ladenburg Capital and a number of other firms as defendants. The
amended complaint alleges that Ladenburg and Ladenburg Capital, as well as all other market
makers in the plaintiff companys stock, the Depository Trust Company and the National
Securities Clearing Corporation, violated various federal and California statutes and
regulations, and committed common law fraud and negligence, purportedly by engaging in improper
short sales of Tridents stock. The plaintiffs were seeking compensatory damages against all
defendants aggregating approximately $152,000 and unspecified punitive damages. In July 2005,
after Ladenburg filed its most recent motion to dismiss, the new amended complaint was
dismissed with prejudice pursuant to a so-ordered stipulation.
With respect to certain arbitration, litigation and regulatory matters, where the Company
believes that it is probable that a liability has been incurred and the amount of loss can be
reasonably estimated, the Company has provided a liability for potential arbitration and
lawsuit losses of approximately $2,947 at June 30, 2005, and $3,826 at December 31, 2004
(included in accounts payable and accrued liabilities). During the three months and six months
ended June 30, 2005, various settlements, including the settlements described above net of
certain favorable settlements, resulted in a charge (credit) to operations of $(62) and $912,
respectively, (included in other expenses). With respect to other pending matters, due to the
uncertain nature of litigation in general, the Company is unable to estimate a range of
possible loss; however, in the opinion of management, after consultation with counsel, the
ultimate resolution of these matters should not have a material adverse effect on the Companys
consolidated financial position, results of operations or liquidity.
7. Income Taxes
The Company files a consolidated federal income tax return and certain combined state and local
income tax returns with its subsidiaries. The Company is on a fiscal tax year ending September
30th.
The Company accounts for taxes in accordance with SFAS No. 109, Accounting for Income Taxes,
which requires the recognition of tax benefits or expense on the temporary differences between
the tax basis and book basis of its assets and liabilities. Deferred tax assets and liabilities
are measured using the enacted tax rates expected to apply to taxable income in the years in
which those timing differences are expected to be recovered or settled. Deferred tax amounts as
of June 30, 2005, which consist principally of the tax benefit of net operating loss
carryforwards and accrued expenses, amounts to approximately $25,433. After consideration of
all the evidence, both positive and negative, especially the fact the Company has sustained
operating losses during 2004, 2003 and 2002 and for the six months ended June 30, 2005 and that
the Company continues to be affected by conditions in the economy, management has determined
that a valuation allowance at June 30, 2005 was necessary to fully offset the deferred tax
assets based on the likelihood of future realization. At June 30, 2005, the Company had net
operating loss carryforwards of approximately $49,195, expiring in various years from 2015
through 2025. The Companys ability to use such carryforwards to reduce future taxable income
is subject to limitations attributable to equity transactions in March 2005 (see Note 9) that
have resulted in a change of ownership as defined in Internal Revenue Code Section 382.
8. Off-Balance-Sheet Risk and Concentrations of Credit Risk
Ladenburg does not carry accounts for customers or perform custodial functions related to
customers securities. Ladenburg introduces all of its customer transactions, which are not
reflected in these financial statements, to its primary clearing broker, which maintains the
customers accounts and clears such transactions. Additionally, the primary clearing broker
provides the clearing and depository operations for Ladenburgs proprietary securities
transactions. These activities may expose the Company to off-balance-sheet risk in the event
that customers do not fulfill their obligations with the clearing broker, as Ladenburg has
agreed to indemnify its clearing broker for any resulting losses. The Company continually
assesses risk associated with each customer who is on margin credit and records an estimated
loss when management believes collection from the customer is unlikely.
The clearing operations for the Companys securities transactions are provided by one clearing
broker. At June 30, 2005 and December 31, 2004, substantially all of the securities owned and
the amounts due from clearing broker reflected in the consolidated statement of financial
condition are positions held at and amounts
14
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
due from one clearing broker, a large financial institution. The Company is subject to credit
risk should this clearing broker be unable to fulfill its obligations.
The Company and its subsidiaries maintain cash in bank deposit accounts, which, at times, may
exceed federally insured limits. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash.
9. Notes Payable
The components of notes payable are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Senior convertible notes payable |
|
$ |
|
|
|
$ |
18,010 |
|
Notes payable (forgivable per terms see below)
in connection with clearing agreement |
|
|
1,333 |
|
|
|
1,333 |
|
Notes payable |
|
|
5,000 |
|
|
|
8,500 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,333 |
|
|
$ |
27,843 |
|
|
|
|
|
|
|
|
Aggregate maturities of the $6,333 of notes payable at June 30, 2005 are as follows:
|
|
|
|
|
Year Ending |
|
|
|
|
December 31, |
|
|
|
|
2005 |
|
$ |
667 |
|
2006 |
|
|
5,666 |
|
|
|
|
|
Total |
|
$ |
6,333 |
|
|
|
|
|
Senior Convertible Notes Payable
In conjunction with the acquisition of Ladenburg in May 2001, LTS issued a total of $20,000
principal amount of senior convertible notes due December 31, 2005, secured by a pledge of the
stock of Ladenburg. The $10,000 principal amount of notes issued to New Valley Corporation
(New Valley) and Berliner, the former Ladenburg stockholders, bore interest at 7.5% per
annum, and the $10,000 principal amount of notes issued to Frost-Nevada, Limited Partnership
(Frost-Nevada), which was subsequently assigned to Frost-Nevada Investments Trust (Frost
Trust), of which Frost-Nevada is the sole and exclusive beneficiary, bore interest at 8.5% per
annum. Dr. Phillip Frost, a director of the Company, is the sole stockholder of the general
partner of Frost-Nevada. The notes held by the former Ladenburg stockholders were convertible
into a total of 4,799,271 shares of common stock, and the note held by Frost Trust was
convertible into a total of 6,497,475 shares of common stock.
On June 28, 2002, New Valley, Berliner and Frost-Nevada agreed with the Company to forbear
until May 15, 2003 payment of the interest due to them under the senior convertible promissory
notes held by these entities on the interest payment dates of the notes commencing June 30,
2002 through March 2003 (the Forbearance Interest Payments). The holders of the senior
convertible promissory notes subsequently agreed to extend the interest forbearance period to
May 13, 2005 with respect to interest payments due through March 31, 2005. Interest on the
deferred amounts accrued at 8% on the New Valley and Berliner notes and 9% on the Frost Trust
note. As of December 31, 2004 accrued interest payments as to which a forbearance was received
from Frost Trust and New Valley, amounted to $4,429. During the second quarter of 2004, the
Company repurchased from Berliner $1,990 principal amount of the notes, plus $320 of accrued
interest, for $1,000 in cash. As a result, the Company recorded a gain on debt cancellation of
$1,310 during the second quarter of 2004.
15
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
In November 2004, the Company entered into an amended debt conversion agreement with Frost
Trust and New Valley to convert their notes, with an aggregate principal amount of $18,010,
together with accrued interest, into common stock of the Company. Pursuant to the conversion
agreement, the conversion price of notes held by Frost Trust was reduced from the prior
conversion price of $1.54 to $0.40 per share, and the conversion price of the notes held by New
Valley was reduced from the prior conversion price of $2.08 to $0.50 per share. As part of the
debt conversion agreement, each of Frost Trust and New Valley agreed to purchase $5,000 of the
Companys common stock for $0.45 per share.
Frost Trust agreed that it would not sell, transfer or assign any shares it received as a
result of the foregoing transactions for a period of one year from the date of the agreement
except to its affiliated entities.
The debt conversion transaction was approved by the Companys shareholders at the annual
shareholder meeting held on January 12, 2005 and closed on March 11, 2005. The transactions
were effective as of February 22, 2005 and resulted in the following:
|
|
|
The $10,000 senior convertible promissory note to Frost Trust and related accrued
interest through February 22, 2005 of $2,761 was converted at $0.40 per share into
31,902,320 shares of the Companys common stock. |
|
|
|
|
The $8,010 senior convertible promissory note to New Valley and related accrued
interest through February 22, 2005 of $1,928 was converted at $0.50 per share into
19,876,358 shares of the Companys common stock. |
|
|
|
|
Frost-Trust acquired 11,111,111 shares of the Companys common stock at $0.45 per
share in exchange for a cash payment of $1,445 and the cancellation of the Companys
$3,500 of notes payable and related accrued interest of $55 described below. |
|
|
|
|
New Valley acquired 11,111,111 shares of the Companys common stock at $0.45 per
share in exchange for a cash payment of $1,445 and the cancellation of the Companys
$3,500 of notes payable and related accrued interest of $55 described below. |
|
|
|
|
The Company recorded a pre-tax charge of $19,359 reflecting the expense attributable
to the reduction in the conversion price of the notes that were converted. The net
effect on the Companys balance sheet from both the conversion and the private
financing, net of related expenses, was an increase to shareholders equity of $32,612. |
|
|
|
|
As a result of the debt conversion and private financing, the beneficial ownership
of Frost-Trust increased from 18.5% to 37.2%. |
|
|
|
|
As a result of the debt conversion and private financing, the beneficial ownership
of New Valley increased from 9.4% to 25.7%. New Valley subsequently distributed
19,876,358 shares of the stock it received from the conversion of its note to its
shareholders. New Valleys residual LTS shares equate to a beneficial ownership of
approximately 9.3%. |
Other Notes Payable
On March 27, 2002, the Company borrowed $2,500 from New Valley. The loan, which bears interest
at 1% above the prime rate, was due on the earlier of December 31, 2003 or the completion of
one or more equity financings where the Company receives at least $5,000 in total proceeds. The
terms of the loan restrict the Company from incurring or assuming any indebtedness that is not
subordinated to the loan so long as the loan is outstanding. On July 16, 2002, the Company
borrowed an additional $2,500 from New Valley (collectively with the March 2002 loan, the 2002
Loans) on the same terms as the March 2002 loan. In November 2002, New Valley agreed in
connection with the Clearing Loans (defined below) to extend the maturity of the 2002 Loans to
December 31, 2006 and to subordinate the 2002 Loans to the repayment of the Clearing Loans.
16
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)
In November 2002, the Company renegotiated a clearing agreement with one of its clearing
brokers whereby this clearing broker became Ladenburgs primary clearing broker, clearing
substantially all of Ladenburgs business (the Clearing Conversion). As part of the new
agreement with this clearing agent, Ladenburg is realizing significant cost savings from
reduced ticket charges and other incentives. In addition, under the new clearing agreement, an
affiliate of the clearing broker loaned the Company an aggregate of $3,500 (the Clearing
Loans) in December 2002. The Clearing Loans and related accrued interest are forgivable over
various periods, up to four years from the date of the Clearing Conversion, provided Ladenburg
continues to clear its transactions through the primary clearing broker. As scheduled, in
November 2003, one of the loans consisting of $1,500 of principal, together with accrued
interest of approximately $90, was forgiven and in November 2004, $667 of principal, together
with accrued interest of approximately $54, was forgiven. The balance of the remaining loan,
consisting of $1,333 of principal, is scheduled to be forgiven as follows: $667 in November
2005 and $666 in November 2006. Accrued interest on this loan as of June 30, 2005 was $157.
Upon the forgiveness of the Clearing Loans, the forgiven amount is accounted for as other
revenues. However, if the clearing agreement is terminated for any reason prior to the loan
maturity date, the loan, less any amount that has been forgiven through the date of the
termination, plus interest, must be repaid on demand.
The Company borrowed $1,750 from New Valley and $1,750 from Frost Trust in 2004 and an
additional $1,750 from each of them in the first quarter of 2005. These notes, together with
accrued interest, payable at 2% above the prime rate, were cancelled in March 2005 as payment,
along with $2,890 in cash, for New Valleys and Frost Trusts purchase of $10,000 of the
Companys common stock.
Liquidity
The Companys liquidity position continues to be adversely affected by its inability to
generate cash from operations. Accordingly, the Company has been forced to cut expenses as
necessary. In order to accomplish this, the Company has implemented certain cost-cutting
procedures throughout its operations. The Company decreased its total number of employees from
324 at December 31, 2003 to 172 at March 31, 2005. Commencing in April 2005, as part of
managements new business plan, the Company employed several new employees and in connection
with their employment agreements, has committed to incur certain expenses to grow its asset
management, wealth management and alternative investments areas of its business. At June 30,
2005, the Company had 174 employees.
The Companys overall capital and funding needs are continually reviewed to ensure that its
liquidity and capital base can support the estimated needs of its business units. These
reviews take into account business needs as well as regulatory capital requirements of the
Companys broker-dealer subsidiary. If, based on these reviews, it is determined that the
Company requires additional funds to support its liquidity and capital base, the Company would
seek to raise additional capital through other available sources, including through borrowing
additional funds on a short-term basis from the Companys significant shareholders or from
other parties, including the Companys clearing brokers, although there can be no assurance
such funding would be available. Additionally, the Company may attempt to raise funds through
a private placement, a rights offering or other type of financing. If a public offering is
consummated, the Company would be required to use the proceeds of the offering to repay the
2002 Loans and related accrued interest, to the extent possible. If the Company continues to
be unable to generate cash from operations and is unable to find alternative sources of funding
as described above, it would have an adverse impact on the Companys liquidity and operations.
10. Related Party Transactions
See Note 9 with respect to loans from related parties.
See Note 4 with respect to purchases of the Companys common stock.
11. Subsequent Event
Capital Contribution to Ladenburg
On August 1, 2005, the Company made a capital contribution to Ladenburg in the amount of $3,000,
increasing Ladenburgs regulatory capital to approximately $5,200, which exceeds its minimum
net capital requirement of $250 by $4,950.
17
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Amounts) |
Introduction
The condensed consolidated financial statements include our accounts and the
accounts of our wholly-owned subsidiaries. Our subsidiaries include, among others, Ladenburg
Thalmann & Co. Inc. (Ladenburg), Ladenburg Capital Management Inc. (Ladenburg Capital) and
Ladenburg Thalmann Europe, Ltd.
Recent Developments
Debt Conversion and Private Financing
In November 2004, we entered into an amended debt conversion agreement with New Valley and
Frost Trust, the holders of our then outstanding $18,010 aggregate principal amount of senior
convertible promissory notes, pursuant to which such parties agreed to convert their notes and
accrued interest into common stock. Pursuant to the conversion agreement, the conversion price of
the 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 amended debt conversion
agreement, each of Frost Trust and New Valley agreed to purchase $5,000 of our common stock at
$0.45 per share. The closing of the debt conversion and private financing took place on March 11,
2005.
Between the time when we signed the original debt conversion agreement and the amended debt
conversion agreement, we borrowed $1,750 from New Valley and $1,750 from Frost Trust in 2004 and an
additional $1,750 from each of them in the first quarter of 2005. On March 11, 2005, New Valley
and Frost-Trust delivered these notes for cancellation as payment, along with $2,890, in cash for
their purchase of $10,000 of our common stock described above.
As a result of the foregoing, approximately $22,699 of principal and accrued interest was
converted into 51,778,678 shares of our common stock, for an average conversion price of
approximately $0.44 per share. Although for accounting purposes, we recorded in the first quarter
of 2005 a pre-tax charge of approximately $19,359 upon the closing of this transaction, reflecting
the expense attributable to the reduction in the conversion price of the notes to be converted, the
net effect on our balance sheet was an increase to shareholders equity of approximately $22,699
(without giving effect to any sale of common stock related to the private financing).
Sale of Common Stock to Newly Hired Employees
On March 4, 2005, we entered into an employment agreement with Mark D. Klein, our chief
executive officer. In connection with his employment, Mr. Klein purchased 2,222,222 shares of our
common stock for $1,000, or $0.45 per share. We also granted him an option to purchase 5,000,000
shares of our common stock at an exercise price of $0.465 per share. The option, which expires on
March 4, 2015, vested as to 500,000 shares immediately upon grant with the remaining shares vesting
as to 1,125,000 shares on each of the first four anniversaries of the date of grant.
On March 25, 2005, Ladenburg entered into an employment agreement with Michael Philipps, its
director of institutional sales. In connection with his employment, Mr. Philipps purchased
1,000,000 shares of our common stock for $450, or $0.45 per share. Mr. Philipps also committed to
purchase 2,500,000 shares of our common stock at $0.64 per share solely through the use of
compensation to be earned by him. We also granted him an option to purchase 1,500,000 shares of
our common stock at an exercise price $0.64 per share. The option, which expires on March 28,
2015, will vest as to 250,000 shares on each of the first four anniversaries of the date of grant.
An additional 125,000 shares will vest on the third anniversary of the date of grant and an
additional 375,000 shares will vest on the fourth anniversary of the date of grant provided that he
purchases the 2,500,000 shares described above.
On June 1, 2005, we hired several employees, including four experienced securities industry
executives to senior corporate positions to help direct our continuing transformation initiatives.
Bruce S. Mendelsohn was named senior executive vice president. L. Keith Mullins, Mark D. Coe and
Michael J. Kramer were named as managing directors. In connection with their employment, each
purchased shares of our common stock as follows: Mr. Mendelsohn purchased 225,000 shares at $0.45
per share (an aggregate purchase price of approximately $101); Mr. Mullins purchased 2,222,222
shares at $0.45 per share (an aggregate purchase price of $1,000); Mr. Coe purchased 2,222,222
shares of our common stock at $0.45 per share (an aggregate purchase price of $1,000) and has
committed to purchase an additional 775,000 shares of our common stock at $0.645 per share, solely
through the use of compensation to be earned by him; and Dr. Kramer purchased 450,000 shares at
$0.45 per share under our Option Plan (an aggregate purchase price of approximately $203).
Additionally, we granted options to these individuals to purchase an aggregate of 7,250,000 shares
of our common stock at $0.645 per share (750,000 shares under our Option Plan and 6,500,000 shares
outside of our Option Plan). The options, which expire ten years from the date of grant, generally
vest in four equal annual installments commencing on the first anniversary of the date of grant.
On July 18, 2005, we hired Lawrence B. Weissman, an experienced portfolio manager and
securities industry executive, as chief investment strategist of our asset management subsidiary,
Ladenburg Thalmann Asset Management Inc. In connection with his employment, Mr. Weissman purchased
1,000,000 shares of our common stock at $0.45 per share (an aggregate purchase price of $450). In
addition, Mr. Weissman has committed to purchase an additional 1,000,000 shares of our common stock
at $0.58 per share, solely through the use of compensation to be earned by him. Additionally, we
have agreed to grant an option to Mr. Weissman to purchase up to 1,000,000 shares of our common
stock at $0.58 per share. The option, which will expire ten years from the date of grant, will
vest in four equal annual installments commencing on the first anniversary of the date of grant.
We also agreed that after the first year of Mr. Weissmans employment, we would grant Mr. Weissman
an additional option to purchase up to 500,000 shares of our common stock at the fair value on the
date of grant. This option,
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Share and Per Share Amounts) |
which will expire nine years from the date of grant, will vest in three equal annual
installments commencing on the first anniversary of the date of grant.
On
August 12, 2005, Ladenburg entered into a letter agreement with
Barry Rabkin, a professional with extensive Wall Street experience.
In connection with his employment, Mr. Rabkin agreed to
purchase 1,000,000 shares of our common stock for $450, or $0.45 per
share. This transaction is subject to prior approval by the American
Stock Exchange.
Private Placement Offering
We are contemplating a private placement of our common stock totaling approximately $10,000,
with a per-share offering price of $0.45. Any funds received by us from the private placement will
be utilized for general corporate purposes. At the time of the offering, these securities will not
be registered under the Securities Act of 1933, as amended, and may not be offered or sold in the
United States absent registration or an applicable exemption from registration requirements. We
anticipate closing the private placement during the third quarter of 2005.
Repurchase of Outstanding Common Stock
On April 14, 2005, we repurchased 4,620,501 shares (Shares) of our common stock from
Berliner Effektengesellschaft AG (Berliner) pursuant to a written agreement between us and
Berliner. Pursuant to the agreement, we paid Berliner $1,155, or $0.25 per share, for the Shares.
The Shares were returned to the status of authorized but unissued shares.
Critical Accounting Policies
General. The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ from those estimates.
Clearing Arrangements. Ladenburg does not carry accounts for customers or perform custodial
functions related to customers securities. Ladenburg introduces all of its customer transactions,
which are not reflected in these financial statements, to its primary clearing broker, which
maintains the customers accounts and clears such transactions. Additionally, the primary clearing
broker provides the clearing and depository operations for Ladenburgs proprietary securities
transactions. These activities may expose Ladenburg to off-balance-sheet risk in the event that
customers do not fulfill their obligations with the primary clearing broker, as Ladenburg has
agreed to indemnify its primary clearing broker for any resulting losses. We continually assess
risk associated with each customer who is on margin credit and record an estimated loss when we
believe collection from the customer is unlikely. We incurred losses from these arrangements,
prior to any recoupment from our financial consultants, of $14 and $42 for the six months ended
June 30, 2005 and 2004, respectively.
Customer Claims, Litigation and Regulatory Matters. In the normal course of business, our
operating subsidiaries have been and continue to be the subject of numerous civil actions and
arbitrations arising out of customer complaints relating to our activities as a broker-dealer, as
an employer and as a result of other business activities. In general, in addition to the
litigation with the landlord discussed below, the cases involve various allegations that our
employees had mishandled customer accounts. Due to the uncertain nature of litigation in general,
we are unable to estimate a range of possible loss related to lawsuits filed against us, but based
on our historical experience and consultation with counsel, we typically reserve an amount we
believe will be sufficient to cover any damages assessed against us. We have accrued approximately
$2,947 and $3,826 for potential arbitration and lawsuit losses as of June 30, 2005 and December 31,
2004, respectively. However, we have in the past been assessed damages that exceeded our reserves.
If we misjudged the amount of damages that may be assessed against us from pending or threatened
claims, or if we are unable to adequately estimate the amount of damages that will be assessed
against us from claims that arise in the future and reserve accordingly, our operating income would
be reduced. Such costs may have a material adverse effect on our future financial position,
results of operations or liquidity.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Share and Per Share Amounts) |
September 11, 2001 Events. On September 11, 2001, terrorists attacked the World Trade Center
complex in New York, which subsequently collapsed and damaged surrounding buildings, including one
occupied by a branch office of Ladenburg Capital. These events resulted in the suspension of
trading of U.S. equity securities for four business days and precipitated the relocation of
approximately 180 employees to Ladenburgs mid-town New York headquarters. Some of Ladenburgs and
Ladenburg Capitals business was temporarily disrupted. We are insured for loss caused by physical
damage to property, including repair or replacement of property. We are also insured for lost
profits due to business interruption, including costs related to lack of access to facilities. We
will record future reimbursements from insurance proceeds related to certain September 11, 2001
expenses when the reimbursements are actually received. Although the claim to the insurance
carrier is significantly greater, the net book value of the lost property, as well as the costs
incurred to temporarily replace some of the lost property, has been recorded as a receivable as of
June 30, 2005. We received insurance proceeds of $150 in July 2002 representing an advance
relating to damaged property, which was applied against our receivable. The receivable balance at
that time, representing the net book value of the damaged property and subsequent construction
costs, was $2,118. In October 2003, we filed a Proof of Loss with the insurance carrier, for an
amount in excess of the policy limits of approximately $7,800 and in July 2004, Ladenburg and
Ladenburg Capital filed a lawsuit against the insurance carrier for failure to pay for damages we
incurred. Although there are no assurances that a settlement will be
reached, we are currently in settlement discussions with the
insurance carrier and anticipate that there will be a settlement for an amount that approximates
the amount of the receivable.
Ladenburg Capital is currently in litigation with its landlord seeking a declaratory judgment
that the lease in this building near the World Trade Center be deemed terminated because, among
other things, the premises were unsafe and uninhabitable for a period of 270 days after September
11, 2001, pursuant to a lease provision giving Ladenburg Capital the right to terminate in those
circumstances. We believe that Ladenburg Capital will prevail and intend to pursue this claim
vigorously. However, in the event that Ladenburg Capital does not prevail, it may incur additional
future expenses to terminate the long-term commitment or, to the extent of foregone rental income
in the event Ladenburg Capital does not sublease the office space for an amount at least equal to
the lease obligations. Such costs may have a material adverse effect on Ladenburg Capitals
financial position and 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.
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Share and Per Share Amounts) |
Valuation of Deferred Tax Assets. We account for taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires the recognition of tax benefits or expense on the
timing differences between the tax basis and book basis of its assets and liabilities. Deferred tax
assets and liabilities are measured using the enacted tax rates expected to apply to taxable income
in the years in which those timing differences are expected to be recovered or settled. Deferred
tax amounts as of June 30, 2005, which consist principally of the tax benefit of net operating loss
carryforwards and accrued expenses, amount to $25,433. After consideration of all the evidence,
both positive and negative, especially the fact we have sustained recurring operating losses and
that we continue to be affected by conditions in the economy, we have determined that a valuation
allowance at June 30, 2005 was necessary to fully offset the deferred tax assets based on the
likelihood of future realization. At June 30, 2005, we had net operating loss carryforwards of
approximately $49,195, expiring in various years from 2015 through 2025. The Companys ability to
use such carryforwards to reduce future taxable income is subject to limitations attributable to
equity transactions in March 2005 (see Recent Developments Debt Conversion and Private
Financing) that have resulted in a change of ownership as defined in Internal Revenue Code Section
382.
Expense Recognition of Employee Stock Options. In December 2004, the Financial Accounting
Standards Board issued Statement No. 123R, Shared-Based Payment (SFAS 123R), which requires
companies to measure and recognize compensation expense for all stock-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. That cost will be recognized as
compensation expense over the service period, which would normally be the vesting period. The
effective date of SFAS No. 123R for us was July 1, 2005 but in April 2005 the SEC postponed it to
January 1, 2006. SFAS 123R will be effective upon us beginning January 1, 2006. As permitted by
SFAS No. 123, we currently account for share-based payments to employees using APB Opinion No. 25s
intrinsic value method and, as such, recognize no compensation cost for employee stock options
unless options granted have an exercise price below the market value on the date of grant.
Accordingly, the adoption of SFAS No. 123Rs fair value method could have a significant impact on
our results of operations, although it will have no impact on our overall financial position. The
impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future.
Results of Operations
Three months ended June 30, 2005 versus three months ended June 30, 2004
Our revenues for the three months ended June 30, 2005 decreased $3,387 from 2004 primarily as
a result of decreased commissions of $2,802, net of increased investment banking fees of $464 and
gain on debt cancellation in the 2004 period of $1,310.
Our expenses for the three months ended June 30, 2005 decreased $3,918 from the 2004 period
primarily as a result of decreased compensation and benefits of $1,652 and decreased settlements
expense of $1,207 (included in other expenses).
Our revenues for the three months ended June 30, 2005 consisted of commissions of $3,646, net
principal transactions of $542, investment banking fees of $675, investment advisory fees of $206,
interest and dividends of $444, syndicate and underwriting income of $86 and other income of $286.
Our revenues for the three months ended June 30, 2004 consisted of commissions of $6,448, net
principal transactions of $259, investment banking fees of $211, investment advisory fees of $45,
interest and dividends of $416, syndicate and underwriting income of $93, gain on debt cancellation
of $1,310 and other income of $490. Our expenses for the three months ended June 30, 2005 consisted
of compensation and benefits of $4,590, brokerage, communication an clearance fees of $624, rent
and occupancy of $667, professional services of $800 and other expenses of $1,183. Our expenses
for the three months ended June 30, 2004 consisted of compensation and benefits of $6,242,
brokerage, communication an clearance fees of $880, rent and occupancy of $1,007, professional
services of $644 and other expenses of $3,009.
The $2,802 (43.5%) decrease in commission income primarily resulted from the decrease in
number of financial consultants in the 2005 period, from an average of 170 in the 2004 period to an
average of 101 in the 2005 period.
The $283 (109.3%) decrease in net principal transactions was primarily the result of a
decrease in trading during the three months ended June 30, 2005.
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Share and Per Share Amounts) |
The $464 (219.9%) increase in investment banking fees was primarily the result of increased
revenue from private placement and advisory assignments due to the increase in the number of
professional staff in the corporate finance area of the investment banking department.
The $161 (357.8%) increase in investment advisory fees was due to an increase in assets under
management, primarily relating to customers associated with our recently hired employees.
The $1,652 (26.5%) decrease in compensation and benefits expense was primarily due to the net
decrease in revenues.
The $256 (29.1%) decrease in brokerage, communication and clearance fees is primarily due to
the decrease in proprietary trading activities in 2005 compared to 2004, as well as decreased
commission business.
The $156 (24.2%) increase in professional services was primarily due to increases in legal
fees in the 2005 period, primarily relating to the litigation with our insurance carrier relating
to our September 11, 2001 claim.
The $415 (78.4%) decrease in interest expense is primarily due to the conversion of our
$18,010 senior convertible notes to equity during the first quarter of 2005.
The $1,355 (61.1%) decrease in other expenses is primarily due to a decrease in settlements
expense and adjustments to arbitration and litigation reserves of $1,207 in the 2005 period
compared to the 2004 period.
Income tax expense for the three months ended June 30, 2005 was $14 compared to an income tax
expense of $4 in 2004. After consideration of all the evidence, both positive and negative,
especially the fact we have sustained operating losses during 2004 and for the three months ended
June 30, 2004 and that we continue to be affected by conditions in the economy, management has
determined that a valuation allowance at June 30, 2005 was necessary to fully offset the deferred
tax assets based on the likelihood of future realization. The income tax rate for the 2005 and
2004 periods does not bear a customary relationship to effective tax rates as a result of
unrecognized net operating losses, the change in valuation allowances, state and local income taxes
and permanent differences.
Six months ended June 30, 2005 versus six months ended June 30, 2004
Our revenues for the six months ended June 30, 2005 decreased $10,689 from 2004 primarily as a
result of decreased commissions of $10,036, decreased net principal transactions of $322, net of
increased investment banking fees of $1,531.
Our expenses for the six months ended June 30, 2005 increased $9,601 from the 2004 period
primarily as a result of the $19,359 inducement expense recorded in the 2005 period, net of
decreased compensation and benefits of $6,898, decreased brokerage, communication and clearance
fees of $693, decreased rent and occupancy of $742 and decreased interest of $520.
Our revenues for the six months ended June 30, 2005 consisted of commissions of $7,515, net
principal transactions of $1,123, investment banking fees of $1,971, investment advisory fees of
$323, interest and dividends of $823, syndicate and underwriting income of $204 and other income of
$608. Our revenues for the six months ended June 30, 2004 consisted of commissions of $17,551, net
principal transactions of $1,445, investment banking fees of $440, investment advisory fees of $82,
interest and dividends of $859, syndicate and underwriting income of $155, gain on debt
cancellation of $1,310 and other income of $1,414.
Our expenses for the six months ended June 30, 2005 consisted of compensation and benefits of
$10,204, brokerage, communication and clearance fees of $1,225, rent and occupancy of $1,344,
professional services of $1,918, inducement expense on the conversion of debt of $19,359 and other
expenses of $3,520. Our expenses for the six months ended June 30, 2004 consisted of compensation
and benefits of $17,102, brokerage, communication and clearance fees of $1,918, rent and occupancy
of $2,086, professional services of $2,027 other expenses of $4,836.
The $10,036 (57.2%) decrease in commission income primarily resulted from the decrease in
number of financial consultants in the 2005 period, from an average of 173 in the 2004 period to an
average of 101 in the 2005 period.
The $322 (22.3%) decrease in net principal transactions was primarily the result of a decrease
in trading income during the six months ended June 30, 2005.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Share and Per Share Amounts) |
The $1,531 (348.0%) increase in investment banking fees was primarily the result of increased
revenue from private placement and advisory assignments due to the increase in the number of
professional staff in the corporate finance area of the investment banking department.
The $6,898 (40.3%) decrease in compensation expense was primarily due to the net decrease in
revenues.
The $693 (36.1%) decrease in brokerage, communication and clearance fees is primarily due to
the decrease in proprietary trading activities in 2005 compared to 2004, as well as decreased
commission business.
The $742 (35.6%) decrease in rent, occupancy, net of sublease revenues was primarily due to
the sublet of one of our floors at our Madison Avenue (New York City) office in September 2004.
The $520 (48.5%) decrease in interest expense is primarily due to the conversion of our senior
convertible promissory notes to equity during the first quarter of 2005.
Income tax expense for the six months ended June 30, 2005 was $26 compared to an income tax
benefit of $99 in 2004, primarily resulting from the reversal of prior period income tax
over-accruals in the 2004 period. After consideration of all the evidence, both positive and
negative, especially the fact we have sustained operating losses during 2004 and for the six months
ended June 30, 2005 and that we continue to be affected by conditions in the economy, management
has determined that a valuation allowance at June 30, 2005 was necessary to fully offset the
deferred tax assets based on the likelihood of future realization. The income tax rate for the
2005 and 2004 periods does not bear a customary relationship to effective tax rates as a result of
unrecognized net operating losses, the change in valuation allowances, state and local income taxes
and permanent differences.
Liquidity and Capital Resources
Approximately 63.2% of our assets at June 30, 2005 are highly liquid, consisting primarily of
cash and cash equivalents, trading securities owned and receivables from clearing brokers, all of
which fluctuate, depending upon the levels of customer business and trading activity. Receivables
from broker-dealers, which are primarily from our primary clearing broker, turn over rapidly. As a
securities dealer, we may carry significant levels of securities inventories to meet customer
needs. A relatively small percentage of our total assets are fixed. The total assets or the
individual components of total assets may vary significantly from period to period because of
changes relating to economic and market conditions, and proprietary trading strategies.
Ladenburg is subject to the net capital rules of the SEC. Therefore, it is subject to certain
restrictions on the use of capital and its related liquidity. At June 30, 2005, Ladenburgs
regulatory net capital, as defined, of $2,620 which exceeded its minimum capital requirement of
$250 by $2,370. On August 1, 2005, we made a capital contribution to Ladenburg in the amount of
$3,000, increasing Ladenburgs regulatory capital to approximately $5,200, which exceeds its
minimum net capital requirement of $250 by $4,950. Failure to maintain the required net capital
may subject Ladenburg to suspension or expulsion by the NYSE, 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 that requires the intensive use of capital, such as
underwriting and trading activities, and also could restrict our ability to withdraw capital from
it, which in turn, could limit our ability to pay dividends and repay and service our debt.
Ladenburg, as guarantor of its customer accounts to its primary clearing broker, is exposed to
off-balance-sheet risks in the event that its customers do not fulfill their obligations with the
clearing broker. In addition, to the extent Ladenburg maintains a short position in certain
securities, it is exposed to a future off-balance-sheet market risk, since its ultimate obligation
may exceed the amount recognized in the financial statements.
Our primary sources of liquidity include the sale of our
securities, financing activities and our anticipated cash inflows
from operations.
Net cash flows used in operating activities for the six months ended June 30, 2005 was $5,393
as compared to $1,549 for the 2004 period.
Net cash flows used in investing activities for the six months ended June 30, 2005 was $191
compared to $287 for the 2004 period. The difference is primarily attributable to a $115 decrease
in the amount of capital expenditures during the 2005 period.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Share and Per Share Amounts) |
The capital expenditures of $191 and $306 for the six months ended June 30, 2005 and 2004,
respectively, related principally to leasehold improvements and enhancements to computer equipment.
There was $9,132 of cash flows provided by financing activities for the six months ended June
30, 2005, primarily representing $3,500 from the issuance of promissory notes, $2,803 from our
private equity offering, $3,977 from the issuance of our common stock, net of $1,155 paid to
repurchase 4,620,501 shares of our common stock outstanding. There was $241 of cash flows provided
from financing activities for the six months ended June 30, 2004, primarily representing $812 of
net contributions from limited partners of discontinued operations and $430 from the issuance of
our common stock pursuant to our Employee Stock Purchase Plan and the exercise of stock options
from our 1999 Performance Equity Plan.
We are obligated under several noncancellable lease agreements for office space, which provide
for minimum lease payments, net of lease abatement and exclusive of escalation charges, of $2,485
in 2005 and approximately $5,142 per year until 2015. Such amounts exclude the lease referred to
in the following paragraph. In addition, one of the leases obligates the Company to occupy
additional space at the landlords option, which may result in aggregate additional lease payments
of up to $701 through June 2015.
Ladenburg Capital may have potential liability under a terminated lease for office space in
New York City which it was forced to vacate during 2001 due to the events of September 11, 2001.
Ladenburg Capital no longer occupies the space and believes it has no further lease obligation
pursuant to the terms of the lease. This lease, which, had it not terminated as a result of the
events of September 11, 2001, would have expired by its terms in March 2010, provides for future
minimum payments aggregating approximately $3,339, payable $351 in 2005, $703 per year from 2006
through 2009 and $176 thereafter. In addition, minimum payments for the period from September 11,
2001 through June 30, 2005, which were not paid by Ladenburg Capital, amounted to $2,473.
Ladenburg Capital is currently in litigation with the landlord in which it is seeking judicial
determination of the termination of the lease. This lawsuit has been stayed due to the landlords
bankruptcy. If Ladenburg Capital is not successful in this litigation, it plans to sublease the
property. Ladenburg Capital has provided for estimated costs in connection with this lease and has
recorded a liability at June 30, 2005 and December 31, 2004. Additional costs may be incurred in
connection with terminating this lease, or if not terminated, to the extent of foregone rental
income in the event Ladenburg Capital does not sublease the office space for an amount at least
equal to the lease obligations. Such costs may have a material adverse effect on Ladenburg
Capitals financial position and liquidity.
In conjunction with the May 2001 acquisition of Ladenburg, we issued a total of $20,000
principal amount of senior convertible promissory notes due December 31, 2005 to New Valley,
Berliner and Frost-Nevada (which was subsequently assigned to Frost-Nevada Investments Trust). The
$10,000 principal amount of notes issued to New Valley and Berliner, the former stockholders of
Ladenburg, bore interest at 7.5% per annum, and the $10,000 principal amount of the note issued to
Frost-Nevada bore interest at 8.5% per annum. The notes were convertible into a total of
11,296,746 shares of our common stock and secured by a pledge of the stock of Ladenburg.
On June 28, 2002, New Valley, Berliner and Frost-Nevada agreed with us to forbear until May
15, 2003 payment of the interest due to them under the senior convertible promissory notes held by
these entities on the interest payment dates of the notes commencing June 30, 2002 through March
2003 (the Forbearance Interest Payments). The holders of the senior convertible promissory notes
subsequently agreed to extend the interest forbearance period to May 13, 2005 with respect to
interest payments due through March 31, 2005. Interest on the deferred amounts accrued at 8% on
the New Valley and Berliner notes and 9% on the Frost-Nevada Investments Trust note. We also
agreed to apply any net proceeds from any subsequent public offerings to any such deferred amounts
owed to the holders of the notes to the extent possible. As of December 31, 2004, accrued interest
payments as to which a forbearance was received, amounted to $4,429. During the second quarter of
2004, we repurchased from Berliner, $1,990 principal amount of the notes, plus $320 of accrued
interest, for $1,000 in cash.
In November 2004, we entered into an amended debt conversion agreement with Frost Trust and
New Valley to convert their notes, with an aggregate principal amount of $18,010, together with
accrued interest, into our common stock. Pursuant to the conversion agreement, the conversion
price of notes held by Frost Trust was reduced from the prior conversion price of $1.54 to $0.40
per share, and the conversion price of the notes held by New Valley was reduced from the prior
conversion price of $2.08 to $0.50 per share.
The debt conversion transaction was approved by our shareholders at our annual shareholders
meeting held on January 12, 2005 and closed on March 11, 2005. As a result, approximately $22,699
of principal and accrued interest was converted into 51,778,678 shares of our common stock, for an
average conversion price of
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Share and Per Share Amounts) |
approximately $0.44 per share. Although for accounting purposes, we recorded a pre-tax charge of
approximately $19,359 upon the closing of this transaction, reflecting the expense attributable to
the reduction in the conversion price of the notes to be converted, the net effect on our balance
sheet was an increase to shareholders equity of approximately $22,699 (without giving effect to
any sale of common stock related to the private financing). As part of the debt conversion
agreement, each of Frost Trust and New Valley purchased $5,000 of our common stock at $0.45 per
share, resulting in an additional increase to our shareholders equity of $10,000.
In November 2002, we consummated the Clearing Conversion whereby we now clear substantially
all of our business through one clearing agent, our primary clearing broker. As part of the new
agreement with this clearing agent, we are realizing significant cost savings from reduced ticket
charges and other incentives. In addition, under the new clearing agreement, an affiliate of the
clearing broker loaned us the $3,500 of Clearing Loans. The Clearing Loans are forgivable over
various periods, up to four years from the date of the Clearing Conversion. As scheduled, in
November 2003, one of the loans consisting of $1,500 of principal, together with accrued interest
of approximately $90, was forgiven and in November 2004, $667 of principal, together with accrued
interest of approximately $54, was forgiven. The balance of the remaining loan, consisting of
$1,333 of principal, is scheduled to be forgiven as follows: $667 in November 2005 and $666 in
November 2006. Accrued interest on this loan as of June 30, 2005 was $157. Upon the forgiveness
of the Clearing Loans, the forgiven amount is accounted for as other revenues. However, if the
clearing agreement is terminated for any reason prior to the loan maturity date, the loan, less any
amount that has been forgiven through the date of the termination, plus interest, must be repaid on
demand.
On March 27, 2002, we borrowed $2,500 from New Valley. The loan, which bears interest at 1%
above the prime rate, was due on the earlier of December 31, 2003 or the completion of one or more
equity financings where we receive at least $5,000 in total proceeds. The terms of the loan
restrict us from incurring or assuming any indebtedness that is not subordinated to the loan so
long as the loan is outstanding. On July 16, 2002, we borrowed an additional $2,500 from New
Valley (collectively, with the March 2002 Loan, the 2002 Loans) on the same terms as the March
2002 loan. In November 2002, New Valley agreed in connection with the Clearing Loans, to extend
the maturity of the 2002 Loans to December 31, 2006 and to subordinate the 2002 Loans to the
repayment of the Clearing Loans.
We borrowed $1,750 from New Valley and $1,750 from Frost Trust in 2004 and an additional
$1,750 from each of them in the first quarter of 2005. These notes, together with accrued
interest, payable at 2% above the prime rate, were delivered for cancellation in March 2005 as
payment, along with $2,890 in cash, for New Valleys and Frost Trusts purchase of $10,000 of our
common stock.
In the normal course of business, our operating subsidiaries have been and continue to be the
subject of numerous civil actions and arbitrations arising out of customer complaints relating to
our activities as a broker-dealer, as an employer and as a result of other business activities. In
general, the cases involve various allegations that our employees had mishandled customer accounts.
We believe that, based on our historical experience and the reserves established by us, the
resolution of the claims presently pending will not have a material adverse effect on our financial
condition. However, although we typically reserve an amount we believe will be sufficient to cover
any damages assessed against us, we have in the past been assessed damages that exceeded our
reserves. If we misjudged the amount of damages that may be assessed against us from pending or
threatened claims, or if we are unable to adequately estimate the amount of damages that will be
assessed against us from claims that arise in the future and reserve accordingly, our financial
condition may be materially adversely affected.
Our liquidity position continues to be adversely affected by our inability to generate cash
from operations and we are currently re-examining our capital needs to support our liquidity and
capital base for the near term. We have been forced to cut expenses in the past as necessary such
as reducing the size of our workforce as well as implementing other cost-cutting procedures
throughout our operations. As a result of decreased revenues, we have continued to reduce
expenses. Commencing in April 2005, as part of our new business plan, we employed several new
employees and in connection with their employment agreements, have committed to incur certain
expenses to grow our asset management, wealth management and alternative investments areas of our
business. At June 30, 2005, we had 174 employees. After reviewing our current operations and
financial position, we believe we have adequate cash and regulatory capital to fund our current
level of operating activities through June 30, 2006.
Our overall capital and funding needs are continually reviewed to ensure that our liquidity
and capital base can support the estimated needs of our business units. These reviews take into
account current and future business needs as well as regulatory capital requirements of our
broker-dealer subsidiary. If, based on these reviews, it is
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Share and Per Share Amounts) |
determined that we require additional funds to support our liquidity and capital base or to grow
our business, we would seek to raise additional capital through available sources, including
through borrowing additional funds on a short-term basis from our shareholders, clearing brokers or
from other parties. Additionally, we may seek to raise money through a private placement, a rights
offering or other type of financing. If
we continue to be unable to generate cash from operations and are unable to find alternative
sources of funding as described above, it would have an adverse impact on our liquidity and
operations.
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 June 30, 2005, the fair market value of our
inventories was $231 in long positions and $4 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 June 30, 2005
will not have a material adverse effect on our consolidated financial position or results of
operations.
Special Note Regarding Forward-Looking Statements
We and our representatives may from time to time make oral or written forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, including
any statements that may be contained in the foregoing discussion in Managements Discussion and
Analysis of Financial Condition and Results of Operations, in this report and in other filings
with the Securities and Exchange Commission and in our reports to shareholders, which reflect our
expectations or beliefs with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties and, in connection with
the safe-harbor provisions of the Private Securities Litigation Reform Act, we have identified
under Risk Factors in Item 1 of our Annual Report on Form 10-K for the year ended December 31,
2004 filed with the Securities and Exchange Commission 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.
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Item 3. 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 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we have evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this report, and, based
on that evaluation, our principal executive officer and principal financial officer have concluded
that these controls and procedures are effective. There were no changes in our internal control
over financial reporting during the period covered by this report that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
Disclosure controls and procedures are our controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated
and communicated to its management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding disclosure.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 to our condensed consolidated financial statements included in Part I, Item 1
of this Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Other than as reported on Current Reports on Form 8-K filed during the quarter ended June
30, 2005, no securities of ours that were not registered under the Securities Act of 1933 have
been issued or sold by us during such quarter.
Item 6. Exhibits
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31.1
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Certification of Chief Executive Officer, Pursuant to Exchange Act Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2
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Certification of Chief Financial Officer, Pursuant to Exchange Act Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1
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Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2
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Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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LADENBURG THALMANN FINANCIAL
SERVICES INC.
(Registrant)
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Date: August 12, 2005 |
By: |
/s/ Salvatore Giardina
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Salvatore Giardina |
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Vice President and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer) |
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