Florida | 65-0701248 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
|
590 Madison Avenue New York, New York (Address of principal executive offices) |
10022 (Zip Code) |
Page | ||||||||
PART I. FINANCIAL INFORMATION |
||||||||
Item 1. Condensed Consolidated Financial Statements (Unaudited): |
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2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
7 | ||||||||
21 | ||||||||
32 | ||||||||
32 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
34 | ||||||||
Section 302 CEO Certification | ||||||||
Section 302 CFO Certification | ||||||||
Section 906 CEO Certification | ||||||||
Section 906 CFO Certification |
1
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 5,776 | $ | 1,720 | ||||
Trading securities owned |
236 | 153 | ||||||
Due from affiliates |
| 121 | ||||||
Receivables from clearing brokers |
12,383 | 10,348 | ||||||
Exchange memberships owned, at historical cost |
1,501 | 1,501 | ||||||
Furniture, equipment and leasehold improvements, net |
2,478 | 2,866 | ||||||
Restricted
cash |
6,421 | | ||||||
Other
restricted assets |
1,062 | 1,060 | ||||||
Other assets |
1,649 | 3,862 | ||||||
Total assets |
$ | 31,506 | $ | 21,631 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY (CAPITAL DEFICIT) |
||||||||
Securities sold, but not yet purchased |
$ | 3 | $ | 28 | ||||
Accrued compensation |
1,896 | 2,009 | ||||||
Accounts payable and accrued liabilities |
5,381 | 6,366 | ||||||
Deferred rent credit |
4,091 | 4,096 | ||||||
Accrued interest |
179 | 2,750 | ||||||
Accrued interest to former parent |
956 | 2,542 | ||||||
Due to affiliate |
| 33 | ||||||
Funds
received in advance private equity offering |
6,421 | | ||||||
Notes payable |
6,333 | 9,833 | ||||||
Senior convertible notes payable |
| 18,010 | ||||||
Total liabilities |
25,260 | 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, 127,525,619 and 46,683,270 |
13 | 5 | ||||||
Additional paid-in capital |
116,252 | 58,674 | ||||||
Unearned employee stock-based compensation |
(1,120 | ) | | |||||
Accumulated deficit |
(108,899 | ) | (82,715 | ) | ||||
Total shareholders equity (capital deficit) |
6,246 | (24,036 | ) | |||||
Total liabilities and shareholders equity (capital deficit) |
$ | 31,506 | $ | 21,631 | ||||
2
Three Months Ended | Nine months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Revenues: |
||||||||||||||||
Commissions |
$ | 4,804 | $ | 4,087 | $ | 12,319 | $ | 21,638 | ||||||||
Principal transactions, net |
790 | 300 | 1,913 | 1,745 | ||||||||||||
Investment banking fees |
1,406 | 334 | 3,377 | 774 | ||||||||||||
Investment advisory fees |
402 | 45 | 725 | 127 | ||||||||||||
Interest and dividends |
497 | 315 | 1,320 | 1,174 | ||||||||||||
Syndications and underwritings |
124 | 139 | 328 | 294 | ||||||||||||
Gain on debt cancellation |
| | | 1,310 | ||||||||||||
Other |
596 | 418 | 1,204 | 1,832 | ||||||||||||
Total revenues |
8,619 | 5,638 | 21,186 | 28,894 | ||||||||||||
Expenses: |
||||||||||||||||
Compensation and benefits |
6,499 | 4,414 | 16,437 | 21,516 | ||||||||||||
Non-cash compensation |
215 | | 481 | | ||||||||||||
Brokerage, communication and clearance fees |
614 | 672 | 1,839 | 2,590 | ||||||||||||
Rent and occupancy, net of sublease revenues |
644 | 1,004 | 1,988 | 3,090 | ||||||||||||
Professional services |
502 | 587 | 2,420 | 2,614 | ||||||||||||
Interest |
126 | 551 | 679 | 1,624 | ||||||||||||
Write-off of leasehold improvements, net |
| 546 | | 546 | ||||||||||||
Depreciation and amortization |
199 | 267 | 620 | 769 | ||||||||||||
Debt conversion expense |
| | 19,359 | | ||||||||||||
Other |
961 | 2,217 | 3,507 | 5,478 | ||||||||||||
Total expenses |
9,760 | 10,258 | 47,330 | 38,227 | ||||||||||||
Loss from continuing operations before
income taxes (benefit) |
(1,141 | ) | (4,620 | ) | (26,144 | ) | (9,333 | ) | ||||||||
Income taxes (benefit) |
14 | 21 | 40 | (78 | ) | |||||||||||
Loss from continuing operations |
(1,155 | ) | (4,641 | ) | (26,184 | ) | (9,255 | ) | ||||||||
Loss from discontinued operations, net of limited
partners interest and income taxes |
| (5 | ) | | (56 | ) | ||||||||||
Net loss |
$ | (1,155 | ) | $ | (4,646 | ) | $ | (26,184 | ) | $ | (9,311 | ) | ||||
Loss per Common Share (basic and diluted): |
||||||||||||||||
Continuing operations |
$ | (0.01 | ) | $ | (0.10 | ) | $ | (0.26 | ) | $ | (0.21 | ) | ||||
Discontinued operations |
| | | | ||||||||||||
Net loss |
$ | (0.01 | ) | $ | (0.10 | ) | $ | (0.26 | ) | $ | (0.21 | ) | ||||
Number of shares used in computation (basic and
diluted) |
126,384,353 | 46,232,704 | 101,091,673 | 44,675,200 | ||||||||||||
3
Unearned | ||||||||||||||||||||||||
Additional | Employee | |||||||||||||||||||||||
Common Stock | Paid-In | Stock- based | Accumulated | |||||||||||||||||||||
Shares | Amount | Capital | Compensation | Deficit | Total | |||||||||||||||||||
Balance, December 31, 2004 |
46,683,270 | $ | 5 | $ | 58,674 | $ | | $ | (82,715 | ) | $ | (24,036 | ) | |||||||||||
Issuance of shares of common
stock under employee stock
purchase plan |
475,284 | | 225 | | | 225 | ||||||||||||||||||
Proceeds from exercise of stock
options |
15,000 | | 7 | | | 7 | ||||||||||||||||||
Issuance of shares of common
stock under performance equity
plan |
580,000 | | 261 | | | 261 | ||||||||||||||||||
Issuance of shares of common
stock to employees pursuant to
stock purchase agreements |
10,391,666 | 1 | 6,262 | (1,587 | ) | | 4,676 | |||||||||||||||||
Stock
options granted to Advisory Board |
| | 14 | | | 14 | ||||||||||||||||||
Amortization of unearned
employee stock-based
compensation |
| | | 467 | | 467 | ||||||||||||||||||
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 |
| | | | (26,184 | ) | (26,184 | ) | ||||||||||||||||
Balance, September 30, 2005 |
127,525,619 | $ | 13 | $ | 116,252 | $ | (1,120 | ) | $ | (108,899 | ) | $ | 6,246 | |||||||||||
4
Nine months Ended September 30, | ||||||||
2005 | 2004 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (26,184 | ) | $ | (9,311 | ) | ||
Adjustments to reconcile net loss to net cash
used in operating activities: |
||||||||
Depreciation and amortization |
620 | 769 | ||||||
Adjustment to deferred rent credit |
(5 | ) | 71 | |||||
Accrued interest |
651 | 1,537 | ||||||
Write-off of leasehold improvements, net |
| 546 | ||||||
Limited partners interest in discontinued operations |
| 323 | ||||||
Debt conversion expense |
19,359 | | ||||||
Non-cash compensation expense |
481 | | ||||||
Gain on debt extinguishment |
| (1,310 | ) | |||||
Other |
| 4 | ||||||
Decrease (increase) in operating assets: |
||||||||
Trading securities owned |
(83 | ) | 636 | |||||
Receivables from clearing brokers |
(2,035 | ) | 9,204 | |||||
Assets of discontinued operations |
| 1,927 | ||||||
Due from affiliates |
121 | 448 | ||||||
Other assets |
2,213 | 525 | ||||||
Increase (decrease) in operating liabilities: |
||||||||
Securities sold, but not yet purchased |
(25 | ) | (4,010 | ) | ||||
Accrued compensation |
(113 | ) | (1,112 | ) | ||||
Accounts payable and accrued liabilities |
(993 | ) | 352 | |||||
Due to affiliates |
(33 | ) | | |||||
Liabilities of discontinued operations |
| (3,312 | ) | |||||
Net cash used in operating activities |
(6,026 | ) | (2,713 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchase of furniture, equipment and leasehold improvements |
(233 | ) | (319 | ) | ||||
Proceeds from sale of equipment |
| 19 | ||||||
Net cash used in investing activities |
(233 | ) | (300 | ) | ||||
Cash flows from financing activities: |
||||||||
(Increase) decrease in restricted assets |
(6,423 | ) | 2 | |||||
Repayment of senior convertible note payable |
| (1,000 | ) | |||||
Issuance of common stock |
5,169 | 507 | ||||||
Repurchase of common stock |
(1,155 | ) | | |||||
Issuance of promissory notes |
3,500 | 1,000 | ||||||
Private equity offering |
2,803 | | ||||||
Funds
received in advance private equity offering |
6,421 | | ||||||
Distributions to limited partners of discontinued operations |
| (543 | ) | |||||
Contributions from limited partners of discontinued operations |
| 1,158 | ||||||
Net cash provided by financing activities |
10,315 | 1,124 | ||||||
Net increase (decrease) in cash and cash equivalents |
4,056 | (1,889 | ) | |||||
Cash and cash equivalents, beginning of period |
1,720 | 3,412 | ||||||
Cash and cash equivalents, end of period |
$ | 5,776 | $ | 1,523 | ||||
5
Nine months Ended September 30, | ||||||||
2005 | 2004 | |||||||
Supplemental cash flow information: |
||||||||
Interest paid |
$ | 6 | $ | 70 | ||||
Taxes paid |
13 | | ||||||
Non-cash
financing transactions: |
||||||||
Conversion of senior convertible notes ($18,010) and accrued interest
($4,689) into common shares |
$ | 22,699 | $ | | ||||
Common
shares purchased pursuant to private placement by exchanging
notes payable ($7,000) and accrued interest ($110) |
7,110 | | ||||||
Settlement of liability with shares of common stock (See Note 6) |
| 1,420 |
6
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 September 30, 2005 and for the nine months ended September 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 nine months ended September 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 nine months ended September 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, research, 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.) |
7
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. | ||
Exchange memberships owned, which include among others, seats on the New York Stock Exchange, American Stock Exchange and Chicago Board Options Exchange, are valued at cost. | ||
Principal transactions, agency commissions and related clearing expenses are recorded on a trade-date basis. | ||
Investment banking revenues include fees earned from providing merger-and-acquisition and financial restructuring advisory services and from private and public offerings of debt and equity securities. Investment banking fees are recorded upon the closing of the transaction, when it can be determined that the fees have been irrevocably earned. | ||
Investment advisory fees are received quarterly, in advance, but are recognized as earned on a pro rata basis over the term of the contract. | ||
Dividends are recorded on an ex-dividend date basis and interest is recorded on an accrual basis. | ||
Ladenburg and its subsidiaries file a consolidated federal income tax return and certain combined state and local income tax returns. The amount of current and deferred taxes payable or refundable is recognized as of the date of the financial statements, utilizing currently enacted tax laws and rates. Deferred tax expenses or benefits are recognized in the financial statements for the changes in deferred tax liabilities or assets between periods. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of September 30, 2005 and December 31, 2004, the valuation allowance was approximately $25,521 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.) |
8
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 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) and all options granted outside the Plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The table below illustrates the effect on the Companys net loss for the three-month and nine-month periods ended September 30, 2005 and 2004, had the Company elected to recognize compensation expense for its outstanding stock options, consistent with the method prescribed by SFAS No. 123. |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net loss, as reported |
$ | (1,155 | ) | $ | (4,646 | ) | $ | (26,184 | ) | $ | (9,311 | ) | ||||
Stock-based employee
compensation
determined under the
fair value
based method |
(612 | ) | (441 | ) | (1,705 | ) | (1,285 | ) | ||||||||
Pro forma net loss |
$ | (1,767 | ) | $ | (5,087 | ) | $ | (27,889 | ) | $ | (10,596 | ) | ||||
Net loss per Common
Share (basic and
diluted), as
reported |
$ | (0.01 | ) | $ | (0.10 | ) | $ | (0.26 | ) | $ | (0.21 | ) | ||||
Pro forma net loss
per Common Share
(basic and diluted) |
$ | (0.01 | ) | $ | (0.11 | ) | $ | (0.28 | ) | $ | (0.24 | ) | ||||
During the nine months ended September 30, 2005, options to purchase 3,524,500 shares of common stock were granted under the Option Plan and 14,000,000 were granted outside of the Option Plan. The per share weighted average fair value of stock options granted during the first, second and third quarters of 2005 was $0.46, $0.50 and $0.56, respectively, estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: |
First Quarter | Second Quarter | Third Quarter | ||||||||||
2005 | 2005 | 2005 | ||||||||||
Risk free interest rate |
4.50% | 4.00% | 4.22% | |||||||||
Volatility |
102.05 | % | 67.63 | % | 38.20 | % | ||||||
Dividend yield |
0 | 0 | 0 | |||||||||
Expected lives |
10 years | 10 years | 10 years |
9
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement, as an operating expense, based on their fair values. Pro forma disclosure is no longer an alternative. That cost will be recognized as compensation expense over the service period, which would normally be the vesting period of the options. The effective date of SFAS No. 123R for the Company is January 1, 2006. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25s intrinsic value method and, as such, recognizes no compensation cost for employee stock options unless options granted have an exercise price below the market value on the date of grant. Accordingly, the adoption of SFAS No. 123Rs fair value method could have a significant impact on the Companys results of operations, although it will have no impact on the Companys overall financial position. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. | ||
3. | Securities Owned and Securities Sold, But Not Yet Purchased | |
The components of securities owned and securities sold, but not yet purchased, as of September 30, 2005 and December 31, 2004 are as follows: |
Securities Sold, | ||||||||
Securities | But Not | |||||||
Owned | Yet Purchased | |||||||
September 30, 2005 |
||||||||
Common stock |
$ | 81 | $ | | ||||
Municipal obligations |
85 | | ||||||
Corporate bonds |
70 | 3 | ||||||
$ | 236 | $ | 3 | |||||
December 31, 2004 |
||||||||
Common stock |
$ | 71 | $ | 23 | ||||
Municipal obligations |
53 | | ||||||
Corporate bonds |
29 | 5 | ||||||
$ | 153 | $ | 28 | |||||
As of September 30, 2005 and December 31, 2004, approximately $236 and $138, respectively, of the securities owned are deposited with the Companys clearing broker and, pursuant to the agreement, the securities may be sold or hypothecated by the clearing broker. | ||
4. | 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 nine-month period ended September 30, 2005, 475,284 shares of the Companys common stock were issued to employees under the Purchase Plan, at a weighted average price of $0.47 per share, resulting in a capital contribution of $225. | ||
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 |
10
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 September 30, 2005, there were 9,266,032 shares of common stock available for issuance under the Option Plan, of which options to purchase 9,173,071 shares have been granted. | ||
During the nine-month period ended September 30, 2005, three participants in the Option Plan exercised stock options to purchase a total of 15,000 shares of common stock at $.45 per share, resulting in a capital contribution of $7. | ||
In March 2005, the Company granted to the nine non-employee directors of the Company options to purchase an aggregate of 180,000 shares of common stock (20,000 shares each) at $0.48 per share, the fair market value on the date of grant. These options vest in full one year from the date of grant and expire ten years from the date of grant. | ||
In March 2005, in connection with the resignation of the Companys then current chief executive officer, 900,000 unvested stock options previously granted to him under the Option Plan 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. | ||
On August 18, 2005, the Company granted several of its employees stock options to purchase an aggregate of 1,394,500 shares of the Companys common stock at an exercise price $0.58 per share. The options, which expire on August 17, 2015, will vest 25% on each of the first four anniversaries of the date of grant. | ||
On September 1, 2005, the Company granted its Advisory Board stock options to purchase an aggregate of 1,200,000 shares of the Companys common stock at an exercise price $0.51 per share. The options, which expire on August 31, 2015, will vest 25% on each of the first four anniversaries of the date of grant. The Company recorded a charge of $14 for the fair value of the options for the three and nine month periods ended September 30, 2005 based on the Black-Scholes option pricing model utilizing the following assumptions: stock price of $0.61, risk-free interest rate of 4.20%, volatility of 100.50%, and term of ten years. The Company will record additional expenses relating to these options as these options vest at the then market price. | ||
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 sold to the officer 2,222,222 shares of its common stock for $1,000, or $0.45 per share, on March 11, 2005. | ||
On March 25, 2005, Ladenburg entered into an employment agreement with a newly employed director of institutional sales and in connection therewith granted him options to purchase 1,500,000 shares of the Companys common stock at an exercise price $0.64 per share. The option, which expires on March 28, 2015, will vest as to 250,000 shares on each of the first four anniversaries of the date of grant. An additional 125,000 shares will vest on the third anniversary of the date of grant and an additional 375,000 shares will vest on the fourth anniversary of the date of grant provided that the Commission Shares (defined below) have been |
11
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 sold to him 1,000,000 shares of its common stock at an exercise price of $0.45 per share, on March 28, 2005. No compensation has been earned by the employee through September 30, 2005 that would require the purchase of Commission Shares. | ||
In March 2005, in connection with the resignation of the Companys then current chief executive officer, 1,500,000 unvested stock options previously granted to him (outside of the Option Plan referred to above) 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 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. No compensation has been earned by the executive through September 30, 2005 that would require the purchase of Commission Shares. In addition, the Company sold to these executives an aggregate of 4,669,444 shares of its common stock at an exercise price of $0.45 per share in June 2005, resulting in a capital contribution of $2,101. | ||
On July 18, 2005, Ladenburg entered into an employment agreement with a newly employed executive and in connection therewith granted him an option to purchase up to 1,000,000 shares of the Companys common stock at an exercise price $0.58 per share. The option, which expires on July 17, 2015, will vest as to 250,000 shares on each of the first four anniversary dates. In addition, the executive committed to purchase up to an additional 1,000,000 shares (Commission Shares) of the Companys common stock at $0.58 per share solely through the use of compensation to be earned by him. No compensation has been earned by the executive through September 30, 2005 that would require the purchase of Commission Shares. In addition, the Company sold to this executive 1,000,000 shares of its common stock at an exercise price of $0.45 per share in July 2005, resulting in a capital contribution of $450. | ||
In August 2005, Ladenburg entered into employment agreements with two newly employed executives and in connection therewith the Company sold to these executives an aggregate of 1,500,000 shares of its common stock at an exercise price of $0.45 per share in September 2005, resulting in a capital contribution of $675. In addition, one of the executives committed to purchase up to an aggregate amount of 3,500,000 shares (Commission Shares and Incentive Shares) of the Companys common stock at $0.53 per share solely through the use of compensation to be earned by them. No compensation has been earned by the executive through September 30, 2005 that would require the purchase of Commission Shares or Incentive Shares. | ||
For sales of the Companys common stock to newly employed executives, where the sales price was below the fair market value of the stock on the effective date of the agreements, the Company recorded unearned stock-based compensation expense of $1,587, representing the difference between fair market value of the common stock and the sales price. Such compensation is being amortized over the initial term of the executives employment agreements, which are generally one to two years. During the three months and nine months ended September 30, 2005, the Company amortized non-cash compensation expense of $201 and $467, respectively. At September 30, 2005, unearned employee stock-based compensation amounted to $1,120. | ||
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. (See Note 9) | ||
Private Placement Offering |
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In July 2005, the Company commenced a private placement of up to 22,222,222 shares of its common stock at $0.45 per share, to raise up to $10,000. Any funds received by the Company from the private placement will be utilized for general corporate purposes. 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. As of September 30, 2005, the Company has received approximately $6,421 from non-affiliated investors for the purchase of 14,268,778 shares of its common stock. Such amount is included in restricted assets with a corresponding amount included in liabilities until the closing of the private placement. Management expects the closing of the private placement to be during the fourth quarter of 2005. In addition, as of September 30, 2005, the Company has received commitments relating to the private placement (which portion is subject to stockholder approval), from directors, employees and affiliated investors, aggregating approximately $2,840. However, no assurances can be given that these transactions will take place. | ||
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, June 2005 and August 2005, LTS made capital contributions to Ladenburg in the amount of $2,000, $1,000 and $3,000, 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 $7,177, were partially offset by Ladenburgs loss from operations for the nine months ended September 30, 2005. At September 30, 2005, Ladenburg had net capital, as defined, of $ 4,965, which exceeded its minimum capital requirement of $250 by $ 4,715. | ||
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 September 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 (three months) |
$ | 1,256 | $ | 885 | $ | 371 | ||||||
2006 |
4,925 | 3,543 | 1,382 | |||||||||
2007 |
5,154 | 3,332 | 1,822 | |||||||||
2008 |
5,632 | 3,415 | 2,217 | |||||||||
2009 |
5,386 | 3,415 | 1,971 | |||||||||
Thereafter |
30,819 | 9,015 | 21,804 | |||||||||
Total |
$ | 53,172 | $ | 23,605 | $ | 29,567 | ||||||
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. |
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The deferred rent credit shown in the consolidated statement of financial condition represents 1) 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 of $3,648 and 2) the fair value of the Companys remaining obligation relating to subleased office space of $443, which increased by $84 from $359 at December 31, 2004. | ||
As of September 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 September 30, 2005, aggregating approximately $3,164, payable $176 in 2005, $703 per year from 2006 through 2009 and $176 in 2010. In addition, minimum payments for the period from September 11, 2001 through September 30, 2005 which were not paid by Ladenburg Capital amounted to $2,649. 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; Ladenburg Capitals motion to remand the case to New York State Supreme Court is currently pending in federal district court. 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 September 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 September 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 $1,051 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. In September 2005, Ladenburg and Ladenburg Capital settled their claim with the insurance carrier for a total of $2,350. The excess of the insurance reimbursement over the $2,118 receivable previously reflected in other assets, amounted to $232 which is included in other income in the Companys statement of operations for the three and nine months ended September 30, 2005. | ||
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 September 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 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 |
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convertible securities from plaintiff and then allegedly manipulated the market to obtain an increased number of shares from the conversion of those securities. Ladenburg acted as placement agent and not as principal in those transactions. Plaintiff has alleged that Ladenburg and the other defendants violated federal securities laws and various state laws. The plaintiff seeks compensatory damages from the defendants of at least $660,000 and punitive damages of $2,000,000. In August 2005, Ladenburgs motion to dismiss was granted in part and denied in part; Ladenburgs motion to reconsider portions of that decision is currently pending. The Company believes the plaintiffs claims in this action are without merit and intends to vigorously defend against them. | ||
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 sought unspecified damages, alleged that defendants other than Ladenburg converted the plaintiff companys licensing rights and other intellectual property, and that Ladenburg was involved in a conspiracy to manipulate the companys stock, apparently through purportedly improper short sales. The claims were for conspiracy, conversion, breach of fiduciary duty, fraud, violations of California state securities law and other related claims. 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 in its entirety 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 and agreed to a fine in the amount of $275. A liability of $1,555 related to the settlement was provided at December 31, 2004. 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 has implemented recommendations made by an independent consultant relating to Ladenburgs policies and procedures concerning the above-mentioned NASD rules. | ||
In July 2004, the Company entered into settlement agreements with several individuals who had brought arbitration claims against Ladenburg and Ladenburg Capital, arising out of customer complaints relating to their activities as broker-dealers. Ladenburg Capital paid to the plaintiffs a total of $1,500 in cash upon execution of the agreements and agreed to pay them a total of $400 in cash due in four equal annual installments of $100 on each of July 15, 2005, 2006, 2007 and 2008. Additionally, the Company issued to the plaintiffs a total of 2,000,000 shares of its common stock valued at $1,420 ($0.71 per share). This settlement resulted in a $1,249 charge to operations during the second quarter of 2004 to increase the liability for arbitration losses. | ||
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 |
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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 California adding Ladenburg, Ladenburg Capital and a number of other firms as defendants. The amended complaint alleged that Ladenburg and Ladenburg Capital, as well as all other market makers in the plaintiff companys stock, the Depository Trust Company and the National Securities Clearing Corporation, violated various federal and California statutes and regulations, and committed common law fraud and negligence, purportedly by engaging in improper short sales of Tridents stock. The plaintiffs were seeking compensatory damages against all defendants aggregating approximately $152,000 and unspecified punitive damages. In July 2005, after Ladenburg filed its most recent motion to dismiss, the new amended complaint was dismissed with prejudice pursuant to a court-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 $3,103 at September 30, 2005, and $3,826 at December 31, 2004 (included in accounts payable and accrued liabilities). During the three months and nine months ended September 30, 2005, various settlements, including the settlements described above net of certain favorable settlements, resulted in a charge to operations of $244 and $1,306, 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 September 30, 2005, which consist principally of the tax benefit of net operating loss carryforwards and accrued expenses, amounts to approximately $25,521. 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 nine months ended September 30, 2005, management has determined that a valuation allowance at September 30, 2005 was necessary to fully offset the deferred tax assets based on the likelihood of future realization. At September 30, 2005, the Company had net operating loss carryforwards of approximately $50,007, 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 |
16
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 September 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 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: |
September 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 September 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 |
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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. | ||
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 |
18
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 December 31, 2003. The terms of the loan restrict the Company from incurring or assuming any indebtedness that is not subordinated to the loan so long as the loan is outstanding. On July 16, 2002, the Company borrowed an additional $2,500 from New Valley (collectively with the March 2002 loan, the 2002 Loans) on the same terms as the March 2002 loan. In November 2002, New Valley agreed in connection with the Clearing Loans (defined below) to extend the maturity of the 2002 Loans to December 31, 2006 and to subordinate the 2002 Loans to the repayment of the Clearing Loans. | ||
In November 2002, the Company renegotiated a clearing agreement with one of its clearing brokers whereby this clearing broker became Ladenburgs primary clearing broker, clearing substantially all of Ladenburgs business (the Clearing Conversion). As part of the new agreement with this clearing agent, Ladenburg is realizing significant cost savings from reduced ticket charges and other incentives. In addition, under the new clearing agreement, an affiliate of the clearing broker loaned the Company an aggregate of $3,500 (the Clearing Loans) in December 2002. The Clearing Loans and related accrued interest are forgivable over various periods, up to four years from the date of the Clearing Conversion, provided Ladenburg continues to clear its transactions through the primary clearing broker. As scheduled, in November 2003, one of the loans consisting of $1,500 of principal, together with accrued interest of approximately $90, was forgiven 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 September 30, 2005 was $179. 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 September 30, 2005, the Company had 169 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 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. |
19
See Note 4 with respect to purchases of the Companys common stock. | ||
11. | Subsequent Event | |
On November 1, 2005, Ladenburg entered into a non-binding Letter of Intent with Fulcrum Global Partners LLC (Fulcrum), to acquire substantially all of the assets and business activities of Fulcrum. Fulcrum is an independent research-driven securities firm that has been providing unbiased research analysis and trade execution services for a wide range of institutional investors, mutual funds, pension funds, portfolio managers and hedge funds. The tentative purchase price is 12.5 million restricted shares of the Companys common stock (subject to purchase price adjustments), the assumption of specified liabilities and up to an additional 15 million restricted shares of the Companys common stock over a three-year period following the acquisition, based on specified financial targets tied to performance of the combined entitys institutional business. The non-binding Letter of Intent is subject to due diligence, execution of definitive documentation and various other customary conditions. Accordingly, no assurances can be given that the transaction will be consummated or, if it is, what the final terms will be. |
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31.1
|
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
|
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
|
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
|
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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LADENBURG THALMANN FINANCIAL SERVICES INC. | ||||||
(Registrant) | ||||||
Date: November 14, 2005
|
By: | /s/ Salvatore Giardina | ||||
Salvatore Giardina | ||||||
Vice President and Chief Financial Officer
(Duly Authorized Officer and Chief Accounting Officer) |
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