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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 SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 1-15799
Ladenburg Thalmann Financial Services Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0701248
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
590 MADISON AVENUE
NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 409-2000
(REGISTRANT'S 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 [X] NO [ ]
AS OF NOVEMBER 13, 2002, THERE WERE OUTSTANDING 42,025,211 SHARES OF THE
REGISTRANT'S COMMON STOCK, $.0001 PAR VALUE.
LADENBURG THALMANN FINANCIAL SERVICES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial Condition
as of September 30, 2002 and December 31, 2001................ 2
Condensed Consolidated Statements of Operations
for the three months and nine months ended
September 30, 2002 and 2001................................... 3
Condensed Consolidated Statement of Changes in
Shareholders' Equity (Capital Deficit) for
the nine months ended September 30, 2002..................... 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2002 and 2001............. 5
Notes to the Condensed Consolidated Financial
Statements .................................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 24
Item 4. Controls and Procedures........................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 25
Item 2. Changes in Securities and Use of Proceeds......................... 25
Item 6. Exhibits and Reports on Form 8-K.................................. 25
SIGNATURE............................................................................. 26
CERTIFICATIONS........................................................................ 27
1
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
2002 2001
------------ ------------
ASSETS
Cash and cash equivalents ............................................... $ 3,040 $ 8,136
Trading securities owned ................................................ 4,702 17,324
Receivables from clearing brokers ....................................... 17,910 27,920
Exchange memberships owned, at historical cost .......................... 1,505 1,505
Furniture and equipment, net of accumulated depreciation ................ 9,313 9,959
Restricted assets ....................................................... 1,059 2,610
Income taxes receivable ................................................. 2,041 499
Deferred tax assets ..................................................... -- 3,339
Due from affiliates ..................................................... 327 262
Goodwill, net of accumulated amortization ............................... -- 18,762
Other assets ............................................................ 5,069 8,091
-------- --------
Total assets ................................................... $ 44,966 $ 98,407
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIT)
Securities sold, not yet purchased ...................................... $ 1,890 $ 12,404
Accrued compensation .................................................... 2,841 11,078
Accounts payable and accrued liabilities ................................ 8,068 7,608
Deferred rent credit .................................................... 7,676 7,189
Due to former parent and affiliate ...................................... 490 434
Notes payable ........................................................... 5,000 2,000
Senior convertible notes payable ........................................ 20,000 20,000
Subordinated note payable ............................................... 2,500 2,500
-------- --------
Total liabilities .............................................. 48,465 63,213
-------- --------
Commitments and contingencies ........................................... -- --
Shareholders' equity (capital deficit):
Preferred stock, $.0001 par value; 2,000,000 shares authorized;
none issued ...................................................... -- --
Common stock, $.0001 par value; 100,000,000 shares authorized;
42,025,211 shares issued and outstanding ......................... 4 4
Additional paid-in capital ......................................... 56,473 56,168
Accumulated deficit ................................................ (59,976) (20,978)
-------- --------
Total shareholders' equity (capital deficit) ................... (3,499) 35,194
-------- --------
Total liabilities and shareholders' equity (capital deficit) ... $ 44,966 $ 98,407
======== ========
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 Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Commissions ...................................... $ 10,712 $ 9,826 $ 38,322 $ 21,646
Principal transactions, net ...................... 954 3,261 8,045 20,249
Investment banking fees .......................... 1,790 1,972 8,097 7,847
Interest and dividends ........................... 579 1,049 1,799 2,823
Syndications and underwritings ................... 91 125 264 395
Investment advisory fees ......................... 651 741 2,154 2,430
Other income ..................................... 1,200 1,105 3,324 2,767
------------ ------------ ------------ ------------
Total revenues ............................... 15,977 18,079 62,005 58,157
------------ ------------ ------------ ------------
Expenses:
Compensation and benefits ........................ 12,035 13,841 44,582 40,480
Brokerage, communication and clearance fees ...... 3,741 4,181 12,117 11,575
Rent and occupancy ............................... 2,046 1,975 6,047 4,849
Depreciation and amortization .................... 455 846 1,544 1,788
Impairment of goodwill ........................... -- -- 18,762 --
Professional services ............................ 1,113 954 3,779 2,247
Interest ......................................... 537 587 1,494 963
Other ............................................ 3,799 4,108 11,284 8,720
------------ ------------ ------------ ------------
Total expenses ............................... 23,726 26,492 99,609 70,622
------------ ------------ ------------ ------------
Loss from operations before income taxes (benefit) .... (7,749) (8,413) (37,604) (12,465)
Income taxes (benefit) ................................ 2,265 (2,728) 1,394 (3,914)
------------ ------------ ------------ ------------
Net loss .............................................. $ (10,014) $ (5,685) $ (38,998) $ (8,551)
============ ============ ============ ============
Loss per Common Share (basic and diluted):
Net loss per Common Share ........................ $ (.24) $ (0.14) $ (.93) $ (0.22)
============ ============ ============ ============
Number of shares used in computation .................. 42,025,211 42,025,211 42,025,211 38,592,936
============ ============ ============ ============
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, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------- -------- ----------- --------
Balance, December 31, 2001 ............ $ 4 $ 56,168 $(20,978) $ 35,194
Employee compensation (Note 2) .... -- 305 -- 305
Net loss .......................... -- -- (38,998) (38,998)
-------- -------- -------- --------
Balance, September 30, 2002 ........... $ 4 $ 56,473 $(59,976) $ (3,499)
======== ======== ======== ========
See accompanying notes to condensed
consolidated financial statements
4
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended
September 30,
-----------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss ....................................................... $(38,998) $ (8,551)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................................. 1,544 1,658
Amortization of deferred rent credit ........................... 250 409
Deferred taxes ................................................. 3,339 (996)
Impairment of goodwill ......................................... 18,762 --
Employee compensation (Note 2) ................................. 305 --
(Increase) decrease in operating assets:
Trading securities owned ....................................... 12,622 12,520
Receivables from clearing brokers .............................. 10,010 (391)
Due from affiliates ............................................ (65) (592)
Other assets ................................................... 1,480 45
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased ............................. (10,514) (4,687)
Accrued compensation ........................................... (8,237) (3,101)
Accounts payable and accrued liabilities ....................... 697 (2,799)
Due to former parent and affiliates ............................ 56 13
-------- --------
NET CASH USED IN OPERATING ACTIVITIES ...................... (8,749) (6,472)
-------- --------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements .... (898) (2,433)
Cash acquired in LTS acquisition ............................... -- 5,151
Decrease in restricted assets .................................. 1,551 --
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES .................. 653 2,718
-------- --------
Cash flows from financing activities:
Payments to Ladenburg stockholders ............................. -- (10,000)
Issuance of subordinated notes payable ......................... -- 2,500
Issuance of promissory notes payable ........................... 5,000 2,000
Payment of promissory note payable ............................. (2,000) --
Convertible note proceeds ...................................... -- 10,000
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 3,000 4,500
-------- --------
Net increase (decrease) in cash and cash equivalents ................ (5,096) 746
Cash and cash equivalents, beginning of period ...................... 8,136 3,928
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................... $ 3,040 $ 4,674
======== ========
Supplemental disclosure of non-cash activity:
Detail of acquisition:
Fair value of assets acquired .................................... $ -- $ 26,619
Goodwill ......................................................... -- 19,385
Liabilities assumed, including priority interest ................. -- (23,820)
Increase to paid-in capital ...................................... -- (17,033)
-------- --------
NET CASH RECEIVED IN ACQUISITION ........................... $ -- $ 5,151
======== ========
See accompanying notes to condensed
consolidated financial statements
5
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except 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"),
formerly known as GBI Capital Management Corp., and its wholly-owned
subsidiaries. The subsidiaries of LTS include Ladenburg Thalmann & Co. Inc.
("Ladenburg"), Ladenburg Capital Management Inc., formerly known as GBI
Capital Partners Inc. ("Ladenburg Capital"), Ladenburg Thalmann
International Ltd. and Ladenburg Capital Fund Management Inc., formerly
known as GBI Fund Management Corp. ("Ladenburg Fund Management"). The
interim financial data as of September 30, 2002 and for the three and nine
months ended September 30, 2002 and September 30, 2001 are unaudited;
however, in the opinion of the Company, the interim data include all
adjustments, consisting of normal recurring and other adjustments,
necessary for a fair statement of the results for the interim periods.
Because of the nature of the Company's business, the results of any interim
period are not necessarily indicative of results for a full year.
Prior to May 7, 2001, Ladenburg Capital and Ladenburg Fund Management were
the only subsidiaries of the Company. Ladenburg was an indirect
wholly-owned subsidiary of New Valley Corporation ("New Valley") from May
31, 1995 to December 1999, when a minority stake in Ladenburg was sold
leaving New Valley with an indirect 80.1% ownership interest. On May 7,
2001, LTS acquired all of the outstanding common stock of Ladenburg, and
its name was changed from GBI Capital Management Corp. to Ladenburg
Thalmann Financial Services Inc. In consideration for the shares of
Ladenburg, LTS issued the former stockholders of Ladenburg a majority
interest in LTS' common stock. For accounting purposes, the acquisition has
been accounted for as a reverse acquisition with Ladenburg treated as the
acquirer of LTS. The historical financial statements prior to May 7, 2001
are those of Ladenburg, and LTS has changed its fiscal year-end from
September 30 to December 31. For a more complete discussion of this
transaction, including pro forma information, see Note 2 to these condensed
consolidated financial statements.
In December 2001, New Valley distributed its shares of LTS common stock to
holders of New Valley common shares as a special dividend.
ORGANIZATION
Ladenburg is a full service broker-dealer that has been a member of the New
York Stock Exchange since 1879. It provides its services principally for
middle market and emerging growth companies and high net worth individuals
through a coordinated effort among corporate finance, research, capital
markets, investment management, brokerage and trading professionals.
Ladenburg is subject to regulation by the Securities and Exchange
Commission ("SEC"), the New York Stock Exchange, National Association of
Securities Dealers, Inc. ("NASD"), Commodities Futures Trading Commission
and National Futures Association.
Ladenburg Capital is a broker-dealer subject to regulation by the SEC and
the NASD. Ladenburg Capital acts as an introducing broker, market maker,
underwriter and trader for its own account. In July 2002, the market making
activities of Ladenburg Capital were terminated. Certain of the employees
working in Ladenburg Capital's market making area were offered employment
with Ladenburg. The Company intends to terminate the remaining operations
of Ladenburg Capital during the fourth quarter of 2002. Ladenburg Capital
expects to withdraw as a broker-dealer at that time. Ladenburg has agreed
to service the Ladenburg Capital accounts, and many of the Ladenburg
Capital employees are expected to be offered employment with Ladenburg.
This will reduce support staff expenses, operating expenses and general
administrative expenses.
6
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Ladenburg and Ladenburg Capital do not carry accounts for customers or
perform custodial functions related to customers' securities. Ladenburg and
Ladenburg Capital introduce all of their customer transactions, which are
not reflected in these financial statements, to their respective clearing
brokers, which maintain the customers' accounts and clear such
transactions. Additionally, the clearing brokers provide the clearing and
depository operations for Ladenburg's and Ladenburg Capital's proprietary
securities transactions. These activities may expose Ladenburg and
Ladenburg Capital to off-balance-sheet risk in the event that customers do
not fulfill their obligations with the clearing broker, as Ladenburg and
Ladenburg Capital have agreed to indemnify their respective clearing
brokers for any resulting losses.
At September 30, 2002, all of the securities owned and securities sold, not
yet purchased, and the amount receivable from the clearing brokers
reflected on the condensed consolidated statements of financial condition
are securities positions with and amounts due from these clearing brokers.
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.
Securities transactions, commission revenue and commission expenses are
recorded on a trade-date basis. Gains and losses (both realized and
unrealized) on securities transactions are included in principal
transactions in the condensed consolidated statements of operations.
USE OF ESTIMATES
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 and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period financial
information to conform to the current interim period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 142
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets", which requires
that goodwill and other intangible assets with indefinite useful lives no
longer be amortized. This statement also requires that, within the first
interim period of adoption, intangible assets with indefinite lives be
tested for impairment as of the date of adoption. Additionally, SFAS No.
142 requires that, within six months of adoption, goodwill be tested for
impairment at the reporting unit level as of the date of adoption. If any
impairment is indicated to have existed upon adoption, it should be
measured and recorded before the end of the year of adoption. SFAS No. 142
requires that any goodwill impairment loss recognized as a result of
initial application be reported in the first interim period of adoption as
a change in accounting principle and that the loss per share effects of the
accounting change be separately disclosed.
Prior to January 1, 2002, the Company tested goodwill and other intangible
assets for impairment based on the recoverability of carrying value using
undiscounted future cash flows in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". The new criteria
provided in SFAS No. 142 require the testing of impairment based on fair
value.
7
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Prior to performing the review for impairment, SFAS No. 142 required that
all goodwill deemed to be related to the entity as a whole be assigned to
all of the Company's reporting units, which differed from the previous
accounting rules where goodwill was assigned only to the businesses of the
acquired entity. As a result, a portion of the goodwill generated in the
Ladenburg acquisition has been reallocated from Ladenburg Capital to
Ladenburg.
A summary of the allocation by entity of the Company's goodwill, including
the impairment charge discussed below, is as follows:
DECEMBER 31, 2001
-----------------------------
ACCUMULATED
GROSS AMORTIZATION NET ADJUSTMENTS SEPTEMBER 30, 2002
-------- -------- -------- -------- ------------------
Ladenburg ............. $ -- $ -- $ -- $ 5,546 $ 5,546
Ladenburg Capital ..... 19,385 (623) 18,762 (5,546) 13,216
-------- -------- -------- -------- --------
$ 19,385 $ (623) $ 18,762 $ -- $ 18,762
======== ======== ======== ========
Impairment loss ....... (18,762)
--------
Total................ $ --
========
The goodwill of $19,385 arose as a result of the Ladenburg transaction on
May 7, 2001. The following table reconciles net loss for the three and
nine months ended September 30, 2001 to its amount adjusted to exclude
previously recorded goodwill amortization expense.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
Reported net loss ............... $ (5,685) $ (8,551)
Goodwill amortization ........... 247 403
--------- ---------
Adjusted net loss ............... $ (5,438) $ (8,148)
========= =========
Reported net loss per share ..... $ (0.14) $ (0.22)
Goodwill amortization ........... 0.01 0.01
--------- ---------
Adjusted net loss per share ..... $ (0.13) $ (0.21)
========= =========
For initial application of SFAS No. 142, in connection with the reporting
of the results for the first quarter of 2002, an independent appraisal
firm was engaged to value the Company's goodwill as of January 1, 2002.
The appraiser valued the businesses using a weighted average of each
unit's projected discounted cash flow, with a weighted average cost of
capital of 17.40%, and a fair market approach (using market comparables
for ten companies). The appraiser weighted the discounted cash flow for
each unit at 70% and the fair market approach at 30%. The discounted cash
flow was based on management's projections of operating results at January
1, 2002. Based on this valuation, no goodwill impairment was indicated,
since the fair value of the reporting units was determined to be greater
than its carrying value.
8
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
In connection with the reporting of the results for the second quarter of
2002, based on the overall market declines in the U.S. equity markets and
the conditions prevailing in the broker-dealer industry, the Company
completed an additional impairment review and recorded a $18,762 charge
for the impairment of goodwill. The charge reflects overall market
declines since the Ladenburg acquisition in May 2001. During this review,
the same independent appraisal firm was engaged to value the Company's
goodwill as of June 30, 2002. The appraiser valued the Company's
businesses using a weighted average of each unit's projected discounted
cash flow, with a weighted average cost of capital of 18.50%, and a fair
market approach (using market comparables for ten companies). The
appraiser weighted the discounted cash flow for each unit at 70% and the
fair market approach at 30%. The discounted cash flow was based on
management's revised projections of operating results at June 30, 2002.
Based on this valuation, an impairment charge of $18,762 of goodwill was
indicated and recorded. The expense is included in the nine months ended
September 30, 2002.
2. LADENBURG TRANSACTION
On May 7, 2001, LTS consummated a stock purchase agreement through which
it acquired all of the outstanding common stock of Ladenburg from New
Valley and Berliner Effektengesellschaft AG ("Berliner"), the former
stockholders of Ladenburg. The primary reason for the acquisition was that
both LTS and Ladenburg concluded that each company needed to enlarge the
size of its business and the scope of services provided to maintain
viability as a participant in the current financial markets. In order to
acquire the stock of Ladenburg, LTS issued to New Valley and Berliner an
aggregate of 23,218,599 shares of common stock and paid to them an
aggregate of $10,000 cash and $10,000 principal amount of senior
convertible promissory notes due December 31, 2005. The notes bear
interest at the rate of 7.5% and are currently convertible into a total of
4,799,271 shares of common stock at a conversion price of approximately
$2.08. The notes are secured by a pledge of Ladenburg stock. If, during
any period of 20 consecutive trading days, the closing sale price of LTS'
common stock is at least $8.00, the principal and all accrued interest on
the notes will be automatically converted into shares of common stock. The
notes also provide that if a change of control occurs, as defined in the
notes, LTS must offer to purchase the notes at a purchase price equal to
the unpaid principal amount of the notes and the accrued interest.
To provide the funds for the acquisition of the common stock of Ladenburg,
LTS borrowed $10,000 from Frost-Nevada, Limited Partnership
("Frost-Nevada") and issued to Frost-Nevada $10,000 principal amount of
senior convertible promissory notes due December 31, 2005. Dr. Frost, a
director of LTS from May 2001 until his resignation in July 2002, is the
sole stockholder of the general partner of Frost-Nevada, Frost-Nevada
Corporation. Dr. Frost, through several entities controlled by him, was
also one of LTS' principal shareholders prior to the time that it became a
public company in August 1999. The notes held by Frost-Nevada are
identical to the notes held by New Valley and Berliner except for the
interest rate which is 8.5% and the conversion price. These notes are
currently convertible into a total of 6,497,475 shares of common stock at
a conversion price of approximately $1.54.
The actual number of shares of common stock paid to New Valley and
Berliner may be increased and the conversion prices of the notes payable
held by New Valley, Berliner and Frost-Nevada may be decreased on or about
May 7, 2003 pending a final resolution of LTS' pre-closing litigation
adjustments.
Concurrently with the closing of the stock purchase agreement, New Valley
purchased 3,945,060 of common stock at $1.00 per share from Joseph
Berland, LTS' former chairman and chief executive officer. Additionally,
on the same date, Frost-Nevada purchased a total of 550,000 shares of
common stock at $1.00 per share from Richard Rosenstock, LTS' vice
chairman and chief operating officer, Mark Zeitchick and Vincent Mangone,
LTS' executive vice presidents, and David Thalheim, LTS' former
administrator.
As a result of the foregoing transactions, the former stockholders of
Ladenburg directly or indirectly held shares or other equity instruments,
representing 27,163,659 shares, or 64.6%, of LTS' common stock, and
9
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Frost-Nevada directly or indirectly held shares or other equity
instruments, representing 7,935,441 shares, or 16.4%, of LTS' common stock.
Prior to the consummation of the acquisition, New Valley maintained office
space at Ladenburg's principal offices. In connection with the consummation
of the transaction, New Valley entered into a license agreement with
Ladenburg in which New Valley will continue to occupy this space at no cost
to New Valley. The license agreement is for one year and is automatically
renewed for successive one year periods unless terminated by New Valley.
The space, which is not currently occupied by New Valley, has been
subleased on a short-term basis by Ladenburg to an unaffiliated third
party.
In connection with these transactions, Howard M. Lorber, president and
chief operating officer of New Valley, became LTS' chairman. Additionally,
Victor M. Rivas, chairman and chief executive officer of Ladenburg, became
LTS' president and chief executive officer pursuant to an employment
agreement with a term expiring in August 2004. In addition to these
individuals, Bennett S. LeBow, Henry C. Beinstein, Robert J. Eide and Dr.
Frost became members of LTS' board of directors in May 2001. Messrs.
Lorber, Rivas, LeBow and Beinstein are also members of the board of
directors of New Valley and Mr. Eide is a member of the board of directors
of Vector Group Ltd., New Valley's parent.
Pursuant to the employment agreement with Mr. Rivas, Mr. Rivas is entitled
to receive an annual base salary of $500, subject to periodic increases as
determined by LTS' board of directors, as well as a minimum annual bonus of
$500. Mr. Rivas is also entitled to participate in LTS' Annual Incentive
Bonus Plan and Special Performance Incentive Plan in accordance with the
terms of the plan and Mr. Rivas' employment agreement. Due to the current
financial condition of the Company, Mr. Rivas has elected to forfeit the
accrued compensation due him under the Special Performance Incentive Plan
for the period January 1, 2002 through August 31, 2002 and the balance of
the compensation due him under this Plan for the remainder of the 2002
calendar year. The amount forfeited through September 30, 2002 of $295 has
been charged to operations with a corresponding increase to additional
paid-in capital.
At the time of the transaction, LTS also entered into amendments to the
existing employment agreements with each of Messrs. Berland, Rosenstock,
Zeitchick and Mangone. Pursuant to the amendments:
o Mr. Berland resigned from his positions with LTS and became the
executive vice president of corporate finance of Ladenburg
Capital through May 2003 at an annual base salary of $150;
o Mr. Rosenstock became LTS' vice chairman and chief operating
officer and Ladenburg Capital's chief executive officer through
August 2004 at an annual base salary of $340;
o Mr. Zeitchick remained as LTS' executive vice president and
became Ladenburg Capital's co-chairman of the board through
August 2004 at an annual base salary of $90; and
o Mr. Mangone remained as an executive vice president of LTS and
Ladenburg Capital through August 2004 at annual base salary of
$90.
Each of Messrs. Rosenstock, Zeitchick and Mangone continue to be entitled
to participate in LTS' Annual Incentive Bonus Plan and Special Performance
Incentive Plan in accordance with the terms of the plan and their
respective employment agreements. Due to the current financial condition of
the Company, effective September 1, 2002, Messrs. Rosenstock, Zeitchick and
Mangone elected to forfeit 25% of the compensation due them under the
Special Performance Incentive Plan for the remainder of the 2002 calendar
year. Effective September 1, 2002, Mr. Rosenstock also elected to forfeit
25% of the compensation due to him pursuant to his employment agreement for
retail and institutional brokerage commissions generated from various
registered representatives employed by the Company's subsidiaries. The
amount forfeited through September 30, 2002 of $10 has been charged to
operations with a corresponding increase to additional paid-in capital.
10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Following consummation of the transaction, in December 2001, New Valley
distributed its shares of LTS common stock to holders of its common shares
as a special dividend.
The shares of LTS common stock issued in the transaction were valued at
May 7, 2001 at $1.75 per share. LTS' common stock is very thinly traded,
and management considered a number of factors in addition to the average
trading price one week before and after closing of the transaction
($3.03). These other factors included the purchase price of the shares
concurrently purchased from LTS' executive officers, the terms of the
convertible notes and the value implied by the previous negotiations
between the parties. No independent appraisal was obtained in connection
with the transaction.
The transaction has been accounted for under the purchase method of
accounting as a reverse acquisition taking place as of May 7, 2001, the
date on which certain future adjustments will be based. For accounting
purposes, Ladenburg has been treated as the acquirer of LTS as Ladenburg's
stockholders held a majority of the LTS common stock following the closing
of the transaction. In determining the accounting treatment of the
transaction, the Company considered the shares of common stock and the
senior convertible promissory notes acquired by New Valley and Berliner on
both a basic and fully diluted basis, and the number of outstanding
options. Although New Valley later distributed its shares of common stock
to its stockholders as described above, the Company determined that it was
still appropriate to treat Ladenburg as the acquirer as New Valley's
stockholders are in all practical matters the actual former stockholders
of Ladenburg.
As a result of the reverse acquisition treatment, the historical financial
statements prior to May 7, 2001 are those of Ladenburg and the financial
results of LTS are included beginning May 7, 2001. LTS has changed its
fiscal year-end from September 30 to December 31 to conform to the fiscal
year-end of Ladenburg. In connection with the acquisition, all per share
data have been restated to reflect retroactively the number of shares of
common stock, convertible notes and cash to be received by the former
stockholders of Ladenburg.
Pro forma information for the nine months ended September 30, 2001, giving
effect to the acquisition and the adoption of SFAS No. 142 as if both
occurred on January 1, 2001, is presented below:
NINE MONTHS
ENDED
SEPTEMBER 30, 2001
------------------
Revenues .......................... $ 77,059
========
Loss from operations .............. $(13,001)
========
Loss from operations per share .... $ (0.31)
========
3. NET CAPITAL REQUIREMENTS
As registered broker-dealers, Ladenburg and Ladenburg Capital are subject
to the SEC's Uniform Net Capital Rule 15c3-1, which requires the
maintenance of minimum net capital. Ladenburg has elected to compute its
net capital under the alternate method allowed by these rules and
Ladenburg Capital has elected to compute its net capital under the basic
method. At September 30, 2002, Ladenburg had net capital, as defined, of
$3,533, which exceeded minimum capital requirements of $1,000 by $2,533.
At September 30, 2002, Ladenburg Capital had net capital, as defined, of
$1,494, which exceeded minimum capital requirements of $379 by $1,115.
11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
4. NOTES PAYABLE
The components of notes payable at September 30, 2002 are as follows:
Senior convertible notes payable................ $ 20,000
Notes payable................................... 5,000
Subordinated note payable....................... 2,500
--------
Total........................................... $ 27,500
========
In conjunction with the acquisition of Ladenburg, LTS issued a total of
$20,000 principal amount of senior convertible notes due December 31, 2005.
The $10,000 principal amount of notes issued to the former Ladenburg
stockholders bears interest at 7.5% per annum, and the $10,000 principal
amount of notes issued to Frost-Nevada bears interest at 8.5% per annum.
The notes held by Frost-Nevada are convertible into a total of 6,497,475
shares of common stock and are collateralized by a pledge of the stock of
Ladenburg. The notes held by the former Ladenburg stockholders are
convertible into a total of 4,799,271 shares of common stock and are
collateralized by a pledge of Ladenburg stock. If, during any period of 20
consecutive trading days, the closing sale price of LTS's common stock is
at least $8.00, the principal and all accrued interest on the notes will be
automatically converted into shares of common stock. The notes also provide
that if a change of control occurs, as defined in the notes, LTS must offer
to purchase all of the outstanding notes at a purchase price equal to the
unpaid principal amount of the notes and the accrued interest.
On March 27, 2002, LTS borrowed $2,500 from New Valley. The loan, which
bears interest at 1% above the prime rate, is due on the earlier of
December 31, 2003 or the completion of one or more equity financings where
LTS receives at least $5,000 in total proceeds. On July 16, 2002, LTS
borrowed an additional $2,500 from New Valley (collectively, the "2002
Loans") on the same terms as the March 2002 loan.
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 convertible notes on the interest payment dates commencing June
30, 2002 through March 31, 2003 (the "Forbearance Interest Payments").
Interest on the deferred amounts accrues at 8% per annum on the New Valley
and Berliner notes, and at 9% per annum on the Frost-Nevada notes. The
Company also agreed to apply, to the maximum extent possible, any net
proceeds from the Company's proposed rights offering, discussed below, in
excess of the amounts invested in the rights offering by the holders of the
convertible notes and any net proceeds from any subsequent public offerings
to pay to the holders of the convertible notes any amount for the
Forbearance Interest Payments then outstanding.
Ladenburg has $2,500 outstanding under a junior subordinated revolving
credit agreement with an affiliate of its clearing broker that extends
through October 31, 2004 under which borrowings incur interest at LIBOR
plus 2%.
The Company's liquidity position continues to be adversely affected by its
inability to generate cash from operations as a result of the continued
significant decline in the equity markets. 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 and, in the third quarter of 2002, reduced the size of its
workforce.
The Company has renegotiated its current clearing agreement with one of its
clearing brokers whereby this clearing broker will become the Company's
primary clearing broker, clearing substantially all of the Company's
business. As part of the new agreement, the Company will realize
significant cost savings from reduced ticket charges and expects to realize
additional cost savings from other incentives. In addition, under
12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
the new clearing agreement, an affiliate of the clearing broker will lend
the Company approximately $3,800 upon the conversion of the business
currently conducted with another clearing broker to this primary clearing
broker. The loans will be forgiven over various periods, up to four years
from the date of conversion. The conversion is currently scheduled to occur
in late November 2002.
During the fourth quarter of 2002, in order to decrease future operating
expenses, the Company intends to terminate the operations of Ladenburg
Capital. Ladenburg Capital expects to withdraw as a broker-dealer at that
time. Ladenburg has agreed to service the Ladenburg Capital accounts, and
many of the Ladenburg Capital employees are expected to be offered
employment with Ladenburg. This will reduce support staff expenses,
operating expenses and general administrative expenses.
The Company filed a registration statement in May 2002 for a proposed
$10,000 rights offering to the holders of the Company's outstanding common
stock, convertible notes, warrants and options in order to raise additional
necessary working capital. New Valley agreed to purchase up to $5,000 of
the Company's common stock in the proposed rights offering if such shares
were otherwise unsubscribed for. However, on August 6, 2002, the Company
announced that it had decided to postpone the rights offering due to market
conditions. The Company intends to review the situation during the fourth
quarter to determine if conditions for the offering have improved, although
the Company does not currently anticipate that the rights offering can be
successfully completed absent a material improvement in market conditions
and a significant increase in the Company's stock price. In the
circumstance where the rights offering were ultimately consummated, the
Company would be required to use the proceeds of the proposed rights
offering to repay the 2002 Loans as well as all accumulated Forbearance
Interest Payments, to the extent possible.
On October 8, 2002, LTS borrowed an additional $2,000 from New Valley. The
loan, which bears interest at 1% above the prime rate, matures on the
earliest of December 31, 2002, the next business day after the Company
receives its federal income tax refund for the fiscal year ended September
30, 2002, and the next business day after the Company receives a loan from
an affiliate of its clearing broker in connection with the conversion of
additional clearing business to this broker. The terms of the New Valley
loan restrict LTS from incurring or assuming any indebtedness that is not
subordinated to the loan so long as the loan is outstanding.
The Company's overall capital and funding needs are continually reviewed to
ensure that its liquidity and capital base can support the estimated needs
of its business units. These reviews take into account business needs as
well as regulatory capital requirements of the Company's subsidiaries.
Based on these reviews, if the proposed rights offering could be
successfully completed, management believes that its capital structure
would be adequate for current operations and reasonably foreseeable future
needs. However, because the rights offering is currently postponed and does
not appear to be a viable option at this time, should the Company otherwise
require additional financing, it will need to seek to raise additional
capital through other available sources, including through borrowing
additional funds on a short-term basis from New Valley or from other
parties, including the Company's shareholders and clearing brokers. In
connection with the Company's recent renegotiation of the clearing
agreement with one of its clearing brokers, in addition to other
incentives, the Company will receive loans of approximately $3,800 from an
affiliate of the clearing broker. If the Company continues to be unable to
generate cash from operations and is unable to find alternative sources of
funding, it would have an adverse impact on the Company's liquidity and
operations.
5. SHAREHOLDERS' EQUITY
On January 10, 2002, the Company granted non-qualified stock options to
five executives pursuant to the Company's 1999 Performance Equity Plan (the
"Plan"). The options entitle the holders to purchase an aggregate of
1,200,000 shares of common stock at an exercise price of $0.88 per share,
the fair market value of a share of common stock on the date of grant. On
March 19, 2002, other employees of the Company or its subsidiaries were
awarded qualified and non-qualified options under the Plan to purchase a
total of 1,047,485
13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
shares of common stock at a price of $0.60 per share, the fair market value
on the date of grant. All options granted in 2002 have a ten-year term and
become exercisable as to one-third of the shares on each of the first three
anniversaries of the grant.
On January 10, 2002, the Company granted to a new non-employee director of
the Company a ten-year option to purchase 20,000 shares of common stock
under the Plan at an exercise price of $0.88 per share. The option will
become exercisable on the first anniversary of the grant.
At the Company's annual meeting held on November 6, 2002, the shareholders
of the Company approved an amendment to the Company's articles of
incorporation to increase the number of authorized shares of common stock
from 100,000,000 to 200,000,000. The shareholders also approved at the
meeting an amendment to the Plan to increase the number of shares of common
stock available for issuance under the Plan from 5,500,000 shares to
10,000,000 shares and to increase the limit on grants to individuals in any
one calendar year from 300,000 shares to 1,000,000 shares.
In May 2002, the board of directors of the Company adopted the Company's
Qualified Employee Stock Purchase Plan (the "ESP Plan"), which was approved
by the shareholders at the annual meeting. The ESP Plan provides that the
Board's compensation committee, which administers the plan, may permit the
Company's employees to acquire up to 5,000,000 shares of common stock
during option periods at a discount of up to 15% below the then current
market price of the Company's common stock. The ESP Plan is intended to
qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code.
For purposes of computing per share amounts, 9,917,333 potential common
shares relating to outstanding stock options and 11,296,746 shares relating
to convertible notes have been excluded because they would be
anti-dilutive.
6. COMMITMENTS AND CONTINGENCIES
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. In the opinion of management, after
consultation with counsel, the ultimate resolution of these matters is not
expected to have a material adverse effect on the Company's consolidated
financial position and results of operations. Due to the uncertain nature
of litigation in general, we are unable to estimate a range of possible
loss related to lawsuits filed against the Company. The Company has
insurance coverage for certain matters, which may cover a portion of any
expenses incurred in connection with these arbitrations and lawsuits. The
Company believes its accrual for arbitration and lawsuit losses, in excess
of it anticipated reimbursements from insurance carriers, of $3,166 at
September 30, 2002 is adequate.
Ladenburg Capital has initiated a lawsuit against one of its landlords
seeking a declaratory judgment that the lease in a 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. The Company believes that Ladenburg
Capital will prevail and intends to pursue this claim vigorously. However,
in the event that Ladenburg Capital does not prevail, it may incur
additional expenses should it decide not to occupy the space.
The Company is currently attempting to renegotiate several of its existing
lease commitments. As a result of these negotiations, the Company may incur
additional expenses in the fourth quarter of 2002 to terminate these
long-term commitments.
During the fourth quarter of 2002, the Company intends to early adopt SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". Under SFAS 146, a cost associated with an exit or disposal
14
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
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. The Company's results of future
operations may be impacted to the extent of foregone rental income, in the
event the Company does not sublet the office space for an amount at least
equal to its lease obligation.
7. INCOME TAXES
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, 2002, which consist
principally of the tax benefit of net operating loss carryforwards and
accrued expenses, amounts to $11,074. After consideration of all the
evidence, both positive and negative, especially the fact the Company has
sustained operating losses during 2001 and for the nine months ended
September 30, 2002 and that the Company continues to be affected by
conditions in the economy, management has determined that a valuation
allowance at September 30, 2002 was necessary to fully offset the deferred
tax assets based on the likelihood of future realization.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
INTRODUCTION
The condensed consolidated financial statements include our accounts and
the accounts of our wholly owned subsidiaries. Our subsidiaries include
Ladenburg, Ladenburg Capital, Ladenburg Thalmann International Ltd. and
Ladenburg Fund Management.
Prior to May 7, 2001, Ladenburg Capital and Ladenburg Fund Management were
our only subsidiaries. On May 7, 2001, we acquired all of the outstanding common
stock of Ladenburg, and our name was changed from GBI Capital Management Corp.
to Ladenburg Thalmann Financial Services Inc. The acquisition of Ladenburg has
been accounted for under the purchase method of accounting as a reverse
acquisition. Under reverse acquisition accounting, LTS was treated as the
acquired entity as Ladenburg's former stockholders held a majority of our common
stock following the transaction. As a result, LTS' operating results were
included as of May 7, 2001, the date of acquisition, with the historical
financial statements of Ladenburg. As appropriate, in the discussion of
operating results, increases in reported revenues and expenses as a result of
the acquired operations of LTS will be referred to as the "Ladenburg Capital
operations." In connection with the acquisition, all per share data have been
restated to reflect retroactively the number of shares of common stock,
convertible notes and cash to be received by the former stockholders of
Ladenburg. We have changed our fiscal year-end from September 30 to December 31
to conform to the fiscal year-end of Ladenburg.
In September 2002, we replaced PricewaterhouseCoopers LLP as our
independent auditors and engaged Eisner LLP to act as our independent auditors
for the fiscal year ending December 31, 2002. Our audit committee recommended
and approved the decision to change independent auditors. There were no
disagreements in accounting or auditing issues that impacted this decision.
In October 2002, our chief financial officer, who is also the chief
financial officer of New Valley and other organizations, resigned from his
position to devote his full time to his other business obligations. We appointed
Salvatore Giardina to replace him. Mr. Giardina has been affiliated with our
broker-dealer subsidiary, Ladenburg, since February 1990 and has been its chief
financial officer since August 1998.
We recently renegotiated our current clearing agreement with one of our
clearing brokers whereby this clearing broker will become our primary clearing
broker, clearing substantially all of our business. As part of the new
agreement, we will realize significant cost savings from reduced ticket charges,
and expect to realize additional cost savings from other incentives. In
addition, under the new clearing agreement, an affiliate of the clearing broker
will lend us approximately $3,800 upon the conversion of the business currently
conducted with another clearing broker to this primary clearing broker. The
loans will be forgiven over various periods, up to four years from the date of
the conversion. The conversion is currently scheduled to occur in late November
2002.
During the fourth quarter of 2002, in order to reduce future operating
expenses, we intend to terminate the operations of Ladenburg Capital. Ladenburg
Capital expects to withdraw as a broker-dealer at that time. Ladenburg has
agreed to service the Ladenburg Capital accounts, and many of the Ladenburg
Capital employees are expected to be offered employment with Ladenburg. This
will reduce support staff expenses, operating expenses and general
administrative expenses.
CRITICAL ACCOUNTING POLICIES
A financial reporting release, which was recently issued by the SEC,
requires all companies to include a discussion of critical accounting policies
or methods used in the preparation of financial statements. Note 2 to our
consolidated financial statements filed with our Annual Report on Form 10-K for
the year ended December 31, 2001 includes a summary of the significant
accounting policies and methods used in the preparation of our consolidated
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by us.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
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 and Ladenburg Capital do not carry
accounts for customers or perform custodial functions related to customers'
securities. Ladenburg and Ladenburg Capital introduce all of their customer
transactions, which are not reflected in these financial statements, to their
respective clearing brokers, which maintain the customers' accounts and clear
such transactions. Additionally, the clearing brokers provide the clearing and
depository operations for Ladenburg's and Ladenburg Capital's proprietary
securities transactions. These activities may expose Ladenburg and Ladenburg
Capital to off-balance-sheet risk in the event that customers do not fulfill
their obligations with the clearing broker, as Ladenburg and Ladenburg Capital
have agreed to indemnify their respective clearing brokers for any resulting
losses. We continually assess risk associated with each customer who is on
margin and record an estimated loss when management believes collection from the
customer is unlikely. We incurred (income) losses from these arrangements of $93
and $161 for the three and nine months ended September 30, 2002, respectively,
and $90 and $(126) for the three and nine months ended September 30, 2001,
respectively.
CUSTOMER CLAIMS. In the normal course of business, our operating
subsidiaries have been and continue to be the subject of numerous civil actions
and arbitrations arising out of customer complaints relating to our activities
as a broker-dealer, as an employer and as a result of other business activities.
In general, 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 $3,166 for arbitration and
lawsuit losses as of September 30, 2002. 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.
SEPTEMBER 11, 2001 EVENTS. On September 11, 2001 terrorists attacked the
World Trade Center complex in New York, which subsequently collapsed and damaged
surrounding buildings, including one occupied by a branch office of Ladenburg
Capital. These events resulted in the suspension of trading of U.S. equity
securities for four business days and precipitated the relocation of
approximately 180 employees to Ladenburg's mid-town New York headquarters.
Although some of Ladenburg Capital's businesses were temporarily disrupted, all
its businesses remained functioning and serving clients. We are insured for loss
caused by physical damage to property. This includes repair or replacement of
property and 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. The net book value of the lost property
has been recorded as a receivable as of December 31, 2001 and the insurance
proceeds for the lost property will be recorded upon receipt. Insurance proceeds
received may vary from the lost property's net book value. We received insurance
proceeds of $150 in July 2002 representing an advance relating to damaged
property, which was applied against our receivable. The receivable balance as of
September 30, 2002 was $1,207.
Ladenburg Capital has initiated a lawsuit against one of its landlords
seeking a declaratory judgment that the lease in a 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 expense should it decide not to occupy
the space.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
NEW ACCOUNTING PRONOUNCEMENT. We are currently attempting to
renegotiate several of our existing lease commitments. As a result of these
negotiations, we may incur additional expenses in the fourth quarter of 2002 to
terminate these long-term commitments.
During the fourth quarter of 2002, we intend to early adopt SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". Under
SFAS 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. Our results of future operations
may be impacted to the extent of foregone rental income, in the event we do not
sublet the office space for an amount at least equal to our lease obligation.
FAIR VALUE. "Trading securities owned" and "Securities sold, not yet
purchased" on our consolidated statements of financial condition are carried at
fair value or amounts that approximate fair value, with related unrealized gains
and losses recognized in our results of operations. The determination of fair
value is fundamental to our financial condition and results of operations and,
in certain circumstances, it requires management to make complex judgments.
Fair values are based on listed market prices, where possible. If
listed market prices are not available or if the liquidation of our positions
would reasonably be expected to impact market prices, fair value is determined
based on other relevant factors, including dealer price quotations. Fair values
for certain derivative contracts are derived from pricing models that consider
market and contractual prices for the underlying financial instruments or
commodities, as well as time value and yield curve or volatility factors
underlying the positions.
Pricing models and their underlying assumptions impact the amount and
timing of unrealized gains and losses recognized, and the use of different
pricing models or assumptions could produce different financial results. Changes
in the fixed income and equity markets will impact our estimates of fair value
in the future, potentially affecting principal trading revenues. The illiquid
nature of certain securities or debt instruments also requires a high degree of
judgment in determining fair value due to the lack of listed market prices and
the potential impact of the liquidation of our position on market prices, among
other factors.
IMPAIRMENT OF GOODWILL. On January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
and were required to analyze our goodwill for impairment issues on January 1,
2002 and on a periodic basis thereafter. In connection with the reporting of
results for the second quarter of 2002, based on the overall declines in the
U.S. equity markets and the conditions prevailing in the broker-dealer industry,
we engaged an independent appraisal firm to value our goodwill as of June 30,
2002. Based on this valuation, an impairment charge of $18,762 of goodwill was
indicated and recorded. The expense is included in the nine months ended
September 30, 2002. The goodwill was generated in the Ladenburg acquisition in
May 2001, and the charge reflected overall market declines since the
acquisition. See Note 1 to our condensed consolidated financial statements for a
discussion of the adoption of SFAS No. 142 and the impairment charge.
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 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, 2002, which
consist principally of the tax benefit of net operating loss carryforwards and
accrued expenses, amounts to $11,074. After consideration of all the evidence,
both positive and negative, especially the fact we have sustained operating
losses during 2001 and for the nine months ended September 30, 2002 and that we
continue to be affected by conditions in the economy, management has determined
that a valuation allowance at September 30, 2002 was necessary to offset the
deferred tax assets based on the likelihood of future realization. Accordingly,
during the quarter ended
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
September 30, 2002, we increased our valuation allowance to fully offset the
deferred tax assets based on the likelihood of future realization.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2001
Our revenues for the three months ended September 30, 2002 decreased
$2,102 from 2001 primarily as a result of decreased principal transactions of
$2,307 and decreased interest and dividends of $470, net of $886 increase in
commissions. Our revenues have been adversely affected by the overall declines
in the U.S. equity markets and the continuing weak operating environment for the
broker-dealer industry.
Our expenses for the three months ended September 30, 2002 decreased $2,766
primarily as a result of decreased employee compensation and benefits of $1,806
and decreased brokerage, communication and clearance fees of $440.
Our revenues for the three months ended September 30, 2002 consisted of
commissions of $10,712, net principal transactions of $954, investment banking
fees of $1,790, syndicate and underwriting income of $91, interest and dividends
of $579, investment advisory fees of $651 and other income of $1,200. Our
revenues for the three months ended September 30, 2001 consisted of commissions
of $9,826, net principal transactions of $3,261, investment banking fees of
$1,972, syndicate and underwriting income of $125, interest and dividends of
$1,049, investment advisory fees of $741 and other income of $1,105. Our
expenses for the three months ended September 30, 2002 consisted of employee
compensation and benefits of $12,035 and other expenses of $11,691. Our expenses
for the three months ended September 30, 2001 consisted of employee compensation
and benefits of $13,841 and other expenses of $12,651.
The $886 (9.0%) increase in commission income was primarily a result of the
depressed market for equity securities for the three months ended September 30,
2001, due to the terrorist attack on the USA as well as the temporary closing of
the U.S. equity markets during that period.
The $2,307 (70.7%) decrease in principal transactions was primarily the
result of decreases in trading income of $1,813 in the 2002 period and a
decrease in sales credits caused by the continued significant decline in the
market for equity securities.
Investment banking fees were generally consistent with the prior year
period and decreased by $182 (9.2%).
Income tax expense for the three months ended September 30, 2002 was
$2,265 compared to an income tax benefit of $2,728 in 2001. After consideration
of all the evidence, both positive and negative, especially the fact we have
sustained operating losses during 2001 and for the nine months ended September
30, 2002 and that we continue to be affected by conditions in the economy,
management has determined that a valuation allowance at September 30, 2002 was
necessary to offset the deferred tax assets based on the likelihood of future
realization. Accordingly, during the quarter ended September 30, 2002, we
increased our valuation allowance to fully offset the deferred tax assets based
on the likelihood of future realization. In addition, the income tax rate for
the 2002 and 2001 periods does not bear a customary relationship to effective
tax rates as a result of state and local income tax expense and limitations on
the utilization of net operating loss carrybacks.
NINE MONTHS ENDED SEPTEMBER 30, 2002 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2001
Our revenues for the nine months ended September 30, 2002 increased $3,848
from 2001 primarily as a result of increased commissions of $16,676, net of
decreased net principal transactions of $12,204. For comparative purposes, the
2002 period includes revenues generated by the Ladenburg Capital operations for
the nine months ended September 30, 2002, while the 2001 period includes
revenues generated by the Ladenburg Capital operations from May 7, 2001 to
September 30, 2001.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Our expenses for the nine months ended September 30, 2002, exclusive of the
$18,762 goodwill impairment charge, increased $10,225 primarily as a result of
an increase in compensation and benefits of $4,102, an increase in brokerage,
communication and clearance fees of $542, an increase in professional services
of $1,532, an increase in rent and occupancy of $1,198 and an increase in
interest expense of $531 offset by a decrease in depreciation and amortization
of $244. For comparative purposes, the 2002 period includes expenses incurred by
the Ladenburg Capital operations for the nine months ended September 30, 2002,
while the 2001 period includes expenses incurred by the Ladenburg Capital
operations from May 7, 2001 to September 30, 2001.
Our revenues for the nine months ended September 30, 2002 consisted of
commissions of $38,322, net principal transactions of $8,045, investment banking
fees of $8,097, syndicate and underwriting income of $264, interest and
dividends of $1,799, investment advisory fees of $2,154 and other income of
$3,324. Our revenues for the nine months ended September 30, 2001 consisted of
commissions of $21,646, net principal transactions of $20,249, investment
banking fees of $7,847, syndicate and underwriting income of $395, interest and
dividends of $2,823, investment advisory fees of $2,430 and other income of
$2,767. Our expenses for the nine months ended September 30, 2002 consisted of
employee compensation and benefits of $44,582, impairment of goodwill of $18,762
and other expenses of $36,265. Our expenses for the nine months ended September
30, 2001 consisted of employee compensation and benefits of $40,480 and other
expenses of $30,142.
The $16,676 (77.0%) increase in commissions was the result of the impact of
the acquired Ladenburg Capital operations, which provided additional commission
income of $30,868 in 2002 versus $11,039 in the 2001 period, offset by a $3,153
decrease at Ladenburg as a result of the significant decline in the market for
equity securities for the nine months ended September 30, 2002.
Investment banking fees were consistent with the prior year, increasing by
$250 (3.2%).
The $12,204 (60.3%) decrease in principal transactions was primarily the
result of decreases in trading income of $9,063 in the 2002 period and a
decrease in sales credits caused by the continued significant decline in the
market for equity securities.
The increase in compensation expense of $4,102 (10.1%) was primarily due to
the inclusion of Ladenburg Capital operations.
In connection with the reporting of the results for the second quarter of
2002, based on the overall declines in the U.S. equity markets and the
conditions prevailing in the broker-dealer industry, we completed an impairment
review and recorded a $18,762 charge for the impairment of goodwill, which was
generated in the Ladenburg acquisition. The charge reflects overall market
declines since the acquisition in May 2001. During this review, an independent
appraisal firm was engaged to value our goodwill as of June 30, 2002. The
appraiser valued our businesses using a weighted average of each unit's
projected discounted cash flow, with a weighted average cost of capital of
18.50%, and a fair market approach (using market comparables for ten companies).
The appraiser weighted the discounted cash flow for each unit at 70% and the
fair market approach at 30%. The discounted cash flow was based on management's
revised projections of operating results at June 30, 2002. Based on this
valuation, an impairment charge of $18,762 of goodwill was indicated and
recorded. The expense is included in the nine months ended September 30, 2002.
Income tax expense benefit for the nine months ended September 30, 2002 was
$1,394 compared to an income tax benefit of $3,914 in 2001. As discussed above,
during the quarter ended September 30, 2002, we increased our valuation
allowance to fully offset the deferred tax assets based on the likelihood of
future realization. In addition, the income tax rate for the 2002 and 2001
periods does not bear a customary relationship to effective tax rates as a
result of state and local income tax expense and limitations on utilization of
net operating loss carrybacks.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
LIQUIDITY AND CAPITAL RESOURCES
Approximately 57.0% of our assets at September 30, 2002 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 clearing
brokers turn over rapidly. As a securities dealer, we may carry significant
levels of securities inventories to meet customer needs. Our inventory of
market-making securities is readily marketable; however, holding large blocks of
the same security may limit liquidity and prevent realization of full market
value for the securities. 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.
Our brokerage subsidiaries, Ladenburg and Ladenburg Capital, are subject to
the net capital rules of the SEC. Therefore, they are subject to certain
restrictions on the use of capital and its related liquidity. Ladenburg's net
capital position, as defined, of $3,533, exceeded minimum capital requirements
of $1,000 by $2,533 at September 30, 2002. As of September 30, 2002, Ladenburg
Capital had net capital, as defined, of $1,494, which exceeded minimum capital
requirements of $379 by $1,115. Failure to maintain the required net capital may
subject Ladenburg or Ladenburg Capital to suspension or expulsion by the NASD,
the SEC and other regulatory bodies and ultimately may require their
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 those operations
of our broker-dealer subsidiaries that require the intensive use of capital,
such as underwriting and trading activities, and also could restrict our ability
to withdraw capital from these subsidiaries, which in turn, could limit our
ability to pay dividends and repay and service our debt.
The Company's primary sources of liquidity include cash inflows from
operations, borrowings and equity offerings.
Cash used in operating activities for the nine months ended September 30,
2002 was $8,749 as compared to $6,472 for the 2001 period. The difference is
primarily due to the net loss of $38,693 in 2002 versus $8,551 in 2001 and the
decrease of $8,237 in accrued compensation versus $3,101 in the 2001 period. The
amounts were offset by the impairment of goodwill in the 2002 period of $18,762
and a decrease in receivables from clearing brokers in 2002 of $10,010 versus an
increase of $391 in the 2001 period.
Cash flows provided from investing activities for the nine months ended
September 30, 2002 were $653 compared to $2,718 for the 2001 period. The
difference is primarily attributable to cash of $5,151 acquired in the 2001 LTS
acquisition, offset by a decrease in restricted assets of $1,551 in the 2002
period and a reduction in purchases of furniture, equipment and leasehold
improvements ($2,433 in the 2001 period versus $898 in the 2002 period). Our
restricted assets at September 30, 2002 and December 31, 2001 consisted
primarily of collateral for a letter of credit which is used as collateral for a
long-term lease of commercial office space. The decrease in restricted assets
during the nine months ended September 30, 2002 was primarily the result of a
$1,500 reduction in the letter of credit pursuant to the lease terms.
The capital expenditures of $898 and $2,433 for the nine months ended
September 30, 2002 and 2001, respectively, related principally to the
enhancements and improvements to computer equipment and furniture and fixtures.
Capital expenditures in the 2001 period included the purchase for $1,118 of
computer equipment and furniture and fixtures previously leased.
Cash flows provided from financing activities for the nine months ended
September 30, 2002 were $3,000 compared to $4,500 for the 2001 period. The
difference is primarily attributable to the 2001 issuance of $10,000 of senior
convertible notes payable to Frost-Nevada, $2,000 of notes payable to New Valley
and Frost-Nevada in August 2001 and Ladenburg's borrowings of $2,500 under its
junior subordinated revolving credit agreement in 2001. The amounts are offset
by $10,000 of cash paid to Ladenburg's former stockholders in connection with
the acquisition of Ladenburg in 2001. In the 2002 period, cash flows from
financing activities reflect the $5,000 of notes payable that were issued to New
Valley, offset by the repayment of $2,000 of notes payable.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
In conjunction with the acquisition of the Ladenburg Capital operations, we
issued a total of $20,000 principal amount of senior convertible notes due
December 31, 2005. The $10,000 principal amount of notes issued to the former
stockholders of Ladenburg bears interest at 7.5% per annum, and the $10,000
principal amount of notes issued to Frost-Nevada bears interest at 8.5% per
annum. The notes are currently convertible into a total of 11,296,746 shares of
our common stock and are secured by a pledge of the stock of Ladenburg.
On August 31, 2001, we borrowed $1,000 from each of New Valley and
Frost-Nevada in order to supplement the liquidity of our broker-dealer
operations. The loans, which bore interest at 1% above the prime rate, were
repaid in January 2002. On March 27, 2002, we borrowed $2,500 from New Valley.
The loan, which bears interest at 1% above the prime rate, is 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. On July 16, 2002, we borrowed an
additional $2,500 from New Valley (collectively, the "2002 Loans") on the same
terms as the March 2002 loan. On June 28, 2002, New Valley, Berliner and
Frost-Nevada also agreed with us to forbear until May 15, 2003 payment of the
interest due to them under the senior convertible notes held by these entities
on the interest payment dates of the notes commencing June 30, 2002 through
March 2003 (the "Forbearance Interest Payments").
Ladenburg had $2,500 outstanding under a junior subordinated revolving
credit agreement with an affiliate of its clearing broker that extends through
October 31, 2004 under which borrowings incur interest at LIBOR plus 2%.
Our brokerage subsidiaries, as guarantors of their customer accounts to
their clearing brokers, are exposed to off-balance-sheet risks in the event that
their customers do not fulfill their obligations with the respective clearing
broker. In addition, to the extent our subsidiaries maintain a short position in
certain securities, they are exposed to a future off-balance-sheet market risk,
since their ultimate obligation may exceed the amount recognized in the
financial statements.
Our liquidity position continues to be adversely affected by our inability
to generate cash from operations as a result of the continued significant
decline in the equity markets. Accordingly, we have been forced to cut expenses
as necessary. In order to accomplish this, we have implemented certain
cost-cutting procedures throughout our operations, and, in the third quarter of
2002, reduced the size of our workforce.
We recently renegotiated our current clearing agreement with one of our
clearing brokers whereby this clearing broker will become our primary clearing
broker, clearing substantially all of our business. As part of the new
agreement, we will realize significant cost savings from reduced ticket charges
and expect to realize additional costs savings from other incentives. In
addition, under the new clearing agreement, an affiliate of the clearing broker
will lend us approximately $3,800 upon the conversion of the business currently
conducted with another clearing broker to this primary clearing broker. The
loans will be forgiven over various periods, up to four years from the date of
the conversion. The conversion is currently scheduled to occur in late November
2002.
During the fourth quarter of 2002, in order to reduce future operating
expenses, we intend to terminate the operations of Ladenburg Capital. Ladenburg
Capital expects to withdraw as a broker-dealer at that time. Ladenburg has
agreed to service the Ladenburg Capital accounts, and many of the Ladenburg
Capital employees are expected to be offered employment with Ladenburg. This
will reduce support staff expenses, operating expenses and general
administrative expenses.
We filed a registration statement in May 2002 for a proposed $10,000 rights
offering to the holders of our outstanding common stock, convertible notes,
warrants and options in order to raise additional necessary working capital. New
Valley has agreed to purchase up to $5,000 of our common stock in the proposed
rights offering if such shares are otherwise unsubscribed for. However, on
August 6, 2002, we announced that we had decided to postpone the rights offering
due to market conditions. We intend to review the situation during the fourth
quarter to determine if conditions for the offering have improved, although we
do not currently anticipate that the rights offering can be successfully
completed absent a material improvement in market conditions and a significant
increase in our stock price. In the circumstance where the rights offering were
ultimately consummated, we
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
would be required to use the proceeds of the proposed rights offering to repay
the 2002 Loans as well as all accumulated Forbearance Interest Payments, to the
extent possible.
On October 8, 2002, we borrowed an additional $2,000 from New Valley. The
loan, which bears interest at 1% above the prime rate, matures on the earliest
of December 31, 2002, the next business day after we receive our federal income
tax refund for the fiscal year ended September 30, 2002, and the next business
day after we receive a loan from an affiliate of our clearing broker in
connection with the conversion of additional clearing business to this broker.
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.
Our overall capital and funding needs are continually reviewed to ensure
that our liquidity and capital base can support the estimated needs of our
business units. These reviews take into account business needs as well as
regulatory capital requirements of our subsidiaries. Based on these reviews, if
the proposed rights offering could be successfully completed, management
believes that our capital structure would be adequate for current operations and
reasonably foreseeable future needs. However, because the rights offering is
currently postponed and does not appear to be a viable option at this time,
should we otherwise require additional financing, we will need to seek to raise
additional capital through other available sources, including through borrowing
additional funds on a short-term basis from New Valley or from other parties,
including our shareholders and clearing brokers. In connection with our recent
renegotiation of the current clearing agreement with one of our clearing
brokers, in addition to other incentives, we will receive loans of approximately
$3,800 from an affiliate of our clearing broker. If we continue to be unable to
generate cash from operations and are unable to find alternative sources of
funding, it would have an adverse impact on our liquidity and operations.
We are obligated under noncancellable lease agreements, which provide for
minimum lease payments, net of lease abatement and inclusive of escalation
charges, of $5,672 in 2002 and approximately $5,500 per year until 2015.
We are currently attempting to renegotiate several of our existing lease
commitments in connection with the termination of the operations of Ladenburg
Capital in the fourth quarter of 2002. As a result of these negotiations, we may
incur additional expenses in the fourth quarter of 2002 to terminate these
long-term commitments.
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 in the normal course of business, 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 counter party risk through the use of
credit exposure information, the monitoring of collateral values and the
establishment of credit limits.
We maintained inventories of trading securities at September 30, 2002 with
fair market values of $4,702 in long positions and $1,890 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 September 30, 2002 will not
have a material adverse effect on our consolidated financial position or results
of operations.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding disclosure.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
24
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 6 to the condensed consolidated financial statements of the
Company included in Part I, Item 1 of this Report.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No securities of ours that were not registered under the Securities Act
of 1933 have been issued or sold by us during the quarter ended
September 30, 2002.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Articles of Amendment to the Articles of Incorporation,
dated November 6, 2002.
10.1 1999 Performance Equity Plan (Amended and Restated).
10.2 Qualified Employee Stock Purchase Plan (incorporated by
reference to Appendix A in the Company's Proxy Statement
dated October 3, 2002).
10.3 Letter Agreement, dated October 10, 2002, between the
Company and Victor M. Rivas
10.4 Letter Agreement, dated October 10, 2002, between the
Company and Richard J. Rosenstock
10.5 Letter Agreement, dated October 10, 2002, between the
Company and Mark Zeitchick
10.6 Letter Agreement, dated October 10, 2002, between the
Company and Vincent A. Mangone
99.1 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.
99.2 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.
(b) REPORTS ON FORM 8-K
DATE ITEMS FINANCIAL STATEMENTS
---- ----- --------------------
July 8, 2002 5 None
September 30, 2002 4 None
25
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.
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Registrant)
Date: November 14, 2002 By: /s/ SALVATORE GIARDINA
------------------------------------------
Salvatore Giardina
Vice President and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
26
CERTIFICATION
I, Victor M. Rivas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ladenburg Thalmann
Financial Services Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ VICTOR M. RIVAS
-------------------------------------
Victor M. Rivas
President and Chief Executive Officer
27
CERTIFICATION
I, Salvatore Giardina, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ladenburg Thalmann
Financial Services Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ SALVATORE GIARDINA
------------------------------------------
Salvatore Giardina
Vice President and Chief Financial Officer
28