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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 1-15799
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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, 34TH FLOOR
NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212) 409-2000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, par value $.0001 per share American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [ ] No [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of June 28, 2002 (the last business day of the Registrant's most
recently completed second fiscal quarter), the aggregate market value of the
Registrant's Common Stock (based on the closing price on the American Stock
Exchange on that date) held by non-affiliates of the Registrant was
$8,880,586.80.
As of March 28, 2003, there were 42,025,211 shares of the Registrant's
Common Stock outstanding.
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LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K
T A B L E O F C O N T E N T S
PAGE
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PART I
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 16
Item 3. Legal Proceedings............................................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 18
Item 6. Selected Financial Data...................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 30
Item 8. Financial Statements and Supplementary Data.................................................. 30
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 31
Item 11. Executive Compensation....................................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.............................................................. 40
Item 13. Certain Relationships and Related Transactions............................................... 43
Item 14. Controls and Procedures...................................................................... 47
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 47
SIGNATURES............................................................................................. 56
CERTIFICATIONS......................................................................................... 58
i
PART I
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 1. BUSINESS.
GENERAL
We are engaged in retail and institutional securities brokerage,
investment banking services and proprietary trading through our principal
operating subsidiary, Ladenburg Thalmann & Co. Inc. We are committed to
establishing a significant presence in the financial services industry by
meeting the varying investment needs of our corporate, institutional and retail
clients.
Ladenburg Thalmann & Co. is a full service broker-dealer that has been
a member of the New York Stock Exchange ("NYSE") since 1879. It provides its
services principally for middle market and emerging growth companies and high
net worth individuals through a coordinated effort among corporate finance,
capital markets, investment management, brokerage and trading professionals.
Ladenburg Thalmann & Co. is subject to regulation by, among others, the
Securities and Exchange Commission ("SEC"), the NYSE and the National
Association of Securities Dealers, Inc. ("NASD") and is a member of the
Securities Investor Protection Corporation ("SIPC"). Ladenburg Thalmann & Co.
currently has 209 registered representatives and 135 other full time employees.
Its private client services and institutional sales departments serve
approximately 65,000 accounts worldwide and its asset management area provides
investment management and financial planning services to numerous individuals
and institutions.
From August 1999 through November 2002, Ladenburg Capital Management
Inc. was one of our principal operating subsidiaries in the securities brokerage
industry and was a member firm of the NASD and the SIPC. Ladenburg Capital
Management's business activities consisted primarily of retail sales and trading
of exchange listed and over-the-counter equity securities, options and mutual
funds, as well as investment banking and research services.
During 2002, we incurred significant operating losses as our revenue
and liquidity were adversely affected by the overall decline in the U.S. equity
markets and the continued weak operating environment for the broker-dealer
industry. In November 2002, in order to reduce future operating expenses, we
terminated the operations of Ladenburg Capital Management, and filed to withdraw
it as a broker-dealer with the NASD. Ladenburg Thalmann & Co. has agreed to and
is servicing the accounts of Ladenburg Capital Management and many of the
employees of Ladenburg Capital Management were offered employment with Ladenburg
Thalmann & Co. The termination of Ladenburg Capital Management's operations has
reduced support staff expenses, operating expenses and general administrative
expenses.
We were incorporated under the laws of the State of Florida in February
1996. Ladenburg Thalmann & Co. was incorporated under the laws of the State of
Delaware in December 1971 and became our wholly owned subsidiary in May 2001.
Our principal executive offices, as well as those of Ladenburg Thalmann & Co.,
are located at 590 Madison Avenue, New York, New York 10022 and both of our
telephone numbers are (212) 409-2000. Ladenburg has branch offices located in
Boca Raton, Florida, Great Neck, New York, Los Angeles, California, Ft.
Lauderdale, Florida and New York, New York. During 2002, we closed our branch
office in Las Vegas, Nevada and in the first quarter of 2003, we closed our
branch office in Cleveland, Ohio. We are planning to open a branch office in
Melville, New York during the second quarter of 2003. Ladenburg Thalmann Europe,
Ltd., a wholly-owned subsidiary of Ladenburg Thalmann & Co., is a retail
brokerage firm regulated by the Financial Services Authority which has an office
in London, England. Ladenburg Thalmann & Co. maintains a website located at
www.ladenburg.com.
1
RETAIL BUSINESS
Approximately half of our revenues in the last several years have been
generated from the retail business of Ladenburg Thalmann & Co. and Ladenburg
Capital Management (64.9% in 2002, 48.2% in 2001 and 44.5% in 2000). Ladenburg
Thalmann & Co.'s private client services and institutional sales departments
currently serve approximately a total of 65,000 accounts worldwide. Ladenburg
Thalmann & Co. charges commissions to our individual and institutional clients
for executing buy and sell orders of securities on national and regional
exchanges and in the over-the-counter market.
INVESTMENT BANKING ACTIVITIES
A significant portion of our revenues was generated from the investment
banking activities of Ladenburg Thalmann & Co. and Ladenburg Capital Management
(11.4% in 2002, 12.5% in 2001 and 17.8% in 2000). Our investment banking
professionals maintain relationships with businesses and provide them with
advisory and investor relations support. Services include:
o merger and acquisition consulting;
o management of and participation in underwriting of public and
private equity and debt financings;
o rendering appraisals, financial evaluations and fairness opinions;
and
o providing general banking and corporate finance consulting services.
In the investment banking area, our subsidiaries have been active as
underwriters or selling group members in numerous public equity transactions.
Participation as a managing underwriter or in an underwriting syndicate involves
both economic and regulatory risks. An underwriter may incur losses if it is
unable to resell the securities it is committed to purchase. In addition, under
the federal securities laws, other laws and court decisions with respect to
underwriters' liabilities and limitations on the indemnification of underwriters
by issuers, an underwriter is subject to substantial potential liability for
misstatements or omissions of material facts in prospectuses and other
communications with respect to such offerings. Acting as a managing underwriter
increases these risks. Underwriting commitments constitute a charge against net
capital and Ladenburg Thalmann & Co.'s ability to make underwriting commitments
may be limited by the requirement that it must at all times be in compliance
with regulations regarding its net capital.
INVESTMENT ACTIVITIES
Ladenburg Thalmann & Co. also seeks to realize investment gains by
purchasing, selling and holding securities for its own account on a daily basis.
Ladenburg Thalmann & Co. engages for its own account in the arbitrage of
securities. We are required to commit the capital necessary for use in these
investment activities. The amount of capital committed at any particular time
will vary according to market, economic and financial factors, including the
other aspects of our business. Additionally, in connection with our investment
banking activities, Ladenburg Thalmann & Co. generally receives warrants that
entitle it to purchase securities of the corporate issuers for which it raises
capital or provides advisory services.
WHOLESALE TRADING ACTIVITIES
Ladenburg Thalmann & Co. buys, sells and maintains an inventory of
various securities in order to make a market in those securities. Its trading
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department makes a market in more than 1,800 securities, primarily in NASDAQ and
OTC Bulletin-Board stocks. Its fixed income groups made markets in various fixed
income securities, including corporate debt and equity, U.S. government
obligations, as well as those of federal agencies, tax-exempt securities and
options. We discontinued the fixed income operations during 2002. When Ladenburg
Thalmann & Co. receives a buy or sell order for a security in which it makes a
market, it may act as a principal and purchase from, or sell to, its customers
the security on a disclosed basis at a price set in accordance with applicable
securities regulations.
Trading profits or losses depend upon the skills of the employees
engaged in market making activities, the capital allocated to positions in
securities and the general trends of prices in the securities markets. Trading
as a principal requires the commitment of capital and creates an opportunity for
profits and risk of loss due to market fluctuations. Ladenburg Thalmann & Co.
may take both long (ownership) and short (borrowing shares to effect sales of
such shares) positions in those securities in which it makes a market.
LADENBURG ASSET MANAGEMENT PROGRAM
Ladenburg Thalmann & Co. offers its customers an asset management
program, the Ladenburg Asset Management Program ("LAMP"), to assist its
customers in achieving their desired investment objectives. LAMP has the ability
to formulate mutual fund portfolios that are balanced, diversified and
consistent with each individual's short-term and long-term financial objectives.
A variety of factors are taken into consideration when building client
portfolios with LAMP, such as allocating investments into a blend of funds and
creating portfolios that meet each client's needs. The custom portfolios are
monitored on a consistent basis and updated periodically.
WEALTH MANAGEMENT STRATEGY
Ladenburg Thalmann & Co. provides its customers with a broad range of
wealth management services in order to help them manage their financial
resources. Through our subsidiaries, Financial Partners Capital Management, Inc.
and Ladenburg Thalmann Asset Management, Inc., registered investment advisers,
we are able to provide clients with discretionary portfolio management and
financial planning.
Financial Partners Capital Management offers planning services
primarily to corporate executives and other high net-worth individuals. The
process includes a thorough evaluation of the client's current financial
position, income tax planning, estate and gift planning, comprehensive
retirement planning and cash flow analysis among other services.
Our subsidiaries also provide comprehensive investment management
services to high net-worth individuals, corporations and pension fund clients.
Through our subsidiary, Ladenburg Thalmann Asset Management Inc., a registered
investment adviser, we are able to give our clients the ability to invest with a
variety of money managers and investment funds. Ladenburg Thalmann Asset
Management's review process entails focusing on a client's tolerance for risk,
capital growth expectations and income requirements as well as analyzing whether
the client may benefit from investing in tax-advantaged products.
We have also established two private investment funds, The Ukraine Fund
and the Ladenburg Focus Fund, L.P. The Ukraine Fund is a closed end investment
fund that seeks capital growth by investing primarily in companies in the
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Ukraine, the securities of which appear to be attractive either in relationship
to their underlying assets, or from the standpoint of their potential long-term
profit growth. Our wholly owned subsidiary, Ladenburg Thalmann International
Ltd., was the investment advisor to The Ukraine Fund through January 31, 2003.
The Ladenburg Focus Fund is an open ended private investment fund that
invests its capital in publicly traded equity securities for the benefit of a
number of our clients. Our wholly owned subsidiary, Ladenburg Capital Fund
Management Inc., is the general partner of this fund for which it receives an
annual management fee based on the net assets of the fund and an incentive fee
based on the performance of the fund each year.
ADMINISTRATION, OPERATIONS, SECURITIES TRANSACTIONS PROCESSING AND
CUSTOMER ACCOUNTS
Ladenburg Thalmann & Co. does not hold any funds or securities for its
customers. Instead, it uses the services of a clearing agent on a fully
disclosed basis. This clearing agent processes all securities transactions and
maintains customer accounts on a fee basis. Customer accounts are protected
through the SIPC for up to $500, of which coverage for cash balances is limited
to $100. In addition, all customer accounts are fully protected by an Excess
Securities Bond issued by the Travelers Casualty & Surety Company providing
protection for the account's entire net equity (both cash and securities). The
services of this clearing agent include billing, credit control, and receipt,
custody and delivery of securities. The clearing agent provides operational
support necessary to process, record, and maintain securities transactions for
Ladenburg Thalmann & Co.'s brokerage activities. It provides these services to
Ladenburg Thalmann & Co.'s customers at a total cost which we believe is less
than it would cost us to process such transactions on our own. The clearing
agent also lends funds to Ladenburg Thalmann & Co.'s customers through the use
of margin credit. These loans are made to customers on a secured basis, with the
clearing agent maintaining collateral in the form of saleable securities, cash
or cash equivalents. Ladenburg Thalmann & Co. has agreed to indemnify the
clearing broker for losses it may incur on these credit arrangements.
We recently renegotiated our current clearing agreement with one of our
clearing brokers whereby this clearing broker became our primary clearing
broker, clearing substantially all of our business (the "Clearing Conversion").
As part of the new agreement with this clearing broker, we 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 loaned us an aggregate
of $3,500 (the "Clearing Loans"). The principal balance of the Clearing Loans is
scheduled to be forgiven as to $1,500 in November 2003, $667 in November 2004,
$667 in November 2005 and $666 in November 2006. Upon the forgiveness of the
Clearing Loans, the forgiven amount will be accounted for as a reduction of
expenses. However, if the clearing agreement is terminated for any reason prior
to the loan maturity dates, the loans, less any amounts that have been forgiven
through the date of the termination, must be repaid on demand.
COMPETITION
Our subsidiaries encounter intense competition in all aspects of their
business and compete directly with many other securities firms for clients, as
well as registered representatives. Many of their competitors have significantly
greater financial, technical, marketing and other resources than they do.
National retail firms such as Merrill Lynch Pierce Fenner & Smith Incorporated,
Salomon Smith Barney, Inc. and Morgan Stanley/Dean Witter dominate the industry.
Our subsidiaries also compete with numerous regional and local firms. In
addition, a number of firms offer discount brokerage services to retail
customers and generally effect transactions at substantially lower commission
rates on an "execution only" basis, without offering other services such as
investment recommendations and research. Moreover, there is substantial
commission discounting by full-service broker-dealers competing for
institutional and retail brokerage business. The recent emergence of online
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trading has further intensified the competition for brokerage customers.
Although Ladenburg Thalmann & Co. offers on-line account access to its customers
to review their account balances and activity, it currently does not offer any
online trading services to its customers. The continued expansion of discount
brokerage firms and online trading could adversely effect the retail business.
Other financial institutions, notably commercial banks and savings and loan
associations, offer customers some of the same services and products presently
provided by securities firms. While it is not possible to predict the type and
extent of competing services which banks and other institutions ultimately may
offer to customers, our subsidiaries may be adversely affected to the extent
those services are offered on a large scale basis. We try to compete through our
advertising and recruiting programs for registered representatives interested in
joining us.
GOVERNMENT REGULATION
The securities industry and our business is subject to extensive
regulation by the SEC, state securities regulators and other governmental
regulatory authorities. The principal purpose of these regulations is the
protection of customers and the securities markets. The SEC is the federal
agency charged with the administration of the federal securities laws. Much of
the regulation of broker-dealers, however, has been delegated to self-regulatory
organizations, principally the NASD Regulation, Inc., the regulatory arm of the
NASD, the NYSE and the Municipal Securities Rulemaking Board. These
self-regulatory organizations adopt rules, subject to approval by the SEC, which
govern its members and conduct periodic examinations of member firms'
operations. Securities firms are also subject to regulation by state securities
commissions in the states in which they are registered. Ladenburg Thalmann & Co.
is a registered broker-dealer with the SEC and a member firm of the NYSE. It is
licensed to conduct activities as a broker-dealer in all 50 states.
Ladenburg Thalmann Europe is an authorized securities broker regulated
by the Financial Services Authority of the United Kingdom and, through the
European Community's passporting provisions, is authorized to conduct business
in all of the member countries of the European Community.
The regulations to which broker-dealers are subject cover all aspects
of the securities industry, including:
o sales methods and supervision;
o trading practices among broker-dealers;
o use and safekeeping of customers' funds and securities;
o capital structure of securities firms;
o record keeping; and
o the conduct of directors, officers and employees.
Additional legislation, changes in rules promulgated by the SEC and by
self-regulatory bodies or changes in the interpretation or enforcement of
existing laws and rules often directly affect the method of operation and
profitability of broker-dealers. The SEC and the self-regulatory bodies may
conduct administrative proceedings which can result in censure, fine, suspension
or expulsion of a broker-dealer, its officers, employees or registered
representatives.
5
NET CAPITAL REQUIREMENTS
As a registered broker-dealer and member of the NYSE, Ladenburg
Thalmann & Co. is subject to the SEC's net capital rule, which is designed to
measure the general financial integrity and liquidity of a broker-dealer. Net
capital is defined as the net worth of a broker-dealer subject to certain
adjustments. In computing net capital, various adjustments are made to net worth
which exclude assets not readily convertible into cash. Additionally, the
regulations require that certain assets, such as a broker-dealer's position in
securities, be valued in a conservative manner so as to avoid over-inflation of
the broker-dealer's net capital. We compute net capital under the alternate
method permitted by the net capital rule. Under this method, Ladenburg Thalmann
& Co. is required to maintain net capital equal to the greater of:
o $250; or
o a determinable amount based on the market price and number of
securities in which Ladenburg Thalmann & Co. is a market-maker, not
to exceed $1,000.
Compliance with the net capital rule limits those operations of broker-dealers
which require the intensive use of their capital, such as underwriting
commitments and principal trading activities.
In addition to the above requirements, funds invested as equity capital
may not be withdrawn, nor may any unsecured advances or loans be made to any
stockholder of a registered broker-dealer, if, after giving effect to the
withdrawal, advance or loan and to any other withdrawal, advance or loan as well
as to any scheduled payments of subordinated debt which are scheduled to occur
within six months, the net capital of the broker-dealer would fall below 120% of
the minimum dollar amount of net capital required or the ratio of aggregate
indebtedness to net capital would exceed 10 to 1. Further, any funds invested in
the form of subordinated debt generally must be invested for a minimum term of
one year and repayment of such debt may be suspended if the broker-dealer fails
to maintain certain minimum net capital levels. For example, scheduled payments
of subordinated debt are suspended in the event that the ratio of aggregate
indebtedness to net capital of the broker-dealer would exceed 12 to 1 or its net
capital would be less than 120% of the minimum dollar amount of net capital
required. The net capital rule also prohibits payments of dividends, redemption
of stock and the prepayment, or payment in respect of principal or subordinated
indebtedness if net capital, after giving effect to the payment, redemption or
repayment, would be less than the specified percent (120%) of the minimum net
capital requirement.
At December 31, 2002, Ladenburg Thalmann & Co. had net capital that
exceeded its minimum net capital requirement. Failure to maintain the required
net capital may subject a firm to suspension or expulsion by the NYSE, the SEC
and other regulatory bodies and ultimately may require its liquidation.
Compliance with the net capital rule could limit Ladenburg Thalmann & Co.'s
operations that require the intensive use of capital, such as underwriting and
trading activities, and also could restrict our ability to withdraw capital from
it, which in turn could limit our ability to pay dividends, repay debt and
redeem or purchase shares of our outstanding capital stock.
PERSONNEL
At December 31, 2002, we had a total of approximately 397 employees, of
which 242 are registered representatives and 155 are other full time employees.
These employees are not covered by a collective bargaining agreement. We
consider our relationship with our employees to be good.
6
RISK FACTORS
WE HAVE INCURRED, AND MAY CONTINUE TO INCUR, SIGNIFICANT LOSSES.
We incurred significant losses from operations during 2002. We cannot
assure you that we will be able to achieve or sustain revenue growth,
profitability or positive cash flow on either a quarterly or annual basis or
that profitability, if achieved, will be sustained. If we are unable to achieve
or sustain profitability, we may not be financially viable in the future and may
have to curtail, suspend or cease additional operations.
WE HAVE INCURRED, AND MAY IN THE FUTURE INCUR, SIGNIFICANT LOSSES FROM TRADING
AND INVESTMENT ACTIVITIES DUE TO MARKET FLUCTUATIONS AND VOLATILITY.
We generally maintain trading and investment positions in the equity
markets. To the extent that we own assets, i.e., have long positions, in those
markets, a downturn in those markets could result in losses from a decline in
the value of those long positions. Conversely, to the extent that we have sold
assets that we do not own, i.e., have short positions, in any of those markets,
an upturn in those markets could expose us to potentially unlimited losses as we
attempt to cover our short positions by acquiring assets in a rising market.
We may from time to time have a trading strategy consisting of holding
a long position in one security and a short position in another security from
which we expect to earn revenues based on changes in the relative value of the
two securities. If, however, the relative value of the two securities changes in
a direction or manner that we did not anticipate or against which we are not
hedged, we might realize a loss in those paired positions. In addition, we
maintain trading positions that can be adversely affected by the level of
volatility in the financial markets, i.e., the degree to which trading prices
fluctuate over a particular period, in a particular market, regardless of market
levels.
WE WILL NEED TO RAISE ADDITIONAL FUNDS IN THE NEAR FUTURE.
Our capital requirements continue to be adversely affected by our
inability to generate cash from operations as a result of the continued
significant decline in the equity markets. As a result, we have been forced to
cut expenses as necessary. Additionally, we have been forced to rely on
borrowings in order to generate working capital for our operations. Accordingly,
unless the equity markets rebound quickly, we will need to seek to raise
additional capital through other available sources, including through equity
offerings or borrowing additional funds on a short-term basis from third
parties, including our current debtholders, shareholders and clearing broker. As
of December 31, 2002, we had cash and cash equivalents of approximately $11,752.
Accordingly, if we continue to be unable to generate cash from operations and
are unable to find sources of funding, it would have an adverse impact on our
liquidity and operations.
OUR EXPENSES MAY INCREASE DUE TO UNRESOLVED REAL ESTATE COMMITMENTS.
Ladenburg Capital Management has two leases for office space in New
York which it no longer occupies, aggregating additional minimum lease payments
as of December 31, 2002 of approximately $2,000 per year through 2007 and $1,582
thereafter. We are currently in litigation with both landlords, and we are
attempting to terminate our remaining lease obligations under these leases.
During the year ended December 31 2002, Ladenburg Capital Management has
provided for costs of $3,031 in connection with such leases, including the
write-off of furniture, fixtures and leasehold improvements of $1,117, and the
recording of a liability at December 31, 2002, which gives effect to estimated
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sublease rentals. Additional costs may be incurred in connection with
terminating the leases, or if not terminated, to the extent of foregone rental
income in the event Ladenburg Capital Management does not sublease the office
space for an amount at least equal to the lease obligations. Such costs may have
a material adverse effect on Ladenburg Capital Management's financial position
and liquidity.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A BREAKDOWN IN THE FINANCIAL
MARKETS.
As a securities broker-dealer, our business is materially affected by
conditions in the financial markets and economic conditions generally, both in
the United States and elsewhere around the world. Many factors or events could
lead to a breakdown in the financial markets including war, terrorism, natural
catastrophes and other types of disasters. These types of events could cause
people to begin to lose confidence in the financial markets and their ability to
function effectively. If the financial markets are unable to effectively prepare
for these types of events and ease public concern over their ability to
function, our revenues are likely to decline and our operations will be
adversely affected.
OUR REVENUES MAY DECLINE IN ADVERSE MARKET OR ECONOMIC CONDITIONS.
Current unfavorable financial and economic conditions have reduced the
number and size of the transactions in which we provide underwriting services,
merger and acquisition consulting and other services. Our investment banking
revenues, in the form of financial advisory and underwriting fees, are directly
related to the number and size of the transactions in which we participate and
therefore have been adversely affected by the sustained market downturn.
Additionally, the downturn in market conditions led to a decline in the volume
of transactions that we executed for our customers and, therefore, to a decline
in the revenues we received from commissions and spreads. If these adverse
financial and economic conditions persist, we will incur a further decline in
transactions and revenues that we receive from commissions and spreads.
WE DEPEND ON SEVERAL KEY EMPLOYEES AND THE LOSS OF ANY OF THEIR SERVICES COULD
HARM OUR BUSINESS.
Our success is dependent in large part upon the services of several key
employees. We have employment agreements with Victor M. Rivas, Mark Zeitchick
and Vincent A. Mangone which provide for these individuals to be employed by us
through August 2004. Each of these individuals, however, may terminate his
agreement upon 30 days' notice. Although the employment agreements contain
various incentives designed to retain the services of these individuals,
including stock options and other incentive based awards as well as
non-solicitation provisions in our favor, these provisions may be insufficient
to keep these individuals from leaving us for a more lucrative opportunity. This
is especially true in light of the increasing competition for experienced
professionals in the securities industry. We do not maintain and do not intend
to obtain key man insurance on the lives of any of these individuals. In the
event that any of these individuals terminates his agreement or otherwise leave
our company, our operations may be materially and adversely affected.
WE FACE SIGNIFICANT COMPETITION FOR PROFESSIONAL EMPLOYEES.
From time to time, individuals we employ may choose to leave our
company to pursue other opportunities. We have experienced losses of registered
representatives, trading and investment banking professionals in the past and
the level of competition for key personnel remains intense. We cannot assure you
that the loss of key personnel will not occur again in the future. The loss of a
registered representative, trading or investment banking professional,
particularly a senior professional with a broad range of contacts in an
industry, could materially and adversely affect our operating results.
8
OUR PRINCIPAL SHAREHOLDERS INCLUDING OUR DIRECTORS AND OFFICERS CONTROL A LARGE
PERCENTAGE OF OUR SHARES OF COMMON STOCK AND CAN SIGNIFICANTLY INFLUENCE OUR
CORPORATE ACTIONS.
At the present time, our executive officers, directors and companies
that these individuals control beneficially own approximately 37% of our common
stock. Accordingly, these individuals and entities will be able to significantly
influence most, if not all, of our corporate actions, including the election of
directors and the appointment of officers. Additionally, this ownership of our
common stock may make it difficult for a third party to acquire control of us,
therefore possibly discouraging third parties from seeking to acquire us. A
third party would have to negotiate any possible transactions with these
principal shareholders, and their interests may be different from the interests
of our other shareholders. This may depress the price of our common stock.
THE AMERICAN STOCK EXCHANGE MAY DELIST OUR COMMON STOCK FROM QUOTATION ON ITS
EXCHANGE.
Our common stock is currently quoted on the American Stock Exchange
("Exchange"). In order to continue quotation of our common stock, we must
maintain certain financial, distribution and stock price levels. Generally, we
must maintain a minimum amount in shareholders' equity (usually between $2
million and $4 million) and a minimum number of public shareholders (usually 300
shareholders or 200,000 shares held by our non-affiliates). Additionally, our
common stock cannot have what is deemed to be a "low selling price" as
determined by the Exchange.
Currently, we do not have the minimum amount in shareholders' equity as
required by the Exchange. Additionally, on March 27, 2003, the last reported
sale price of our common stock was $0.07. If the Exchange determines that this
is a "low selling price," it may require us to effect a reverse split or
suspend or remove our common stock from listing on the Exchange. In determining
whether a reverse split or suspension or removal is appropriate, the Exchange
will consider all pertinent factors including market conditions in general, the
number of shares outstanding, plans which may have been formulated by
management, applicable regulations of the state or country of incorporation or
of any governmental agency having jurisdiction over the company and the
relationship to other Exchange policies regarding continued listing.
If the Exchange delists our common stock from trading on its exchange,
we could face significant material adverse consequences including:
o a limited availability of market quotations for our common stock;
o a determination that our common stock is a "penny stock" which will
require brokers trading in our common stock to adhere to more
stringent rules and possibly resulting in a reduced level of trading
activity in the secondary trading market for our common stock;
o a limited amount of news and analyst coverage for our company; and
o a decreased ability to issue additional securities or obtain
additional financing in the future.
WE MAY HAVE DIFFICULTY EFFECTIVELY MANAGING OUR GROWTH.
In May 2001, we acquired Ladenburg Thalmann & Co. and significantly
increased the number of registered representatives, trading and investment
banking professionals under our control. Due to the overall declines in the U.S.
equity markets and the continued weak operating environment for the
broker-dealer industry in 2002, we were forced to reduce our number of
registered representatives, trading and investment banking professionals,
support staff and administrative employees. However, we are continually looking
for and reviewing possible business acquisitions that would allow our business
to expand and grow. Growth of this nature, however, involves numerous risks such
as:
9
o difficulties and expenses incurred in connection with the subsequent
assimilation of the operations and services or products of the
acquired company;
o the potential loss of key employees of the acquired company; and
o the diversion of management's attention from other business
concerns.
If we are unable to effectively address these risks, we may be required to
restructure the acquired business or write off the value of some or all of the
assets of the acquired business. Further, this type of growth requires increased
investments in management personnel, financial and management systems and
controls, and facilities. We cannot assure you that we will experience parallel
growth in these areas. If these areas do not grow at the same time, our
operating margins may decline from current levels.
Additionally, as is common in the securities industry, we will continue
to be highly dependent on the effective and reliable operation of our
communications and information systems. We believe that our current and
anticipated future growth will require implementation of new and enhanced
communications and information systems and training of our personnel to operate
such systems. Any difficulty or significant delay in the implementation or
operation of existing or new systems or the training of personnel could
adversely affect our ability to manage our growth.
WE MAY LOSE CUSTOMERS AND OUR REVENUES MAY DECLINE DUE TO OUR LACK OF INTERNET
BROKERAGE SERVICE CAPABILITY.
Recently, a growing number of brokerage firms have begun offering
Internet brokerage services to their customers in response to increased customer
demand for these services. While we intend to offer Internet brokerage services
in the future, we may not be able to offer services that will appeal to our
current or prospective customers and these services may not be profitable. Our
failure to commence Internet brokerage services in the near future could have a
material adverse effect on our business including the loss of our existing
customers to competitors that do offer these services. Additionally, if we
commence Internet brokerage services but are unable to attract customers for
those services, our revenues will decline.
WE RELY ON ONE PRIMARY CLEARING BROKER AND THE TERMINATION OF THE AGREEMENT WITH
THIS CLEARING BROKER COULD DISRUPT OUR BUSINESS.
Ladenburg Thalmann & Co. primarily uses one clearing broker to process
its securities transactions and maintain customer accounts on a fee basis. The
clearing broker also provides billing services, extends credit and provides for
control and receipt, custody and delivery of securities. Ladenburg Thalmann &
Co. depends on the operational capacity and ability of the clearing broker for
the orderly processing of transactions. In addition, by engaging the processing
services of a clearing firm, Ladenburg Thalmann & Co. is exempt from some
capital reserve requirements and other regulatory requirements imposed by
federal and state securities laws. If the clearing agreement is terminated for
any reason, we would be forced to find an alternative clearing firm. We cannot
assure you that we would be able to find an alternative clearing firm on
acceptable terms to it or at all.
In addition, during 2002, we completed the Clearing Conversion and
renegotiated our clearing agreement with this clearing broker. As part of the
negotiations, an affiliate of this clearing broker provided us with the Clearing
Loans, aggregating to $3,500, with various terms and maturing at various dates
through December 2006. The principal balance of the Clearing Loans is scheduled
to be forgiven as to $1,500 in November 2003, $667 in November 2004, $667 in
November 2005 and $666 in November 2006. Upon the forgiveness of the Clearing
10
Loans, the forgiven amount will be accounted for as a reduction of expenses.
However, if the clearing agreement is terminated for any reason prior to the
loan maturity dates, the loans, less any amounts that have been forgiven through
the date of the termination, must be repaid on demand.
OUR CLEARING BROKER EXTENDS CREDIT TO OUR CLIENTS AND WE ARE LIABLE IF THE
CLIENTS DO NOT PAY.
Ladenburg Thalmann & Co. permits its clients to purchase securities on
a margin basis or sell securities short, which means that the clearing firm
extends credit to the client secured by cash and securities in the clients'
account. During periods of volatile markets, the value of the collateral held by
the clearing broker could fall below the amount borrowed by the client. If
margin requirements are not sufficient to cover losses, the clearing broker
sells or buys securities at prevailing market prices, and may incur losses to
satisfy client obligations. Ladenburg Thalmann & Co. has agreed to indemnify the
clearing broker for losses it may incur while extending credit to its clients.
WE ARE SUBJECT TO VARIOUS RISKS ASSOCIATED WITH THE SECURITIES INDUSTRY.
As a securities broker-dealer, Ladenburg Thalmann & Co. is subject to
uncertainties that are common in the securities industry. These uncertainties
include:
o the volatility of domestic and international financial, bond and
stock markets, as demonstrated by recent disruptions in the
financial markets;
o extensive governmental regulation;
o litigation;
o intense competition;
o substantial fluctuations in the volume and price level of
securities; and
o dependence on the solvency of various third parties.
As a result, revenues and earnings may vary significantly from quarter to
quarter and from year to year. In periods of low volume, profitability is
impaired because certain expenses remain relatively fixed. Ladenburg Thalmann &
Co. is much smaller and has much less capital than many competitors in the
securities industry. In the event of a market downturn, our business could be
adversely affected in many ways, including those described below. Our revenues
are likely to decline in such circumstances and, if we are unable to reduce
expenses at the same pace, our profit margins would erode.
OUR RISK MANAGEMENT POLICIES AND PROCEDURES MAY LEAVE US EXPOSED TO UNIDENTIFIED
RISKS OR AN UNANTICIPATED LEVEL OF RISK.
The policies and procedures we employ to identify, monitor and manage
risks may not be fully effective. Some methods of risk management are based on
the use of observed historical market behavior. As a result, these methods may
not predict future risk exposures, which could be significantly greater than the
historical measures indicate. Other risk management methods depend on evaluation
of information regarding markets, clients or other matters that are publicly
available or otherwise accessible by us. This information may not be accurate,
complete, up-to-date or properly evaluated. Management of operational, legal and
regulatory risk requires, among other things, policies and procedures to
properly record and verify a large number of transactions and events. We cannot
assure you that our policies and procedures will effectively and accurately
record and verify this information.
11
We seek to monitor and control our risk exposure through a variety of
separate but complementary financial, credit, operational and legal reporting
systems. We believe that we effectively evaluate and manage the market, credit
and other risks to which we are exposed. Nonetheless, the effectiveness of our
ability to manage risk exposure can never be completely or accurately predicted
or fully assured. For example, unexpectedly large or rapid movements or
disruptions in one or more markets or other unforeseen developments can have a
material adverse effect on our results of operations and financial condition.
The consequences of these developments can include losses due to adverse changes
in inventory values, decreases in the liquidity of trading positions, higher
volatility in earnings, increases in our credit risk to customers as well as to
third parties and increases in general systemic risk.
CREDIT RISK EXPOSES US TO LOSSES CAUSED BY FINANCIAL OR OTHER PROBLEMS
EXPERIENCED BY THIRD PARTIES.
We are exposed to the risk that third parties that owe us money,
securities or other assets will not perform their obligations. These parties
include:
o trading counterparties;
o customers;
o clearing agents;
o exchanges;
o clearing houses; and
o other financial intermediaries as well as issuers whose securities
we hold.
These parties may default on their obligations owed to us due to bankruptcy,
lack of liquidity, operational failure or other reasons. This risk may arise,
for example, from:
o holding securities of third parties;
o executing securities trades that fail to settle at the required time
due to non-delivery by the counterparty or systems failure by
clearing agents, exchanges, clearing houses or other financial
intermediaries; and
o extending credit to clients through bridge or margin loans or other
arrangements.
Significant failures by third parties to perform their obligations owed to us
could adversely affect our revenues and perhaps our ability to borrow in the
credit markets.
INTENSE COMPETITION FROM EXISTING AND NEW ENTITIES MAY ADVERSELY AFFECT OUR
REVENUES AND PROFITABILITY.
The securities industry is rapidly evolving, intensely competitive and
has few barriers to entry. We expect competition to continue and intensify in
the future. Many of our competitors have significantly greater financial,
technical, marketing and other resources than we do. Some of our competitors
also offer a wider range of services and financial products than we do and have
greater name recognition and a larger client base. These competitors may be able
to respond more quickly to new or changing opportunities, technologies and
client requirements. They may also be able to undertake more extensive
12
promotional activities, offer more attractive terms to clients, and adopt more
aggressive pricing policies. We may not be able to compete effectively with
current or future competitors and competitive pressures faced by us may harm our
business.
THE PRECAUTIONS WE TAKE TO PREVENT AND DETECT EMPLOYEE MISCONDUCT MAY NOT BE
EFFECTIVE AND WE COULD BE EXPOSED TO UNKNOWN AND UNMANAGED RISKS OR LOSSES.
We run the risk that employee misconduct could occur. Misconduct by
employees could include:
o employees binding us to transactions that exceed authorized limits
or present unacceptable risks to us;
o employees hiding unauthorized or unsuccessful activities from us; or
o the improper use of confidential information.
These types of misconduct could result in unknown and unmanaged risks or losses
to us including regulatory sanctions and serious harm to our reputation. The
precautions we take to prevent and detect these activities may not be effective.
If employee misconduct does occur, our business operations could be materially
adversely affected.
WE ARE CURRENTLY SUBJECT TO EXTENSIVE SECURITIES REGULATION AND THE FAILURE TO
COMPLY WITH THESE REGULATIONS COULD SUBJECT US TO PENALTIES OR SANCTIONS.
The securities industry and our business is subject to extensive
regulation by the SEC, state securities regulators and other governmental
regulatory authorities. We are also regulated by industry self-regulatory
organizations, including the NYSE, the NASD and the Municipal Securities
Rulemaking Board.
Ladenburg Thalmann & Co. is a registered broker-dealer with the SEC and
a member firm of the NYSE. Broker-dealers are subject to regulations which cover
all aspects of the securities business, including:
o sales methods and supervision;
o trading practices among broker-dealers;
o use and safekeeping of customers' funds and securities;
o capital structure of securities firms;
o record keeping; and
o the conduct of directors, officers and employees.
Much of the regulation of broker-dealers has been delegated to self-regulatory
organizations, principally the NASD Regulation, Inc., the regulatory arm of the
NASD, and the NYSE, which are our primary regulatory agencies. NASD Regulation
and the NYSE adopt rules, subject to approval by the SEC, that govern its
members and conducts periodic examinations of member firms' operations.
Compliance with many of the regulations applicable to us involves a
number of risks, particularly in areas where applicable regulations may be
subject to varying interpretation. The requirements imposed by these regulators
are designed to ensure the integrity of the financial markets and to protect
13
customers and other third parties who deal with us. Consequently, these
regulations often serve to limit our activities, including through net capital,
customer protection and market conduct requirements. If we are found to have
violated an applicable regulation, administrative or judicial proceedings may be
initiated against us that may result in:
o censure;
o fine;
o civil penalties, including treble damages in the case of insider
trading violations;
o the issuance of cease-and-desist orders;
o the deregistration or suspension of our broker-dealer activities;
o the suspension or disqualification of our officers or employees; or
o other adverse consequences.
The imposition of any of these or other penalties could have a material adverse
effect on our operating results and financial condition.
The regulatory environment is also subject to change. We may be
adversely affected as a result of new or revised legislation or regulations
imposed by the SEC, other federal or state governmental regulatory authorities,
or self-regulatory organizations. We also may be adversely affected by changes
in the interpretation or enforcement of existing laws and rules by these
governmental authorities and self-regulatory organizations.
FAILURE TO COMPLY WITH NET CAPITAL REQUIREMENTS COULD SUBJECT US TO SUSPENSION
OR REVOCATION BY THE SEC OR SUSPENSION OR EXPULSION BY THE NASD AND THE NYSE.
Ladenburg Thalmann & Co. is subject to the SEC's net capital rule which
requires the maintenance of minimum net capital. We compute net capital under
the alternate method permitted by the net capital rule. Under this method,
Ladenburg Thalmann & Co. is required to maintain net capital equal to:
o $250; or
o a determinable amount based on the market price and number of
securities in which Ladenburg Thalmann & Co. is a market-maker, not
to exceed $1,000.
The net capital rule is designed to measure the general financial integrity and
liquidity of a broker-dealer. In computing net capital, various adjustments are
made to net worth which exclude assets not readily convertible into cash.
Additionally, the regulations require that certain assets, such as a
broker-dealer's position in securities, be valued in a conservative manner so as
to avoid over-inflation of the broker-dealer's net capital. The net capital rule
requires that a broker-dealer maintain a certain minimum level of net capital.
The particular levels vary in application depending upon the nature of the
activity undertaken by a firm. Compliance with the net capital rule limits those
14
operations of broker-dealers which require the intensive use of their capital,
such as underwriting commitments and principal trading activities. The rule also
limits the ability of securities firms to pay dividends or make payments on
certain indebtedness such as subordinated debt as it matures. A significant
operating loss or any charge against net capital could adversely affect the
ability of a broker-dealer to expand or, depending on the magnitude of the loss
or charge, maintain its then present level of business. The NASD and the NYSE
may enter the offices of a broker-dealer at any time, without notice, and
calculate the firm's net capital. If the calculation reveals a deficiency in net
capital, the NASD may immediately restrict or suspend certain or all of the
activities of a broker-dealer, including its ability to make markets. Ladenburg
Thalmann & Co. may not be able to maintain adequate net capital, or its net
capital may fall below requirements established by the SEC, and subject us to
disciplinary action in the form of fines, censure, suspension, expulsion or the
termination of business altogether.
RISK OF LOSSES ASSOCIATED WITH SECURITIES LAWS VIOLATIONS AND LITIGATION.
Many aspects of our business involve substantial risks of liability. An
underwriter is exposed to substantial liability under federal and state
securities laws, other federal and state laws, and court decisions, including
decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel. In recent years,
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. Our
underwriting activities will usually involve offerings of the securities of
smaller companies, which often involve a higher degree of risk and are more
volatile than the securities of more established companies. In comparison with
more established companies, smaller companies are also more likely to be the
subject of securities class actions, to carry directors and officers liability
insurance policies with lower limits or not at all, and to become insolvent.
Each of these factors increases the likelihood that an underwriter of a smaller
companies' securities will be required to contribute to an adverse judgment or
settlement of a securities lawsuit.
In the normal course of business, our operating subsidiaries have been
and continue to be the subject of numerous civil actions and arbitrations
arising out of customer complaints relating to our activities as a
broker-dealer, as an employer and as a result of other business activities. In
general, the cases involve various allegations that our employees had mishandled
customer accounts. We believe that, based on our historical experience and the
reserves established by us, the resolution of the claims presently pending will
not have a material adverse effect on our financial condition. However, although
we typically reserve an amount we believe will be sufficient to cover any
damages assessed against us, we have in the past been assessed damages that
exceeded our reserves. If we misjudged the amount of damages that may be
assessed against us from pending or threatened claims, or if we are unable to
adequately estimate the amount of damages that will be assessed against us from
claims that arise in the future and reserve accordingly, our financial condition
may be materially adversely affected.
POSSIBLE ADDITIONAL ISSUANCES WILL CAUSE DILUTION.
While we currently have outstanding 42,025,211 shares of common stock,
options to purchase a total of 4,656,813 shares of common stock, warrants to
purchase a total of 200,000 shares of common stock and senior convertible
promissory notes initially convertible into 11,296,746 shares of common stock,
we are authorized to issue up to 200,000,000 shares of common stock and are
therefore able to issue additional shares without being required under corporate
law to obtain shareholder approval. If we issue additional shares, or if our
existing shareholders exercise or convert their outstanding options or notes,
our other shareholders may find their holdings drastically diluted, which if it
occurs, means that they will own a smaller percentage of our company.
15
WE MAY ISSUE PREFERRED STOCK WITH PREFERENTIAL RIGHTS THAT MAY ADVERSELY AFFECT
YOUR RIGHTS.
The rights of our shareholders will be subject to and may be adversely
affected by the rights of holders of any preferred stock that we may issue in
the future. Our articles of incorporation authorize our board of directors to
issue up to 2,000,000 shares of "blank check" preferred stock and to fix the
rights, preferences, privilege and restrictions, including voting rights, of
these shares without further shareholder approval.
ITEM 2. PROPERTIES.
Our principal executive offices and those of Ladenburg Thalmann & Co.
and other subsidiaries of ours are located at 590 Madison Avenue, 34th Floor,
New York, New York 10022, where we lease approximately 82,000 square feet of
office space pursuant to a lease that expires in June 2015. We also operate
several branch offices located in New York, Florida and California. During 2002,
we closed our office in Nevada and in January 2003 we closed our office in Ohio.
Ladenburg Capital Management has two leases for office space in New York which
it no longer occupies, aggregating additional minimum lease payments as of
December 31, 2002 of approximately $2,000 per year through 2007 and $1,582
thereafter. We are currently in litigation with both landlords, and we are
attempting to terminate our remaining lease obligations under these leases.
During the year ended December 31 2002, Ladenburg Capital Management has
provided for costs of $3,031 in connection with such leases, including the
write-off of furniture, fixtures and leasehold improvements of $1,117, and the
recording of a liability at December 31, 2002, which gives effect to estimated
sublease rentals. Additional costs may be incurred in connection with
terminating the leases, or if not terminated, to the extent of foregone rental
income in the event Ladenburg Capital Management does not sublease the office
space for an amount at least equal to the lease obligations. Such costs may have
a material adverse effect on Ladenburg Capital Management's financial position
and liquidity.
ITEM 3. LEGAL PROCEEDINGS.
See Note 9 to our Consolidated Financial Statements included in Part
II, Item 8 of this Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 6, 2002, we held our annual meeting of shareholders at
which we submitted the following matters to a vote of security holders:
16
1. Our shareholders re-elected each of the individuals nominated for
election for a term of one year and until their successors are elected and
qualified as follows:
VOTES FOR VOTES WITHHELD
--------- --------------
Henry C. Beinstein 34,153,934 270,770
Robert J. Eide 34,153,856 270,848
Richard J. Lampen 34,194,012 230,692
Bennett S. LeBow 34,128,538 296,166
Howard M. Lorber 34,107,446 317,258
Vincent A. Mangone 33,496,995 927,709
Victor M. Rivas 33,522,259 902,445
Richard J. Rosenstock 33,496,695 928,009
Mark Zeitchick 33,496,667 928,037
2. Our shareholders authorized an amendment to our articles of
incorporation to increase the number of authorized shares of our common stock
from 100,000,000 shares to 200,000,000 shares as follows:
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
------------------ -------------------- ------------------- -----------------
33,168,345 1,235,917 20,441 4
------------------ -------------------- ------------------- -----------------
3. Our shareholders authorized an amendment to our 1999 Performance
Equity 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 year from 300,000 shares
to 1,000,000 shares as follows:
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
----------------- ------------------ ------------------- -------------------
18,597,730 3,394,701 21,910 12,410,366
----------------- ------------------ ------------------- -------------------
4. Our shareholders approved the adoption of the "Ladenburg Thalmann
Financial Services Inc. Qualified Employee Stock Purchase Plan" as follows:
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
----------------- ------------------ ------------------- -------------------
19,479,100 2,523,017 12,226 12,410,364
----------------- ------------------ ------------------- -------------------
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On April 14, 2000, our common stock began trading on the Exchange under
the symbol "GBC." On May 7, 2001, we changed our name to Ladenburg Thalmann
Financial Services Inc. and on the same date our common stock began quotation on
the Exchange under the symbol "LTS." The following table sets forth the high and
low prices of the common stock for the periods specified.
HIGH($) LOW($)
------- ------
2003
First Quarter* 0.12 0.05
2002
Fourth Quarter 0.23 0.09
Third Quarter 0.35 0.13
Second Quarter 0.96 0.30
First Quarter 1.00 0.57
2001
Fourth Quarter 1.86 0.70
Third Quarter 2.08 0.70
Second Quarter 3.20 1.96
First Quarter 3.15 1.85
- --------
*Through March 28, 2003.
HOLDERS
On March 28, 2003, there were approximately 13,300 holders of record of
our common stock.
DIVIDENDS
To date, we have not paid or declared any dividends on our common
stock. The payment of future dividends, if any, will be at the discretion of our
board of directors after taking into account various factors, including our
financial condition, operating results, current anticipated cash needs as well
as any other factors that the board of directors may deem relevant. Our ability
to pay dividends in the future also may be restricted by our operating
subsidiaries' obligations to comply with the net capital requirements imposed on
broker-dealers by the SEC and the NASD. We do not intend to declare any
dividends in the foreseeable future, but instead intend on retaining all
earnings for use in our business.
RECENT SALES OF UNREGISTERED SECURITIES
None.
18
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below is derived from our audited
financial statements. This selected financial data should be read in conjunction
with the section under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS: (a)
Total revenues ....................... $ 79,998 $ 93,953 $ 89,584 $ 77,171 $ 66,569
Total costs and expenses ............. 124,991 106,202 83,372 74,107 72,741
(Loss) income before income taxes .... (44,993) (12,249) 6,212 3,064 (6,172)
Net (loss) income .................... (46,393) (12,293) 5,090 4,006 (6,175)
Per common and equivalent share(b):
Basic and diluted:
(Loss) income per Common Share .... $ (1.10) $ (0.31) $ 0.15 $ 0.12 $ (0.18)
============ ============ ============ ============ ============
Basic and diluted weighted average
Common Shares (b) ................. 42,025,211 39,458,057 34,647,170 34,647,170 34,647,170
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Total assets ......................... $ 43,899 $ 98,407 $ 50,354 $ 49,139 $ 55,671
Total liabilities, excluding
subordinated liabilities ........... 32,293 40,713 20,054 23,930 22,298
Subordinated debt .................... 22,500 22,500 -- -- 18,500
Shareholders' equity (capital deficit) (10,894) 35,194 30,300 25,209 14,874
OTHER DATA:
Ratio of assets to shareholders'
equity .......................... N/A 2.80 1.66 1.95 3.74
Return on average equity ............. (381.8%) (38.0%) 18.3% 20.0% (34.3%)
Return on average equity
before income taxes ............. (370.3%) (37.5%) 22.4% 15.3% (34.3%)
Book value per share (b) ............. -- $ 0.84 $ 1.67 $ 1.39 $ 0.82
Registered representatives ........... 399 540 250 171 200
- -------------
(a) The financial data prior to May 7, 2001 reflect Ladenburg Thalmann &
Co.'s financial results and the financial data afterwards reflect
Ladenburg Thalmann Financial Services' financial results.
(b) All per share data prior to May 7, 2001 have been retroactively adjusted
to reflect the number of equivalent shares received by the former
stockholders of Ladenburg Thalmann & Co. in the form of common stock,
convertible notes and cash.
19
ITEM 7. 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, among others, Ladenburg Thalmann & Co. Inc., Ladenburg Capital
Management Inc., Ladenburg Thalmann Europe, Ltd., Ladenburg Thalmann
International, Ltd. and Ladenburg Fund Management Inc.
Prior to May 7, 2001, Ladenburg Capital Management and Ladenburg
Fund Management were our only subsidiaries. On May 7, 2001, we acquired all of
the outstanding common stock of Ladenburg Thalmann & Co., and our name was
changed from GBI Capital Management Corp. to Ladenburg Thalmann Financial
Services Inc. Ladenburg Thalmann & Co. was an indirect wholly owned subsidiary
of New Valley Corporation until December 1999 when a minority stake was sold,
leaving New Valley with an indirect 80.1% ownership interest. In consideration
for the shares of Ladenburg Thalmann & Co., we issued to the former stockholders
of Ladenburg Thalmann & Co. a majority interest in our common stock. The
acquisition of Ladenburg Thalmann & Co. has been accounted for under the
purchase method of accounting as a reverse acquisition. Under reverse
acquisition accounting, we were treated as the acquired entity as Ladenburg
Thalmann & Co.'s former stockholders held a majority of our common stock
following the transaction. As a result, our operating results were included as
of May 7, 2001, the date of the acquisition, with the historical financial
statements of Ladenburg Thalmann & Co. As appropriate, in the discussion of
operating results, increases in reported revenues and expenses as a result of
the acquired operations of Ladenburg Thalmann Financial Services Inc. 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 Thalmann & Co. We have changed our fiscal
year-end from September 30 to December 31 to conform to the fiscal year-end of
Ladenburg Thalmann & Co. For a more complete discussion of this transaction, see
Note 3 to our consolidated financial statements and Item 13 included in this
report.
RECENT DEVELOPMENTS
CHANGE OF ACCOUNTANTS AND CHIEF FINANCIAL OFFICER. 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
Ladenburg Thalmann & Co. since February 1990 and has been its chief financial
officer since August 1998. Mr. Giardina has also been our vice president of
finance since June 2001.
RENEGOTIATION OF CLEARING ARRANGEMENT. We recently completed our
Clearing Conversion with one of our clearing brokers whereby this clearing
broker became our primary clearing broker, clearing substantially all of our
business. As part of the new agreement with this clearing broker, we will
realize significant cost savings from reduced ticket charges, and expect to
realize additional cost savings from other incentives. In addition, under the
20
new clearing agreement, an affiliate of the clearing broker loaned us the $3,500
of Clearing Loans. The principal balance of the Clearing Loans is scheduled to
be forgiven as to $1,500 in November 2003, $667 in November 2004, $667 in
November 2005 and $666 in November 2006. Upon the forgiveness of the Clearing
Loans, the forgiven amount will be accounted for as a reduction of expenses.
However, if the clearing agreement is terminated for any reason prior to the
loan maturity dates, the loans, less any amounts that have been forgiven through
the date of the termination, must be repaid on demand.
LADENBURG CAPITAL MANAGEMENT. During the fourth quarter of 2002, in
order to reduce future operating expenses, we terminated the Ladenburg Capital
operations and filed to withdraw it as a broker-dealer. Ladenburg Capital
Management is currently in the process of winding down its remaining business,
including satisfying or collecting all of its outstanding obligations and
receivables to the extent possible. Ladenburg Thalmann & Co. agreed to and is
servicing the accounts of Ladenburg Capital Management and many of the employees
of Ladenburg Capital Management were offered employment with Ladenburg Thalmann
& Co. The termination of the Ladenburg Capital operations has reduced our
support staff expenses, operating expenses and general administrative expenses.
Ladenburg Capital Management has two leases for office space in New
York which it no longer occupies, aggregating additional minimum lease payments
as of December 31, 2002 of approximately $2,000 per year through 2007 and $1,582
thereafter. We are currently in litigation with both landlords, and we are
attempting to terminate our remaining lease obligations under these leases. Our
liabilities at December 31, 2002 include accruals for the estimated expense of
these lease terminations, which we believe are adequate. If we are not
successful in terminating these leases, we plan to sublease the properties.
During the year ended December 31 2002, Ladenburg Capital Management has
provided for costs of $3,031 in connection with such leases, including the
write-off of furniture, fixtures and leasehold improvements of $1,117, and the
recording of a liability at December 31, 2002, which gives effect to estimated
sublease rentals. Additional costs may be incurred in connection with
terminating the leases, or if not terminated, to the extent of foregone rental
income in the event Ladenburg Capital Management does not sublease the office
space for an amount at least equal to the lease obligations. Such costs may have
a material adverse effect on Ladenburg Capital Management's financial position
and liquidity.
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 included in this report 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.
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 Thalmann & Co. does not carry accounts
for customers or perform custodial functions related to customers' securities.
Ladenburg Thalmann & Co. introduces all of its customer transactions, which are
not reflected in these financial statements, to its clearing broker, which
maintains the customers' accounts and clears such transactions. Additionally,
the clearing broker provides the clearing and depository operations for
Ladenburg Thalmann & Co.'s proprietary securities transactions. These activities
may expose Ladenburg Thalmann & Co. to off-balance-sheet risks in the event that
21
customers do not fulfill their obligations with the clearing broker, as
Ladenburg Thalmann & Co. has agreed to indemnify its clearing broker 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 losses (income) from these
arrangements of $233 and $(150) for the years ended December 31, 2002 and 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 $6,201 for customer and
non-customer arbitration and lawsuit losses as of December 31, 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 and this could
have a material adverse affect on our future consolidated financial position,
results of operations or liquidity.
SEPTEMBER 11, 2001 EVENTS. On September 11, 2001, terrorists attacked
the World Trade Center complex in New York City, which subsequently collapsed
and damaged surrounding buildings, including one occupied by a branch office of
Ladenburg Capital Management. 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 Thalmann & Co.'s mid-town New York
headquarters. Although some of Ladenburg Capital Management'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, 2002 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 December 31, 2002 was $1,207.
Ladenburg Capital Management has initiated a lawsuit against one of its
landlords seeking 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 Management the
right to terminate in those circumstances. After the action was commenced, the
landlord filed for bankruptcy and the action was automatically stayed by the
Bankruptcy Court. We anticipate that the Bankruptcy Court will eventually lift
the stay and Ladenburg Capital Management will proceed with the claim. Once the
action is recommenced, Ladenburg Capital Management will continue to pursue the
claim vigorously and we believe it will prevail on its claim. However, in the
event that Ladenburg Capital Management does not prevail, it may incur
additional expense if it is forced to sublet the space.
22
NEW ACCOUNTING PRONOUNCEMENT. We are currently attempting to terminate
two of our existing lease commitments. During the fourth quarter of 2002, we
early adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" and applied its provisions to leased premises which were
vacated during such periods. 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
current 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 AND VALUATION OF DEFERRED TAX ASSETS. On January
1, 2002, we adopted SFAS 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. 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.
As a result of this valuation, an impairment charge of $18,762 of goodwill was
indicated and recorded. The expense is included in the year ended December 31,
2002. The goodwill was generated in the acquisition of the common stock of
Ladenburg Thalmann & Co. in May 2001, and the charge reflected overall market
declines during 2002. For a discussion of the adoption of SFAS No. 142 and the
impairment charge, see Note 1 to the consolidated financial statements included
in this report.
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 December 31, 2002, which
23
consist principally of the tax benefit of net operating loss carryforwards and
accrued expenses, amounts to $17,409. After consideration of all the evidence,
both positive and negative, especially the fact we have sustained operating
losses during 2002 and that we continue to be affected by conditions in the
economy, management has determined that a valuation allowance at December 31,
2002 was necessary to fully offset the deferred tax assets based on the
likelihood of future realization.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Our revenues for 2002 decreased $13,955 from 2001 primarily as a result
of decreases in net principal transactions of $19,616 offset by an increase in
commissions of $10,040. Our revenues were adversely affected by the overall
declines in the U.S. equity markets and the continuing weak operating
environment for the broker-dealer industry. For comparative purposes, the 2002
period includes revenues generated by the Ladenburg Capital operations for the
full year while the 2001 period includes revenues generated by the Ladenburg
Capital operations from May 7, 2001 to December 31, 2001.
Our expenses for 2002, exclusive of the $18,762 goodwill impairment
charge, increased $27. The overall net increase includes an increase in rent and
occupancy of $3,050, an increase in professional services of $1,869 and a net
increase in various other expenses of $2,322, net of decreased employee
compensation of $5,865 and decreased brokerage, communication and clearance fees
of $1,349. For comparative purposes, the 2002 period includes expenses incurred
by the Ladenburg Capital operations for the full year while the 2001 period
includes expenses incurred by the Ladenburg Capital operations from May 7, 2001
to December 31, 2001.
Our revenues for 2002 consisted of commissions of $49,796, net
principal transactions of $11,046, investment banking fees of $9,141, syndicate
and underwriting income of $258, interest and dividends of $2,285, investment
advisory fees of $2,736 and other income of $4,736. Our revenues for 2001
consisted of commissions of $39,756, net principal transactions of $30,662,
investment banking fees of $11,698, syndicate and underwriting income of $652,
interest and dividends of $4,100, investment advisory fees of $2,696 and other
income of $4,389. Our expenses for 2002 consisted of employee compensation and
benefits of $56,876, impairment of goodwill of $18,762 and other expenses of
$49,353. Our expenses for 2001 consisted of employee compensation and benefits
of $62,741 and other expenses of $43,461.
The $10,040 (25.3%) increase in commissions was primarily the result of
the impact of the acquired Ladenburg Capital operations, which provided
additional commission income of $34,900 in 2002 versus $25,175 in the 2001
period.
The $2,557 (21.9%) decrease in investment banking fees was primarily
the result of decreased revenue from private placement and advisory assignments
due to the decrease in capital markets activity.
The $19,616 (64.0%) decrease in principal transactions was primarily
the result of decreases in trading income of $14,207 in the 2002 period and a
decrease in sales credits caused by the continued significant decline in the
market for equity securities.
The decrease in compensation expense of $5,865 (9.3%) was primarily due
to the net decrease in revenues.
Based on the overall declines in the U.S. equity markets and the
conditions prevailing in the broker-dealer industry in 2002, we completed an
impairment review and recorded a $18,762 charge for the impairment of goodwill,
24
which was generated in the acquisition of the Ladenburg Capital operations. 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.
Income tax expense for 2002 was $1,400 compared to $44 in 2001. The
income tax rate for 2002 did not bear a customary relationship to effective tax
rates primarily as a result of an increase in the valuation allowance of
$12,844, state and local taxes and permanent differences. The income tax rate
for 2001 did not bear a customary relationship to effective tax rates primarily
as a result of the establishment of a valuation allowance of $4,565, state and
local taxes and permanent differences.
After consideration of all the evidence, both positive and negative,
especially the fact we have sustained operating losses during 2001 and for the
year ended December 31, 2002 and that we continue to be affected by conditions
in the economy, management has determined that a valuation allowance at December
31, 2002 was necessary to offset the deferred tax assets based on the likelihood
of future realization. Accordingly, during 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.
THE YEAR 2001 COMPARED TO 2000
Our revenues for 2001 increased $4,369 from 2000 primarily as a result
of increases in commissions of $6,689 and principal transactions of $2,387
offset by decreased investment banking fees of $4,239.
Our expenses for 2001 increased $22,830 primarily as a result of
increased employee compensation of $6,519 and increased brokerage, communication
and clearance fees of $6,171.
Our revenues for 2001 consisted of commissions of $39,756, principal
transactions of $30,662, investment banking fees of $11,698, syndicate and
underwriting income of $652, interest and dividends of $4,100, investment
advisory fees of $2,696 and other income of $4,389. Ladenburg Thalmann & Co.'s
revenues in 2000 consisted of commissions of $33,067, principal transactions of
$28,275, investment banking fees of $15,937, syndicate and underwriting income
of $417, interest and dividends of $5,241, investment advisory fees of $3,109
and other income of $3,538. Our expenses for 2001 consisted of employee
compensation and benefits of $62,741 and other expenses of $43,461. Expenses of
Ladenburg Thalmann & Co. for 2000 consisted of employee compensation and
benefits of $56,222 and other expenses of $27,150.
The $6,689 (20.2%) increase in commissions was the result of the impact
of the acquisition of the Ladenburg Capital operations, which provided
additional commission income of $25,175, offset by the significant decline in
the market for equity securities during 2001.
The $2,387 (8.4%) increase in principal transactions was primarily the
result of the acquisition of the Ladenburg Capital operations, which added
25
an additional $4,734 of principal transactions, offset by the continued
significant decline in the market for equity securities.
The $4,239 (26.6%) decrease in investment banking fees was primarily
the result of decreased revenue from private placement and advisory assignments
due to the decrease in capital markets activity.
The increase in compensation expense of $6,519 (11.6%) was primarily
the result of an increase in compensation expense associated with our acquired
operations, offset by a decrease in performance-based compensation.
Income tax expense for 2001 was $44 compared to $1,122 in 2000. The
income tax rate for 2001 did not bear a customary relationship to effective tax
rates primarily as a result of the establishment of a valuation allowance of
$4,565, state and local taxes and permanent differences. The income tax rate for
2000 did not bear a customary relationship to effective tax rates as a result of
the utilization of net operating loss carryforwards and state and local tax
expense.
LIQUIDITY AND CAPITAL RESOURCES
Approximately 62.6% of our assets at December 31, 2002 are highly
liquid, consisting primarily of cash and cash equivalents, securities
inventories, and receivables from other broker-dealers, all of which fluctuate,
depending upon the levels of customer business and trading activity. Receivables
from broker-dealers, which are primarily from our primary clearing broker, 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. A relatively small percentage of our total assets are fixed. The
total assets or the individual components of total assets may vary significantly
from period to period because of changes relating to customer demand, economic
and market conditions, and proprietary trading strategies.
Our brokerage subsidiary, Ladenburg Thalmann & Co. is subject to the
net capital rules of the SEC. Therefore, it is subject to certain restrictions
on the use of capital and its related liquidity. Ladenburg Thalmann & Co.'s
regulatory net capital, as defined, of $3,693, exceeded minimum capital
requirements of $1,000 by $2,693 at December 31, 2002. Failure to maintain the
required net capital may subject Ladenburg Thalmann & Co. to suspension or
expulsion by the NASD, the SEC and other regulatory bodies and ultimately may
require its liquidation. The net capital rule also prohibits the payment of
dividends, redemption of stock and prepayment or payment of principal of
subordinated indebtedness if net capital, after giving effect to the payment,
redemption or prepayment, would be less than specified percentages of the
minimum net capital requirement. Compliance with the net capital rule could
limit the operations of Ladenburg Thalmann & Co. that requires the intensive use
of capital, such as underwriting and trading activities, and also could restrict
our ability to withdraw capital from it, which in turn, could limit our ability
to pay dividends and repay and service our debt.
Ladenburg Thalmann & Co., as guarantor of its customer accounts to its
clearing broker, is exposed to off-balance-sheet risks in the event that its
customers do not fulfill their obligations with the clearing broker. In
addition, to the extent Ladenburg Thalmann & Co. maintains a short position in
certain securities, it is exposed to a future off-balance-sheet market risk,
since its ultimate obligation may exceed the amount recognized in the financial
statements.
Our primary sources of liquidity include cash inflows from operations,
borrowings and equity offerings.
26
Cash used in operating activities for the year ended December 31, 2002
was $2,919 as compared to $2,696 for 2001. The difference is primarily due to an
increase in loss for operations.
Cash flows used in investing activities for the year ended December 31,
2002 was $1,521 compared to cash flows provided by investing activities of
$2,416 for the 2001 period. The difference is primarily attributable to cash
received in the LTS acquisition in 2001 of $5,151 net of a decrease in capital
expenditures of $1,790.
The capital expenditures of $1,521 in 2002 and $2,735 in 2001 related
principally to leasehold improvements and enhancements and improvements to
computer equipment.
Cash flows provided from financing activities for the year ended
December 31, 2002 were $8,056 compared to $4,488 for 2001. The difference is
primarily attributable to $5,000 in loans received from New Valley in 2002
compared to $2,000 in loans received from New Valley and Frost-Nevada in 2001
which were repaid in 2002. In addition, $3,500 of loans were received from our
primary clearing broker in 2002.
We are obligated under noncancellable lease agreements, which provide
for minimum lease payments, net of lease abatement and exclusive of escalation
charges, of $4,125 in 2003 and approximately $4,500 per year until 2015. In
addition, Ladenburg Capital Management has two leases for office space which it
no longer occupies. Ladenburg Capital Management is currently in the process of
terminating the leases and has accrued reserves which we believe are adequate.
If we are not successful in terminating these leases, we plan to sublease the
properties. In this situation, our additional minimum lease payments as of
December 31, 2002 are approximately $2,000 per year, through 2007 and $1,582
thereafter.
In conjunction with the acquisition of the Ladenburg Capital
operations, we issued a total of $20,000 principal amount of senior convertible
promissory notes due December 31, 2005 to New Valley, Berliner
Effektengesellschaft AG and Frost-Nevada, Limited Partnership. The $10,000
principal amount of notes issued to New Valley and Berliner, the former
stockholders of Ladenburg Thalmann & Co., bear interest at 7.5% per annum, and
the $10,000 principal amount of notes issued to Frost-Nevada, bear 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
Thalmann & Co.
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, was due on the
earlier of December 31, 2003 or the completion of one or more equity financings
where we receive at least $5,000 in total proceeds. The terms of the loan
restrict us from incurring or assuming any indebtedness that is not subordinated
to the loan so long as the loan is outstanding. On July 16, 2002, we borrowed an
additional $2,500 from New Valley (collectively, the "2002 Loans") on the same
terms as the March 2002 loan. In November 2002, New Valley agreed in connection
with the Clearing Loans, to extend the maturity of the 2002 Loans to December
31, 2006 and to subordinate the 2002 Loans to the repayment of the Clearing
Loans.
On June 28, 2002, New Valley, Berliner and Frost-Nevada agreed with us
to forbear until May 15, 2003 payment of the interest due to them under the
senior convertible promissory notes held by these entities on the interest
payment dates of the notes commencing June 30, 2002 through March 2003 (the
"Forbearance Interest Payments"). On March 3, 2003, the holders of the senior
convertible promissory notes agreed to extend the interest forbearance period to
January 15, 2005 with respect to interest payments due through December 31,
2004. Interest on the deferred amounts accrues at 8% on the New Valley and
Berliner notes and 9% on the Frost-Nevada note. We also agreed to apply any net
27
proceeds from any subsequent public offerings to any such deferred amounts owed
to the holders of the notes to the extent possible. As of December 31, 2002,
accrued interest payments as to which a forbearance was received amounted to
$1,404 ($770 is included in accounts payable and accrued liabilities and $634 is
included in due to former parent and affiliate).
On October 8, 2002, we borrowed an additional $2,000 from New Valley.
The loan, which bore interest at 1% above the prime rate, matured on the
earliest of December 31, 2002, the next business day after we received our
federal income tax refund for the fiscal year ended September 30, 2002, and the
next business day after we received the Clearing Loans in connection with the
Clearing Conversion. This loan was repaid in December 2002 upon receipt of the
Clearing Loans.
Ladenburg Thalmann & Co. also has $2,500 outstanding under a junior
subordinated revolving credit agreement with an affiliate of its primary
clearing broker that matures on October 31, 2004, under which borrowings incur
interest at LIBOR plus 2%. The outstanding $2,500 subordinated loan at December
31, 2001 was repaid during 2002.
In November 2002 we consummated the Clearing Conversion whereby we now
clear substantially all of our business through one clearing agent, our primary
clearing broker. As part of the new agreement with this clearing agent, are
realizing significant cost savings from reduced ticket charges and other
incentives. In addition, under the new clearing agreement, an affiliate of the
clearing broker loaned us the $3,500 of Clearing Loans. The Clearing Loans are
forgivable over various periods, up to four years from the date of the Clearing
Conversion. The principal balance of the Clearing Loans is scheduled to be
forgiven as to $1,500 in November 2003, $667 in November 2004, $667 in November
2005 and $666 in November 2006. Upon the forgiveness of the Clearing Loans, the
forgiven amount will be accounted for as a reduction of expenses. However, if
the clearing agreement is terminated for any reason prior to the loan maturity
dates, the loans, less any amounts that have been forgiven through the date of
the termination, must be repaid on demand.
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 including reducing the
size of our workforce. Additionally, during the fourth quarter of 2002, in order
to reduce future operating expenses, we terminated the operations of Ladenburg
Capital Management and filed to withdraw it as a broker-dealer. Ladenburg
Thalmann & Co. has agreed to and is currently servicing the accounts of
Ladenburg Capital Management and many of the employees of Ladenburg Capital
Management were offered employment with Ladenburg Thalmann & Co. The termination
of Ladenburg Capital Management's operations reduced support 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 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 continue to review the situation
during the first half of 2003 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 circumstances where the rights
offering were ultimately consummated, we 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.
28
Our overall capital and funding needs are continually reviewed to
ensure that our liquidity and capital base can support the estimated needs of
our business units. These reviews take into account business needs as well as
regulatory capital requirements of the subsidiary. Based upon 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 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 our primary clearing broker. Accordingly, 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.
OFF-BALANCE SHEET ARRANGEMENTS
The table below summarizes information about our contractual
obligations as of December 31, 2002 and the effects these obligations are
expected to have on our liquidity and cash flow in the future years.
- ----------------------------------------- ----------------------------------------------------------------------------------------
Payments Due By Period ($)
----------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
- ----------------------------------------- ----------------- ------------------- ---------------- ------------------ --------------
Long-Term Debt 31,000 1,500 22,500 7,000 --
- ----------------------------------------- ----------------- ------------------- ---------------- ------------------ --------------
Capital Lease Obligations -- -- -- -- --
- ----------------------------------------- ----------------- ------------------- ---------------- ------------------ --------------
Operating Leases 74,646 6,128 13,148 12,551 42,819
- ----------------------------------------- ----------------- ------------------- ---------------- ------------------ --------------
Employment Agreement Compensation* 2,202 1,264 938 -- --
- ----------------------------------------- ----------------- ------------------- ---------------- ------------------ --------------
Other Long-Term Liabilities Reflected on -- -- -- -- --
the Company's Balance Sheet under GAAP
- ----------------------------------------- ----------------- ------------------- ---------------- ------------------ --------------
Totals 107,848 8,892 36,586 19,551 42,819
- ----------------------------------------- ----------------- ------------------- ---------------- ------------------ --------------
- -----------
* The employment agreements provide for bonus payments that are excluded from
these amounts.
MARKET RISK
Market risk generally represents the risk of loss that may result from
the potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rates, foreign exchange
rates, equity and commodity prices and also changes in the credit ratings of
either the issuer or its related country of origin. Market risk is inherent to
both derivative and non-derivative financial instruments, and accordingly, the
scope of our market risk management procedures extends beyond derivatives to
include all market risk sensitive financial instruments.
Current and proposed underwriting, corporate finance, merchant banking
and other commitments are subject to due diligence reviews by our senior
management, as well as professionals in the appropriate business and support
29
units involved. Credit risk related to various financing activities is reduced
by the industry practice of obtaining and maintaining collateral. We monitor our
exposure to counterparty risk through the use of credit exposure information,
the monitoring of collateral values and the establishment of credit limits.
We maintain inventories of trading securities. At December 31, 2002 the
fair market value of our inventories were $4,365 in long positions and $1,218 in
short positions. We performed an entity-wide analysis of our financial
instruments and assessed the related risk. Based on this analysis, in the
opinion of management, the market risk associated with our financial instruments
at December 31, 2002 will not have a material adverse effect on our consolidated
financial position or results of operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We and our representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995, including any statements that may be contained in the foregoing
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations", in this report and in other filings with the Securities
and Exchange Commission and in our reports to shareholders, which reflect our
expectations or beliefs with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
and, in connection with the "safe-harbor" provisions of the Private Securities
Reform Act, we have identified under "Risk Factors" in Item 1 above important
factors that could cause actual results to differ materially from those
contained in any forward-looking statement made by or on behalf of us.
Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. We do not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements and Notes thereto, together
with the reports thereon of Eisner LLP dated February 14, 2003 and
PricewaterhouseCoopers, LLP dated March 22, 2002, beginning on page F-1 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective September 30, 2002, we changed our independent accountants as
described in our Current Report on Form 8-K dated September 30, 2002 and filed
with the SEC on October 2, 2002.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of our
current directors and executive officers as of March 28, 2003. Our directors are
elected annually and serve until the next annual meeting of shareholders and
until their successors are elected and appointed. Our executive officers serve
until the election and qualification of their successors or until their death,
resignation or removal by our board of directors.
NAME AGE POSITION
- ---- --- --------
Howard M. Lorber 54 Chairman of the Board
Victor M. Rivas 59 President and Chief Executive Officer
Vincent A. Mangone 37 Executive Vice President and Director
Mark Zeitchick 37 Executive Vice President and Director
Henry C. Beinstein 60 Director
Robert J. Eide 50 Director
Richard J. Lampen 49 Director
Bennett S. LeBow 65 Director
Richard J. Rosenstock 51 Director
Salvatore Giardina 41 Vice President and Chief Financial Officer
HOWARD M. LORBER has been chairman of our board of directors since May
2001. Since November 1994, he has been president, chief operating officer and a
member of the board of directors of New Valley. From January 1994 to January
2001, Mr. Lorber was a consultant to Vector Group Ltd., a New York Stock
Exchange-listed holding company, and since January 2001 has served as its
president, chief operating officer and a member of its board of directors. Mr.
Lorber has been a stockholder and a registered representative of Aegis Capital
Corp., a broker-dealer and a member firm of the NASD since 1984. Since 1990, Mr.
Lorber has been chairman of the board of directors of Nathan's Famous, Inc., a
chain of fast food restaurants, and has been its chief executive officer since
1993. Mr. Lorber also serves as a director of United Capital Corp., a real
estate investment and diversified manufacturing company, and of Prime
Hospitality Corp., a company doing business in the lodging industry. He is also
a trustee of Long Island University and Babson College.
VICTOR M. RIVAS has been our president and chief executive officer and
a member of our board of directors since May 2001. Mr. Rivas has been affiliated
with Ladenburg Thalmann & Co. since September 1997 and has been its chairman and
chief executive officer since July 1999. He has also been co-chairman of the
board of directors of Ladenburg Capital Management since November 2001. Since
October 1999, he has been a member of the board of directors of New Valley.
Prior to joining Ladenburg Thalmann & Co., Mr. Rivas served as an executive
officer of the brokerage firms of Rickel & Associates, Inc. from March 1997 to
September 1997 and Janssen-Meyers Associates, L.P. from January 1996 to March
1997. Mr. Rivas had previously served as chairman of the board and chief
executive officer of Conquest Industries Inc. and its subsidiary, Conquest
Airlines Corp.
VINCENT A. MANGONE has been our executive vice president and a member
of our board of directors since August 1999. Mr. Mangone has also been
affiliated with Ladenburg Capital Management since October 1993 and has been an
executive vice president since September 1995.
31
MARK ZEITCHICK has been our executive vice president and a member of
our board of directors since August 1999. Mr. Zeitchick has also been affiliated
with Ladenburg Capital Management since October 1993. Mr. Zeitchick has been
Ladenburg Capital Management's co-chairman since November 2001. From September
1995 until November 2001, he was an executive vice president of Ladenburg
Capital Management. From May 2001 until November 2001, he served as chairman of
Ladenburg Capital Management, and became co-chairman in November 2001.
HENRY C. BEINSTEIN has been a member of our board of directors since
May 2001. Mr. Beinstein has been a director of New Valley since 1994. Since
August 2002, Mr. Beinstein has been a registered representative of Gagnon
Securities, LLC, a broker-dealer and a member firm of the NASD. From August 1997
until August 2002, Mr. Beinstein was the executive director of Schulte Roth &
Zabel LLP, a New York-based law firm. In August 2002, Mr. Beinstein retired from
this position. Prior to joining Schulte Roth & Zabel, Mr. Beinstein had served
as the managing director of Milbank, Tweed, Hadley & McCloy LLP, a New
York-based law firm, commencing in November 1995. From April 1985 through
October 1995, Mr. Beinstein was the executive director of Proskauer Rose LLP, a
New York-based law firm. Mr. Beinstein is a certified public accountant in New
York and New Jersey and prior to joining Proskauer was a partner and national
director of finance and administration at Coopers & Lybrand.
ROBERT J. EIDE has been a member of our board of directors since May
2001. He has also been the chairman and treasurer of Aegis Capital Corp. since
before 1988. Mr. Eide also serves as a director of Nathan's Famous and Vector
Group.
RICHARD J. LAMPEN has been a member of our board of directors since
January 2002. He has been the executive vice president and general counsel of
New Valley since October 1995 and a member of its board of directors since July
1996. Since July 1996, Mr. Lampen has served as executive vice president of
Vector Group. Since January 1997, Mr. Lampen has served as a director of CDSI
Holdings Inc., a company with interests in the marketing services business, and
since November 1998 has been its president and chief executive officer. From May
1992 to September 1995, Mr. Lampen was a partner at Steel Hector & Davis, a law
firm located in Miami, Florida. From January 1991 to April 1992, Mr. Lampen was
a managing director at Salomon Brothers Inc., an investment bank, and was an
employee at Salomon Brothers from 1986 to April 1992. Mr. Lampen has served as a
director of a number of other companies, including U.S. Can Corporation, The
International Bank of Miami, N.A., Spec's Music Inc. and Panaco, Inc., as well
as a court-appointed independent director of Trump Plaza Funding, Inc.
BENNETT S. LEBOW has been a member of our board of directors since May
2001. Since June 1990, Mr. LeBow has been the chairman of the board of directors
and chief executive officer of Vector Group, and has been a member of its board
of directors since October 1986 and currently holds various positions with
Vector Group's subsidiaries, including Vector Tobacco Inc. He has been chairman
of the board of directors of New Valley since January 1988 and chief executive
officer since November 1994.
RICHARD J. ROSENSTOCK has been a member of our board of directors since
August 1999. From May 2001 until December 2002, Mr. Rosenstock served as vice
chairman of our board of directors and from August 1999 until December 2002,
served as our chief operating officer. He also served as our president from
August 1999 until May 2001. Since January 2003, Mr. Rosenstock has been a
registered representative of Ladenburg Thalmann & Co. Mr. Rosenstock had been
affiliated with Ladenburg Capital Management from 1986 until December 2002. From
May 2001 until December 2002, he served as Ladenburg Capital Management's chief
executive officer. From January 1994 until May 1998, he served as an executive
vice president of Ladenburg Capital Management and was its president from May
1998 until November 2001.
32
OTHER EXECUTIVE OFFICER
SALVATORE GIARDINA has been our vice president and chief financial
officer since October 2002 and was our vice president of finance from June 2001
until October 2002. Mr. Giardina has been affiliated with Ladenburg Thalmann &
Co. since February 1990. He has served as Ladenburg Thalmann & Co.'s chief
financial officer since August 1998, and from February 1990 until August 1998,
served as its controller. From August 1983 until February 1990, Mr. Giardina was
an auditor with the national public accounting firm of Laventhol & Horwath. Mr.
Giardina is a certified public accountant.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers, directors and persons who beneficially own more than ten
percent of our common stock to file reports of ownership and changes in
ownership with the SEC. These reporting persons are also required to furnish us
with copies of all Section 16(a) forms they file. To our knowledge, based solely
on our review of the copies of these forms furnished to us and representations
that no other reports were required, all Section 16(a) reporting requirements
were complied with during the fiscal year ended December 31, 2002, except that
Dr. Frost, the beneficial holder of 16.6% of our common stock, filed one Form 4
late, which Form 4 included one transaction that was not reported on a timely
basis.
33
ITEM 11. EXECUTIVE COMPENSATION.
The following table shows the compensation paid by us to our chief
executive officer and to our other four most highly compensated executive
officers (collectively, the "Named Executive Officers") for the calendar years
2002 and 2001, for the period from October 1, 2000 until December 31, 2000
("Stub Period") and for the period from August 25, 1999 until September 30,
2000.
- --------------------------------------- --------------- ------------------------------ ----------------------- ---------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------- --------------- ----------------------- ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL PERIOD SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION
- --------------------------------------- --------------- -------------- --------------- ----------------------- ---------------------
Victor M. Rivas 2002 500,000 595,678(1) 300,000 3,044(2)
President and Chief Executive 2001 500,000(3) 867,826(4) 1,000,000 375,000(5)
Officer
- --------------------------------------- --------------- -------------- --------------- ----------------------- ---------------------
Mark Zeitchick 2002 90,000 378,055(6) 250,000 32,357(2)
Executive Vice President 2001 66,500 379,681(6) -0- 15,458(2)
Stub Period 30,000 150,651(6) -0- 2,981(2)
2000 130,000 2,482,017(7) -0- 278,394(8)
- --------------------------------------- --------------- -------------- --------------- ----------------------- ---------------------
Vincent A. Mangone 2002 90,000 378,055(6) 250,000 40,341(2)
Executive Vice President 2001 66,500 379,681(6) -0- 10,752(2)
Stub Period 30,000 150,651(6) -0- 7,436(2)
2000 130,000 2,482,017(7) -0- 278,510(8)
- --------------------------------------- --------------- -------------- --------------- ----------------------- ---------------------
Richard J. Rosenstock 2002 340,000 164,242(6) 250,000 641,580(9)
Former Vice Chairman and 2001 237,041 138,351(6) -0- -0-
Chief Operating Officer Stub Period 30,000 87,535(6) -0- 18,885(2)
2000 130,000 1,780,372(7) -0- 236,746(8)
- --------------------------------------- --------------- -------------- --------------- ----------------------- ---------------------
Salvatore Giardina 2002 214,000 -0- 35,000 70(10)
Vice President and 2001 214,000 3,500(11) -0- 709(10)
Chief Financial Officer
- --------------------------------------- --------------- -------------- --------------- ----------------------- ---------------------
(1) Represents (i) a $500,000 bonus paid by Ladenburg Thalmann & Co. and
(ii) a $95,678 bonus paid by us under our Special Performance Incentive
Plan.
(2) Represents commissions earned from customer accounts for which the
individual is a designated account representative.
(3) Represents $173,973 of salary paid by Ladenburg Thalmann & Co. prior to
the consummation of the stock purchase agreement with New Valley,
Berliner and Ladenburg Thalmann & Co. on May 7, 2001 and $326,027 of
salary paid thereafter by us.
(4) Represents (i) a $173,973 bonus paid by Ladenburg Thalmann & Co., (ii)
a $326,027 bonus paid by us pursuant to his employment agreement and
(iii) a $367,826 bonus paid by us under our Special Performance
Incentive Plan.
(5) Represents the portion of a fee paid by New Valley to Mr. Rivas which
was reimbursed by Ladenburg Thalmann & Co. for his services in
connection with the closing of the stock purchase agreement with New
Valley, Berliner and Ladenburg Thalmann & Co.
(6) Represents a bonus paid to the individual under our Special Performance
Incentive Plan.
34
(7) Represents bonuses paid under our Annual Incentive Bonus Plan and
Special Performance Incentive Plan as follows:
ANNUAL INCENTIVE ($) SPECIAL PERFORMANCE ($)
-------------------- -----------------------
Rosenstock 821,128 959,244
Zeitchick 821,128 1,660,889
Mangone 821,128 1,660,889
(8) Represents commissions earned from customer accounts for which the
individual is a designated account representative, together with
override commissions earned in the following amounts: Rosenstock -
$39,841, Zeitchick - $67,925 and Mangone - $67,925.
(9) Represents (i) a $590,000 accrual for a buy-out of Mr. Rosenstock's
employment agreement and (ii) $51,580 of commissions earned from
customer accounts for which Mr. Rosenstock is a designated account
representative.
(10) Represents residual earnings from stock options surrendered with
respect to the 1995 merger of Ladenburg Thalmann and New Valley.
(11) Represents a discretionary bonus received by the individual.
COMPENSATION ARRANGEMENTS FOR CURRENT EXECUTIVE OFFICERS
Victor M. Rivas is currently employed by us as our president and chief
executive officer until August 2004 under an employment agreement with Ladenburg
Thalmann & Co. The employment agreement provides for an annual base salary of
$500 subject to periodic increases as determined by our board of directors or
our compensation committee. The agreement also provides for a guaranteed minimum
annual bonus of $500. Mr. Rivas is entitled to participate in our Annual
Incentive Bonus Plan and receive an override (as defined in our Special
Performance Incentive Plan) in accordance with the terms of each plan. However,
our compensation committee may limit Mr. Rivas' participation in the plans so
that:
o he may not receive in excess of 32.5% of the bonus pool available
under the Bonus Plan; and
o he may not receive an override in excess of a certain percentage of
our total consolidated revenues earned in each year of the agreement
ranging from 0.6167% for revenues up to $150,000 to 0.5% for
revenues over $270,000.
Additionally, the committee may determine that $400 of Mr. Rivas' guaranteed
bonus will be credited against any amounts owed to him under the Special
Performance Incentive Plan. Due to our financial condition, during 2002 Mr.
Rivas voluntarily forfeited the accrued compensation due to him under this plan
of $305, in addition to forfeiting compensation that would otherwise be due to
him for the remainder of the 2002 year.
In connection with the agreement, we granted Mr. Rivas an option to
purchase 1,000,000 shares of our common stock. The option was granted under our
1999 Performance Equity Plan and is exercisable at a price of $3.05 per share.
35
The options vest in three annual installments commencing on May 7, 2002 and
expire on May 7, 2011. The options provide that if a change of control occurs,
all options not yet vested will vest and become immediately exercisable.
Messrs. Zeitchick and Mangone are currently employed by us as executive
vice presidents until August 2004 under employment agreements with us and
Ladenburg Capital Management. Each of these officers receive an annual base
salary of $90 subject to periodic increases as determined by our board of
directors or our compensation committee. Pursuant to the agreements, Messrs.
Zeitchick and Mangone are entitled to participate in our Annual Incentive Bonus
Plan and receive an override under the Special Performance Incentive Plan in
accordance with the terms of each plan. However, our compensation committee may
limit each of their participation in the plans so that:
o neither may receive in excess of 22.5% of the bonus pool available
under the Bonus Plan (if either Messrs. Zeitchick or Mangone receive
less than 22.5% of the bonus pool available under the Bonus Plan, he
may terminate the employment agreement for "reason" which entitles
him to certain severance benefits; and
o neither may receive an override in excess of a certain percentage of
our total consolidated revenues earned in each year of the agreement
ranging from 0.5067% for revenues up to $150,000 to 0.4108% for
revenues over $270,000.
Due to our financial condition, Messrs. Zeitchick and Mangone voluntarily
forfeited 25% of the compensation due to them under the Special performance
Incentive Plan for the period from September 1, 2002 through December 31, 2002.
The agreements with Messrs. Rivas, Zeitchick and Mangone provide that
they will not compete with us or our subsidiaries for a period of one year from
the date of their respective terminations.
Mr. Rosenstock, our former vice chairman and chief operating officer,
was previously employed by us under an employment agreement with us and
Ladenburg Capital Management pursuant to a five-year employment agreement dated
August 24, 1999. Due to our financial condition, effective September 1, 2002,
Mr. Rosenstock voluntarily forfeited 25% of the compensation due to him under
the Special Performance Incentive Plan for the remainder of the 2002 calendar
year. Effective September 1, 2002, Mr. Rosenstock also voluntarily forfeited 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 our subsidiaries. Effective December 31, 2002, we
entered into an amendment to Mr. Rosenstock's agreement that provided for him to
terminate his employment with us as our vice chairman and chief operating
officer. The amendment provides for him to be employed with our subsidiary,
Ladenburg Thalmann & Co. as a registered representative until December 31, 2005.
Mr. Rosenstock received $25 upon signing of the amendment and will receive a
monthly base salary of approximately $17 for the first year of the agreement and
a monthly base salary of $15 for the second and third years of the agreement.
Additionally, Mr. Rosenstock will receive 50% of all of his retail brokerage
production for the term of the agreement and 15% of any compensation received by
Ladenburg Thalmann & Co. or any of its affiliates as a finders fee for any
corporate finance transactions entered into within 18 months after the
introduction by Mr. Rosenstock to Ladenburg Thalmann & Co. However, he will no
longer be entitled to participate in the Special Performance Incentive Plan and
Annual Incentive Bonus Plan. The agreement provides that Mr. Rosenstock will not
compete with us or our subsidiaries for a period of one year from the date of
his termination, but allows him to deal with any of his prior or then existing
customers or clients without any restriction. Because Mr. Rosenstock is not
obligated to perform future services, the signing bonus and base salary are
considered a buy-out and, accordingly, a total of $590 was accrued as of
December 31, 2002 and included in operating expenses for 2002.
36
Salvatore Giardina, our vice president and chief financial officer, is
an at-will employee. His compensation consists of an annual base salary of $214
plus discretionary bonuses. Mr. Giardina received a bonus of $4 in 2001 and did
not receive a bonus in 2002.
COMPENSATION ARRANGEMENTS FOR DIRECTORS
Directors who are employees of ours receive no cash compensation for
serving as directors. During 2002, we paid our non-employee directors an annual
fee of $12, payable in quarterly installments, for their service on our board of
directors. Effective February 1, 2003, our directors will each receive annual
fees of $15, and members of our audit committee and compensation committee will
receive an additional annual fee of $10 and $5, respectively. In addition, each
director will receive five hundred dollars per meeting that he attends.
Additionally, upon their election or re-election, as the case may be, we grant
our non-employee directors ten-year options under our 1999 Performance Equity
Plan to purchase 20,000 shares of our common stock at fair market value on the
date of grant. On May 7, 2001, we granted to each of Messrs. Lorber, LeBow,
Frost, Beinstein, and Eide a ten-year option to purchase 20,000 shares of common
stock at an exercise price of $3.05 per share, which options vested in full on
May 7, 2002. On January 10, 2002, we granted Mr. Lampen a ten-year option to
purchase 20,000 shares of common stock at an exercise price of $0.88 per share,
which options vested in full on January 10, 2003. On November 15, 2002, we
granted each of Messrs. Lorber, LeBow, Beinstein, Eide and Lampen a ten-year
option to purchase 20,000 shares of common stock at an exercise price of $0.22
per share, which options vest in full on November 15, 2003. All of our directors
are reimbursed for their costs incurred in attending meetings of the board of
directors or of the committees on which they serve.
OPTION GRANTS
The following table represents the stock options granted in the fiscal
year ended December 31, 2002, to the Named Executive Officers.
STOCK OPTION GRANTS IN 2002
- --------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED TO
OPTIONS GRANTED EMPLOYEES IN EXERCISE PRICE EXPIRATION GRANT DATE PRESENT
NAME OF EXECUTIVE (#) FISCAL YEAR (%) OF OPTIONS($) DATE VALUE(1)($)
- ---------------------------- ------------------- ------------------------ ---------------- --------------- ---------------------
Victor M. Rivas 300,000 12.67% 0.88 1/10/12 $258,000
- ---------------------------- ------------------- ------------------------ ---------------- --------------- ---------------------
Richard J. Rosenstock 250,000 10.56% 0.88 1/10/12 $215,000
- ---------------------------- ------------------- ------------------------ ---------------- --------------- ---------------------
Mark Zeitchick 250,000 10.56% 0.88 1/10/12 $215,000
- ---------------------------- ------------------- ------------------------ ---------------- --------------- ---------------------
Vincent A. Mangone 250,000 10.56% 0.88 1/10/12 $215,000
- ---------------------------- ------------------- ------------------------ ---------------- --------------- ---------------------
Salvatore Giardina 35,000 1.48% 0.60 3/19/12 $ 20,300
- ---------------------------- ------------------- ------------------------ ---------------- --------------- ---------------------
(1) The estimated present value at grant date of the options granted to
such individuals has been calculated using the Black-Scholes option
pricing model, based upon the following assumptions: volatility of
134.08%, a risk-free rate of 4.385%, an expected life of 10 years, a
dividend rate of 0% and no forfeiture. The approach used in developing
the assumptions upon which the Black-Scholes valuation was done is
consistent with the requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation."
The following table sets forth the fiscal year-end option values of
outstanding options at December 31, 2002, and the dollar value of unexercised,
in-the-money options for our Named Executive Officers. There were no stock
options exercised by any of the Named Executive Officers in 2002.
37
AGGREGATED FISCAL YEAR-END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES UNDERLYING DOLLAR VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
NAME FISCAL YEAR END: FISCAL YEAR END
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
EXERCISABLE (#) UNEXERCISABLE (#) EXERCISABLE ($) UNEXERCISABLE ($)
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
Victor M. Rivas 333,333 966,667 -0- -0-
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
Richard J. Rosenstock 89,508 260,492 -0- -0-
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
Mark Zeitchick 98,460 251,540 -0- -0-
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
Vincent A. Mangone 98,460 251,540 -0- -0-
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
Salvatore Giardina 11,666 23,334 -0- -0-
- ---------------------------- --------------------- --------------------- --------------------- ----------------------
ANNUAL INCENTIVE BONUS PLAN
On August 23, 1999, our shareholders adopted the Annual Incentive Bonus
Plan, which is a performance-based compensation plan for our executive officers
and other key employees. The plan is administered by our compensation committee
and is intended to comply with the regulations issued under Section 162(m) of
the Internal Revenue Code. Under this plan, bonuses are paid to participants
selected by our compensation committee if performance targets established by our
compensation committee are met within the specified performance periods. For the
fiscal year ended December 31, 2002 and for the fiscal year ending December 31,
2003, our compensation committee determined that participating employees would
share in a bonus pool equal to 25% of our net income before taxes and before the
accrual of compensation payable under this plan provided that we achieve a 10%
return on equity before taxes at the end of the fiscal year. The maximum award
payable annually to any participant under this plan is limited to a percentage
of the bonus pool created and is subject to the maximum limit of $5,000,000 for
any person. The maximum award available to Victor M. Rivas under the Plan is
limited to 32.5% of the Pool and the maximum award available to any other
participant under the plan is limited to 22.5% of the Pool. No awards were made
under the Bonus Plan for fiscal 2002 to Messrs. Rivas, Rosenstock, Zeitchick and
Mangone, the participants in the Bonus Plan for 2002. The compensation committee
has selected Messrs. Rivas, Zeitchick and Mangone to participate in the Bonus
Plan for fiscal 2003.
SPECIAL PERFORMANCE INCENTIVE PLAN
On August 23, 1999, our shareholders adopted our Special Performance
Incentive Plan. The Special Performance Incentive Plan is similar in nature to
the Annual Incentive Bonus Plan in seeking to provide performance-based
compensation within the meaning of Section 162(m) of the Internal Revenue Code.
Executive officers and key employees selected by our compensation committee may
receive bonuses upon reaching performance targets established by our
compensation committee within specific performance periods, which performance
targets may be based upon one or more selected business criteria. For the fiscal
year ended December 31, 2002 and for the fiscal year ending December 31, 2003,
the compensation committee has determined that participants are entitled to
receive an incentive award that is based on our total consolidated revenues
provided that specified commission levels are achieved. Awards are payable
monthly, based on the average monthly revenues to such date. However, final
awards reflecting the performance for the last month of the fiscal period and
the fiscal period overall are not paid until all financial results for the year
are reconciled and the compensation committee has approved and certified that
the established performance requirements have been achieved. The maximum award
payable for any fiscal period to any participant is the lesser of $5,000,000 or
a set percentage for the individual participants as disclosed elsewhere in this
report. Messrs. Rivas, Rosenstock, Zeitchick and Mangone received bonuses under
the Special Performance Incentive Plan for fiscal 2002 as disclosed in the
Summary Compensation table above. The compensation committee has determined that
Messrs. Rivas, Zeitchick and Mangone will currently be entitled to participate
in this plan for fiscal 2003.
38
1999 PERFORMANCE EQUITY PLAN
On August 23, 1999, our shareholders adopted the 1999 Performance
Equity Plan covering 3,000,000 shares of our common stock, under which our
officers, directors, key employees and consultants are eligible to receive
incentive or non-qualified stock options, stock appreciation rights, restricted
stock awards, deferred stock, stock reload options and other stock based awards.
On May 7, 2001, our shareholders approved an amendment increasing the number of
shares available for issuance under the plan to 5,500,000 shares. On November 6,
2002, our shareholders approved another amendment increasing the number of
shares available for issuance under the plan to 10,000,000 shares. The
Performance Equity Plan will terminate when no further awards may be granted and
awards granted are no longer outstanding, provided that incentive options may
only be granted until May 26, 2009. The plan is intended to comply with the
regulations issued under Section 162(m) of the Internal Revenue Code and is
administered by our compensation committee. To the extent permitted under the
provisions of the plan, the compensation committee has authority to determine
the selection of participants, allotment of shares, price, and other conditions
of awards.
LADENBURG THALMANN FINANCIAL SERVICES INC. EMPLOYEE STOCK PURCHASE PLAN
In November 2002, our shareholders approved the "Ladenburg Thalmann
Financial Services Inc. Employee Stock Purchase Plan," under which a total of
5,000,000 shares of common stock are available for issuance. Under this stock
purchase plan, as currently administered by the compensation committee, all
full-time employees may use a portion of their salary to acquire shares of our
common stock. Option periods have been initially set at three months long and
commence on January 1st, April 1st, July 1st and October 1st of each year and
end on March 31st, June 30th, September 30th and December 31st of each year. On
the first day of each option period, known as the "date of grant," each
participating employee is automatically granted an option to purchase shares of
our common stock to be automatically exercised on the last trading day of the
three-month purchase period comprising an option period. The last trading day of
an option period is known as an "exercise date." On the exercise date, the
amounts withheld will be applied to purchase shares for the employee from us.
The purchase price will be the lesser of 85% of the last sale price of our
common stock on the date of grant or on the exercise date. The Plan became
effective November 6, 2002 and we anticipate that our first option period will
commence April 1, 2003. Accordingly, as of the date of this report, no shares of
common stock have been issued under the Ladenburg Thalmann Financial Services
Inc. Employee Stock Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee is comprised of Messrs. Lorber, Beinstein
and Eide. None of these individuals served as officers of ours or of our
subsidiaries. Mr. Lorber is the chairman of the board of a firm which receives
commissions from insurance policies written for us. See "Item 13 - Certain
Relationships and Related Transactions."
Victor M. Rivas, our president and chief executive officer, served as a
member of New Valley's board of directors, of which Mr. Lorber is president,
chief operating officer and a director. Additionally, Bennett S. LeBow, New
Valley's chairman of the board of directors and chief executive officer, and
Richard J. Lampen, New Valley's executive vice president, general counsel and
director, are members of our board of directors. Prior to October 2002, New
Valley's board of directors did not have a separate compensation committee and
acted on compensation matters as an entire body. No individual who is an
executive officer of ours currently serves on the New Valley compensation
committee.
39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information as of March 28, 2003
with respect to the beneficial ownership of our common stock by (i) those
persons or groups known to beneficially own more than 5% of our voting
securities, (ii) each of our directors, (iii) the Named Executive Officers and
(iv) all of our current directors and executive officers as a group. Except as
otherwise stated, the business address of each of the below listed persons is
c/o Ladenburg Thalmann Financial Services Inc., 590 Madison Avenue, 34th Floor,
New York, New York 10022.
AMOUNT AND NATURE OF PERCENT OF CLASS
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF VOTING SECURITIES
- ------------------------ ----------------------- --------------------
Phillip Frost, M.D. (2) 8,105,341(3) 16.5%
Berliner Effektengesellschaft AG(4) 5,575,556(5) 13.0%
Bennett S. LeBow 4,361,314(6) 10.4%
Richard J. Rosenstock 3,874,187(7) 9.2%
New Valley Corporation(8) 3,944,216(9) 8.6%
Carl C. Icahn(10) 3,396,258(11) 8.1%
Howard M. Lorber 1,535,878(12) 3.6%
Mark Zeitchick 1,608,104(13) 3.5%
Vincent Mangone 1,608,104(14) 3.5%
Victor M. Rivas 446,133(15) *
Richard J. Lampen 58,367(16) *
Robert J. Eide 31,367(17) *
Henry C. Beinstein 31,361(18) *
Salvatore Giardina 11,666(19) *
All directors and executive officers as a group 13,566,481(20) 31.5%
(10 persons)
- -----------------
* Less than 1 percent.
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934. The information concerning the
shareholders is based upon numbers reported by the owner in documents
publicly filed with the SEC, publicly available information or
information made known to us. Except as otherwise indicated, all of the
shares of common stock are owned of record and beneficially and the
persons identified have sole voting and investment power with respect
thereto.
(2) The business address of Dr. Frost is c/o IVAX Corporation, 4400
Biscayne Boulevard, Miami, Florida 33137.
(3) Represents (i) 1,487,866 shares of common stock held by Frost Gamma
Investments Trust, a trust organized under Nevada law, (ii) 100,000
shares of common stock issuable upon exercise of an immediately
exercisable warrant held by Frost Gamma, (iii) 6,497,475 shares of
common stock issuable upon conversion of a senior convertible
promissory note held by Frost-Nevada Investments Trust, a trust
organized under Nevada law, and (iv) 20,000 shares of common stock
issuable upon exercise of currently exercisable options held by Dr.
Frost. Dr. Frost is the sole trustee of both Frost Gamma Investments
Trust and Frost-Nevada Investments Trust. Dr. Frost is also (a) the
sole limited partner of Frost Gamma Limited Partnership, the
beneficiary of Frost Gamma Investments Trust, and is the sole
shareholder of Frost-Nevada Corporation, the sole shareholder of Frost
Gamma Inc., the general partner of Frost Gamma Limited Partnership, (b)
one of the three limited partners of Frost-Nevada, Limited Partnership,
the beneficiary of Frost-Nevada Investments Trust, and is the sole
shareholder of Frost-Nevada Corporation, the general partner of
Frost-Nevada, Limited Partnership and (c) the sole shareholder of Frost
40
Beta, Inc., the sole general partner of Frost Beta, LLP, a limited
partner of Frost-Nevada, Limited Partnership. Record ownership of these
shares may be transferred from time to time among Dr. Frost and, in
addition to other entities that he may control, any or all of Frost
Gamma Investments Trust, Frost Gamma Limited Partnership, Frost Gamma
Inc., Frost-Nevada Investments Trust, Frost-Nevada, Limited
Partnership, Frost Beta, Inc., Frost Beta, LLP and Frost-Nevada
Corporation. Accordingly, solely for purposes of reporting beneficial
ownership of these shares pursuant to Section 13(d) of the Exchange
Act, each of these parties will be deemed to be the beneficial owner of
the shares held by any other of the parties. The foregoing information
was derived from an Amendment to Schedule 13D filed with the SEC on
September 10, 2001 as well as from information made known to us.
(4) The business address for Berliner Effektengesellschaft AG is
Kurfustendamm 119, 10711 Berlin, Germany.
(5) Includes 955,055 shares of common stock issuable upon conversion of a
senior convertible promissory note held by Berliner.
(6) Represents (i) 758,205 shares of common stock held directly by Mr.
LeBow, (ii) 3,325,199 shares of common stock held by LeBow Gamma
Limited Partnership, a Nevada limited partnership, (iii) 110,336 shares
of common stock held by LeBow Alpha LLLP, a Delaware limited liability
limited partnership, (iv) 147,574 shares of common stock held by The
Bennett and Geraldine LeBow Foundation, Inc., a Florida not-for-profit
corporation and (v) 20,000 shares of common stock issuable upon
exercise of currently exercisable options held by Mr. LeBow. Does not
include 20,000 shares of common stock issuable upon exercise of options
held by Mr. LeBow that are not currently exercisable and that will not
become exercisable within 60 days. LeBow Holdings Inc., a Nevada
corporation, is the sole stockholder of LeBow Gamma Inc., a Nevada
corporation, which is the general partner of LeBow Gamma Limited
Partnership, and is the general partner of LeBow Alpha LLLP. Mr. LeBow
is a director, officer and sole stockholder of LeBow Holdings Inc. and
a director and officer of LeBow Gamma Inc. Mr. LeBow and family members
serve as directors and executive officers of the Foundation. The
foregoing information was derived from an Amendment to Schedule 13D
filed with the SEC on December 21, 2001 as well as from information
made known to us.
(7) Represents 3,701,346 shares of common stock held of record by The
Richard J. Rosenstock Revocable Living Trust Dated 3/5/96, of which Mr.
Rosenstock is the sole trustee and beneficiary, and 172,841 shares of
common stock issuable upon exercise of currently exercisable options
held by Mr. Rosenstock. Does not include 177,159 shares of common stock
issuable upon exercise of options held by Mr. Rosenstock that are not
currently exercisable and that will not become exercisable within the
next 60 days.
(8) The business address for New Valley Corporation is 100 S. E. Second
Street, Miami, Florida 33131.
(9) Represents (i) 3,844,216 shares of common stock issuable upon
conversion of a senior convertible promissory note held by New Valley
and (ii) 100,000 shares of common stock issuable upon exercise of
immediately exercisable warrants held by New Valley.
(10) The business address for Mr. Icahn is c/o Icahn Associates Corp., 767
Fifth Avenue, 47th Floor, New York, New York 10153.
(11) Represents (i) 2,148,725 shares of common stock held by High River
Limited Partnership, (ii) 1,227,773 shares of common stock held by
Tortoise Corp. and (iii) 19,760 shares of common stock held by Little
Meadow Corp. Each of these entities are either directly or indirectly
100% owned by Mr. Icahn. As such, Mr. Icahn is in a position to
directly and indirectly determine the investment and voting decisions
made by these entities. Accordingly, Mr. Icahn may be deemed to be the
beneficial owner of these shares for purposes of reporting beneficial
41
ownership pursuant to Section 13(d) of the Exchange Act. However, Mr.
Icahn disclaims beneficial ownership of these shares for all other
purposes. The foregoing information was derived from a Schedule 13D
filed with the SEC on December 28, 2001.
(12) Represents (i) 1,392,251 shares of common stock held directly by Mr.
Lorber, (ii) 118,560 shares of common stock held by Lorber Alpha II
Partnership, a Nevada limited partnership, (iii) 5,067 shares of common
stock held by the Lorber Charitable Fund, a New York not-for-profit
corporation, and (iv) 20,000 shares of common stock issuable upon
exercise of currently exercisable options held by Mr. Lorber. Does not
include 20,000 shares of common stock issuable upon exercise of options
held by Mr. Lorber that are not currently exercisable and that will not
become exercisable within 60 days. Lorber Alpha II, Inc., a Nevada
corporation, is the general partner of Lorber Alpha II Partnership. Mr.
Lorber is the director, officer and principal stockholder of Lorber
Alpha II, Inc. Mr. Lorber and family members serve as directors and
executive officers of Lorber Charitable Fund and Mr. Lorber possesses
shared voting power and shared dispositive power with the other
directors of the fund with respect to the fund's shares of our common
stock. The foregoing information was derived from an Amendment to
Schedule 13D filed with the SEC on December 21, 2001 as well as from
information made known to us.
(13) Includes 181,793 shares of common stock issuable upon exercise of
currently exercisable options held by Mr. Zeitchick. Does not include
168,207 shares of common stock issuable upon exercise of options held
by Mr. Zeitchick that are not currently exercisable and that will not
become exercisable within the next 60 days.
(14) Represents (i) 1,426,311 shares of common stock held of record by The
Vincent A. Mangone Revocable Living Trust Dated 11/5/96, of which Mr.
Mangone is the sole trustee and beneficiary, and (ii) 181,793 shares of
common stock issuable upon exercise of currently exercisable options
held by Mr. Mangone. Does not include 168,207 shares of common stock
issuable upon exercise of options held by Mr. Mangone that are not
currently exercisable and that will not become exercisable within the
next 60 days.
(15) Includes 433,333 shares of common stock issuable upon exercise of
currently exercisable options held by Mr. Rivas. Does not include
866,667 shares of common stock issuable upon exercise of options held
by Mr. Rivas that are not currently exercisable and that will not
become exercisable within the next 60 days.
(16) Includes 20,000 shares of common stock issuable upon exercise of
currently exercisable options held by Mr. Lampen. Does not include
20,000 shares of common stock issuable upon exercise of options held by
Mr. Lampen that are not currently exercisable and that will not become
exercisable within the next 60 days.
(17) Includes 20,000 shares of common stock issuable upon exercise of
currently exercisable options held by Mr. Eide. Does not include 20,000
shares of common stock issuable upon exercise of options held by Mr.
Eide that are not currently exercisable and that will not become
exercisable within 60 days.
(18) Includes (i) 823 shares of common stock held of record in the
individual retirement account of Mr. Beinstein's spouse and (ii) 20,000
shares of common stock issuable upon exercise of currently exercisable
options held by Mr. Beinstein. Does not include 20,000 shares of common
stock issuable upon exercise of options held by Mr. Beinstein that are
not currently exercisable and that will not become exercisable within
60 days.
(19) Includes 11,666 shares of common stock issuable upon exercise of
currently exercisable options held by Mr. Giardina. Does not include
23,334 shares of common stock issuable upon exercise of options held by
Mr. Giardina that are not currently exercisable and that will not
become exercisable within the next 60 days.
(20) Includes 1,081,426 shares of common stock issuable upon exercise of
currently exercisable options and excludes 1,503,574 shares of common
stock issuable upon exercise of options that are not currently
exercisable and that will not become exercisable within the next 60
days. See notes 6, 7, 12, 13, 14, 15, 16, 17, 18 and 19.
42
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information at December 31, 2002
with respect to our equity compensation plans that provide for the issuance of
options, warrants or rights to purchase our securities.
- -------------------------------- ---------------------------- ------------------------- --------------------------------
NUMBER OF SECURITIES REMAINING
AVAILABLE FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE UNDER EQUITY COMPENSATION
ISSUED UPON EXERCISE OF EXERCISE PRICE OF PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN THE FIRST COLUMN)
- -------------------------------- ---------------------------- ------------------------- --------------------------------
Equity Compensation Plans
Approved by Security Holders 4,656,813 $2.08 5,343,187
- -------------------------------- ---------------------------- ------------------------- --------------------------------
Equity Compensation Plans Not
Approved by Security Holders 200,000 $1.00 -0-
- -------------------------------- ---------------------------- ------------------------- --------------------------------
On August 31, 2001, New Valley and Frost-Nevada each loaned us
$1,000,000. As consideration for the loans, we issued to each of them a
five-year, immediately exercisable warrant to purchase 100,000 shares of our
common stock at an exercise price of $1.00 per share. These two warrants are our
only equity compensation "plans" not approved by our shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On May 7, 2001, we consummated the stock purchase agreement, as
amended, with New Valley Corporation, Berliner Effektengesellschaft AG and
Ladenburg Thalmann & Co. in which we acquired all of the outstanding common
stock of Ladenburg Thalmann & Co. As partial consideration for the common stock
of Ladenburg Thalmann & Co., we issued:
o 18,598,098 shares of common stock and $8.01 million aggregate
principal amount of our senior convertible promissory notes,
currently convertible into 3,844,216 shares of common stock, to New
Valley; and
o 4,620,501 shares of common stock and $1.99 million aggregate
principal amount of our senior convertible promissory notes,
currently convertible into 955,055 shares of common stock, to
Berliner.
The stock purchase agreement provides that we may be required to issue an
additional number of shares of common stock to New Valley and Berliner on or
about May 7, 2003 pending a final resolution of all pre-closing litigation
adjustments. Therefore, the final number of shares to be issued cannot be
determined until May 7, 2003. We also paid New Valley and Berliner $8.01 million
and $1.99 million in cash, respectively. The cash portion of the consideration
paid to New Valley and Berliner was obtained pursuant to a loan agreement with
Frost-Nevada, Limited Partnership under which Frost-Nevada provided us with $10
million in cash in exchange for $10 million aggregate principal amount of our
senior convertible promissory notes, currently convertible into 6,497,475 shares
of common stock.
As a result of these transactions, the following individuals became
affiliated with us:
43
o Howard M. Lorber, president and chief operating officer of New
Valley, is now the chairman of our board of directors;
o Bennett S. LeBow, chairman and chief executive officer of New
Valley, is now a member of our board of directors;
o Victor M. Rivas, chairman and chief executive officer of Ladenburg
Thalmann & Co. and a member of the board of directors of New Valley,
is now our president and chief executive officer;
o Richard J. Lampen, executive vice president, general counsel and a
member of the board of directors of New Valley, is now a member of
our board of directors;
o Henry C. Beinstein, a member of the board of directors of New
Valley, is now a member of our board of directors; and
o Robert J. Eide, a member of the board of directors of Vector Group,
the parent of New Valley, is now a member of our board of directors.
Upon becoming members of our board of directors in May 2001, each of Messrs.
Lorber, LeBow, Beinstein and Eide were granted a ten-year option to purchase
20,000 shares of common stock at $3.05 per share. The options vested in full on
May 7, 2002. Upon becoming a member of our board of directors in January 2002,
Mr. Lampen was granted a ten-year option to purchase 20,000 shares of common
stock at $0.88 per share. This option vested in full on January 10, 2003. Each
of these grants were made under our Equity Plan. In November 2002, we granted
each of Messrs. Lorber, LeBow, Beinstein, Eide and Lampen a ten-year option to
purchase 20,000 shares of common stock at $0.22 per share. The options vest in
full on November 15, 2003.
Pursuant to the employment agreement with Mr. Rivas in which he became
our president and chief executive officer, Mr. Rivas is entitled to receive an
annual base salary of $500,000, subject to periodic increases as determined by
LTS' board of directors, as well as a guaranteed minimum annual bonus of
$500,000. Mr. Rivas will also be entitled to participate in our Bonus Plan and
Incentive Plan in accordance with the terms of the plan and Mr. Rivas'
employment agreement. Additionally, we granted Mr. Rivas an option to purchase
1,000,000 shares of common stock at $3.05 per share under our Equity Plan. The
option vests in three equal annual installments commencing on May 7, 2002. The
option also provides that if a change of control occurs, the portion of the
option not yet vested will vest and become immediately exercisable.
The notes issued to New Valley and Berliner bear interest at a rate of
7.5% per year, payable quarterly, and are secured by a pledge of the shares of
common stock of Ladenburg Thalmann & Co. The notes are convertible, in whole or
in part, at any time, into that number of shares of common stock determined by
dividing the principal and interest to be converted by the "conversion price."
The "conversion price" is $2.0836498 and is subject to anti-dilution adjustment
for stock splits, dividends and other similar events. The conversion price is
also subject to adjustment on or about May 7, 2003 in the same manner as the
number of shares we issued to New Valley and Berliner described above.
Additionally, if, during any period of 20 consecutive trading days, the closing
sale price of our 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 at the conversion price then in effect. The notes also provide that if a
change of control occurs, as defined in the notes, we must offer to purchase all
44
of the outstanding notes at a purchase price equal to the unpaid principal
amount of the notes and the accrued interest.
The note issued to Frost-Nevada has the same terms as the notes issued
to New Valley and Berliner, except that the conversion price of the note is
$1.5390594 and pays interest at a rate of 8.5% per year. The note issued to
Frost-Nevada is also secured by a pledge of the shares of common stock of
Ladenburg Thalmann & Co.
On June 28, 2002, New Valley, Berliner and Frost-Nevada agreed with us
to forbear the Forbearance Interest Payments until May 15, 2003. On March 3,
2003, the holders of the senior convertible promissory notes agreed to extend
the interest forbearance period to January 15, 2005 with respect to interest
payments due through December 31, 2004. Interest on the deferred amounts accrues
at 8% on the New Valley and Berliner notes and 9% on the Frost-Nevada note. We
also agreed to apply any net proceeds from any subsequent public offerings to
any such deferred amounts owed to the holders of the notes to the extent
possible.
Concurrently with the closing of the stock purchase agreement, New
Valley purchased 3,945,060 of our common stock at $1.00 per share from Joseph
Berland, our former chairman and chief executive officer. Additionally, on the
same date, Frost-Nevada purchased a total of 550,000 shares of our common stock
at $1.00 per share from Richard Rosenstock, our vice chairman and chief
operating officer, Mark Zeitchick and Vincent Mangone, our executive vice
presidents, and David Thalheim, our former administrator. In connection with
these sales, our board waived lock-up agreements between us and the individuals
in which the individuals had agreed that they would not, without our board's
prior written consent, sell, transfer or otherwise dispose of any of their
shares of our common stock until August 2001.
In connection with these transactions, we 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 us and became the
executive vice president of corporate finance of Ladenburg Capital
Management through May 2003 at an annual base salary of $150;
o Mr. Rosenstock became our vice chairman and chief operating officer
and Ladenburg Capital Management's chief executive officer through
August 2004 at an annual base salary of $340;
o Mr. Zeitchick remained as an executive vice president of ours and
became Ladenburg Capital Management'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 ours and Ladenburg Capital Management through August 2004 at
annual base salary of $90.
Effective December 31, 2002, we entered into an amendment to Mr. Rosenstock's
agreement that provided for him to no longer be employed by us. However, he will
continue to be a member of our board of directors and will be employed by
Ladenburg Thalmann & Co. as a registered representative until December 31, 2005.
Mr. Rosenstock received $25 upon signing of the amendment and will receive a
monthly base salary of $17 for the first year of the agreement and a monthly
base salary of $15 for the second and third years of the agreement.
Additionally, Mr. Rosenstock will receive 50% of all of his retail brokerage
production for the term of the agreement and 15% of any compensation received by
Ladenburg Thalmann & Co. or any of its affiliates as a finders fee for any
45
corporate finance transactions entered into within 18 months after the
introduction by Mr. Rosenstock to Ladenburg Thalmann & Co. However, he will no
longer be entitled to participate in the Special Performance Incentive Plan and
Annual Incentive Bonus Plan. The agreement provides that Mr. Rosenstock will not
compete with us or our subsidiaries for a period of one year from the date of
his termination, but allows him to deal with any of his prior or then existing
customers or clients without any restriction. The signing bonus and base salary
are considered a buy-out, and accordingly, a total of $590 was accrued as of
December 31, 2002 and included in operating expenses for 2002.
Each of Messrs. Zeitchick and Mangone continue to be entitled to
participate in our Bonus Plan and Incentive Plan in accordance with the terms of
the respective plans and their respective employment agreements.
Prior to the consummation of the acquisition, New Valley maintained office
space at Ladenburg Thalmann & Co.'s principal offices. In connection with the
consummation of the transaction, New Valley entered into a license agreement
with Ladenburg Thalmann & Co. 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 Thalmann & Co. to an unaffiliated
third party.
From June 2001 until October 2002, J. Bryant Kirkland III, the vice
president, treasurer and chief financial officer of New Valley, served as our
chief financial officer and New Valley did not allocate any expense to us for
his services. In December 2002, we accrued compensation for Mr. Kirkland's
services, in the amount of $100, payable in four quarterly installments of $25,
commencing April 1, 2003.
On August 31, 2001, New Valley and Frost-Nevada each loaned us $1,000.
The loans were evidenced by promissory notes that matured on the earlier of
February 28, 2002 and the next business day after we received our federal income
tax refund for the fiscal year ending September 30, 2001. The promissory notes
bore interest at the Prime Rate as published in the Wall Street Journal plus 1%.
As consideration for the loans, we issued to each of New Valley and Frost-Nevada
a five-year, immediately exercisable warrant to purchase 100,000 shares of our
common stock at an exercise price of $1.00 per share. These loans 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, was due on the earlier of December
31, 2003 or the completion of one or more equity financings where we receive at
least $5,000 in total proceeds. The terms of the loan restrict us from incurring
or assuming any indebtedness that is not subordinated to the loan so long as the
loan is outstanding. On July 16, 2002, we borrowed an additional $2,500 from New
Valley on the same terms as the March 2002 loan. In November 2002, New Valley
agreed in connection with the Clearing Loans, to extend the maturity of the 2002
Loans to December 31, 2006 and to subordinate the 2002 Loans to the repayment of
the Clearing Loans.
On October 8, 2002, we borrowed an additional $2,000 from New Valley.
The loan, which bore interest at 1% above the prime rate, matured on the
earliest of December 31, 2002, the next business day after we received our
federal income tax refund for the fiscal year ended September 30, 2002, and the
next business day after we received a loan from an affiliate of our clearing
broker in connection with the conversion of additional clearing business to this
broker. This loan was repaid in December 2002 upon receipt of the Clearing
Loans.
We may from time to time borrow additional funds on a short-term basis
46
from New Valley or from other parties, including our shareholders and clearing
brokers, in order to supplement the liquidity of our broker-dealer operations.
Howard Lorber is chairman of the board of directors of Hallman & Lorber
Associates, Inc., a private consulting and actuarial firm, and related entities,
which receive commissions from insurance policies written for us. These
commissions amounted to approximately $106 in 2002.
Several members of the immediate families of our executive officers and
directors are employed as registered representatives of Ladenburg Thalmann & Co.
As such, they receive a percentage of commissions generated from customer
accounts for which they are designated account representatives and are eligible
to receive bonuses in the discretion of management. The arrangements we have
with these individuals are similar to the arrangements we have with our other
registered representatives. Oscar Sonkin and Richard Sonkin, the father-in-law
and brother-in-law, respectively, of Richard J. Rosenstock, received $72 and
$216, respectively, in compensation during 2002. Steven Zeitchick, the brother
of Mark Zeitchick, received $182 in compensation during 2002. It is anticipated
that each of these individuals will receive in excess of $60 in compensation
from us in 2003.
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90-day period prior to the filing of this annual report, an
evaluation of the effectiveness of our disclosure controls and procedures was
made under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer. Based on that
evaluation, the chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, there were no
significant changes in our internal controls or in other factors that could
significantly affect these controls, including any corrective actions with
regard to significance deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1): Index to 2002 Consolidated Financial Statements
The Consolidated Financial Statements and the Notes thereto,
together with the report thereon of Eisner LLP dated February 14, 2003,
appear beginning on page F-1 of this report.
(a)(2): Financial Statement Schedules
Financial statement schedules not included in this report have
been omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or the
Notes thereto.
(a)(3): Exhibits Filed
The following is a list of exhibits filed herewith as part of this
Annual Report on Form 10-K.
47
EXHIBIT INDEX
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ------------------ -------- ----
2.1 Agreement and Plan of Merger, dated May 27, A 2.1 -
1999
3.1 Articles of Incorporation B 3.1 -
3.2 Articles of Amendment to the Articles of C 3.2 -
Incorporation, dated August 24, 1999
3.3 Bylaws B 3.2 -
4.1 Form of common stock certificate B 4.1 -
4.2 Form of Warrant Agreement between the Company B 4.2 -
and Cardinal Capital Management, Inc.
(including the form of Warrant Certificate).
4.3 Form of Senior Convertible Promissory Note, as D 4.2 -
amended, dated May 7, 2001, issued to New
Valley Capital Corporation and Berliner
Effektengesellschaft AG
4.4 Senior Convertible Promissory Note, as D 4.3 -
amended, dated May 7, 2001, issued to
Frost-Nevada, Limited Partnership
4.5 Form of Promissory Note, dated August 31, D 4.4 -
2001, issued to New Valley Corporation and
Frost-Nevada, Limited Partnership
4.6 Promissory Note, dated March 27, 2002, issued E 4.1 -
to New Valley Corporation
10.1 Agreement of Lease, dated December 20, 1996, C 10.1 -
between the Company and Briarcliffe College,
Inc.
10.2 Standard Form of Office Lease, dated August 3, C 10.2 -
1999, between the Company and Mayore Estates
LLC and 80 Lafayette LLC, together with
Amendment, dated August 19, 1999.
10.3 Agreement for Securities Clearance Services, C 10.3 -
dated April 30, 1985, between Ladenburg
Capital Management Inc. and Bear Stearns.
10.4 Amended and Restated 1999 Performance Equity F 10.1 -
Plan*
10.5 Annual Incentive Bonus Plan* G Exhibit "D" -
48
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ------------------ -------- ----
10.6 Special Performance Incentive Plan* G Exhibit "E" -
10.7 Form of Employment Agreement, dated August 24, G Exhibit "F" -
1999, between the Company and certain
employees*
Schedule of Employment Agreements in the form
10.7.1 of Exhibit 10.7, including material detail in C 10.7.1 -
which such documents differ from Exhibit 10.7*
10.8 Form of Stock Option Agreement, dated August H 10.8 -
24, 1999, between the Company and certain
employees*
10.8.1 Schedule of Stock Option Agreements in the H 10.8.1 -
form of Exhibit 10.8, including material
detail in which such documents differ from
Exhibit 10.8*
10.9 Form of Stock Option Agreement, dated December H 10.9 -
13, 1999, between the Company and certain
directors*
10.9.1 Schedule of Stock Option Agreements in the H 10.9.1 -
form of Exhibit 10.9, including material
detail in which such documents differ from
Exhibit 10.9*
10.10 Form of Stock Option Agreement, dated December H 10.10 -
13, 1999, between the Company and Diane
Chillemi*
10.11 Stock Purchase Agreement, dated February 8, I Appendix A -
2001, by and among the Company, New Valley
Corporation, New Valley Capital Corporation,
Berliner Effektengesellschaft AG and Ladenburg
Thalmann & Co. Inc.
10.12 Stock Purchase Agreement, dated as of February J 4.2 -
8, 2001, by and between Ladenburg Thalmann
Group Inc., Joseph Berland Revocable Living
Trust Dated 4/16/97 and Joseph Berland
49
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ------------------ -------- ----
10.13 Form of Stock Purchase Agreement, dated as of J 4.3 -
February 8, 2001, by and between (A) each of
(i) The Richard J. Rosenstock Revocable Living
Trust Dated 3/5/96, Richard J. Rosenstock,
(ii) The Vincent A. Mangone Revocable Living
Trust Dated 11/5/96, Vincent A. Mangone, (iii)
Mark Zeitchick and (iv)The David Thalheim
Revocable Living Trust Dated 3/5/96, David
Thalheim and (B) Frost-Nevada, Limited
Partnership
10.14 Proxy and Voting Agreement, dated as of I Appendix E -
February 8, 2001, among New Valley
Corporation, Ladenburg Thalmann Group Inc.,
Berliner Effektengesellschaft AG, the Company
and the individual shareholders listed on
Schedule A attached thereto
10.15 Loan Agreement, dated as of February 8, 2001, I Appendix C -
between the Company and Frost-Nevada, Limited
Partnership
10.16 Investor Rights Agreement, dated as of I Appendix G -
February 8, 2001, among the Company, New
Valley Corporation, New Valley Capital
Corporation, Berliner Effektengesellschaft
AG, Frost-Nevada, Limited Partnership and the
Principals
10.17 Form of Pledge and Security Agreement, dated J 10.2 -
as of February 8, 2001, between the Company,
Ladenburg Thalmann Group Inc., Berliner
Effektengesellschaft AG, Frost-Nevada, Limited
Partnership and U.S. Bank Trust National
Association
10.18 Employment Agreement, dated as of February 8, J 10.3 -
2001, between Ladenburg Thalmann & Co. Inc.
and Victor Rivas*
10.19 First Amendment to the Employment Agreement, J 10.4 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and Joseph
Berland*
10.20 First Amendment to the Employment Agreement, J 10.5 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and Richard
J. Rosenstock*
50
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ------------------ -------- ----
10.21 First Amendment to the Employment Agreement, J 10.6 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and Vincent
A. Mangone*
10.22 First Amendment to the Employment Agreement, J 10.7 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and Mark
Zeitchick*
10.23 First Amendment to the Employment Agreement, J 10.8 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and David
Thalheim*
10.24 Form of Guarantee Agreement, dated February 8, J 10.9 -
2001, between (A) each of (i) Joseph Berland,
(ii) Richard J. Rosenstock, (iii) Vincent A.
Mangone, (iv) Mark Zeitchick and (v) David
Thalheim and (B) the Company
10.25 Form of Escrow Agreement, dated as of February J 10.10 -
8, 2001, between the Company, Berliner
Effektengesellschaft AG and Continental Stock
Transfer & Trust Company
10.26 Amendment No. 1 to Stock Purchase Agreement, K Appendix A -
dated February 8, 2001, by and among the
Company, New Valley Corporation, New Valley
Capital Corporation, Berliner
Effektengesellschaft AG and Ladenburg Thalmann
& Co. Inc.
10.27 Amendment No. 1 to Loan Agreement, dated as of K Appendix C -
February 8, 2001, between the Company and
Frost-Nevada, Limited Partnership
10.28 Second Amendment to the Employment Agreement, L 10.2 -
dated August 24, 1999, between the Company,
Ladenburg Capital Management Inc. and David
Thalheim*
10.29 Stock Option Agreement, dated May 7, 2001, M 10.1 -
between the Company and Victor M. Rivas*
10.30 Stock Option Agreement, dated as of May 7, M 10.2 -
2001, between the Company and David Thalheim*
10.31 Form of Stock Option Agreement, dated as of M 10.3 -
May 7, 2001, between the Company and certain
directors
10.31.1 Schedule of Stock Option Agreements in the M 10.3.1 -
form of Exhibit 10.31, including material
detail in which such documents differ from
Exhibit 10.31
51
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ------------------ -------- ----
10.32 Amendment No. 2 to Stock Purchase Agreement, D 4.1 -
dated February 8, 2001, by and among the
Company, New Valley Corporation, New Valley
Capital Corporation, Berliner
Effektengesellschaft AG and Ladenburg Thalmann
& Co. Inc.
10.33 Amendment No. 2 to Loan Agreement, dated as of D 10.1 -
February 8, 2001, between the Company and
Frost-Nevada, Limited Partnership
10.34 Second Amendment to the Employment Agreement, D 10.2 -
dated August 24, 1999, as amended, between the
Company, Ladenburg Capital Management Inc. and
Richard J. Rosenstock*
10.35 Second Amendment to the Employment Agreement, D 10.3 -
dated August 24, 1999, as amended, between the
Company, Ladenburg Capital Management Inc. and
Mark Zeitchick*
10.36 Second Amendment to the Employment Agreement, D 10.4 -
dated August 24, 1999, as amended, between the
Company, Ladenburg Capital Management Inc. and
Vincent A. Mangone*
10.37 Second Amendment to the Employment Agreement, D 10.5 -
dated August 24, 1999, as amended, between the
Company, Ladenburg Capital Management Inc. and
Joseph Berland*
10.38 Form of Warrant issued to New Valley D 10.6 -
Corporation and Frost-Nevada, Limited
Partnership
10.39 Letter Amendment to Investor Rights Agreement, D 10.7 -
dated as of February 8, 2001, among the
Company, New Valley Corporation, New Valley
Capital Corporation, Berliner
Effektengesellschaft AG, Frost-Nevada,
Limited Partnership and the Principals
10.40 Stock Option Agreement, dated as of January N 10.2 -
10, 2002, between the Company and Richard J.
Lampen
52
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ------------------ -------- ----
10.41 Form of Stock Option Agreement, dated January N 10.3 -
10, 2002, between the Company and each of
Victor M. Rivas, Richard J. Rosenstock, Mark
Zeitchick and Vincent A. Mangone*
10.41.1 Schedule of Stock Option Agreements in the N 10.3.1 -
form of Exhibit 10.41, including material
detail in which such documents differ from
Exhibit 10.41*
10.42 Ladenburg Thalmann Financial Services Inc. F 10.2 -
Qualified Employee Stock Purchase Plan
10.43 Letter Agreement, dated October 10, 2002, F 10.3 -
between the Company and Victor M. Rivas
10.44 Letter Agreement, dated October 10, 2002, F 10.4 -
between the Company and Richard J. Rosenstock
10.45 Letter Agreement, dated October 10, 2002, F 10.5 -
between the Company and Mark Zeitchick
10.46 Letter Agreement, dated October 10, 2002, F 10.6 -
between the Company and Vincent A. Mangone
10.47 Third Amendment to the Employment Agreement, - - Filed
dated August 24, 1999, as amended, between the Herewith
Company, Ladenburg Capital Management Inc. and
Richard J. Rosenstock*
10.48 Form of Stock Option Agreement, dated November - - Filed
15, 2002, between the Company and each of Herewith
Bennett S. LeBow, Howard M. Lorber, Henry C.
Beinstein, Robert J. Eide and Richard J.
Lampen*
10.48.1 Schedule of Stock Option Agreements in the - - Filed
form of Exhibit 10.48, including material Herewith
detail in which such documents differ from
Exhibit 10.48*
21 List of Subsidiaries - - Filed
Herewith
23.1 Consent of Eisner LLP - - Filed
Herewith
23.2 Consent of PricewaterhouseCoopers LLP - - Filed
Herewith
53
INCORPORATED
EXHIBIT BY REFERENCE FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT PAGE
- ------ ----------- ------------------ -------- ----
99.1 Certification of Chief Executive Officer, - - Filed
Pursuant to 18 U.S.C. Section 1350, as Adopted Herewith
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification of Chief Financial Officer, - - Filed
Pursuant to 18 U.S.C. Section 1350, as Adopted Herewith
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
- ---------------------
A. Quarterly report on Form 10-QSB filed on August 16, 1999.
B. Registration statement on Form SB-2 (File No. 333-31001).
C. Annual report on Form 10-K for the year ended August 24, 1999.
D. Current report on Form 8-K/A, dated February 8, 2001 and filed with the SEC
on September 10, 2001.
E. Quarterly report on Form 10-Q for the quarter ended March 31, 2002.
F. Quarterly report on Form 10-Q for the quarter ended September 30, 2002.
G. Definitive proxy statement relating to a special meeting of shareholders
held on August 23, 1999.
H. Annual report on Form 10-K for the year ended September 30, 2000.
I. Definitive proxy statement relating to our annual meeting of shareholders
held on May 7, 2001, filed March 28, 2001, as supplemented on April 2, 2001
and April 26, 2001.
J. Current report on Form 8-K, dated February 8, 2001 and filed with the SEC
on February 21, 2001.
K. Second supplement to our definitive proxy statement dated April 26, 2001.
L. Current report on Form 8-K/A, dated February 8, 2001 and filed with the SEC
on May 1, 2001.
M. Quarterly report on Form 10-Q for the quarter ended June 30, 2001.
N. Registration statement on Form S-3 (File No. 333-81964).
* Management Compensation Contract
54
(b) Reports on Form 8-K.
Company's Report on Form 8-K filed on October 8, 2002
Item 5. Other events
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Registrant)
Dated: March 31, 2003
By: /s/ VICTOR M. RIVAS
---------------------------------------------
Name: Victor M. Rivas
Title: President and Chief Executive Officer
POWER OF ATTORNEY
The undersigned directors and officers of Ladenburg Thalmann Financial
Services Inc. hereby constitute and appoint Howard M. Lorber, Victor M. Rivas
and Salvatore Giardina, and each of them, with full power to act without the
other and with full power of substitution and resubstitution, our true and
lawful attorneys-in-fact with full power to execute in our name and behalf in
the capacities indicated below, this Annual Report on Form 10-K and any and all
amendments thereto and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
and hereby ratify and confirm all that such attorneys-in-fact, or any of them,
or their substitutes shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 31, 2003.
SIGNATURES TITLE
- ---------- -----
/s/ Victor M. Rivas
- ------------------------------ President and Chief Executive Officer
Victor M. Rivas (Principal Executive Officer)
/s/ Salvatore Giardina
- ------------------------------ Vice President and Chief Financial Officer
Salvatore Giardina (Principal Financial Officer and Principal
Accounting Officer)
/s/ Henry C. Beinstein
- ------------------------------ Director
Henry C. Beinstein
/s/ Robert J. Eide
- ------------------------------ Director
Robert J. Eide
56
/s/ Richard J. Lampen
- ------------------------------ Director
Richard J. Lampen
/s/ Bennett S. LeBow
- ------------------------------ Director
Bennett S. LeBow
/s/ Howard M. Lorber Director
- ------------------------------
Howard M. Lorber
/s/ Vincent A. Mangone Director
- ------------------------------
Vincent A. Mangone
/s/ Richard J. Rosenstock Director
- ------------------------------
Richard J. Rosenstock
/s/ Mark Zeitchick Director
- ------------------------------
Mark Zeitchick
57
CERTIFICATION
I, Victor M. Rivas, certify that:
1. I have reviewed this annual report on Form 10-K of Ladenburg Thalmann
Financial Services Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual report whether 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: March 31, 2003
By: /s/ VICTOR M. RIVAS
---------------------------------------------
Name: Victor M. Rivas
Title: President and Chief Executive Officer
58
CERTIFICATION
I, Salvatore Giardina, certify that:
1. I have reviewed this annual report on Form 10-K of Ladenburg Thalmann
Financial Services Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual report whether 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: March 31, 2003
By: /s/ SALVATORE GIARDINA
--------------------------------------------
Name: Salvatore Giardina
Title: Vice President and Chief
Financial Officer
59
LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
ITEMS 8 AND 15(A) (1) AND (2)
INDEX TO FINANCIAL STATEMENTS
Financial Statements of the Registrant and its subsidiaries required
to be included in Items 8 and 15(a) (1) and (2) are listed below:
FINANCIAL STATEMENTS:
PAGE
----
LADENBURG THALMANN FINANCIAL SERVICES INC. CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Certified Public Accountants....................................... F-2
Consolidated Statements of Financial Condition as of December 31, 2002 and 2001........... F-4
Consolidated Statements of Operations
for the years ended December 31, 2002, 2001 and 2000............................... F-5
Consolidated Statements of Changes in Shareholders' Equity (Capital Deficit)
for the years ended December 31, 2002, 2001 and 2000............................... F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 2002, 2001 and 2000............................... F-7
Notes to the Consolidated Financial Statements............................................ F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Ladenburg Thalmann Financial Services Inc.
We have audited the accompanying consolidated statement of financial condition
of Ladenburg Thalmann Financial Services Inc. and its subsidiaries (the
"Company") as of December 31, 2002, and the related consolidated statements of
operations, changes in shareholders' equity (capital deficit) and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ladenburg Thalmann
Financial Services Inc. and its subsidiaries as of December 31, 2002 and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 4 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets".
/s/ Eisner LLP
- ---------------------------------
Eisner LLP
New York, New York
February 14, 2003, except for the seventh
paragraph of Note 13 and the fifth paragraph
of Note 9, as to which the dates are
March 3, 2003 and March 13, 2003, respectively
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Ladenburg Thalmann Financial Services Inc.
In our opinion, the accompanying consolidated statement of financial condition
and the related consolidated statements of operations, changes in shareholders'
equity (capital deficit) and cash flows present fairly, in all material
respects, the financial position of Ladenburg Thalmann Financial Services Inc.
and its subsidiaries (the "Company") at December 31, 2001, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
PricewaterhouseCoopers LLP
New York, New York
March 22, 2002
F-3
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
2002 2001
-------- --------
ASSETS
Cash and cash equivalents ...................................................... $ 11,752 $ 8,136
Trading securities owned ....................................................... 4,365 17,324
Due from affiliates ............................................................ 86 262
Receivables from clearing brokers .............................................. 11,378 27,920
Exchange memberships owned, at historical cost ................................. 1,505 1,505
Furniture, equipment and leasehold improvements, net ........................... 8,087 9,959
Restricted assets .............................................................. 1,054 2,610
Income taxes receivable ........................................................ 2,224 499
Deferred tax assets ............................................................ -- 3,339
Goodwill, net of accumulated amortization ...................................... -- 18,762
Other assets ................................................................... 3,448 8,091
-------- --------
Total assets .......................................................... $ 43,899 $ 98,407
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIT)
Securities sold, not yet purchased ............................................. $ 1,218 $ 12,404
Accrued compensation ........................................................... 3,268 11,078
Accounts payable and accrued liabilities ....................................... 12,084 7,608
Deferred rent credit ........................................................... 6,589 7,189
Due to former parent and affiliate ............................................. 634 434
Notes payable .................................................................. 8,500 2,000
Senior convertible notes payable ............................................... 20,000 20,000
Subordinated note payable ...................................................... 2,500 2,500
-------- --------
Total liabilities ..................................................... 54,793 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; authorized; 200,000,000 shares in 2002
and 100,000,000 shares in 2001; 42,025,211 shares issued and
outstanding ............................................................... 4 4
Additional paid-in capital ................................................ 56,473 56,168
Accumulated deficit ....................................................... (67,371) (20,978)
-------- --------
Total shareholders' equity (capital deficit) .......................... (10,894) 35,194
-------- --------
Total liabilities and shareholders' equity (capital deficit) .......... $ 43,899 $ 98,407
======== ========
See accompanying notes to consolidated financial statements
F-4
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------ ------------ -----------
REVENUES:
Commissions ................................... $ 49,796 $ 39,756 $ 33,067
Principal transactions, net ................... 11,046 30,662 28,275
Investment banking fees ....................... 9,141 11,698 15,937
Dividends and interest ........................ 2,285 4,100 5,241
Syndications and underwritings ................ 258 652 417
Investment advisory fees ...................... 2,736 2,696 3,109
Other income .................................. 4,736 4,389 3,538
------------ ------------ -----------
Total revenues ........................... 79,998 93,953 89,584
------------ ------------ -----------
EXPENSES:
Compensation and benefits ..................... 56,876 62,741 56,222
Brokerage, communication and clearance fees ... 14,733 16,082 9,911
Rent and occupancy ............................ 9,708 6,658 5,596
Depreciation and amortization ................. 1,999 2,538 1,078
Impairment of goodwill ........................ 18,762 -- --
Professional services ......................... 4,999 3,130 2,557
Interest ...................................... 2,043 1,666 223
Other ......................................... 15,871 13,387 7,785
------------ ------------ -----------
Total expenses ........................... 124,991 106,202 83,372
------------ ------------ -----------
(Loss) income before income taxes ........ (44,993) (12,249) 6,212
Income tax expense ................................ 1,400 44 1,122
------------ ------------ -----------
Net (loss) income ........................ $ (46,393) $ (12,293) $ 5,090
============ ============ ===========
(Loss) income per Common Share (basic and diluted):
Net (loss) income per Common Share ........... $ (1.10) $ (0.31) $ 0.15
============ ============ ===========
Number of shares used in computation .............. 42,025,211 39,458,057 34,647,170
============ ============ ===========
See accompanying notes to consolidated financial statements
F-5
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY (CAPITAL DEFICIT)
(DOLLARS IN THOUSANDS)
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
--------------- ----------------- ------------------- ---------------
Balance, December 31, 1999 ......... $ 2 $38,983 $(13,775) $ 25,210
Net income ......................... - -- 5,090 5,090
------ ------- -------- --------
Balance, December 31, 2000 ......... 2 38,983 (8,685) 30,300
Net loss ........................... - -- (12,293) (12,293)
Issuance of warrants to note holders - 154 -- 154
Effect of LTS Acquisition .......... 2 17,031 -- 17,033
------ ------- -------- --------
Balance, December 31, 2001 ......... 4 56,168 (20,978) 35,194
Employee compensation .............. - 305 -- 305
Net loss ........................... - -- (46,393) (46,393)
------ ------- -------- --------
Balance, December 31, 2002 ......... $ 4 $56,473 $(67,371) $(10,894)
====== ======= ======== ========
See accompanying notes to consolidated financial statements
F-6
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
-------- -------- -------
Cash flows from operating activities:
Net (loss) income ............................ $(46,393) $(12,293) $ 5,090
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization ................ 1,999 2,538 1,078
Write-off of furniture, fixtures and
leasehold improvements ................... 1,394 -- --
Amortization of (adjustment to)
deferred rent credit ..................... (600) 450 491
Deferred taxes ............................... 3,339 1,397 (550)
Impairment of goodwill ....................... 18,762 -- --
Employee compensation ........................ 305 -- --
Issuance of warrants to note holders ......... -- 154 --
(Increase) decrease in operating assets:
Trading securities owned ..................... 12,959 3,843 (2,641)
Due from clearing brokers .................... 16,542 (9,602) 777
Advances to former parent and affiliates ..... 176 -- (178)
Income taxes receivable ...................... (1,725) -- --
Other assets ................................. 4,643 1,512 (746)
Increase (decrease) in operating liabilities:
Trading securities sold, but not yet purchased (11,186) 5,434 (4,055)
Accrued compensation ......................... (7,810) 3,561 138
Accrued expenses and other liabilities ....... 4,476 (75) (542)
Payable to former parent and affiliate ....... 200 385 919
-------- -------- -------
NET CASH USED IN OPERATING ACTIVITIES .... (2,919) (2,696) (219)
-------- -------- -------
Cash flows from investing activities:
Purchases of furniture, equipment
and leasehold improvements ............... (1,521) (2,735) (764)
Cash received in LTS acquisition ............. -- 5,151 --
-------- -------- -------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES ..................... (1,521) 2,416 (764)
-------- -------- -------
Cash flows from financing activities:
Payments to Ladenburg stockholders ........... -- (10,000) --
Issuance of subordinated notes payable ....... 2,500 2,500 --
Issuance of other notes payable .............. 10,500 2,000 --
Convertible note proceeds .................... -- 10,000 --
Change in restricted assets .................. 1,556 (12) --
Payment of subordinated note payable ......... (2,500) -- --
Payment of other notes payable ............... (4,000) -- --
-------- -------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES .... 8,056 4,488 --
-------- -------- -------
Net increase (decrease) in cash
and cash equivalents ......................... 3,616 4,208 (983)
Cash and cash equivalents, beginning of year ...... 8,136 3,928 4,911
-------- -------- -------
Cash and cash equivalents, end of year ............ $ 11,752 $ 8,136 $ 3,928
======== ======== =======
See accompanying notes to consolidated financial statements
F-7
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
------ -------- ----
Supplemental cash flow information:
Interest paid .......................... $1,018 $ 246 $223
Taxes paid ............................. 206 337 99
Supplemental disclosure of non-cash activity:
Detail of acquisition:
Assets acquired, including cash ........ $ -- $ 26,619 $--
Goodwill ............................... -- 19,385 --
Liabilities assumed, including minority
interest................................ -- (23,820) --
Increase to paid in capital ............ -- (17,033) --
Cash paid .............................. $ -- -- --
------ -------- ----
Net cash received in acquisition ....... $ -- $ 5,151 $--
====== ======== ====
See accompanying notes to consolidated financial statements
F-8
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. PRINCIPLES OF REPORTING
The 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, among others, Ladenburg Thalmann & Co. Inc.
("Ladenburg"), Ladenburg Capital Management Inc., formerly known as GBI
Capital Partners Inc. ("Ladenburg Capital"), Ladenburg Thalmann Europe,
Ltd., Ladenburg Thalmann International Ltd. and Ladenburg Capital Fund
Management Inc., formerly known as GBI Fund Management Corp. ("Ladenburg
Fund Management").
Ladenburg is a registered broker-dealer in securities that clears its
customers' transactions through correspondent clearing brokers on a fully
disclosed basis. Ladenburg Capital, until it voluntarily filed to withdraw
its license in November 2002, also operated as a broker dealer in
securities. Broker-dealer activities include principal and agency trading
and investment banking and underwriting activities. The Company's other
subsidiaries primarily provide asset management services.
Prior to May 7, 2001, Ladenburg Capital and Ladenburg Fund Management were
the only subsidiaries of the Company. 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 giving effect to the acquisition as if it took place on
January 1, 2000, see Note 3 to these consolidated financial statements.
Ladenburg was an indirect wholly owned subsidiary of New Valley
Corporation ("New Valley") until December 23, 1999, when a minority stake
in Ladenburg was sold leaving New Valley with an indirect 80.1% ownership
interest. On December 21, 2001, New Valley distributed its shares of LTS
common stock to holders of New Valley common shares as a special dividend.
(See Note 3.)
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned. All
significant intercompany balances and transactions have been eliminated
upon consolidation.
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, 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 and National Association
of Securities Dealers, Inc. ("NASD"), Commodities Futures Trading
Commission and National Futures Association. See Note 12.
Ladenburg Capital, until November 2002, was a broker-dealer subject to
regulation by the SEC and the NASD. Ladenburg Capital acted as an
introducing broker, market maker, underwriter and trader for its own
account. In July 2002, the market making activities of Ladenburg Capital
were terminated. Certain employees working in Ladenburg Capital's market
making area were offered employment with Ladenburg. In an effort to reduce
support staff expenses, operating expenses and general administrative
expenses, the Company terminated the remaining operations of Ladenburg
Capital during the fourth quarter of 2002. Ladenburg Capital filed to
withdraw as a broker dealer at that time. Ladenburg has agreed to and is
currently servicing the Ladenburg Capital accounts, and many of the
Ladenburg Capital employees were offered and have accepted employment with
Ladenburg.
F-9
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of these financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company considers all highly liquid financial instruments with an
original maturity of less than three months to be cash equivalents.
Securities owned and securities sold, but not yet purchased, which are
traded on a national securities exchange or listed on Nasdaq are valued at
the last reported sales prices of the year. Futures contracts are also
valued at their last reported sales price. Securities owned, which have
exercise or holding period restrictions, are valued at fair value as
determined by the Company's management. Unrealized gains and losses
resulting from changes in valuation are reflected in net gain on principal
transactions.
Principal transactions, agency commissions and related clearing expenses
are recorded on a trade-date basis.
Investment banking revenues include fees earned from providing
merger-and-acquisition, private and public offerings of debt and equity
securities and financial restructuring advisory services. Investment
banking fees are recorded upon the closing of the transaction, when it can
be determined that the fees have been irrevocably earned.
Investment advisory fees are received quarterly, in advance, but are
recognized as earned on a pro rata basis over the term of the contract.
Dividends are recorded on an ex-dividend date basis and interest is
recorded on an accrual basis.
Ladenburg and its former subsidiaries were included in the consolidated
federal income tax return filed by New Valley prior to May 7, 2001 and are
included in the consolidated federal income tax return filed by LTS
commencing May 8, 2001. According to the tax sharing agreement formerly in
effect with New Valley, federal income taxes were calculated as if the
companies filed on a separate return basis and the amount of current tax
or benefit calculated was either remitted to or received from the former
parent. The amount of current and deferred taxes payable or refundable is
recognized as of the date of the financial statements, utilizing currently
enacted tax laws and rates. Deferred tax expenses or benefits are
recognized in the financial statements for the changes in deferred tax
liabilities or assets between years. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. As of December 31, 2002 and December 31, 2001, the valuation
allowance was $17,409 and $4,565, respectively.
Depreciation of furniture and equipment is provided by the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements are amortized on a straight-line basis over the lease term.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and No. 142, "Goodwill and Other Intangible Assets". SFAS
No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, establishes specific
criteria for the recognition of intangible assets separately from
goodwill, and requires unallocated negative goodwill to be written off.
SFAS No. 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. Upon the
adoption of SFAS No. 142, effective January 1, 2002, goodwill was
subjected to periodic assessments of impairment and no longer being
amortized. In 2002 the Company recorded an impairment charge of $18,762 of
goodwill. (See Note 4.)
F-10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", and requires (i) the recognition and
measurement of the impairment of long-lived assets to be held and used and
(ii) the measurement of long-lived assets to be disposed of by sale. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001.
The adoption of this statement in 2002 did not result in a material impact
on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The Company early adopted
SFAS No. 146 during the fourth quarter of 2002 and applied its provisions
to leased premises which were vacated during such period. 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. (See Note 9.)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock- based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has adopted the disclosure
requirements of SFAS No. 148.
SFAS No. 123, "Accounting for Stock-Based Compensation," allows the fair
value of stock-based compensation to be included in expense over the
period earned; alternatively, if the fair value of stock-based
compensation awards is not included in expense, SFAS 123 requires
disclosure of net income, on a pro forma basis, as if expense treatment
had been applied. As permitted by SFAS 123, the Company continues to
account for such compensation under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, pursuant to which no compensation cost has been
recognized in connection with the issuance of stock options, as all
options granted under the employee incentive plan (see Note 14) had an
exercise price equal to the market value of the underlying common stock on
the date of grant. Had the Company elected to recognize compensation
expense for the stock option plan, consistent with the method prescribed
by SFAS 123, the Company's net loss for the years ended December 31, 2002
and 2001 would have increased to the pro forma amount as follows:
2002 2001
-------- --------
Net loss, as reported .................................... $(46,393) $(12,293)
Stock-based employee compensation determined under
the fair value based method ........................... (3,554) (998)
-------- --------
Pro forma net loss ....................................... $(49,947) $(13,291)
======== ========
Net loss per Common Share (basic and diluted), as reported $ (1.10) $ (0.31)
======== ========
Pro forma net loss per Common Share (basic and diluted) .. $ (1.19) $ (0.32)
======== ========
The per share weighted average fair value of stock options granted during
2002 and for the period May 7, 2001 through December 31, 2001 (See Note 3)
of $0.73 and $2.61, respectively, was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
F-11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001
------- -------
Risk free interest rate 4.45% 4.88%
Volatility ............ 135.00% 83.58%
Dividend yield ........ 0 0
Expected lives ........ 10 years 10 years
Certain reclassifications have been made to prior period financial
information to conform to the current period presentation.
3. 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'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 the notes at a purchase price equal to
the unpaid principal amount of the notes and the accrued interest.
Upon closing, New Valley, the previous 80.1% owner of Ladenburg, acquired
an additional 3,945,060 shares of LTS from the former chairman of LTS for
$1.00 per share. Following completion of the transaction, the former
stockholders of Ladenburg owned 64.6% and 59.9% of the common stock of LTS
on a basic and fully diluted basis, respectively. On December 21, 2001,
New Valley distributed its 22,543,158 shares of LTS common stock, a 53.6%
interest, to holders of New Valley common shares through a special
dividend. Following completion of the special dividend, New Valley
continued to hold $8,010 principal amount of LTS's senior convertible
promissory notes, convertible into 3,844,216 shares of LTS common stock,
and a warrant to purchase 100,000 shares of LTS common stock at $1.00 per
share.
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 2002 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's 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% per annum and the conversion price. The note
is currently convertible into a total of 6,497,475 shares of common stock
at a conversion price of approximately $1.54. These notes, together with
the notes issued to the Ladenburg stockholders, are collateralized by a
pledge of the Ladenburg stock. (See Note 13.)
The actual number of shares of common stock paid to New Valley and
Berliner may be increased and the conversion prices of the senior
convertible promissory 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's 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, the former chairman and chief executive officer of LTS.
Additionally, on the same date, Frost-Nevada purchased a total of 550,000
F-12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
shares of common stock at $1.00 per share from Richard J. Rosenstock, LTS'
former 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
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 voluntarily
forfeited 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.
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.
Messrs. 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 financial condition of the Company, effective
September 1, 2002, Messrs. Rosenstock, Zeitchick and Mangone voluntarily
forfeited 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 voluntarily forfeited 25% of the
F-13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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. 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.
Under the purchase method of accounting, the assets acquired and
liabilities assumed were recorded at estimated fair values as determined
by management based on available information. Goodwill of $19,385 was
recognized for the amount of the excess of the purchase price paid over
the fair market value of the net assets acquired and was amortized during
2001 on the straight line basis over 20 years. The final allocation of the
purchase price made during 2002 to the individual assets acquired and
liabilities assumed did not differ from preliminary estimates of fair
value reflected in the 2001 financial statements.
F-14
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The allocation of the purchase price has been summarized in the following
tables:
CALCULATION OF PURCHASE PRICE:
Common stock ............... $ 32,912
Stock options .............. 1,422
Transaction costs .......... 407
--------
Total purchase price ... $ 34,741
========
ALLOCATION OF PURCHASE PRICE:
Assets:
LTS's assets ............. $ 26,619
Goodwill ................. 19,385
Liabilities:
LTS's liabilities ........ (11,263)
--------
Total purchase price ... $ 34,741
========
The following adjustments, which increased shareholders' equity by
$17,033, were made to shareholders' equity to record the acquisition of
LTS:
o an increase in paid-in capital of $32,912 relating to the deemed
issuance of 18,806,612 shares of LTS common stock at $1.75 per share to
existing LTS stockholders;
o an increase in shareholders' equity of $1,422 to recognize the value of
1,875,979 stock options outstanding at May 7, 2001 to LTS employees,
based on a weighted average fair value of $0.76 per option. The fair
value of the options was determined using the Black-Scholes option
pricing model and was based on the following weighted-average
assumptions: expected volatility of 85.93%; expected life of three
years; a risk-free interest rate of 4.42%; and no expected dividend
yield or forfeiture;
o an increase of $2,700 in shareholders' equity principally relating to
net operating losses acquired from New Valley in connection with
Ladenburg's deconsolidation from New Valley's consolidated federal
income tax group; and
o a decrease of $20,000 in shareholders' equity relating to the issuance
of $10,000 of convertible notes and the payment of $10,000 of cash to
the former stockholders of Ladenburg.
Pro forma information, giving effect to the acquisition as if it took
place on January 1 of each respective year is presented below:
Year Ended December 31,
-------------------------
2001 2000
---------- --------
Revenues ............ $ 112,855 $201,623
========== ========
Net (loss) income ... $ (16,873) $ 7,889
========== ========
Net (loss) income per
Common Share .... $ (0.40) $ 0.19
========== ========
F-15
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. IMPAIRMENT OF GOODWILL
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 intangible assets
with indefinite lives be tested for impairment as of the date of adoption.
Additionally, SFAS No. 142 requires that goodwill be tested for impairment
at the reporting unit level as of the date of adoption and that any
goodwill impairment loss recognized as a result of initial application be
reported as the effect of a change in accounting principle.
Prior to January 1, 2002, goodwill and other intangible assets were tested
for impairment based on the recoverability of carrying value using
undiscounted future cash flows. The new criteria provided in SFAS No. 142
require the testing of impairment based on fair value.
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
its reporting units, which differed from the previous accounting rules
where goodwill was assigned only to the business of the acquired entity.
As a result, a portion of the goodwill generated in the acquisition has
been reallocated from Ladenburg Capital to Ladenburg (see Note 3).
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 DECEMBER 31, 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 year ended
December 31, 2001 to its amount adjusted to exclude previously recorded
goodwill amortization expense.
YEAR ENDED
DECEMBER 31, 2001
-----------------
Reported net loss..................... $ (12,293)
Goodwill amortization................. 623
---------
Adjusted net loss..................... $ (11,670)
=========
Reported net loss per share........... $ (0.31)
Goodwill amortization................. 0.01
---------
Adjusted net loss per share........... $ (0.30)
=========
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
F-16
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
Based on the overall market declines in the U.S. equity markets and the
conditions prevailing in the broker-dealer industry during 2002, 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.
5. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET PURCHASED
The components of securities owned and securities sold, but not yet
purchased as of December 31 are as follows:
SECURITIES
SECURITIES SOLD, BUT NOT
OWNED YET PURCHASED
---------- -------------
2002
Common stock ........... $ 4,210 $ 1,188
Municipal obligations .. 33 --
Corporate bonds ........ 122 30
------- -------
$ 4,365 $ 1,218
======= =======
2001
Common stock ........... $15,735 $12,208
Equity and index options 10 --
Municipal obligations .. 2 --
Corporate bonds ........ 1,577 196
------- -------
$17,324 $12,404
======= =======
As of December 31, 2002 and 2001 approximately $4,342 and $17,324,
respectively, of the securities owned are deposited with the Company's
clearing brokers and pursuant to the agreements, the securities may be
sold or re-hypothecated by the clearing brokers.
6. NET CAPITAL REQUIREMENTS
As a registered broker-dealer, Ladenburg is subject to the SEC's Uniform
Net Capital Rule 15c3-1 and the Commodity Futures Trading Commission's
Regulation 1.17, which require the maintenance of minimum net capital.
Ladenburg has elected to compute its net capital under the alternative
method allowed by these rules. At December 31, 2002, Ladenburg had net
capital, as defined, of $3,693, which exceeded its minimum capital
requirement of $1,000 by $2,693.
Ladenburg claims an exemption from the provisions of the SEC's Rule 15c3-3
pursuant to paragraph (k)(2)(ii) as it clears its customer transactions
through its correspondent brokers on a fully disclosed basis.
F-17
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. FINANCIAL INSTRUMENTS
The financial instruments of the Company and it subsidiaries are reported
in the consolidated statements of financial condition at market or fair
value or at carrying amounts that approximate fair values because of the
relatively short-term nature of the instruments or, with respect to notes
payable other than subordinated notes payable, because of their variable
interest rates which periodically adjust to reflect changes in overall
market interest rates. With respect to the $20,000 of fixed rate
subordinated notes payable, the Company's management believes that the
stated interest rates in the notes would not be substantially different
than what the Company could have obtained as of December 31, 2002 and
2001, based on the Company's financial position.
In the normal course of its business, Ladenburg enters into transactions
in financial instruments with off-balance sheet risk. These financial
instruments consist of financial futures contracts, written equity index
option contracts and securities sold, but not yet purchased.
Financial futures contracts provide for the delayed delivery of a
financial instrument with the seller agreeing to make delivery at a
specified future date, at a specified price. These futures contracts
involve elements of market risk that may exceed the amounts recognized in
the consolidated statement of financial condition. Risk arises from
changes in the values of the underlying financial instruments or indices.
Equity index options give the holder the right to buy or sell a specified
number of units of a stock market index, at a specified price, within a
specified time and are settled in cash. Ladenburg generally enters into
these option contracts in order to reduce its exposure to market risk on
securities owned. Credit and market risk arises from the potential
inability of the counterparties to perform under the terms of the
contracts and from changes in the value of a stock market index. Ladenburg
believes it mitigates the market risk of its option positions used for
trading purposes because they are generally hedged transactions. As a
writer of options, Ladenburg receives a premium in exchange for bearing
the risk of unfavorable changes in the price of the securities underlying
the option.
The table below discloses the fair value of these commitments.
Long Short
------------- -----------
As of December 31, 2002:
Equity and index options $-- $--
Financial futures contracts 213 --
As of December 31, 2001:
Equity and index options $10 $--
Financial futures contracts 477 508
For the years ended December 31, 2002, 2001 and 2000, the net gain arising
from options and futures contracts without regard to the benefit derived
from market risk reduction was $60, $366 and $1,186, respectively. The
measurement of market risk is meaningful only when all related and
offsetting transactions are taken into consideration.
Ladenburg, and Ladenburg Capital prior to terminating its operations, sold
securities that they do not currently own and will therefore be obligated
to purchase such securities at a future date. These obligations have been
recorded in the financial statements at December 31, 2002 and 2001 at
market values of the related securities and the Company will incur a loss
if the market value of the securities increases subsequent to December 31,
2002.
F-18
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Components of furniture, equipment and leasehold improvements included in
the consolidated statements of financial condition were as follows:
AS OF DECEMBER 31,
------------------------
2002 2001
-------- --------
Cost
Leasehold improvements ........................ $ 7,927 $ 8,685
Computer equipment ............................ 4,039 5,129
Furniture and fixtures ........................ 1,237 1,854
Other ......................................... 2,220 2,788
-------- --------
15,423 18,456
Less, accumulated depreciation and amortization (7,336) (8,497)
-------- --------
$ 8,087 $ 9,959
======== ========
See Note 9 - Operating Leases.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under several noncancelable lease agreements for
office space, expiring in various years through June 2015. Certain leases
have provisions for escalation based on specified increases in costs
incurred by the landlord. The Company is subleasing a portion of its
office space for approximately $1,031 per year with annual increases. The
sublease expires on August 31, 2009.
As of December 31, 2002, the leases, exclusive of two leases relating to
vacated premises referred to below, provide for minimum lease payments,
net of lease abatement and exclusive of escalation charges, as follows:
YEAR ENDING
DECEMBER 31,
------------
2003.................................... $ 4,125
2004.................................... 4,376
2005.................................... 4,544
2006.................................... 4,398
2007.................................... 4,618
Thereafter.............................. 41,236
--------
Total.............................. $ 63,297
=========
In addition to the above, one of the leases obligates the Company to
occupy additional space at the landlord's option, which may result in
aggregate additional lease payments of up to $1,100 through June 2015.
As of December 31, 2002, Ladenburg Capital has two leases for office space
which it no longer occupies. Such leases, which expire in 2007 and 2010,
provide for future minimum payments of approximately $2,000 per year,
aggregating approximately $12,000. Ladenburg Capital is currently in
litigation with the landlords, and is attempting to terminate its
F-19
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
remaining lease obligations. If Ladenburg Capital is not successful in
terminating these leases, it plans to sublease the properties. During the
year ended December 31 2002, Ladenburg Capital has provided for costs of
$3,031 in connection with such leases, including the write-off of
furniture, fixtures and leasehold improvements of $1,117, and the
recording of a liability at December 31, 2002, which gives effect
to estimated sublease rentals. Additional costs may be incurred in
connection with terminating the leases, or if not terminated, to the
extent of foregone rental income in the event Ladenburg Capital does not
sublease the office space for an amount at least equal to the lease
obligations. Such costs may have a material adverse effect on Ladenburg
Capital's financial position and liquidity.
On March 13, 2003, the Company entered into an additional lease for office
space located in Melville, New York. The lease provides for minimum lease
payments of $237 in 2003, $418 in 2004, $432 in 2005, $448 in 2006, $463
in 2007 and $210 in 2008.
Deferred rent credit at December 31, 2002 and 2001 of $6,589 and $7,189,
respectively, represents the difference between rent payable calculated
over the life of the leases on a straight-line basis (net of lease
incentives) and rent payable on a cash basis. Deferred rent related to the
vacated premises has been reclassified to accounts payable and accrued
expenses at December 31, 2002.
At December 31, 2002, Ladenburg has utilized a letter of credit in the
amount of $1,000 that is collateralized by $1,054 of Ladenburg's
marketable securities (shown as restricted assets on the consolidated
statement of financial condition) as collateral for the lease of office
space. Pursuant to the lease agreement, the requirement to maintain this
letter of credit facility expires on December 31, 2006. At December 31,
2001, Ladenburg utilized a letter of credit in the amount of $2,500 as
collateral for leases. The letter of credit was collateralized by $1,050
of marketable securities and $1,560 of cash.
LITIGATION
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. With respect to certain
arbitration and litigation matters, where the Company believes that it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated, the Company has provided a liability for loss of
$6,201 at December 31, 2002 (included in accounts payable and accrued
liabilities) of which $3,110 was charged to operations for the year then
ended. With respect to other pending matters, due to the uncertain nature
of litigation in general, the Company is unable to estimate a range of
possible loss; however, in the opinion of management, after consultation
with counsel, the ultimate resolution of these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
10. INCOME TAXES
Prior to May 7, 2001, Ladenburg was included in the consolidated federal
income tax return of New Valley, and determined its income tax provision
on a separate company basis. As a result of the decrease in New Valley's
ownership of Ladenburg following the LTS acquisition, Ladenburg is no
longer permitted to be included in the filing of New Valley's consolidated
federal income tax return.
F-20
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The income tax expense (benefit) consists of the following:
STATE AND
FEDERAL LOCAL TOTAL
------- ------- -------
2002:
Current $(2,187) $ 248 $(1,939)
Deferred 3,339 -- 3,339
------- ------- -------
$ 1,152 $ 248 $ 1,400
======= ======= =======
2001:
Current $(1,854) $ 501 $(1,353)
Deferred 512 885 1,397
------- ------- -------
$(1,342) $ 1,386 $ 44
======= ======= =======
2000:
Current $ 1,507 $ 165 $ 1,672
Deferred (467) (83) (550)
------- ------- -------
$ 1,040 $ 82 $ 1,122
======= ======= =======
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax
rate (34%) to pretax income (loss) as a result of the following
differences:
2002 2001 2000
-------- -------- -------
(Loss) income before income taxes ................ $(44,993) $(12,249) $ 6,212
-------- -------- -------
(Benefit) provision under statutory U.S. tax rates (15,298) (4,165) 2,112
Increase in taxes resulting from:
Nontaxable items ............................. -- 380 223
Write-off of goodwill ........................ 6,379 -- --
State taxes, net of Federal benefit .......... 164 915 54
Other, net ................................... -- (63) --
Unrecognized net operating losses ............ 6,816 (1,588) --
Increase (decrease) in valuation reserve, net 3,339 4,565 (1,267)
-------- -------- -------
Income tax provision ................... $ 1,400 $ 44 $ 1,122
======== ======== =======
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 enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
F-21
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Deferred tax amounts are comprised of the following at December 31:
2002 2001
-------- -------
Deferred tax assets:
Net operating loss carryforward $ 12,663 $ 4,554
Accrued expenses .............. 3,884 2,050
Compensation and benefits ..... 135 404
Depreciation and amortization . 449 315
Unrealized losses ............. 278 97
Other, net .................... -- 484
-------- -------
17,409 7,904
Valuation allowance ............... (17,409) (4,565)
-------- -------
Net deferred taxes ................ $ -- $ 3,339
======== =======
As a result of losses in recent years, a valuation allowance has been
established to offset deferred tax amounts based on management's
evaluation that it is more likely than not that the benefits will not be
realized.
At December 31, 2002, the Company had net operating loss carryforwards,
which are subject to restrictions on utilization, of approximately $27.5
million which expire in various years from 2015 through 2023.
11. BENEFIT PLANS
Ladenburg and Ladenburg Capital have a 401(k) retirement plan (the
"Plan"), which allows eligible employees to invest a percentage of their
pretax compensation, limited to the statutory maximum ($11,000 for 2002
and $10,500 for 2001 and 2000). The Plan also allows the Company to make
matching and/or discretionary contributions. Ladenburg elected to make
matching contributions for the year 2000 in the amount of $259. Neither
Ladenburg nor Ladenburg Capital made matching contributions for 2002 or
2001.
12. OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Ladenburg does not carry accounts for customers or perform custodial
functions related to customers' securities. Ladenburg introduces all of
its customer transactions, which are not reflected in these financial
statements, to its primary clearing broker, which maintains the customers'
accounts and clears such transactions. Additionally, the primary clearing
broker provides the clearing and depository operations for Ladenburg's
proprietary securities transactions. These activities may expose the
Company to off-balance-sheet risk in the event that customers do not
fulfill their obligations with the clearing brokers, as Ladenburg and
Ladenburg Capital have agreed to indemnify its clearing brokers for any
resulting losses. The Company constantly assesses risk with each customer
who is on margin credit and records an estimated loss when collection from
the customer is unlikely.
The clearing operations for the Company's securities transactions are
provided by several clearing brokers. At December 31, 2002 and 2001,
substantially all of the securities owned and the amounts due from brokers
reflected in the consolidated statement of financial condition are
positions held at and amounts due from one clearing broker, a large
financial institution. The Company is subject to credit risk should this
broker be unable to fulfill its obligations.
The Company and its subsidiaries maintain cash in bank deposit accounts,
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash.
F-22
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. NOTES PAYABLE
The components of notes payable are as follows:
DECEMBER 31,
---------------------
2002 2001
------- -------
Senior convertible notes payable $20,000 $20,000
Notes payable in connection with
clearing agreement ......... 3,500 --
Notes payable .................. 5,000 2,000
Subordinated note payable ...... 2,500 2,500
------- -------
Total .......................... $31,000 $24,500
======= =======
Aggregate maturities of the $31,000 of notes payable at December 31, 2002
are as follows:
YEAR ENDING
DECEMBER 31,
------------
2003 1,500
2004 2,500
2005 20,000
2006 7,000
------
$31,000
=======
In conjunction with the acquisition of Ladenburg, LTS issued a total of
$20,000 principal amount of senior convertible notes due December 31,
2005, secured by a pledge of the stock of Ladenburg. The $10,000 principal
amount of notes issued to 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 the
former Ladenburg stockholders are convertible into a total of 4,799,271
shares of common stock, and the Frost-Nevada notes are convertible into a
total of 6,497,475 shares of common stock and the conversion price of the
notes is subject to adjustment on or about May 7, 2003 pending a final
resolution of LTS's pre-closing litigation adjustments. 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 August 31, 2001, the Company borrowed $1,000 from each of New Valley
and Frost-Nevada in order to supplement the liquidity of the Company's
broker-dealer operations. The loans, which bore interest at 1% above the
prime rate, were repaid in January 2002. As consideration for the loans,
the Company issued to each of New Valley and Frost-Nevada a five-year,
immediately exercisable, warrant to purchase 100,000 shares of the
Company's common stock at an exercise price of $1.00 per share. The
Company recorded an expense of $154 associated with the issuance of such
warrants based on the value determined by using the Black-Scholes
option-pricing model.
As of December 31, 2002, Ladenburg has a $2,500 junior subordinated
revolving credit agreement with an affiliate of its primary clearing
broker that matures on October 31, 2004, under which outstanding
borrowings incur interest at LIBOR plus 2%. The outstanding $2,500
subordinated loan at December 31, 2001 was repaid during 2002.
On March 27, 2002, the Company borrowed $2,500 from New Valley. The loan,
which bears interest at 1% above the prime rate, was due on the earlier of
December 31, 2003 or the completion of one or more equity financings where
F-23
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
the Company receives at least $5,000 in total proceeds. The terms of the
loan restrict the Company from incurring or assuming any indebtedness that
is not subordinated to the loan so long as the loan is outstanding. On
July 16, 2002, the Company borrowed an additional $2,500 from New Valley
(collectively, the "2002 Loans") on the same terms as the March 2002 loan.
In November 2002, New Valley agreed in connection with the Clearing Loans
(defined below) to extend the maturity of the 2002 Loans to December 31,
2006 and to subordinate the 2002 Loans to the repayment of the Clearing
Loans.
On June 28, 2002, New Valley, Berliner and Frost-Nevada agreed with the
Company to forbear until May 15, 2003 payment of the interest due to them
under the senior convertible promissory notes held by these entities on
the interest payment dates of the notes commencing June 30, 2002 through
March 2003 (the "Forbearance Interest Payments"). On March 3, 2003, the
holders of the senior convertible promissory notes agreed to extend the
interest forbearance period to January 15, 2005 with respect to interest
payments due through December 31, 2004. Interest on the deferred amounts
accrues at 8% on the New Valley and Berliner notes and 9% on the
Frost-Nevada note. The Company also agreed to apply any net proceeds from
any subsequent public offerings to any such deferred amounts owed to the
holders of the notes to the extent possible. As of December 31, 2002,
accrued interest payments as to which a forbearance was received amounted
to $1,404 ($770 is included in accounts payable and accrued liabilities
and $634 is included in due to former parent and affiliate).
On October 8, 2002, LTS borrowed an additional $2,000 from New Valley. The
loan, which bore interest at 1% above the prime rate, was scheduled to
mature on the earliest of December 31, 2002, the next business day after
the Company received its federal income tax refund for the fiscal year
ended September 30, 2002, and the next business day after the Company
received the Clearing Loans. The loan was repaid in December 2002 upon the
receipt of the Clearing Loans.
In November 2002, the Company renegotiated a clearing agreement with one
of its clearing brokers whereby this clearing broker became Ladenburg's
primary clearing broker, clearing substantially all of Ladenburg's
business. As part of the new agreement with this clearing agent, Ladenburg
expects to realize significant cost savings from reduced ticket charges
and other incentives. In addition, under the new clearing agreement, an
affiliate of the clearing broker loaned the Company an aggregate of $3,500
(the "Clearing Loans") in December 2002. The Clearing Loans, which bear
interest at prime and mature in November 2003 ($1,500) and November 2006
($2,000), and related accrued interest will be forgiven over various
periods, up to four years from the date of the new agreement, provided
Ladenburg continues to clear its transactions through the primary clearing
broker. The principal balance of the Clearing Loans is scheduled to be
forgiven as to $1,500 in November 2003, $667 in November 2004, $667 in
November 2005 and $666 in November 2006. Upon the forgiveness of the
Clearing Loans, the forgiven amount will be accounted for as a reduction
of expenses. However, if the clearing agreement is terminated for any
reason prior to the loan maturity dates, the loans, less any amounts that
have been forgiven through the date of the termination, must be repaid on
demand.
LIQUIDITY
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. During the fourth quarter of 2002, the Company terminated the
operations of Ladenburg Capital. Ladenburg Capital filed to withdraw as a
broker-dealer at that time. Ladenburg has agreed to and is currently
servicing the Ladenburg Capital accounts, and many of the Ladenburg
Capital employees were offered and have accepted employment with
Ladenburg. This further reduced 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
F-24
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 in
the future 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.
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. 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.
14. SHAREHOLDERS' EQUITY
AUTHORIZED SHARES
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.
WEIGHTED AVERAGE SHARES OUTSTANDING
In connection with the LTS acquisition, all per share data have been
retroactively restated to reflect the number of equivalent shares received
by the former stockholders of Ladenburg in the form of common stock,
convertible notes and cash. During 2002 and 2001, respectively, options
and warrants to purchase 4,856,813 and 3,112,104 common shares, and during
both 2002 and 2001, 11,296,747 common shares issuable upon the conversion
of notes payable, were not included in the computation of diluted loss per
share as the effect would have been anti-dilutive.
STOCK OPTION PLAN
In 1999, the Company adopted the 1999 Performance Equity Plan (the "Plan")
which, as amended, provides for the grant of stock options and stock
purchase rights to certain designated employees, officers and directors
and certain other persons performing services for the Company, as
designated by the board of directors. In 2002, shareholders approved an
amendment to the Plan at the Company's annual meeting 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 connection with the LTS acquisition, shareholders'
equity was increased $1,422 to recognize the value of 1,875,979 stock
options outstanding at May 7, 2001 to LTS employees, based on a weighted
average fair value of $0.76 per option. The fair value of the options was
determined using the Black-Scholes option pricing model and was based on
the following weighted-average assumptions: expected volatility of 85.93%;
expected life of three years; a risk-free interest rate of 4.42%; and no
expected dividend yield or forfeiture.
F-25
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A summary of the status of the Plan at December 31, 2002, and changes
during the year ended December 31, 2002 and the period ended December 31,
2001, are presented below:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ --------------
Options outstanding, May 7, 2001............... 1,875,979 $3.21
Granted........................................ 1,200,000 3.05
Forfeited...................................... 168,875 3.00
----------
Options outstanding, December 31, 2001 2,907,104 3.16
Granted........................................ 2,367,485 .73
Forfeited...................................... 617,776 1.96
----------
Options outstanding, December 31, 2002 4,656,813 2.08
==========
Options exercisable, December 31, 2002 1,780,854 3.28
The following table summarizes information about stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ --------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF EXERCISE OUTSTANDING AT CONTRACTUAL LIFE EXERCISE EXERCISABLE AT EXERCISE
PRICES DECEMBER 31, 2002 (YEARS) PRICE DECEMBER 31, 2002 PRICE
- ------------------ ----------------- ----------------- ----------------- ---------------- -----------------
$4.47 200,000 1.67 $4.47 179,016 $4.47
4.06 300,000 6.67 4.06 295,380 4.06
3.05 1,200,000 8.33 3.05 533,333 3.05
3.00 633,708 6.96 3.00 598,125 3.00
2.52 110,000 8.10 2.52 110,000 2.52
2.13 75,000 8.00 2.13 65,000 2.13
.88 1,220,000 9.04 .88 -- --
.60 818,105 9.21 .60 -- --
.22 100,000 9.88 .22 -- --
--------- ---------
4,656,813 8.11 2.08 1,780,854 3.28
--------- ---------
In connection with the LTS acquisition, Ladenburg entered into a new
employment agreement with Victor M. Rivas, which provided for Mr. Rivas to
become President and Chief Executive Officer of LTS upon closing of the
transaction. As part of Mr. Rivas' compensation under the employment
agreement, LTS granted him on May 7, 2001 a ten-year non-qualified option
under the Plan to purchase 1,000,000 shares of LTS common stock at $3.05,
the closing market price as reflected by the American Stock Exchange on
the date of grant. The options have a ten-year term and become exercisable
as to one-third of the shares on each of the first three anniversaries of
the date of grant.
On May 7, 2001, the Company granted to each of the five new non-employee
directors of the Company ten-year options to purchase 20,000 shares of
common stock at $3.05 per share. Each option became exercisable on the
first anniversary of the date of grant.
On January 10, 2002, the Company granted non-qualified stock options to
five executives, to purchase an aggregate of 1,220,000 shares of common
F-26
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
stock at an exercise price of $.88 per share, the fair market value of a
share of common stock on the date of grant. These options vest in three
equal annual installments commencing on the first anniversary of the date
of grant and expire ten years from the date of grant.
On March 19, 2002, the Company granted to other employees of the Company
and its subsidiaries qualified and non-qualified options under the Plan to
purchase a total of 1,047,485 shares of common stock at a price of $.60
per share, the fair market value on the date of grant. These options vest
in three equal annual installments commencing on the first anniversary of
the date of grant and expire ten years from the date of grant.
On November 15, 2002, the Company granted to the five non-employee
directors of the Company options to purchase a total of 100,000 shares of
common stock at $.22 per share, the fair market value on the date of
grant. These options vest in one year from the date of grant and expire
ten years from the date of grant.
EMPLOYEE STOCK PURCHASE PLAN
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 Company's annual meeting in 2002. The
ESP Plan provides that the Board's compensation committee, which
administers the plan, may permit the Company's employees, commencing in
2003, to acquire up to 5,000,000 shares of common stock during quarterly
option periods at a discount of up to 15% below the lesser of the then
current market price of the Company's common stock on the dates of grant
or exercise. The ESP Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code.
15. RELATED PARTY TRANSACTIONS
Following the May 2001 acquisition of Ladenburg by LTS, certain officers
and directors of New Valley became affiliated with the Company. Various
directors of New Valley serve as directors of the Company, including
Victor M. Rivas, LTS's President and Chief Executive Officer. An executive
officer of New Valley served as Chief Financial Officer of LTS from June
2001 through September 2002. In 2002, the Company accrued compensation for
this executive officer in the amount of $100, which is payable in four
quarterly installments commencing April 1, 2003. See Note 14 regarding
options granted to the non-employee directors of LTS and to Mr. Rivas in
May 2001 and subsequently in 2002. For a more complete discussion of the
acquisition of Ladenburg, see Note 3.
In connection with the acquisition of Ladenburg, New Valley and
Frost-Nevada acquired LTS's senior convertible notes. In August 2001, New
Valley and Frost-Nevada each loaned the Company $1,000, which loans were
repaid in January 2002. During 2002, New Valley loaned the Company an
additional $7,000 of which $2,000 was repaid. (See Note 13.)
During 2001, New Valley paid a fee of $750 to the President of Ladenburg,
who serves as President and Chief Executive Officer of LTS. The fee was
paid for his services in connection with the closing of the acquisition of
Ladenburg by LTS. One-half of the fee was reimbursed by Ladenburg to the
former parent.
Howard Lorber, the Company's chairman of the board, is chairman of the
board of directors of Hallman & Lorber Associates, Inc., a private
consulting and actuarial firm, and related entities, which receive
commissions from insurance policies written for the Company. These
commissions amounted to approximately $106 in 2002.
Several members of the immediate families of LTS's executive officers and
directors are employed as registered representatives of Ladenburg and were
previously employed by Ladenburg Capital Management. As such, they receive
a percentage of commissions generated from customer accounts for which
they are designated account representatives and are eligible to receive
bonuses in the discretion of management. Oscar Sonkin, the father-in-law
of Richard J. Rosenstock received $72 and $104 of compensation in 2002 and
2001, respectively. Richard Sonkin, the brother-in-law of Richard J.
Rosenstock, received $216 and $150 in compensation in 2002 and 2001,
respectively. Steven Zeitchick, the brother of Mark Zeitchick, received
$182 and $136 in compensation during 2002 and 2001, respectively.
F-27
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS
-------------------------------------------------------------------------
1ST 2ND 3RD 4TH
------------ ------------ ------------ ------------
2002:
Revenues .......................... $ 25,615 $ 20,413 $ 15,977 $ 17,993
Expenses .......................... 29,802 46,081 (c) 23,726 25,382
------------ ------------ ------------ ------------
Loss before income taxes ........ (4,187) (25,668) (7,749) (7,389)
Net loss .......................... $ (3,532) $ (25,452)(c) $ (10,014) $ (7,395)
Basic and diluted:
Loss per Common Share ............... $ (0.08) $ (0.61)(c) $ (.24) $ (.18)
Basic and diluted weighted average
Common Shares ....................... 42,025,211 42,025,211 42,025,211 42,025,211
2001: (a)
Revenues .......................... $ 18,910 $ 21,168 $ 18,079 $ 35,796
Expenses .......................... 19,274 24,856 26,492 35,580
------------ ------------ ------------ ------------
(Loss) income before income taxes (364) (3,688) (8,413) 216
Net loss .......................... $ (272) $ (2,594) $ (5,685) $ (3,872)
============ ============ ============ ============
Basic and diluted:
Loss per Common Share ............... $ (0.01) $ (0.07) $ (0.14) $ (0.09)
============ ============ ============ ============
Basic and diluted weighted average
Common Shares (b)(d) ................ 34,647,170 39,025,348 42,025,211 42,025,211
============ ============ ============ ============
- -----------------
(a) The financial data prior to May 7, 2001 reflect Ladenburg's financial
results and the financial data afterwards reflect the Company's
financial results.
(b) All per share data prior to May 7, 2001 have been retroactively
adjusted to reflect the number of equivalent shares received by the
former stockholders of Ladenburg in the form of common stock,
convertible notes and cash.
(c) Includes impairment charge for goodwill of $18,762 ($0.45 per common
share) (see Note 4).
(d) The sum of the quarterly loss per share may not equal the loss per
share for the year, because the per share data for each quarter and
for the year are independently computed.
F-28