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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
COMMISSION FILE NUMBER 1-15799
Ladenburg Thalmann Financial Services Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0701248
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
590 MADISON AVENUE
NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 409-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
AS OF MAY 14, 2003, THERE WERE OUTSTANDING 42,025,211 SHARES OF THE
REGISTRANT'S COMMON STOCK, $.0001 PAR VALUE.
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LADENBURG THALMANN FINANCIAL SERVICES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial Condition
as of March 31, 2003 and December 31, 2002.................... 2
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2003 and 2002............ 3
Condensed Consolidated Statement of Changes in
Shareholders' Capital Deficit for the three months ended
March 31, 2003................................................ 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2003 and 2002................ 5
Notes to the Condensed Consolidated Financial
Statements.................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 22
Item 4. Controls and Procedures........................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 23
Item 2. Changes in Securities and Use of Proceeds......................... 23
Item 6. Exhibits and Reports on Form 8-K.................................. 23
SIGNATURE............................................................................. 24
CERTIFICATIONS........................................................................ 25
1
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
-------- ------------
ASSETS
Cash and cash equivalents ........................................................... $ 8,430 $ 11,752
Trading securities owned ............................................................ 728 4,365
Due from affiliates ................................................................. 89 86
Receivables from clearing brokers ................................................... 15,340 11,378
Exchange memberships owned, at historical cost ...................................... 1,505 1,505
Furniture, equipment and leasehold improvements, net ................................ 7,732 8,087
Restricted assets ................................................................... 1,057 1,054
Income taxes receivable ............................................................. -- 2,224
Other assets ........................................................................ 3,586 3,448
-------- --------
Total assets ............................................................... $ 38,467 $ 43,899
======== ========
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIT
Securities sold, not yet purchased .................................................. $ 120 $ 1,218
Accrued compensation ................................................................ 2,619 3,268
Accounts payable and accrued liabilities ............................................ 11,055 12,084
Deferred rent credit ................................................................ 6,780 6,589
Due to former parent ................................................................ 856 634
Notes payable ....................................................................... 8,500 8,500
Senior convertible notes payable .................................................... 20,000 20,000
Subordinated note payable ........................................................... 2,500 2,500
-------- --------
Total liabilities .......................................................... 52,430 54,793
-------- --------
Commitments and contingencies ....................................................... -- --
Shareholders' capital deficit:
Preferred stock, $.0001 par value; 2,000,000 shares authorized; none issued .... -- --
Common stock, $.0001 par value; 200,000,000 shares authorized;
42,025,211 shares issued and outstanding ............................... 4 4
Additional paid-in capital ..................................................... 56,473 56,473
Accumulated deficit ............................................................ (70,440) (67,371)
-------- --------
Total shareholders' capital deficit ........................................ (13,963) (10,894)
-------- --------
Total liabilities and shareholders' capital deficit ........................ $ 38,467 $ 43,899
======== ========
See accompanying notes to condensed
consolidated financial statements
2
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------ ------------
Revenues:
Commissions ...................................... $ 7,955 $ 13,950
Principal transactions, net ...................... 1,035 5,057
Investment banking fees .......................... 657 3,946
Investment advisory fees ......................... 615 827
Dividends and interest ........................... 429 683
Syndications and underwritings ................... 35 --
Other income ..................................... 1,180 1,152
------------ ------------
Total revenues .............................. 11,906 25,615
------------ ------------
Expenses:
Compensation and benefits ........................ 8,648 17,590
Brokerage, communication and clearance fees ...... 1,801 4,489
Rent and occupancy ............................... 1,426 1,860
Depreciation and amortization .................... 356 609
Professional services ............................ 743 1,169
Interest ......................................... 505 488
Other ............................................ 1,450 3,597
------------ ------------
Total expenses ............................... 14,929 29,802
------------ ------------
Loss before income taxes (benefit) .................... (3,023) (4,187)
Income taxes (benefit) ................................ 46 (655)
------------ ------------
Net loss .............................................. $ (3,069) $ (3,532)
============ ============
Loss per Common Share (basic and diluted):
Net loss per Common Share ........................ $ (0.07) $ (0.08)
============ ============
Number of shares used in computation .................. 42,025,211 42,025,211
============ ============
See accompanying notes to condensed
consolidated financial statements
3
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' CAPITAL DEFICIT
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------- ---------- ----------- --------
Balance, December 31, 2002 .... $ 4 $ 56,473 $(67,371) $(10,894)
Net loss ................... -- -- (3,069) (3,069)
-------- -------- -------- --------
Balance, March 31, 2003 ....... $ 4 $ 56,473 $(70,440) $(13,963)
======== ======== ======== ========
See accompanying notes to condensed
consolidated financial statements
4
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net loss ....................................................... $ (3,069) $ (3,532)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................................. 356 609
Amortization of deferred rent credit ........................... 191 648
Deferred taxes ................................................. -- 147
Decrease (increase) in operating assets:
Trading securities owned ....................................... 3,637 6,288
Receivables from clearing brokers .............................. (3,962) 2,655
Due from affiliates ............................................ (3) 58
Income taxes receivable ........................................ 2,224 --
Other assets ................................................... (138) (255)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased ............................. (1,098) (2,680)
Accrued compensation ........................................... (649) (6,348)
Accounts payable and accrued liabilities ....................... (1,029) (1,038)
Due to former parent ........................................... 222 (434)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES ...................... (3,318) (3,882)
-------- --------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements .... (41) (268)
Net proceeds from sale of equipment ............................ 40 --
Decrease (increase) in restricted assets ....................... (3) 1,560
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ........ (4) 1,292
-------- --------
Cash flows from financing activities:
Repayment of promissory notes payable .......................... -- (2,000)
Issuance of promissory notes payable ........................... -- 2,500
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. -- 500
-------- --------
Net decrease in cash and cash equivalents ........................... (3,322) (2,090)
Cash and cash equivalents, beginning of period ...................... 11,752 8,136
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................... $ 8,430 $ 6,046
======== ========
See accompanying notes to condensed
consolidated financial statements
5
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The condensed consolidated financial statements include the accounts of
Ladenburg Thalmann Financial Services Inc. ("LTS" or the "Company") and
its wholly-owned subsidiaries. The subsidiaries of LTS include, among
others, Ladenburg Thalmann & Co. Inc. ("Ladenburg"), Ladenburg Capital
Management Inc. ("Ladenburg Capital"), Ladenburg Thalmann Europe, Ltd.,
Ladenburg Thalmann International Ltd. and Ladenburg Capital Fund
Management Inc. ("Ladenburg Fund Management").
The interim financial data as of March 31, 2003 and for the three months
ended March 31, 2003 and March 31, 2002 are unaudited and have been
prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. In the
opinion of the management, the interim data includes all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods. Because of the nature of the
Company's business, the results of any interim period are not necessarily
indicative of results for the full year.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with generally accepted accounting principles. The balance sheet at
December 31, 2002 has been derived from the audited financial statements
at that date, but does not include all of the information and notes
required by generally accepted accounting principles for complete
financial statement presentation. The notes to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002, filed with the Securities and Exchange
Commission, provide additional disclosures and a further description of
accounting policies.
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.
As part of the consideration for the shares of Ladenburg, LTS issued to
the former stockholders of Ladenburg a majority interest in the LTS common
stock. For accounting purposes, the acquisition has been accounted for as
a reverse acquisition with Ladenburg treated as the acquirer of LTS. For a
more complete description of these transactions, see Note 3 to the
consolidated financial statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002.
The accompanying condensed 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. Ladenburg clears its customers'
transactions through correspondent clearing brokers on a fully disclosed
basis. Broker-dealer activities include principal and agency trading and
investment banking and underwriting activities. Ladenburg provides its
services principally for middle market and emerging growth companies and
high net worth individuals through a coordinated effort among corporate
finance, capital markets, investment management, brokerage and trading
professionals. Ladenburg is subject to regulation by 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 7.)
6
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Ladenburg Capital, until it voluntarily filed to withdraw its license in
November 2002, operated as a broker-dealer subject to regulation by the
SEC and the NASD. Ladenburg Capital acted as an introducing broker, market
maker, underwriter and trader for its own account. In 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 November 2002, in an effort to reduce
support staff expenses, operating expenses and general administrative
expenses, the Company terminated the remaining 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.
The Company's other subsidiaries primarily provide asset management
services.
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.
The Company files a consolidated federal income tax return with its
subsidiaries. The amount of current and deferred taxes payable or
refundable is recognized as of the date of the financial statements,
utilizing currently enacted tax laws and rates. Deferred tax expenses or
benefits are recognized in the financial statements for the changes in
deferred tax liabilities or assets between periods. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. As of March 31, 2003 and December 31, 2002, the
valuation allowance was $18,689 and $17,409, 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.
7
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 the second quarter of 2002, the Company recorded an
impairment charge of $18,762 of goodwill.
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 5.)
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 use of
the fair value based method of accounting for stock-based employee
compensation. Alternatively, SFAS No. 123 allows entities to continue to
apply the intrinsic value method prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations and provide proforma disclosures of net income
(loss) and income (loss) per share, as if the fair value based method of
accounting had been applied to employee awards. As permitted by SFAS 123,
the Company continues to account for such compensation under APB No. 25
and related interpretations, pursuant to which no compensation cost has
been recognized in connection with the issuance of stock options, as all
options granted under the employee incentive plan had an exercise price
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on the Company's net
loss for three months ended March 31, 2003 and 2002, had the Company
elected to recognize compensation expense for the stock option plan,
consistent with the method prescribed by SFAS 123.
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
------- -------
Net loss, as reported $(3,069) $(3,532)
Stock-based employee compensation determined under
the fair value based method (389) (342)
------- -------
Pro forma net loss $(3,458) $(3,874)
======= =======
Net loss per Common Share (basic and diluted), as reported $ (0.07) $ (0.08)
======= =======
Pro forma net loss per Common Share (basic and diluted) $ (0.08) $ (0.09)
======= =======
8
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Certain reclassifications have been made to prior period financial
information to conform to the current period presentation.
During the three months ended March 31, 2003 and 2002, respectively,
options and warrants to purchase 4,728,230 and 5,313,131 common shares,
and during both the 2003 and 2002 periods, 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.
3. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET PURCHASED
The components of securities owned and securities sold, but not yet
purchased as of March 31, 2003 and December 31, 2002 are as follows:
SECURITIES SOLD,
SECURITIES BUT NOT
OWNED YET PURCHASED
---------- ---------------
MARCH 31, 2003
--------------
Common stock $ 386 $ 112
Equity and index options 4 8
Municipal obligations 3 --
Corporate bonds 335 --
------ ------
$ 728 $ 120
====== ======
DECEMBER 31, 2002
-----------------
Common stock $4,210 $1,188
Equity and index options -- --
Municipal obligations 33 --
Corporate bonds 122 30
------ ------
$4,365 $1,218
====== ======
As of March 31, 2003 and December 31, 2002, approximately $709 and $4,342,
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.
4. 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 March 31, 2003, Ladenburg had net
capital, as defined, of $5,486, which exceeded its minimum capital
requirement of $1,000 by $4,486.
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.
5. 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
9
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 March 31, 2003, 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.................................... $ 3,645
2004.................................... 4,795
2005.................................... 4,978
2006.................................... 4,847
2007.................................... 5,082
Thereafter.............................. 41,407
-------
Total................................... $64,750
=======
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 March 31, 2003, 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 $11,000. Ladenburg Capital is currently in
litigation with the landlords, and is attempting to terminate its
remaining lease obligations. If Ladenburg Capital is not successful in
terminating these leases, it plans to sublease the properties. In this
situation, Ladenburg Capital's additional minimum lease payments as of
March 31, 2003 are approximately $1,500 in 2003, $2,000 per year for 2004
though 2007 and $1,582 thereafter. Ladenburg Capital has provided for
costs in connection with such leases and the recording of a liability at
March 31, 2003, 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.
Deferred rent credit at March 31, 2003 and December 31, 2002 of $6,780 and
$6,589, 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 March 31, 2003, Ladenburg has utilized a letter of credit in the amount
of $1,000 that is collateralized by $1,057 of Ladenburg's marketable
securities (shown as restricted assets on the consolidated statement of
financial condition) as collateral for the lease of office space of the
Company's Madison Avenue (New York City) office space. Pursuant to the
lease agreement, the requirement to maintain this letter of credit
facility expires on December 31, 2006. At December 31, 2002, this letter
of credit was collateralized by $1,054 of Ladenburg's marketable
securities.
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 reserve for potential
arbitration and lawsuit losses of $5,755 at March 31, 2003 (included in
10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
accounts payable and accrued liabilities) of which $46 was charged to
operations for the three months ended March 31, 2003. With respect to
other pending matters, due to the uncertain nature of litigation in
general, the Company is unable to estimate a range of possible loss;
however, in the opinion of management, after consultation with counsel,
the ultimate resolution of these matters should not have a material
adverse effect on the Company's consolidated financial position, results
of operations or liquidity.
On May 5, 2003, a suit was filed in the U.S. District Court for the
Southern District of New York by Sedona Corporation against Ladenburg,
former employees of Ladenburg, Pershing LLC and a number of other firms
and individuals. The plaintiff alleges, among other things, that certain
defendants (other than Ladenburg) purchased convertible securities from
the plaintiff and then allegedly manipulated the market to obtain an
increased number of shares from the conversion of those securities.
Ladenburg acted as placement agent and not as principal in those
transactions. The plaintiff has alleged that Ladenburg and the other
defendants violated federal securities laws and various state laws. The
plaintiff seeks compensatory damages from the defendants of at least
$500,000 and punitive damages of $2,000,000. Ladenburg, which has not been
served in the suit, believes the plaintiff's claims are without merit and
intends to vigorously defend against them.
6. INCOME TAXES
The Company accounts for taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the recognition of tax
benefits or expense on the temporary differences between the tax basis and
book basis of its assets and liabilities. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those timing differences are expected
to be recovered or settled. Deferred tax amounts as of March 31, 2003,
which consist principally of the tax benefit of net operating loss
carryforwards and accrued expenses, amounts to $18,689. After
consideration of all the evidence, both positive and negative, especially
the fact the Company has sustained operating losses during 2002 and for
the three months ended March 31, 2003 and that the Company continues to be
affected by conditions in the economy, management has determined that a
valuation allowance at March 31, 2003 was necessary to fully offset the
deferred tax assets based on the likelihood of future realization. At
March 31, 2003, the Company had net operating loss carryforwards, which
are subject to restrictions on utilization, of approximately $30,000 which
expire in various years from 2015 through 2023.
7. 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 has
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 March 31, 2003 and December 31,
2002, substantially all of the securities owned and the amounts due from
clearing 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 clearing broker be unable to fulfill its obligations.
The Company and its subsidiaries maintain cash in bank deposit accounts,
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash.
11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
8. NOTES PAYABLE
The components of notes payable are as follows:
MARCH 31, DECEMBER 31,
2003 2002
------- -----------
Senior convertible notes payable ... $20,000 $20,000
Notes payable in connection with
clearing agreement ............. 3,500 3,500
Notes payable ...................... 5,000 5,000
Subordinated note payable .......... 2,500 2,500
------- -------
Total .............................. $31,000 $31,000
======= =======
Aggregate maturities of the $31,000 of notes payable at March 31, 2003 are
as follows:
YEAR ENDING
DECEMBER 31,
------------
2003...................... $ 1,500
2004...................... 2,500
2005...................... 20,000
2006...................... 7,000
-------
Total................ $31,000
=======
In conjunction with the acquisition of Ladenburg in May 2001, LTS issued a
total of $20,000 principal amount of senior convertible notes due December
31, 2005, secured by a pledge of the stock of Ladenburg. The $10,000
principal amount of notes issued to the former Ladenburg stockholders
bears interest at 7.5% per annum, and the $10,000 principal amount of
notes issued to Frost-Nevada, Limited Partnership ("Frost-Nevada"), which
was subsequently assigned to Frost-Nevada Investments Trust ("Frost
Trust"), of which Frost-Nevada is the sole and exclusive beneficiary,
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 note held by Frost Trust is convertible into a total of
6,497,475 shares of common stock. If, during any period of 20 consecutive
trading days, the closing sale price of LTS's common stock is at least
$8.00, the principal and all accrued interest on the notes will be
automatically converted into shares of common stock. The notes also
provide that if a change of control occurs, as defined in the notes, LTS
must offer to purchase all of the outstanding notes at a purchase price
equal to the unpaid principal amount of the notes and the accrued
interest.
On August 31, 2001, the Company borrowed $1,000 from each of New Valley
Corporation ("New Valley"), the Company's majority shareholder until
December 2001, 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 of March 31, 2003, 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%.
On March 27, 2002, the Company borrowed $2,500 from New Valley. The loan,
which bears interest at 1% above the prime rate, was due on the earlier of
December 31, 2003 or the completion of one or more equity financings where
the Company receives at least $5,000 in total proceeds. The terms of the
loan restrict the Company from incurring or assuming any indebtedness that
is not subordinated to the loan so long as the loan
12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 and Berliner Effektengesellschaft AG
("Berliner"), who were the shareholders of Ladenburg prior to May 2001,
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 Trust 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 March 31, 2003, accrued interest payments as to
which a forbearance was received amounted to $1,888 ($1,032 is included in
accounts payable and accrued liabilities and $856 is included in due to
former parent).
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. The Company decreased its total number of employees from
approximately 780 at March 31, 2002 to approximately 345 at March 31,
2003. 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
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,
13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
9. 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. For a more complete
discussion of the acquisition of Ladenburg, see Note 3 to the consolidated
financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2002 filed with the Securities and
Exchange Commission.
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 8.)
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
INTRODUCTION
------------
The condensed consolidated financial statements include our accounts and
the accounts of our wholly-owned subsidiaries. Our subsidiaries include,
among others, Ladenburg Thalmann & Co. Inc. ("Ladenburg"), Ladenburg
Capital Management Inc. ("Ladenburg Capital"), Ladenburg Thalmann Europe,
Ltd., Ladenburg Thalmann International Ltd. and Ladenburg Fund Management
Inc.
RECENT DEVELOPMENTS
-------------------
RENEGOTIATION OF CLEARING AGREEMENT. In November 2002, we renegotiated our
current clearing arrangement 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 agent, we are realizing significant cost
savings from reduced ticket charges and other incentives. In addition,
under the new clearing agreement, an affiliate of the clearing broker
loaned us an aggregate of $3,500 (the "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.
LADENBURG CAPITAL MANAGEMENT. During the fourth quarter of 2002, in order
to reduce future operating expenses, we terminated the operations of
Ladenburg Capital. Ladenburg Capital voluntarily filed to withdraw its
broker-dealer license 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 has reduced support staff expenses, operating expenses and
general administrative expenses.
LITIGATION. On May 5, 2003, a suit was filed in the U.S. District Court
for the Southern District of New York by Sedona Corporation against
Ladenburg, former employees of Ladenburg, Pershing LLC and a number of
other firms and individuals. The plaintiff alleges, among other things,
that certain defendants (other than Ladenburg) purchased convertible
securities from the plaintiff and then allegedly manipulated the market to
obtain an increased number of shares from the conversion of those
securities. Ladenburg acted as placement agent and not as principal in
those transactions. The plaintiff has alleged that Ladenburg and the other
defendants violated federal securities laws and various state laws. The
plaintiff seeks compensatory damages from the defendants of at least
$500,000 and punitive damages of $2,000,000. Ladenburg, which has not been
served in the suit, believes the plaintiff's claims are without merit and
intends to vigorously defend against them.
CRITICAL ACCOUNTING POLICIES
----------------------------
A financial reporting release issued by the SEC, requires all companies to
include a discussion of critical accounting policies or methods used in
the preparation of financial statements. Note 2 to our consolidated
financial statements filed with our Annual Report on Form 10-K for the
year ended December 31, 2002 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 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 maintain
the customers' accounts and clears
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(Dollars in Thousands, Except Per Share Amounts)
such transactions. Additionally, the primary clearing broker provides the
clearing and depository operations for Ladenburg's proprietary securities
transactions. These activities may expose Ladenburg to off-balance-sheet
risk in the event that customers do not fulfill their obligations with the
clearing broker, as Ladenburg 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 from
these arrangements, prior to any recoupment from our retail brokers, of
$28 and $40 for the three months ended March 31, 2003 and 2002,
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 $5,755 and $6,201 for potential arbitration
and lawsuit losses as of March 31, 2003 and December 31, 2002,
respectively. However, we have in the past been assessed damages that
exceeded our reserves. If we misjudged the amount of damages that may be
assessed against us from pending or threatened claims, or if we are unable
to adequately estimate the amount of damages that will be assessed against
us from claims that arise in the future and reserve accordingly, our
operating income would be reduced. Such costs may have a material adverse
effect on our future financial position and liquidity.
SEPTEMBER 11, 2001 EVENTS. On September 11, 2001 terrorists attacked the
World Trade Center complex in New York, which subsequently collapsed and
damaged surrounding buildings, including one occupied by a branch office
of Ladenburg Capital. These events resulted in the suspension of trading
of U.S. equity securities for four business days and precipitated the
relocation of approximately 180 employees to Ladenburg's mid-town New York
headquarters. Although some of Ladenburg Capital's business were
temporarily disrupted, 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. Although the claim to the insurance carrier is
significantly greater, the net book value of the lost property has been
recorded as a receivable as of March 31, 2003 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 March 31, 2003 was $1,207.
Ladenburg Capital has initiated a lawsuit against one of its landlords
seeking a declaratory judgment that the lease in a building near the World
Trade Center be deemed terminated because, among other things, the
premises were unsafe and uninhabitable for a period of 270 days after
September 11, 2001, pursuant to a lease provision giving Ladenburg Capital
the right to terminate in those circumstances. We believe that Ladenburg
Capital will prevail and intend to pursue this claim vigorously. However,
in the event that Ladenburg Capital does not prevail, it may incur
additional expense should it decide not to occupy the space.
We are currently in litigation regarding two of our existing lease
commitments. As a result of this litigation, we may incur additional
future expenses to terminate these long-term commitments.
NEW ACCOUNTING PRONOUNCEMENT. During the fourth quarter of 2002, we early
adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities". Under SFAS 146, a cost associated with an exit or
disposal activity shall be recognized and measured initially at its fair
value in the period in which the liability is incurred. For operating
leases, a liability for costs that will continue to be incurred under the
lease for its remaining term without economic benefit to the entity shall
be recognized and measured at its fair value when the entity ceases using
the right conveyed by the lease (the "cease-use date"). The fair value of
the liability at the "cease-use date" shall be determined based on the
remaining lease rentals, reduced by estimated sublease rentals that could
be reasonably obtained for the property. Our results of future operations
may be
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(Dollars in Thousands, Except Per Share Amounts)
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, less any amounts accrued.
FAIR VALUE. "Trading securities owned" and "Securities sold, not yet
purchased" on our consolidated statements of financial condition are
carried at fair value or amounts that approximate fair value, with related
unrealized gains and losses recognized in our results of operations. The
determination of fair value is fundamental to our financial condition and
results of operations and, in certain circumstances, it requires
management to make complex judgments.
Fair values are based on listed market prices, where possible. If listed
market prices are not available or if the liquidation of our positions
would reasonably be expected to impact market prices, fair value is
determined based on other relevant factors, including dealer price
quotations. Fair values for certain derivative contracts are derived from
pricing models that consider market and contractual prices for the
underlying financial instruments or commodities, as well as time value and
yield curve or volatility factors underlying the positions.
Pricing models and their underlying assumptions impact the amount and
timing of unrealized gains and losses recognized, and the use of different
pricing models or assumptions could produce different financial results.
Changes in the fixed income and equity markets will impact our estimates
of fair value in the future, potentially affecting principal trading
revenues. The illiquid nature of certain securities or debt instruments
also requires a high degree of judgment in determining fair value due to
the lack of listed market prices and the potential impact of the
liquidation of our position on market prices, among other factors.
IMPAIRMENT OF GOODWILL. On January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," and were required to analyze our goodwill for impairment issues
on January 1, 2002 and on a periodic basis thereafter. In connection with
the reporting of results for the second quarter of 2002, based on the
overall declines in the U.S. equity markets and the conditions prevailing
in the broker-dealer industry, we engaged an independent appraisal firm to
value our goodwill as of June 30, 2002. Based on this valuation, an
impairment charge of $18,762 of goodwill was indicated and recorded in
June 2002. The goodwill was generated in the Ladenburg acquisition in May
2001, and the charge reflected overall market declines since the
acquisition. See Note 2 to our condensed consolidated financial statements
for a discussion of the adoption of SFAS No. 142.
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 March 31, 2003, which consist principally of the tax benefit
of net operating loss carryforwards and accrued expenses, amount to
$18,689. After consideration of all the evidence, both positive and
negative, especially the fact we have sustained operating losses during
2002 and for the three months ended March 31, 2003 and that we continue to
be affected by conditions in the economy, management has determined that a
valuation allowance at March 31, 2003 was necessary to fully offset the
deferred tax assets based on the likelihood of future realization.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 VERSUS THREE MONTHS ENDED MARCH 31, 2002
Our revenues for the three months ended March 31, 2003 decreased $13,709
from 2002 primarily as a result of decreased commissions of $5,995,
decreased net principal transactions of $4,022 and decreased investment
banking fees of $3,289. 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.
Our expenses for the three months ended March 31, 2003 decreased $14,873
from 2002 primarily as a result of decreased compensation and benefits of
$8,942, decreased brokerage, communication and clearance fees of $2,688,
decreased professional services of $426 and decreased depreciation and
amortization of $253.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(Dollars in Thousands, Except Per Share Amounts)
Our revenues for the three months ended March 31, 2003 consisted of
commissions of $7,955, net principal transactions of $1,035, investment
banking fees of $657, investment advisory fees of $615, dividends and
interest of $429, syndicate and underwriting income of $35 and other
income of $1,180. Our revenues for the three months ended March 31, 2002
consisted of commissions of $13,950, net principal transactions of $5,057,
investment banking fees of $3,946, investment advisory fees of $827,
dividends and interest of $683 and other income of $1,152. Our expenses
for the three months ended March 31, 2003 consisted of compensation and
benefits of $8,648 and other expenses of $6,281. Our expenses for the
three months ended March 31, 2002 consisted of compensation and benefits
of $17,590 and other expenses of $12,212.
The $5,995 (43.0%) decrease in commission income was primarily a result of
the depressed market for equity securities for the three months ended
March 31, 2003.
The $4,022 (79.5%) decrease in net principal transactions was primarily
the result of decreases in trading income of $3,655 in the 2003 period and
a decrease in sales credits caused by the continued significant decline in
the market for equity securities.
The $3,289 (83.4%) 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 decrease in compensation expense of $8,942 (50.8%) was primarily due
to the net decrease in revenues and various staff reductions in the third
and fourth quarters of 2002.
Income tax expense for the three months ended March 31, 2003 was $46
compared to an income tax benefit of $655 in 2002. After consideration of
all the evidence, both positive and negative, especially the fact we have
sustained operating losses during 2002 and for the three months ended
March 31, 2003 and that we continue to be affected by conditions in the
economy, management has determined that a valuation allowance at March 31,
2003 was necessary to fully offset the deferred tax assets based on the
likelihood of future realization. The income tax rate for the 2003 and
2002 periods does not bear a customary relationship to effective tax rates
as a result of unrecognized net operating losses, the change in valuation
allowances, state and local income taxes and permanent differences.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Approximately 63.7% of our assets at March 31, 2003 are highly liquid,
consisting primarily of cash and cash equivalents, trading securities
owned and receivables from clearing brokers, all of which fluctuate,
depending upon the levels of customer business and trading activity.
Receivables from broker-dealers, which are primarily from our primary
clearing broker, turn over rapidly. As a securities dealer, we may carry
significant levels of securities inventories to meet customer needs. 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.
Ladenburg is subject to the net capital rules of the SEC. Therefore, it is
subject to certain restrictions on the use of capital and its related
liquidity. Ladenburg's regulatory net capital, as defined, of $5,486,
exceeded minimum capital requirements of $1,000 by $4,486 at March 31,
2003. Failure to maintain the required net capital may subject Ladenburg
to suspension or expulsion by the NYSE, the SEC and other regulatory
bodies and ultimately may require its liquidation. The net capital rule
also prohibits the payment of dividends, redemption of stock and
prepayment or payment of principal of subordinated indebtedness if net
capital, after giving effect to the payment, redemption or prepayment,
would be less than specified percentages of the minimum net capital
requirement. Compliance with the net capital rule could limit the
operations of Ladenburg that requires the intensive use of capital, such
as underwriting and trading activities, and also could restrict our
ability to withdraw capital from it, which in turn, could limit our
ability to pay dividends and repay and service our debt.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(Dollars in Thousands, Except Per Share Amounts)
Ladenburg, as guarantor of its customer accounts to its primary clearing
broker, is exposed to off-balance-sheet risks in the event that its
customers do not fulfill their obligations with the clearing broker. In
addition, to the extent Ladenburg 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 and
borrowings.
Net cash flows used in operating activities for the three months ended
March 31, 2003 was $3,318 as compared to $3,882 for the 2002 period.
Net cash flows used in investing activities for the three months ended
March 31, 2003 was $4 compared to net cash flows provided by investing
activities of $1,292 for the 2002 period. The difference is primarily
attributable to a decrease of $1,500 in the required collateral under our
letter of credit facility, in the 2002 period, as stipulated in the lease
agreement with one of our landlords.
The capital expenditures of $41 and $268 for the three months ended March
31, 2003 and 2002, respectively, related principally to leasehold
improvements and enhancements to computer equipment.
There were no cash flows provided from financing activities for the three
months ended March 31, 2003, compared to $500 for the 2002 period.
Our subsidiaries are obligated under noncancellable lease agreements,
which provide for minimum lease payments, net of lease abatement and
exclusive of escalation charges, of $3,641 in 2003 and approximately
$5,100 per year until 2015. In addition, 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 $11,000. Ladenburg Capital is
currently in litigation with the landlords, and is attempting to terminate
its remaining lease obligations. If Ladenburg Capital is not successful in
terminating these leases, Ladenburg Capital plans to sublease the
properties. In this situation, Ladenburg Capital's additional minimum
lease payments as of March 31, 2003 are approximately $1,500 in 2003,
$2,000 per year for 2004 through 2007 and $1,582 thereafter. Ladenburg
Capital has provided for costs in connection with such leases and the
recording of a liability at March 31, 2003, 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.
In conjunction with the May 2001 acquisition of Ladenburg, we issued a
total of $20,000 principal amount of senior convertible promissory notes
due December 31, 2005 to New Valley, Berliner and Frost-Nevada. The
$10,000 principal amount of notes issued to New Valley and Berliner, the
former stockholders of Ladenburg, bear interest at 7.5% per annum, and the
$10,000 principal amount of the note issued to Frost-Nevada bears interest
at 8.5% per annum. The notes are currently convertible into a total of
11,296,746 shares of our common stock and are secured by a pledge of the
stock of Ladenburg.
On August 31, 2001, we borrowed $1,000 from each of New Valley and
Frost-Nevada in order to supplement the liquidity of our broker-dealer
operations. The loans, which bore interest at 1% above the prime rate,
were repaid in January 2002. On March 27, 2002, we borrowed $2,500 from
New Valley. The loan, which bears interest at 1% above the prime rate, 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.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(Dollars in Thousands, Except Per Share Amounts)
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 Trust note. We
also agreed to apply any net proceeds from any subsequent public offerings
to any such deferred amounts owed to the holders of the notes to the
extent possible. As of March 31, 2003, accrued interest payments as to
which a forbearance was received amounted to $1,888 ($1,032 is included in
accounts payable and accrued liabilities and $856 is included in due to
former parent).
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 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%.
In November 2002, we consummated the Clearing Conversion whereby we now
clear substantially all of our business through one clearing agent, our
primary clearing broker. As part of the new agreement with this clearing
agent, we are realizing significant cost savings from reduced ticket
charges and other incentives. In addition, under the new clearing
agreement, an affiliate of the clearing broker loaned us the $3,500 of
Clearing Loans. The Clearing Loans are forgivable over various periods, up
to four years from the date of the Clearing Conversion. 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 and filed to withdraw it as
a broker-dealer. Ladenburg has agreed to and is currently servicing the
accounts of Ladenburg Capital and many of the employees of Ladenburg
Capital were offered and have accepted employment with Ladenburg. The
termination of Ladenburg Capital'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.
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
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(Dollars in Thousands, Except Per Share Amounts)
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.
MARKET RISK
-----------
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rates, foreign
exchange rates, equity and commodity prices and also changes in the credit
ratings of either the issuer or its related country of origin. Market risk
is inherent to both derivative and non-derivative financial instruments,
and accordingly, the scope of our market risk management procedures
extends beyond derivatives to include all market risk sensitive financial
instruments.
Current and proposed underwriting, corporate finance, merchant banking and
other commitments are subject to due diligence reviews by our senior
management, as well as professionals in the appropriate business and
support units involved. Credit risk related to various financing
activities is reduced by the industry practice of obtaining and
maintaining collateral. We monitor our exposure to counterparty risk
through the use of credit exposure information, the monitoring of
collateral values and the establishment of credit limits.
We maintain inventories of trading securities. At March 31, 2003, the fair
market value of our inventories were $728 in long positions and $120 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 March 31, 2003 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 of our Annual Report on Form
10-K for the year ended December 31, 2002 filed with the Securities and
Exchange Commission important factors that could cause actual results to
differ materially from those contained in any forward-looking statement
made by or on behalf of us.
Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. Due to such uncertainties and risks, readers are cautioned not to
place undue reliance on such forward-looking statements, which speak only
as of the date on which such statements are made. We do not undertake to
update any forward-looking statement that may be made from time to time by
or on behalf of us.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding disclosure.
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
22
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
See Note 5 to the condensed consolidated financial statements of the
Company included in Part I, Item 1 of this Report.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
No securities of ours that were not registered under the Securities Act of
1933 have been issued or sold by us during the quarter ended March 31,
2003.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS
4.1 Temporary Forbearance Agreement, dated as of June 28,
2002, as amended March 3, 2003, among the Company, New
Valley Capital Corporation, Frost-Nevada Investments
Trust and Berliner Effektengesellschaft AG.
99.1 Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
None.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Registrant)
Date: May 15, 2003 By: /s/ SALVATORE GIARDINA
-----------------------------------
Salvatore Giardina
Vice President and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
24
CERTIFICATION
I, Victor M. Rivas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ladenburg Thalmann
Financial Services Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ VICTOR M. RIVAS
-------------------------------------
Victor M. Rivas
President and Chief Executive Officer
25
CERTIFICATION
I, Salvatore Giardina, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ladenburg Thalmann
Financial Services Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ SALVATORE GIARDINA
------------------------------------------
Salvatore Giardina
Vice President and Chief Financial Officer
26