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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 JUNE 30, 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
Adress 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 AUGUST 13, 2003, THERE WERE OUTSTANDING 42,859,432 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 JUNE 30, 2003
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial Condition
as of June 30, 2003 and December 31, 2002..................... 2
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2003 and 2002..... 3
Condensed Consolidated Statement of Changes in
Shareholders' Capital Deficit for the six months ended
June 30, 2003................................................. 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 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........................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 25
Item 4. Controls and Procedures........................................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 26
Item 2. Changes in Securities and Use of Proceeds......................... 26
Item 6. Exhibits and Reports on Form 8-K.................................. 26
SIGNATURE ............................................................................ 27
1
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
---------------- -----------------
June 30, December 31,
---------------- -----------------
2003 2002
---------------- -----------------
ASSETS
Cash and cash equivalents.................................................. $ 6,652 $ 11,752
Trading securities owned................................................... 1,037 4,365
Due from affiliates........................................................ 72 86
Receivables from clearing brokers.......................................... 20,377 11,378
Exchange memberships owned, at historical cost............................. 1,505 1,505
Furniture, equipment and leasehold improvements, net....................... 5,306 8,087
Restricted assets.......................................................... 1,060 1,054
Income taxes receivable.................................................... 181 2,224
Other assets............................................................... 4,280 3,448
------------- -------------
Total assets...................................................... $ 40,470 $ 43,899
============= =============
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIT
Securities sold, not yet purchased......................................... $ 847 $ 1,218
Accrued compensation....................................................... 4,954 3,268
Accounts payable and accrued liabilities................................... 11,358 12,084
Deferred rent credit....................................................... 5,918 6,589
Due to former parent....................................................... 1,083 634
Notes payable.............................................................. 8,500 8,500
Senior convertible notes payable........................................... 20,000 20,000
Subordinated note payable.................................................. 2,500 2,500
------------- -------------
Total liabilities................................................. 55,160 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;
shares issued and outstanding, 42,859,432 and 42,025,211........... 4 4
Additional paid-in capital............................................ 56,508 56,473
Accumulated deficit................................................... (71,202) (67,371)
------------- -------------
Total shareholders' capital deficit............................... (14,690) (10,894)
------------- -------------
Total liabilities and shareholders' capital deficit.............. $ 40,470 $ 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 Six Months Ended
June 30, June 30,
---------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Revenues:
Commissions................................................ $ 13,998 $ 13,660 $ 21,953 $ 27,610
Principal transactions, net................................ 1,681 2,034 2,716 7,091
Investment banking fees.................................... 1,019 2,361 1,676 6,307
Investment advisory fees................................... 573 676 1,188 1,503
Dividends and interest..................................... 422 537 851 1,220
Syndications and underwritings............................. (5) 54 30 173
Other income............................................... 1,385 1,091 2,565 2,124
--------- --------- --------- ---------
Total revenues......................................... 19,073 20,413 30,979 46,028
-------- --------- --------- ---------
Expenses:
Compensation and benefits.................................. 12,530 14,957 21,178 32,547
Brokerage, communication and clearance fees................ 1,271 3,887 3,072 8,376
Rent and occupancy......................................... 2,039 2,141 3,465 4,001
Depreciation and amortization.............................. 295 480 651 1,089
Interest................................................... 542 469 1,047 957
Impairment of goodwill..................................... -- 18,762 -- 18,762
Write-off of leasehold improvements, net................... 779 -- 779 --
Professional services...................................... 1,017 1,497 1,760 2,666
Other...................................................... 1,326 3,888 2,776 7,485
--------- --------- --------- ---------
Total expenses......................................... 19,799 46,081 34,728 75,883
-------- --------- --------- ---------
Loss before income taxes........................................ (726) (25,668) (3,749) (29,855)
Income taxes (benefit).......................................... 36 (216) 82 (871)
----------- --------- --------- ---------
Net loss........................................................ $ (762) $ (25,452) $ (3,831) $ (28,984)
========== ========= ========= =========
Loss per Common Share (basic and diluted):
Loss per Common Share...................................... $ (0.02) $ (0.61) $ (0.09) $ (0.69)
========== ========= ========= =========
Number of shares used in computation (basic and diluted)........ 42,034,378 42,025,211 42,029,820 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)
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------- -----
Balance, December 31, 2002............ 42,025,211 $ 4 $ 56,473 $ (67,371) $ (10,894)
Issuance of Common Stock.......... 834,221 -- 35 -- 35
Net loss.......................... -- -- -- (3,831) (3,831)
---------- --------- --------- ----------- -----------
Balance, June 30, 2003................ 42,859,432 $ 4 $ 56,508 $ (71,202) $ (14,690)
========== ========= ========= =========== ===========
See accompanying notes to condensed
consolidated financial statements
4
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
------------------------------------
Six Months Ended
June 30,
------------------------------------
2003 2002
------------------------------------
Cash flows from operating activities:
Net loss.............................................................. $ (3,831) $ (28,984)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization......................................... 651 1,044
Adjustment to deferred rent credit.................................... 143 575
Deferred taxes........................................................ -- 132
Impairment of goodwill................................................ -- 18,762
Write-off of leasehold improvements, net.............................. 779 --
Loss on disposal of fixed assets...................................... 3 --
Decrease (increase) in operating assets:
Trading securities owned.............................................. 3,328 934
Receivables from clearing brokers..................................... (8,999) 15,115
Due from affiliates................................................... 14 77
Income taxes receivable............................................... 2,043 --
Other assets.......................................................... 78 909
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased.................................... (371) (7,269)
Accrued compensation.................................................. 1,686 (7,210)
Accounts payable and accrued liabilities.............................. (726) (309)
Due to former parent.................................................. 449 (398)
------------- -----------
NET CASH USED IN OPERATING ACTIVITIES............................. (4,753) (6,622)
------------- -----------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements........... (468) (676)
Net proceeds from sale of equipment................................... 92 --
Decrease (increase) in restricted assets.............................. (6) 1,554
------------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES............... (382) 878
------------- -----------
Cash flows from financing activities:
Issuance of common stock.............................................. 35 --
Repayment of promissory notes payable................................. -- (2,000)
Issuance of promissory notes payable.................................. -- 2,500
------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES......................... 35 500
------------- -----------
Net decrease in cash and cash equivalents.................................. (5,100) (5,244)
Cash and cash equivalents, beginning of period............................. 11,752 8,136
------------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $ 6,652 $ 2,892
============= ===========
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 June 30, 2003 and for the three and six
months ended June 30, 2003 and June 30, 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 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 ("NYSE") since 1879. Ladenburg clears its
customers' transactions through a correspondent clearing broker on a fully
disclosed basis. Broker-dealer activities include principal and agency
trading and investment banking and underwriting activities. Ladenburg
provides its services principally for middle market and emerging growth
companies and high net worth individuals through a coordinated effort
among corporate finance, capital markets, investment management, brokerage
and trading professionals. Ladenburg is subject to regulation by the
Securities and Exchange Commission ("SEC"), the NYSE and National
Association of Securities Dealers, Inc. ("NASD"), Commodities Futures
Trading Commission and National Futures Association. (See Notes 5 and 8.)
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 six 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 June 30, 2003 and December 31, 2002, the
valuation allowance was $20,193 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 6.)
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 the three-month and six-month periods ended June 30, 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 Six Months Ended
June 30, June 30,
---------------- ----------------- ---------------- -----------------
2003 2002 2003 2002
---------------- ----------------- ---------------- -----------------
Net loss, as reported............... $ (762) $ (25,452) $ (3,831) $ (28,984)
Stock-based employee compensation
determined under the fair value
based method........................ (418) (399) (800) (741)
-------------- ------------- ------------- --------------
Pro forma net loss.................. $ (1,180) $ (25,851) $ (4,631) $ (29,725)
============== ============= ============= ==============
Net loss per Common Share (basic and
diluted), as reported .............. $ (0.02) $ (0.61) $ (0.09) $ (0.69)
============== ============= ============= ==============
Pro forma net loss per Common Share
(basic and diluted)................. $ (0.03) $ (0.62) $ (0.11) $ (0.71)
============== ============= ============= ==============
8
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
During the six months ended June 30, 2003 and 2002, respectively, options
and warrants to purchase 2,709,572 and 2,560,965 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 June 30, 2003 and December 31, 2002 are as follows:
SECURITIES SOLD,
SECURITIES BUT NOT
OWNED YET PURCHASED
------------- -----------------
JUNE 30, 2003
Common stock................................ $ 752 $ 842
Equity and index options.................... 29 --
Municipal obligations....................... 3 --
Corporate bonds............................. 253 5
------------- --------------
$ 1,037 $ 847
============= ==============
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 June 30, 2003 and December 31, 2002, approximately $1,001 and
$4,342, respectively, of the securities owned are deposited with the
Company's clearing broker and, pursuant to the agreement, the securities
may be sold or re-hypothecated by the clearing broker.
4. EMPLOYEE STOCK PURCHASE PLAN
In November 2002, the Company's shareholders approved the Ladenburg
Thalmann Financial Services Inc. Employee Stock Purchase Plan (the
"Plan"), under which a total of 5,000,000 shares of common stock are
available for issuance. Under the Plan, as currently administered by the
Company's compensation committee, all full-time employees may use a
portion of their salary to acquire shares of the Company's 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.
The Plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. The Plan became effective
November 6, 2002 and the first option period commenced April 1, 2003.
During the period ended June 30, 2003, 834,221 shares of the Company's
common stock were issued to employees under this Plan, at $.0425 per
share, resulting in a capital contribution of $35.
5. 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.
9
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Ladenburg has elected to compute its net capital under the alternative
method allowed by these rules. Effective June 13, 2003, Ladenburg's
management decided to eliminate its market making activities. As a result,
Ladenburg's minimum net capital requirement decreased from $1,000 to $250.
At June 30, 2003, Ladenburg had net capital, as defined, of $7,567, which
exceeded its minimum capital requirement of $250 by $7,317.
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 broker on a fully disclosed basis.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under several noncancelable lease agreements for
office space, expiring in various years through June 2015. Certain leases
have provisions for escalation based on specified increases in costs
incurred by the landlord. The Company is subleasing a portion of its
office space for approximately $1,000 per year with annual increases. The
subleases expire on various dates through August 31, 2009.
As of June 30, 2003, the leases, exclusive of two leases relating to
premises vacated by Ladenburg Capital referred to below, provide for
minimum lease payments, net of lease abatement and exclusive of escalation
charges, as follows:
Year Ending
December 31,
------------
2003.................................... $ 2,353
2004.................................... 4,516
2005.................................... 4,975
2006.................................... 4,844
2007.................................... 5,080
Thereafter.............................. 41,485
---------
Total.............................. $ 63,253
=========
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.
In May 2003, Ladenburg relocated approximately 95 of its employees from
its New York City office to its Melville, New York office. As a result of
this move, Ladenburg ceased using one of the several floors it occupies in
its New York City office. In accordance with SFAS No. 146, the Company's
management has evaluated the Company's liability with respect to this
space, taking into account estimated future sublease payments that could
be reasonably obtained for the property. In this evaluation, the Company's
management concluded that a liability for this matter did not exist as of
June 30, 2003; however, the net book value of the leasehold improvements
was written off. Additional costs may be incurred, to the extent of
foregone rental income in the event Ladenburg 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's financial position and
liquidity. In conjunction with the write-off of these leasehold
improvements, the unamortized deferred rent credit representing
reimbursement from the landlord of such leasehold improvements was also
written off. During the three months ended June 30, 2003, the write-off of
leasehold improvements, net of accumulated amortization ($1,592) and the
write-off of the unamortized deferred rent credit ($813) resulted in a net
charge to operations of $779.
10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
As of June 30, 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 aggregating approximately $10,350.
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 June 30, 2003 are approximately $1,000 in
2003, $2,000 per year from 2004 through 2007 and $1,600 thereafter.
Ladenburg Capital has provided for costs in connection with such leases
and has recorded a liability at June 30, 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 June 30, 2003 and December 31, 2002 of $5,918 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. The unamortized
deferred rent credit representing reimbursement from the landlord of
leasehold improvements related to Ladenburg's vacated premises, has been
written off during the period ended June 30, 2003.
At June 30, 2003, Ladenburg has utilized a letter of credit in the amount
of $1,000 that is collateralized by $1,060 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, including the litigation with
the two landlords discussed above, 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 $5,759 at June 30, 2003 (included in
accounts payable and accrued liabilities), of which $746 and $785 were
charged to operations for the three and six months ended June 30, 2003,
respectively. 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 the Company,
former employees of the Company, Pershing LLC and a number of other firms
and individuals. The plaintiff alleges, among other things, that certain
defendants (not the Company) purchased convertible securities from
plaintiff and then allegedly manipulated the market to obtain an increased
number of shares from the conversion of those securities. The Company
acted as placement agent and not as principal in those transactions.
Plaintiffs have alleged that the Company 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. The Company believes the plaintiff's claims are
without merit and intends to vigorously defend against them.
11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
7. INCOME TAXES
The Company accounts for taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the recognition of tax
benefits or expense on the temporary differences between the tax basis and
book basis of its assets and liabilities. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those timing differences are expected
to be recovered or settled. Deferred tax amounts as of June 30, 2003,
which consist principally of the tax benefit of net operating loss
carryforwards and accrued expenses, amounts to $20,193. After
consideration of all the evidence, both positive and negative, especially
the fact the Company has sustained operating losses during 2002 and for
the six months ended June 30, 2003 and that the Company continues to be
affected by conditions in the economy, management has determined that a
valuation allowance at June 30, 2003 was necessary to fully offset the
deferred tax assets based on the likelihood of future realization. At June
30, 2003, the Company had net operating loss carryforwards, which are
subject to restrictions on utilization, of approximately $31,388 which
expire in various years from 2015 through 2023.
8. OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Ladenburg does not carry accounts for customers or perform custodial
functions related to customers' securities. Ladenburg introduces all of
its customer transactions, which are not reflected in these financial
statements, to its primary clearing broker, which maintains the customers'
accounts and clears such transactions. Additionally, the primary clearing
broker provides the clearing and depository operations for 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 continually assesses risk with each customer who is on margin
credit and records an estimated loss when management believes collection
from the customer is unlikely.
The clearing operations for the Company's securities transactions are
provided by several clearing brokers. At June 30, 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.
9. NOTES PAYABLE
The components of notes payable are as follows:
June 30, 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
========== ==========
12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Aggregate maturities of the $31,000 of notes payable at June 30, 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 June 30, 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 is outstanding. On
July 16, 2002, the Company borrowed an additional $2,500 from New Valley
(collectively, with the March 2002 loan, the "2002 Loans") on the same
terms as the March 2002 loan. In November 2002, New Valley agreed in
connection with the Clearing Loans (defined below) to extend the maturity
of the 2002 Loans to December 31, 2006 and to subordinate the 2002 Loans
to the repayment of the Clearing Loans.
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 June 30, 2003, accrued interest payments as to
13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
which a forbearance was received amounted to $2,387 ($1,034 is included in
accounts payable and accrued liabilities and $1,083 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
is realizing significant cost savings from reduced ticket charges and
other incentives. In addition, under the new clearing agreement, an
affiliate of the clearing broker loaned the Company an aggregate of $3,500
(the "Clearing Loans") in December 2002. The Clearing Loans, 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. During the third and fourth quarters of 2002, as well as the
first and second quarters of 2003, the Company reduced the size of its
workforce. The Company decreased its total number of employees from 780 at
June 30, 2002 to 317 at June 30, 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'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. If, based on these reviews, it is determined that the
Company requires additional funds to support its liquidity and capital
base, the Company would seek to raise additional capital through 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. Additionally, the Company may attempt
to raise funds through a rights offering or other type of financing. In
May 2002, the Company filed a registration statement 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. However, on August 6, 2002, the
Company announced that it had decided to postpone the rights offering due
to market conditions. If additional funds were needed, the Company could
attempt to consummate the rights offering, although the Company does not
currently anticipate that a rights offering could 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. If the Company continues to be unable to generate
14
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
cash from operations and is unable to find alternative sources of funding
as described above, it would have an adverse impact on the Company's
liquidity and operations.
10. 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 being paid 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 9.)
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
The condensed consolidated financial statements include our accounts and
the accounts of our wholly-owned subsidiaries. Our subsidiaries include,
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 the
Company, former employees of the Company, Pershing LLC and a number of
other firms and individuals. The plaintiff alleges, among other things,
that certain defendants (not the Company) purchased convertible securities
from plaintiff and then allegedly manipulated the market to obtain an
increased number of shares from the conversion of those securities. The
Company acted as placement agent and not as principal in those
transactions. Plaintiffs have alleged that the Company 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. We believe the plaintiff's
claims are without merit and intends to vigorously defend against them.
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.
The Plan became effective November 6, 2002 and the first option period
commenced April 1, 2003. During the period ended June 30, 2003, 834,221
shares of our common stock were issued to employees under this Plan, at
$.0425 per share, resulting in a capital contribution of $35.
ELIMINATION OF MARKET MAKING ACTIVITIES. In June 2003, we closed our Ft.
Lauderdale office, which constituted all of our market making activities.
As a result of our decision to eliminate our market making activities, our
minimum net capital requirement decreased from $1,000 to $250.
WRITE-OFF OF LEASEHOLD IMPROVEMENTS. In May 2003, Ladenburg relocated
approximately 95 of its employees from its New York City office to its
Melville, New York office. As a result, Ladenburg ceased
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
using one of the several floors it occupies in its New York City office.
In accordance with SFAS No. 146, we have evaluated our liability with
respect to this space, taking into account estimated future sublease
payments that could be reasonably obtained for the property. In this
evaluation, we concluded that a liability for this matter did not exist as
of June 30, 2003; however, the net book value of the leasehold
improvements was written off. Additional costs may be incurred, to the
extent of foregone rental income in the event Ladenburg 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's financial
position and liquidity. In conjunction with the write-off of these
leasehold improvements, the unamortized deferred rent credit representing
reimbursement from the landlord of such leasehold improvements was also
written off. During the three months ended June 30, 2003, the write-off of
leasehold improvements, net of accumulated amortization ($1,592) and the
write-off of the unamortized deferred rent credit ($813) resulted in a net
charge to operations of $779.
CRITICAL ACCOUNTING POLICIES
GENERAL. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ
from those estimates.
CLEARING ARRANGEMENTS. Ladenburg does not carry accounts for customers or
perform custodial functions related to customers' securities. Ladenburg
introduces all of its customer transactions, which are not reflected in
these financial statements, to its primary clearing broker, which
maintains the customers' accounts and clears such transactions.
Additionally, the primary clearing broker provides the clearing and
depository operations for 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 credit 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
$35 and $125 for the three and six months ended June 30, 2003,
respectively, and $26 and $66 for the three and six months ended June 30,
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, in addition to the litigation with the
two landlords discussed below, the cases involve various allegations that
our employees had mishandled customer accounts. Due to the uncertain
nature of litigation in general, we are unable to estimate a range of
possible loss related to lawsuits filed against us, but based on our
historical experience and consultation with counsel, we typically reserve
an amount we believe will be sufficient to cover any damages assessed
against us. We have accrued $5,139 and $6,201 for potential arbitration
and lawsuit losses as of June 30, 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 was
temporarily disrupted, its businesses remained functioning and serving
clients. We are insured for loss caused by physical damage to property.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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, as well as
the costs incurred to temporarily replace some of the lost property, has
been recorded as a receivable as of June 30, 2003. 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 June 30, 2003 was $2,117.
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 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
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 June 30, 2003, which consist principally of the tax benefit
of net operating loss carryforwards and accrued expenses, amount to
$20,193. After consideration of all the evidence, both positive and
negative, especially the fact we have sustained operating losses during
2002 and for the six months ended June 30, 2003 and that we continue to be
affected by conditions in the economy, management has determined that a
valuation allowance at June 30, 2003 was necessary to fully offset the
deferred tax assets based on the likelihood of future realization.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 VERSUS THREE MONTHS ENDED JUNE 30, 2002
Our revenues for the three months ended June 30, 2003 decreased $1,340
from 2002 primarily as a result of decreased investment banking fees of
$1,342.
Our expenses for the three months ended June 30, 2003 decreased $26,282
from 2002 primarily as a result of the $18,762 impairment of goodwill in
2002, decreased compensation and benefits of $2,427, decreased brokerage,
communication and clearance fees of $2,616, decreased professional
services of $480 and decreased depreciation and amortization of $185.
Our revenues for the three months ended June 30, 2003 consisted of
commissions of $13,998, net principal transactions of $1,681, investment
banking fees of $1,019, investment advisory fees of $573, dividends and
interest of $422, syndicate and underwriting loss of $5 and other income
of $1,385. Our revenues for the three months ended June 30, 2002 consisted
of commissions of $13,660, net principal transactions of $2,034,
investment banking fees of $2,361, investment advisory fees of $676,
dividends and interest of $537, syndicating and underwriting income of $54
and other income of $1,091. Our expenses for the three months ended June
30, 2003 consisted of compensation and benefits of $12,530, write-off of
leasehold improvements of $779 and other expenses of $6,490. Our expenses
for the three months ended June 30, 2002 consisted of compensation and
benefits of $14,957, impairment of goodwill of $18,762 and other expenses
of $12,362.
The $338 (2.5%) increase in commission income primarily resulted from an
improvement in the market for equity securities during the three months
ended June 30, 2003.
The $353 (17.4%) decrease in net principal transactions was primarily the
result of decreases in trading income of $636, net of an increase in sales
credits due to an improvement in the market for equity securities during
the three months ended June 30, 2003.
The $1,342 (56.8%) 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 $2,427 (16.2%) was primarily due
to the net decrease in revenues and various staff reductions in the third
and fourth quarters of 2002.
In connection with the reporting of the results for the second quarter of
2002, based on the overall declines in the U.S. equity markets and the
conditions prevailing in the broker-dealer industry, the Company completed
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
an additional impairment review and recorded a $18,762 charge for the
impairment of goodwill, which was generated in the Ladenburg acquisition.
The charge reflected the overall market declines since the acquisition in
May 2001. During this review, an independent appraisal firm was engaged to
value the Company's goodwill as of June 30, 2002. The appraiser valued the
businesses using a weighted average of each unit's projected discounted
cash flow, with a weighted average cost of capital of 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 for the three months ended June 30, 2002.
In May 2003, Ladenburg relocated approximately 95 of its employees from
its New York City office to its Melville, New York office. As a result,
Ladenburg ceased using one of the several floors it occupies in its New
York City office. In accordance with SFAS No. 146, we have evaluated our
liability with respect to this space, taking into account estimated future
lease payments that could be reasonably obtained for the property. In this
evaluation, we concluded that the net book value of the leasehold
improvements should be written off. Accordingly, the unamortized deferred
rent credit representing reimbursement from the landlord of such leasehold
improvements was also written off. During the three months ended June 30,
2003, the write-off of leasehold improvements, net of accumulated
amortization ($1,592) and the write-off of the unamortized deferred rent
credit ($813) resulted in a net charge to operations of $779.
Income tax expense for the three months ended June 30, 2003 was $36
compared to an income tax benefit of $216 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 six months ended June
30, 2003 and that we continue to be affected by conditions in the economy,
management has determined that a valuation allowance at June 30, 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.
SIX MONTHS ENDED JUNE 30, 2003 VERSUS SIX MONTHS ENDED JUNE 30, 2002
Our revenues for the six months ended June 30, 2003 decreased $15,049 from
2002 primarily as a result of decreased commissions of $5,657, decreased
net principal transactions of $4,375 and decreased investment banking fees
of $4,631. 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 six months ended June 30, 2003 decreased $41,155 from
2002 primarily as a result of the $18,762 impairment of goodwill in 2002,
decreased compensation and benefits of $11,369, decreased brokerage,
communication and clearance fees of $5,304, decreased professional
services of $906 and decreased depreciation and amortization of $438.
Our revenues for the six months ended June 30, 2003 consisted of
commissions of $21,953, net principal transactions of $2,716, investment
banking fees of $1,676, investment advisory fees of $1,188, dividends and
interest of $851, syndicate and underwriting income of $30 and other
income of $2,565. Our revenues for the six months ended June 30, 2002
consisted of commissions of $27,610, net principal transactions of $7,091,
investment banking fees of $6,307, investment advisory fees of $1,503,
dividends and interest of $1,220, syndicating and underwriting income of
$173 and other income of $2,124. Our expenses for the six months ended
June 30, 2003 consisted of compensation and benefits of $21,178, write-off
of leasehold improvements of $779 and other expenses of $12,771. Our
expenses for the six months ended June 30, 2002 consisted of compensation
and benefits of $32,547, impairment of goodwill of $18,762 and other
expenses of $24,574.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The $5,657 (20.5%) decrease in commission income was primarily a result of
a decrease in the number of retail brokers during the six months ended
June 30, 2003 compared to the six months ended June 30, 2002.
The $4,375 (61.7%) decrease in net principal transactions was primarily
the result of decreases in trading income of $4,291 in the 2003 period.
The $4,631 (73.4%) 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 $11,369 (34.9%) was primarily due
to the net decrease in revenues and various staff reductions in the third
and fourth quarters of 2002 as well as the first and second quarters of
2003.
Results for the six months ended June 30, 2002 included the $18,762 charge
for the impairment of goodwill. Results for the six months ended June 30,
2003 included the $779 charge to operations for the write-off of leasehold
improvements and the related unamortized deferred rent credit.
Income tax expense for the six months ended June 30, 2003 was $82 compared
to an income tax benefit of $871 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 six months ended June
30, 2003 and that we continue to be affected by conditions in the economy,
management has determined that a valuation allowance at June 30, 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 69.4% of our assets at June 30, 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 $7,567,
exceeded minimum capital requirements of $250 by $7,317 at June 30, 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. In June 2003, we closed our Ft. Lauderdale office, which
constituted all of our market making activities. As a result of our
decision to eliminate our market making activities, effective June 13,
2003, our minimum net capital requirement decreased from $1,000 to $250.
21
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 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 six months ended June
30, 2003 was $4,753 as compared to $6,622 for the 2002 period.
Net cash flows used in investing activities for the six months ended June
30, 2003 was $382 compared to net cash flows provided by investing
activities of $878 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 $468 and $676 for the six months ended June
30, 2003 and 2002, respectively, related principally to leasehold
improvements and enhancements to computer equipment.
There was $35 of cash flows provided from financing activities for the six
months ended June 30, 2003, representing 834,221 shares of our common
stock issued pursuant to our Employee Stock Purchase Plan which commenced
on April 1, 2003. There was $500 of cash flows provided from financing
activities for the six months ended June 30, 2002 period, representing the
issuance by us of $2,500 of promissory notes payable offset by the
repayment of $2,000 of outstanding promissory notes payable.
We are obligated under noncancellable lease agreements, which provide for
minimum lease payments, net of lease abatement and exclusive of escalation
charges, of $2,353 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 aggregating approximately $10,350. 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 June 30, 2003 are approximately $1,000 in
2003, $2,000 per year from 2004 through 2007 and $1,600 thereafter.
Ladenburg Capital has provided for costs in connection with such leases
and the recording of a liability at June 30, 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
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(collectively, with the March 2002 Loan, the "2002 Loans") on the same
terms as the March 2002 loan. In November 2002, New Valley agreed in
connection with the Clearing Loans, to extend the maturity of the 2002
Loans to December 31, 2006 and to subordinate the 2002 Loans to the
repayment of the Clearing Loans.
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 June 30, 2003, accrued interest payments as to
which a forbearance was received amounted to $2,387 ($1,304 is included in
accounts payable and accrued liabilities and $1,083 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.
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. If, based on these
reviews, it is determined that we require additional funds to support our
liquidity and capital base, we would seek to raise additional capital
through available sources, including through borrowing additional funds on
a short-term basis from New Valley or from other parties, including our
shareholders and clearing brokers. Additionally, we may seek to raise
money through a rights offering or other type of financing. In May 2002,
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
we filed a registration statement 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. However, on August 6, 2002, we announced that we had decided to
postpone the rights offering due to market conditions. If additional funds
were needed, we could attempt to consummate the rights offering, although
we do not currently anticipate that a rights offering could be
successfully completed absent a material improvement in market conditions
and a significant increase in our stock price. In the circumstance where
the rights offering were ultimately consummated, we 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. If we continue to be unable to generate cash from operations and
are unable to find alternative sources of funding as described above, it
would have an adverse impact on our liquidity and operations.
MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rates, foreign
exchange rates, equity and commodity prices and also changes in the credit
ratings of either the issuer or its related country of origin. Market risk
is inherent to both derivative and non-derivative financial instruments,
and accordingly, the scope of our market risk management procedures
extends beyond derivatives to include all market risk sensitive financial
instruments.
Current and proposed underwriting, corporate finance, merchant banking and
other commitments are subject to due diligence reviews by our senior
management, as well as professionals in the appropriate business and
support units involved. Credit risk related to various financing
activities is reduced by the industry practice of obtaining and
maintaining collateral. We monitor our exposure to counterparty risk
through the use of credit exposure information, the monitoring of
collateral values and the establishment of credit limits.
We maintain inventories of trading securities. At June 30, 2003, the fair
market value of our inventories were $1,037 in long positions and $847 in
short positions. We performed an entity-wide analysis of our financial
instruments and assessed the related risk. Based on this analysis, in the
opinion of management, the market risk associated with our financial
instruments at June 30, 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.
24
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
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer,
we have evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report, and, based
on that evaluation, our principal executive officer and principal
financial officer have concluded that these controls and procedures are
effective. There were no changes in our internal control over financial
reporting during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange 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 or submit under the Exchange
Act is accumulated and communicated to its management, including our
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding disclosure.
25
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 6 to our condensed consolidated financial statements included in
Part I, Item 1 of this Report.
Item 2. 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 June 30,
2003.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
31.1 Certification of Chief Executive Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
None.
26
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: August 14, 2003 By: /s/ SALVATORE GIARDINA
------------------------------------------
Salvatore Giardina
Vice President and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
27