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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
COMMISSION FILE NUMBER 1-15799
Ladenburg Thalmann Financial Services Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0701248
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
590 MADISON AVENUE
NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 409-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
AS OF NOVEMBER 13, 2003, THERE WERE OUTSTANDING 43,326,234 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 SEPTEMBER 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 September 30, 2003 and December 31, 2002................ 2
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2003
and 2002..................................................... 3
Condensed Consolidated Statement of Changes in
Shareholders' Capital Deficit for the nine months ended
September 30, 2003............................................ 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 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........ 26
Item 4. Controls and Procedures........................................... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 27
Item 2. Changes in Securities and Use of Proceeds......................... 27
Item 4. Submission of Matters to a Vote of Security Holders............... 27
Item 6. Exhibits and Reports on Form 8-K.................................. 27
SIGNATURE........................................................................... 29
1
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
2003 2002
------------- -------------
ASSETS
Cash and cash equivalents $ 5,665 $ 11,752
Trading securities owned 313 4,365
Due from affiliates 77 86
Receivables from clearing brokers 20,806 11,378
Exchange memberships owned, at historical cost 1,505 1,505
Furniture, equipment and leasehold improvements, net 5,018 8,087
Restricted assets 1,062 1,054
Income taxes receivable 17 2,224
Other assets 3,877 3,448
-------- --------
Total assets $ 38,340 $ 43,899
======== ========
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIT
Securities sold, not yet purchased $ 696 $ 1,218
Accrued compensation 3,807 3,268
Accounts payable and accrued liabilities 12,695 12,084
Deferred rent credit 5,953 6,589
Due to former parent 1,313 634
Notes payable 8,500 8,500
Senior convertible notes payable 20,000 20,000
Subordinated note payable 2,500 2,500
-------- --------
Total liabilities 55,464 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, 43,326,234 and 42,025,211 4 4
Additional paid-in capital 56,595 56,473
Accumulated deficit (73,723) (67,371)
-------- --------
Total shareholders' capital deficit (17,124) (10,894)
-------- --------
Total liabilities and shareholders' capital deficit $ 38,340 $ 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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Commissions $ 11,320 $ 10,712 $ 33,273 $ 38,322
Principal transactions, net 897 954 3,613 8,045
Investment banking fees 454 1,790 2,130 8,097
Investment advisory fees 603 651 1,791 2,154
Interest and dividends 436 579 1,287 1,799
Syndications and underwritings 128 91 158 264
Other income 1,322 1,200 3,887 3,324
------------ ------------ ------------ ------------
Total revenues 15,160 15,977 46,139 62,005
------------ ------------ ------------ ------------
Expenses:
Compensation and benefits 10,247 12,035 31,425 44,582
Brokerage, communication and clearance fees 1,101 3,741 4,173 12,117
Rent and occupancy 1,972 2,046 5,437 6,047
Depreciation and amortization 308 455 959 1,544
Interest 529 537 1,576 1,494
Impairment of goodwill -- -- -- 18,762
Write-off of leasehold improvements, net -- -- 779 --
Professional services 1,208 1,113 2,968 3,779
Other 2,276 3,799 5,052 11,284
------------ ------------ ------------ ------------
Total expenses 17,641 23,726 52,369 99,609
------------ ------------ ------------ ------------
Loss before income taxes (2,481) (7,749) (6,230) (37,604)
Income taxes 40 2,265 122 1,394
------------ ------------ ------------ ------------
Net loss $ (2,521) $ (10,014) $ (6,352) $ (38,998)
============ ============ ============ ============
Loss per Common Share (basic and diluted):
Loss per Common Share $ (0.06) $ (0.24) $ (0.15) $ (0.93)
============ ============ ============ ============
Number of shares used in computation (basic and diluted) 42,864,506 42,025,211 42,311,106 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 1,301,023 - 122 -- 122
Net loss -- - -- (6,352) (6,352)
---------- -- ------- -------- --------
Balance, September 30, 2003 43,326,234 $4 $56,595 $(73,723) $(17,124)
========== == ======= ======== ========
See accompanying notes to condensed
consolidated financial statements
4
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
--------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net loss $(6,352) $(38,998)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 959 1,544
Adjustment to deferred rent credit 179 250
Deferred taxes -- 3,339
Impairment of goodwill -- 18,762
Write-off of leasehold improvements, net 779 --
Loss on disposal of fixed assets 3 --
Employee compensation (Note 4) -- 305
Decrease (increase) in operating assets:
Trading securities owned 4,052 12,622
Receivables from clearing brokers (9,428) 10,010
Due from affiliates 9 (65)
Income taxes receivable 2,207 --
Other assets 481 1,480
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased (522) (10,514)
Accrued compensation 539 (8,237)
Accounts payable and accrued liabilities 611 697
Due to former parent 679 56
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (5,804) (8,749)
-------- --------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements (490) (898)
Net proceeds from sale of equipment 93 --
Decrease (increase) in restricted assets (8) 1,551
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (405) 653
-------- --------
Cash flows from financing activities:
Issuance of common stock 122 --
Issuance of promissory notes payable -- 5,000
Repayment of promissory notes payable -- (2,000)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 122 3,000
-------- --------
Net decrease in cash and cash equivalents (6,087) (5,096)
Cash and cash equivalents, beginning of period 11,752 8,136
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,665 $ 3,040
======== ========
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.
and Ladenburg Capital Fund Management Inc. ("Ladenburg Capital Fund
Management").
The interim financial data as of September 30, 2003 and for the three
and nine months ended September 30, 2003 and September 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 Capital Fund
Management were the only operating 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 three months to be cash equivalents.
Securities owned and securities sold, but not yet purchased, which are
traded on a national securities exchange or listed on Nasdaq are valued
at the last reported sales prices of the reporting period. 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 and financial restructuring advisory services
and from private and public offerings of debt and equity securities.
Investment banking fees are recorded upon the closing of the
transaction, when it can be determined that the fees have been
irrevocably earned.
Investment advisory fees are received quarterly, in advance, but are
recognized as earned on a pro rata basis over the term of the contract.
Dividends are recorded on an ex-dividend date basis and interest is
recorded on an accrual basis.
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 September 30, 2003 and
December 31, 2002, the valuation allowance was $21,314 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 September 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 nine-month periods ended September 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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
------- -------- ------- --------
Net loss, as reported $(2,521) $(10,014) $(6,352) $(38,998)
Stock-based employee
compensation
determined under the fair value
based method (379) (390) (1,179) (1,131)
------- -------- ------- --------
Pro forma net loss $(2,900) $(10,404) $(7,531) $(40,129)
======= ======== ======= ========
8
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Net loss per Common Share (basic and
diluted), as reported $ (0.06) $ (0.24) $ (0.15) $ (0.93)
======= ======== ======= ========
Pro forma net loss per Common Share
(basic and diluted) $ (0.07) $ (0.25) $ (0.18) $ (0.95)
======= ======== ======= ========
During the nine months ended September 30, 2003 and 2002, respectively,
options and warrants to purchase 2,625,105 and 1,665,881 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 September 30, 2003 and December 31, 2002 are as
follows:
SECURITIES SOLD,
SECURITIES BUT NOT
OWNED YET PURCHASED
---------- ------------------
SEPTEMBER 30, 2003
Common stock $ 286 $ 691
Equity and index options 3 --
Municipal obligations 3 --
Corporate bonds 21 5
------ ------
$ 313 $ 696
====== ======
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 September 30, 2003 and December 31, 2002, approximately $281 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. SHAREHOLDERS' EQUITY
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 1, April 1, July 1, and October 1 of each year and
end on March 31, June 30, September 30 and December 31 of each year.
The 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 three month period ended September 30, 2003,
466,802 shares of the Company's common stock were issued to employees
under this Plan, at $.187 per share, resulting in a capital
contribution of $87. During the nine months ended September 30, 2003,
1,301,023 shares of the Company's common stock were issued to employees
under this Plan, at an average price of $.0943 per share, resulting in
a capital contribution of $122.
9
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In September 2003, the Company granted its non-employee directors of
the Company ten-year options to purchase an aggregate of 80,000 shares
of common stock under its stock option plan at an exercise price of
$0.30 per share. The options will become exercisable on the first
anniversary of the grant.
During the third quarter of 2002, some of the Company's executives
elected to forfeit accrued compensation due them under the Company's
Special Performance Incentive Plan. The amount forfeited through
September 30, 2002 of $305 has been charged to operations with a
corresponding increase to additional paid-in capital.
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. 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 September 30, 2003, Ladenburg had net
capital, as defined, of $8,471, which exceeded its minimum capital
requirement of $250 by $8,221.
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 noncancellable 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 September 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.................................... $ 1,233
2004.................................... 4,516
2005.................................... 4,975
2006.................................... 4,844
2007.................................... 5,080
Thereafter.............................. 41,485
-------
Total................................... $62,133
=======
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,
10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
the Company's management evaluates the Company's liability with respect
to this space on a quarterly basis, taking into account estimated
future sublease payments that could be reasonably obtained for the
property. In these evaluations, the Company's management concluded that
a liability for this matter did not exist as of June 30, 2003 or
September 30, 2003; however, the net book value of the leasehold
improvements was written-off in the second quarter of 2003. 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 in the
second quarter of 2003. During the second quarter of 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.
As of September 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
$9,814. 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 September
30, 2003 are approximately $536 in 2003, $2,145 per year from 2004
through 2006, $1,295 in 2007 and $1,548 thereafter. Ladenburg Capital
has provided for costs in connection with such leases and has recorded
a liability at September 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 September 30, 2003 and December 31, 2002 of
$5,953 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 such leasehold improvements related to Ladenburg's vacated
premises, has been written-off during the second quarter of 2003.
At September 30, 2003, Ladenburg has utilized a letter of credit in the
amount of $1,000 that is collateralized by $1,062 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 $7,187 at September 30,
2003 (included in accounts payable and accrued liabilities), of which
$1,639 and $2,412 were charged to operations as other expense for the
three and nine months ended September 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.
11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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. Plaintiff has 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.
7. INCOME TAXES
The Company accounts for taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the recognition of tax
benefits or expense on the temporary differences between the tax basis
and book basis of its assets and liabilities. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply
to taxable income in the years in which those timing differences are
expected to be recovered or settled. Deferred tax amounts as of
September 30, 2003, which consist principally of the tax benefit of net
operating loss carryforwards and accrued expenses, amounts to $21,314.
After consideration of all the evidence, both positive and negative,
especially the fact the Company has sustained operating losses during
2002 and for the nine months ended September 30, 2003 and that the
Company continues to be affected by conditions in the economy,
management has determined that a valuation allowance at September 30,
2003 was necessary to fully offset the deferred tax assets based on the
likelihood of future realization. At September 30, 2003, the Company
had net operating loss carryforwards of approximately $32,900, expiring
in various years from 2015 through 2023, of which approximately $7,400
are subject to restrictions on utilization.
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 associated with
each customer who is on margin credit and records an estimated loss
when management believes collection from the customer is unlikely.
The clearing operations for the Company's securities transactions are
provided by several clearing brokers. At September 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.
12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
9. NOTES PAYABLE
The components of notes payable are as follows:
September 30, December 31,
2003 2002
------------- ------------
Senior convertible notes payable $20,000 $20,000
Notes payable (forgivable per terms - see
below) in connection with Clearing
agreement 3,500 3,500
Notes payable 5,000 5,000
Subordinated note payable 2,500 2,500
------- -------
Total $31,000 $31,000
======= =======
Aggregate maturities of the $31,000 of notes payable at September 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.
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.
13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 September 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 September 30,
2003, accrued interest payments as to which a forbearance was received
amounted to $2,896 ($1,583 is included in accounts payable and accrued
liabilities and $1,313 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 (the "Clearing Conversion"). As part of the new
agreement with this clearing agent, Ladenburg is realizing significant
cost savings from reduced ticket charges and other incentives. In
addition, under the new clearing agreement, an affiliate of the
clearing broker loaned the Company an aggregate of $3,500 (the
"Clearing Loans") in December 2002. The Clearing Loans and related
accrued interest are forgivable over various periods, up to four years
from the date of the Clearing Conversion, provided Ladenburg continues
to clear its transactions through the primary clearing broker. The
principal balance of the Clearing Loans is scheduled to be forgiven as
follows: $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.
As of September 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%.
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 490 at September 30, 2002 to 306 at
September 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
14
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 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. and
Ladenburg Capital 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") in December 2002. The Clearing Loans and related accrued
interest are forgivable over various periods, up to four years from the date of
the Clearing Conversion, provided we continue to clear our transactions through
our primary clearing broker. The principal balance of the Clearing Loans is
scheduled to be forgiven as follows: $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. The plaintiff has 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 intend 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 1, April 1, July 1 and October 1 of each
year and end on March 31, June 30, September 30 and December 31 of each year.
The Plan became effective November 6, 2002 and the first option period commenced
April 1, 2003. During the three month period ended September 30, 2003, 466,802
shares of our common stock were issued to employees under this Plan, at $.187
per share, resulting in a capital contribution of $87. During the nine months
ended September 30, 2003, 1,301,023 shares of our common stock were issued to
employees under this Plan, at an average price of $.0943 per share, resulting in
a capital contribution of $122.
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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 using one of the several floors
it occupies in its New York City office. In accordance with SFAS No. 146, we
evaluate our liability with respect to this space on a quarterly basis, taking
into account estimated future sublease payments that could be reasonably
obtained for the property. In these evaluations, we concluded that a liability
for this matter did not exist as of June 30, 2003 or September 30, 2003;
however, the net book value of the leasehold improvements was written off in the
second quarter of 2003. 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 second quarter of 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 we
believe collection from the customer is unlikely. We incurred losses from these
arrangements, prior to any recoupment from our retail brokers, of $25 and $150
for the three and nine months ended September 30, 2003, respectively, and $93
and $161 for the three and nine months ended September 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 $7,187 and $6,201 for potential arbitration and
lawsuit losses as of September 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
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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. Some
of Ladenburg's and Ladenburg Capital's business was temporarily disrupted. We
are insured for loss caused by physical damage to property, including repair or
replacement of property. We are also insured for 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
September 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 September 30, 2003 was $2,117. In
October 2003, we filed a Proof of Loss with the insurance carrier, for an amount
in excess of the policy limits (approximately $7,800). There are no assurances,
however, that we will recover the full amount of insurance available to
Ladenburg and Ladenburg Capital as a result of this claim.
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.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
IMPAIRMENT OF GOODWILL. On January 1, 2002, we adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," and were required to analyze our goodwill for
impairment issues on January 1, 2002 and on a periodic basis thereafter. In
connection with the reporting of results for the second quarter of 2002, based
on the overall declines in the U.S. equity markets and the conditions prevailing
in the broker-dealer industry, we engaged an independent appraisal firm to value
our goodwill as of June 30, 2002. Based on this valuation, an impairment charge
of $18,762 of goodwill was indicated and recorded in September 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 September 30, 2003, which consist principally of the
tax benefit of net operating loss carryforwards and accrued expenses, amount to
$21,314. After consideration of all the evidence, both positive and negative,
especially the fact we have sustained operating losses during 2002 and for the
nine months ended September 30, 2003 and that we continue to be affected by
conditions in the economy, we have determined that a valuation allowance at
September 30, 2003 was necessary to fully offset the deferred tax assets based
on the likelihood of future realization. At September 30, 2003, we had net
operating loss carryforwards of approximately $32,900, expiring in various years
from 2015 through 2023, of which approximately $7,400 are subject to
restrictions on utilization.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2002
Our revenues for the three months ended September 30, 2003 decreased $817 from
2002 primarily as a result of decreased investment banking fees of $1,336.
Our expenses for the three months ended September 30, 2003 decreased $6,085 from
2002 primarily as a result of decreased compensation and benefits of $1,788,
decreased brokerage, communication and clearance fees of $2,640 and other
expenses of $1,523.
Our revenues for the three months ended September 30, 2003 consisted of
commissions of $11,320, net principal transactions of $897, investment banking
fees of $454, investment advisory fees of $603, interest and dividends of $436,
syndicate and underwriting income of $128 and other income of $1,322. Our
revenues for the three months ended September 30, 2002 consisted of commissions
of $10,712, net principal transactions of $954, investment banking fees of
$1,790, investment advisory fees of $651, interest and dividends of $579,
syndicating and underwriting income of $91 and other income of $1,200. Our
expenses for the three months ended September 30, 2003 consisted of compensation
and benefits of $10,247 and other expenses of $7,394. Our expenses for the three
months ended September 30, 2002 consisted of compensation and benefits of
$12,035, and other expenses of $11,691.
The $608 (5.7%) increase in commission income primarily resulted from an
improvement in the market for equity securities during the three months ended
September 30, 2003.
The $57 (6.0%) decrease in net principal transactions was primarily the result
of a decrease in sales credits of approximately $344, net of an increase in
trading income during the three months ended September 30, 2003.
The $1,336 (74.6%) decrease in investment banking fees was primarily the result
of decreased revenue from private placement and advisory assignments due to the
decrease in capital markets activity in 2003 compared to 2002, as well as a
reduction in the number of professional staff in the corporate finance area of
the investment banking department.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The decrease in compensation expense of $1,788 (14.9%) was primarily due to the
net decrease in revenues and various staff reductions in the third and fourth
quarters of 2002, as well as in the first and second quarters of 2003.
The decrease of $2,640 (70.6%) in brokerage, communication and clearance fees is
primarily due to the renegotiation of our clearing agreement with our primary
clearing broker (effective November 2002) and the decrease in proprietary
trading activities in 2003 compared to 2002.
The $1,523 (40.1%) decrease in other expenses was primarily due to decreases in
customer arbitration settlements, insurance premiums expense, license and
registration fees and valuation allowances relating to receivables.
Income tax expense for the three months ended September 30, 2003 was $40
compared to an income tax expense of $2,265 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 nine months ended September 30, 2003
and that we continue to be affected by conditions in the economy, management has
determined that a valuation allowance at September 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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2002
Our revenues for the nine months ended September 30, 2003 decreased $15,866 from
2002 primarily as a result of decreased commissions of $5,049, decreased net
principal transactions of $4,432 and decreased investment banking fees of
$5,967. 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 nine months ended September 30, 2003 decreased $47,240 from
2002 primarily as a result of the $18,762 impairment of goodwill in 2002,
decreased compensation and benefits of $13,157, decreased brokerage,
communication and clearance fees of $7,944, and decreased other expenses of
$6,232.
Our revenues for the nine months ended September 30, 2003 consisted of
commissions of $33,273, net principal transactions of $3,613, investment banking
fees of $2,130, investment advisory fees of $1,791, interest and dividends of
$1,287, syndicate and underwriting income of $158 and other income of $3,887.
Our revenues for the nine months ended September 30, 2002 consisted of
commissions of $38,322, net principal transactions of $8,045, investment banking
fees of $8,097, investment advisory fees of $2,154, interest and dividends of
$1,799, syndicating and underwriting income of $264 and other income of $3,324.
Our expenses for the nine months ended September 30, 2003 consisted of
compensation and benefits of $31,425, write-off of leasehold improvements of
$779 and various other expenses of $20,165. Our expenses for the nine months
ended September 30, 2002 consisted of compensation and benefits of $44,582,
impairment of goodwill of $18,762 and other expenses of $36,265.
The $5,049 (13.2%) decrease in commission income was primarily a result of a
decrease in the number of retail brokers during the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002.
The $4,432 (55.1%) decrease in net principal transactions was primarily the
result of decreases in trading income of $3,731 in the 2003 period.
The $5,967 (73.7%) decrease in investment banking fees was primarily the result
of decreased revenue from private placement and advisory assignments due to the
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
decrease in capital markets activity in 2003 compared to 2002, as well as a
reduction in the number of professional staff in the corporate finance area of
the investment banking department.
The decrease in compensation expense of $13,157 (29.5%) 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.
The decrease of $7,944 (65.6%) decrease in brokerage, communication and
clearance fees is primarily due to the renegotiation of our clearing agreement
with our primary clearing broker (effective November 2002), the decrease in
proprietary trading activities and the decreased amount of commissions earned in
2003 compared to 2002.
The $6,232 (55.2%) decrease in other expenses was primarily due to decreases in
advertising, customer arbitration settlements, insurance premiums expense,
license and registration fees, travel and valuation allowances relating to
receivables.
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 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 second quarter of 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 second
quarter of 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 nine months ended September 30, 2003 was $122
compared to $1,394 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 nine months ended September 30, 2003 and that we
continue to be affected by conditions in the economy, management has determined
that a valuation allowance at September 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 69.9% of our assets at September 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
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
rapidly. As a securities dealer, we may carry significant levels of securities
inventories to meet customer needs. 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
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 $8,471, exceeded minimum
capital requirements of $250 by $8,221 at September 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.
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 nine months ended September
30, 2003 was $5,804 as compared to $8,749 for the 2002 period.
Net cash flows used in investing activities for the nine months ended September
30, 2003 was $405 compared to net cash flows provided by investing activities of
$653 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 $490 and $898 for the nine months ended September
30, 2003 and 2002, respectively, related principally to leasehold improvements
and enhancements to computer equipment.
There was $122 of cash flows provided from financing activities for the nine
months ended September 30, 2003, representing 1,301,023 shares of our common
stock issued pursuant to our Employee Stock Purchase Plan which commenced on
April 1, 2003. There was $3,000 of cash flows provided from financing activities
for the nine months ended September 30, 2002 period, representing the issuance
by us of $5,000 of promissory notes payable offset by the repayment of $2,000 of
outstanding promissory notes payable.
We are obligated under several noncancellable lease agreements for office space,
which provide for minimum lease payments, net of lease abatement and exclusive
of escalation charges, of $1,233 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 $9,814. Ladenburg Capital is
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
September 30, 2003 are approximately $536 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 September 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 (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 September 30, 2002 through March 2003 (the
"Forbearance Interest Payments"). On March 3, 2003, the holders of the senior
convertible promissory notes agreed to extend the interest forbearance period to
January 15, 2005 with respect to interest payments due through December 31,
2004. Interest on the deferred amounts accrues at 8% on the New Valley and
Berliner notes and 9% on the Frost-Nevada Investments 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
September 30, 2003, accrued interest payments as to which a forbearance was
received amounted to $2,896 ($1,583 is included in accounts payable and accrued
liabilities and $1,313 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 follows: $1,500 in November 2003, $667 in November 2004, $667 in
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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, 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 September 30, 2003, the fair
market value of our inventories were $313 in long positions and $696 in short
positions. We performed an entity-wide analysis of our financial instruments and
assessed the related risk. Based on this analysis, in the opinion of management,
the market risk associated with our financial instruments at September 30, 2003
will not have a material adverse effect on our consolidated financial position
or results of operations.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
Litigation 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 Litigation 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.
25
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.
26
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 September 30, 2003,
except on September 17, 2003, we granted to each of our four non-employee
directors a ten-year option to purchase 20,000 shares of common stock at an
exercise price of $0.30 per share, which options become fully exercisable one
year from the date of grant. The foregoing transactions were effected in
reliance on exemptions from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 17, 2003, we held our annual meeting of shareholders. At the annual
meeting, our shareholders re-elected each of the individuals nominated for
election for a term of one year and until their successors are elected and
qualified as follows:
- ----------------------------------------------------------------------------
NOMINEE VOTES FOR VOTES WITHHELD
- ----------------------------------------------------------------------------
Henry C. Beinstein 26,464,218 142,674
- ----------------------------------------------------------------------------
Robert J. Eide 26,464,888 142,004
- ----------------------------------------------------------------------------
Richard J. Lampen 26,513,478 93,414
- ----------------------------------------------------------------------------
Howard M. Lorber 26,484,676 122,216
- ----------------------------------------------------------------------------
Vincent A. Mangone 26,474,881 132,011
- ----------------------------------------------------------------------------
Victor M. Rivas 26,464,700 142,192
- ----------------------------------------------------------------------------
Richard J. Rosenstock 26,484,174 122,718
- ----------------------------------------------------------------------------
Mark Zeitchick 26,474,883 132,009
- ----------------------------------------------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Form of Stock Option Agreement, dated as of September 17,
2003, between the Company and each of Henry C. Beinstein,
Robert J. Eide, Richard J. Lampen and Howard M. Lorber
10.1.1 Schedule of Stock Option Agreements in the form of Exhibit
10.1, including material detail in which such documents
differ from Exhibit 10.1
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.
27
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.
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Registrant)
Date: November 14, 2003 By: /s/ SALVATORE GIARDINA
--------------------------------------------
Salvatore Giardina
Vice President and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
29