Ladenburg Thalmann Financial Services Inc.
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, 2006
Commission File Number 1-15799
Ladenburg Thalmann Financial Services Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Florida
(State or other jurisdiction of
incorporation or organization)
|
|
65-0701248
(I.R.S. Employer
Identification Number) |
|
|
|
4400 Biscayne Boulevard, 12th Floor
Miami, Florida
(Address of principal executive offices)
|
|
33137
(Zip Code) |
(212) 409-2000
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of November 14, 2006, there were outstanding 154,757,665 shares of the registrants Common
Stock, $.0001 par value.
LADENBURG THALMANN FINANCIAL SERVICES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
1
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
(Unaudited) |
|
|
|
|
ASSETS
|
Cash and cash equivalents |
|
$ |
8,140 |
|
|
$ |
10,936 |
|
Securities owned, at market value |
|
|
193 |
|
|
|
1,904 |
|
Receivable from clearing broker |
|
|
18,885 |
|
|
|
20,947 |
|
Receivables from other broker-dealers |
|
|
3,607 |
|
|
|
|
|
Exchange memberships owned, at historical cost (Note 4) |
|
|
545 |
|
|
|
1,413 |
|
NYSE Group Inc. common stock, not readily marketable (Note 4) |
|
|
1,228 |
|
|
|
|
|
Investment in fund manager |
|
|
435 |
|
|
|
|
|
Furniture, equipment and leasehold improvements, net |
|
|
775 |
|
|
|
966 |
|
Restricted assets |
|
|
1,383 |
|
|
|
1,313 |
|
Intangible-customer accounts, net |
|
|
720 |
|
|
|
|
|
Other assets |
|
|
2,311 |
|
|
|
1,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
38,222 |
|
|
$ |
39,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased |
|
$ |
5 |
|
|
$ |
8,857 |
|
Accrued compensation |
|
|
1,985 |
|
|
|
2,488 |
|
Accounts payable and accrued liabilities |
|
|
3,787 |
|
|
|
6,634 |
|
Deferred rent credit |
|
|
1,540 |
|
|
|
1,529 |
|
Accrued interest |
|
|
141 |
|
|
|
101 |
|
Accrued interest to former parent |
|
|
1,387 |
|
|
|
1,056 |
|
Notes payable, including $5,000 to former parent |
|
|
5,667 |
|
|
|
5,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
14,512 |
|
|
|
26,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.0001 par value; 2,000,000 shares authorized; none issued |
|
|
|
|
|
|
|
|
Common stock, $.0001 par value; 400,000,000 and 200,000,000
shares authorized; shares issued and outstanding, |
|
|
|
|
|
|
|
|
150,663,345 and 141,590,529 |
|
|
15 |
|
|
|
14 |
|
Additional paid-in capital |
|
|
128,548 |
|
|
|
122,532 |
|
Unearned employee stock-based compensation |
|
|
(144 |
) |
|
|
(893 |
) |
Accumulated deficit |
|
|
(104,709 |
) |
|
|
(108,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
23,710 |
|
|
|
12,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
38,222 |
|
|
$ |
39,299 |
|
|
|
|
|
|
|
|
|
|
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, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
$ |
2,913 |
|
|
$ |
4,804 |
|
|
$ |
12,569 |
|
|
$ |
12,319 |
|
Principal transactions, net |
|
|
2,996 |
|
|
|
790 |
|
|
|
5,557 |
|
|
|
1,913 |
|
Investment banking fees |
|
|
2,335 |
|
|
|
1,406 |
|
|
|
3,781 |
|
|
|
3,377 |
|
Investment advisory fees |
|
|
636 |
|
|
|
402 |
|
|
|
1,832 |
|
|
|
725 |
|
Interest and dividends |
|
|
708 |
|
|
|
497 |
|
|
|
2,045 |
|
|
|
1,320 |
|
Syndications and underwritings |
|
|
292 |
|
|
|
124 |
|
|
|
1,855 |
|
|
|
328 |
|
Gain on NYSE merger transaction |
|
|
|
|
|
|
|
|
|
|
4,859 |
|
|
|
|
|
Realized and unrealized loss on NYSE Group
Inc. restricted common stock |
|
|
|
|
|
|
|
|
|
|
(1,001 |
) |
|
|
|
|
Other |
|
|
299 |
|
|
|
596 |
|
|
|
933 |
|
|
|
1,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
10,179 |
|
|
|
8,619 |
|
|
|
32,430 |
|
|
|
21,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
6,343 |
|
|
|
6,499 |
|
|
|
18,174 |
|
|
|
16,437 |
|
Non-cash compensation |
|
|
303 |
|
|
|
215 |
|
|
|
1,444 |
|
|
|
481 |
|
Brokerage, communication and clearance fees |
|
|
669 |
|
|
|
614 |
|
|
|
2,094 |
|
|
|
1,839 |
|
Rent and occupancy, net of sublease revenues |
|
|
424 |
|
|
|
644 |
|
|
|
1,547 |
|
|
|
1,988 |
|
Professional services |
|
|
802 |
|
|
|
502 |
|
|
|
1,708 |
|
|
|
2,420 |
|
Interest |
|
|
161 |
|
|
|
126 |
|
|
|
417 |
|
|
|
679 |
|
Depreciation and amortization |
|
|
177 |
|
|
|
199 |
|
|
|
505 |
|
|
|
620 |
|
Debt conversion expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,359 |
|
Other |
|
|
716 |
|
|
|
961 |
|
|
|
2,511 |
|
|
|
3,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
9,595 |
|
|
|
9,760 |
|
|
|
28,400 |
|
|
|
47,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
584 |
|
|
|
(1,141 |
) |
|
|
4,030 |
|
|
|
(26,144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
14 |
|
|
|
14 |
|
|
|
53 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
570 |
|
|
$ |
(1,155 |
) |
|
$ |
3,977 |
|
|
$ |
(26,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
0.03 |
|
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
0.03 |
|
|
|
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
150,559,806 |
|
|
|
126,384,353 |
|
|
|
147,430,887 |
|
|
|
101,091,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
154,120,951 |
|
|
|
126,384,353 |
|
|
|
150,536,840 |
|
|
|
101,091673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
3
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED
STATEMENT OF CHANGES
IN SHAREHOLDERS EQUITY
(Dollars in
Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
|
|
|
|
Common Stock |
|
Additional |
|
Employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In |
|
Stock-based |
|
Accumulated |
|
|
|
|
Shares |
|
Amount |
|
Capital |
|
Compensation |
|
Deficit |
|
Total |
Balance, December 31, 2005. |
|
|
141,590,529 |
|
|
$ |
14 |
|
|
$ |
122,532 |
|
|
$ |
(893 |
) |
|
$ |
(108,686 |
) |
|
$ |
12,967 |
|
Issuance of shares of
common stock under
employee stock purchase
plan |
|
|
202,810 |
|
|
|
|
|
|
|
215 |
|
|
|
|
|
|
|
|
|
|
|
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
472,115 |
|
|
|
|
|
|
|
334 |
|
|
|
|
|
|
|
|
|
|
|
334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted to
Advisory Board |
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned
employee stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
749 |
|
|
|
|
|
|
|
749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense relating to
employee stock options
granted |
|
|
|
|
|
|
|
|
|
|
445 |
|
|
|
|
|
|
|
|
|
|
|
445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares to
affiliates pursuant to
private equity offering,
net of expenses of $103 |
|
|
8,397,891 |
|
|
|
1 |
|
|
|
3,675 |
|
|
|
|
|
|
|
|
|
|
|
3,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued for acquisition of customer
accounts |
|
|
|
|
|
|
|
|
|
|
698 |
|
|
|
|
|
|
|
|
|
|
|
698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued for interest in fund manager |
|
|
|
|
|
|
|
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
399 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,977 |
|
|
|
3,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006 |
|
|
150,663,345 |
|
|
$ |
15 |
|
|
$ |
128,548 |
|
|
$ |
(144 |
) |
|
$ |
(104,709 |
) |
|
$ |
23,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
2006 |
|
2005 |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
3,977 |
|
|
$ |
(26,184 |
) |
Adjustments to reconcile net income (loss) to
net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
501 |
|
|
|
620 |
|
Increase (decrease) of deferred rent credit |
|
|
11 |
|
|
|
(5 |
) |
Amortization of customer accounts |
|
|
4 |
|
|
|
|
|
Additional 1% investment in fund manager |
|
|
(40 |
) |
|
|
|
|
Amortization of investment in fund manager |
|
|
5 |
|
|
|
|
|
Accrued interest |
|
|
378 |
|
|
|
651 |
|
Debt conversion expense |
|
|
|
|
|
|
19,359 |
|
Non-cash compensation expense |
|
|
1,444 |
|
|
|
481 |
|
Gain on NYSE merger transaction |
|
|
(4,860 |
) |
|
|
|
|
Realized and unrealized loss on NYSE Group Inc. restricted
common stock |
|
|
1,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in operating assets: |
|
|
|
|
|
|
|
|
Securities owned |
|
|
1,743 |
|
|
|
(83 |
) |
NYSE Group Inc. common stock, not readily marketable
including cash received on sale of shares of $3,128 |
|
|
3,499 |
|
|
|
|
|
Receivable from clearing broker |
|
|
2,061 |
|
|
|
(2,035 |
) |
Receivable from other broker-dealers |
|
|
(3,607 |
) |
|
|
|
|
Due from affiliates |
|
|
4 |
|
|
|
121 |
|
Other assets |
|
|
(528 |
) |
|
|
2,213 |
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in operating liabilities: |
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased |
|
|
(8,852 |
) |
|
|
(25 |
) |
Accrued compensation |
|
|
(502 |
) |
|
|
(113 |
) |
Accounts payable and accrued liabilities |
|
|
(3,185 |
) |
|
|
(993 |
) |
Due to affiliates |
|
|
331 |
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(6,615 |
) |
|
|
(6,026 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of customer accounts |
|
|
(26 |
) |
|
|
|
|
Purchase of furniture, equipment and leasehold improvements |
|
|
(350 |
) |
|
|
(233 |
) |
Net proceeds received from sale of furniture |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(335 |
) |
|
|
(233 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Increase in restricted assets |
|
|
(70 |
) |
|
|
(6,423 |
) |
Issuance of common stock other than private equity offering |
|
|
549 |
|
|
|
5,169 |
|
Repurchase of common stock |
|
|
|
|
|
|
(1,155 |
) |
Issuance of other notes payable |
|
|
|
|
|
|
3,500 |
|
Funds received in advance-private equity offering |
|
|
|
|
|
|
6,421 |
|
Private equity offering |
|
|
3,675 |
|
|
|
2,803 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
4,154 |
|
|
|
10,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(2,796 |
) |
|
|
4,056 |
|
Cash and cash equivalents, beginning of period |
|
|
10,936 |
|
|
|
1,720 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
8,140 |
|
|
$ |
5,776 |
|
|
|
|
|
|
|
|
|
|
5
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
(Dollars in Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
2006 |
|
2005 |
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
49 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
Taxes paid |
|
|
229 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
Non-cash financing transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of senior convertible notes ($18,010) and accrued interest
($4,689) into common shares |
|
$ |
|
|
|
$ |
22,699 |
|
|
|
|
|
|
|
|
|
|
Common
shares purchased pursuant to private placement by exchanging
notes payable ($7,000) and accrued interest ($110) |
|
|
|
|
|
|
7,110 |
|
|
|
|
|
|
|
|
|
|
Warrant to purchase common shares issued for acquisition of Broadwall
customer accounts |
|
|
698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant to purchase common shares issued for 10% interest in fund
manager |
|
|
399 |
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
6
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and 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), a holding company, and its subsidiaries, all
of which are wholly-owned. The principal operating subsidiary of LTS is Ladenburg Thalmann &
Co. Inc. (Ladenburg), which is a registered broker-dealer in securities. The Companys other
subsidiaries primarily provide asset management services. All significant intercompany
balances and transactions have been eliminated.
The interim financial data as of September 30, 2006 and for the nine months ended September 30,
2006 and 2005 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 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 Companys 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 notes
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, 2005 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 Companys Annual Report on Form 10-K for the year ended
December 31, 2005 filed with the Securities and Exchange Commission (SEC) provide additional
disclosures and a description of accounting policies.
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 retail
and institutional brokerage, research, investment banking, asset
management 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 and
brokerage professionals. Ladenburg is subject to regulation by,
among others, the SEC, the NYSE, National Association of Securities
Dealers, Inc. (NASD), Commodities Futures Trading Commission and
National Futures Association. (See Note 6)
Effective January 1, 2006, the Company has adopted SFAS No. 123 (Revised 2004), Share-Based
Payment (SFAS No. 123R), which requires a public entity to measure the cost of employee,
officer and director services received in exchange for an award of equity instruments based on
the grant-date fair value of the award. SFAS No. 123R supersedes the Companys previous
accounting under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), which
permitted the Company to account for such compensation under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). Pursuant to APB No.
25, and related interpretations, no compensation cost had been recognized in connection with
the issuance of stock options, as all options granted under the Companys 1999 Performance
Equity Plan (the Option Plan) and all options granted outside the Option Plan had an exercise
price equal to or greater than the market value of the underlying common stock on the date of
grant. The Company adopted SFAS No. 123R using the modified prospective transition method,
which requires that compensation cost be recorded as earned, (i) for all unvested stock options
outstanding at the beginning of the first fiscal year of adoption of SFAS No. 123R based upon
the grant date fair value estimated in accordance with the original provisions of SFAS No. 123
and (ii) for all share-based payments granted subsequent to the adoption, based on the grant
date fair value estimated in accordance with the provisions of SFAS No. 123R.
7
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
The Companys condensed consolidated financial statements as of and for the periods ended
September 30, 2006 reflect the impact of SFAS No. 123R. In accordance with the modified
prospective transition method, the Companys condensed consolidated financial statements for
prior periods have not been restated to reflect, and do not include, the impact of SFAS No.
123R. As a result of adopting SFAS 123R, the Companys income before income taxes and net
income for the three and nine months ended September 30, 2006 are $167 and $445, respectively,
lower than if it had continued to account for share-based compensation under APB No. 25. There
was no effect on basic and diluted net income per share for the three months ended September
30, 2006 and for the nine months ended September 30, 2006 as a result of
adopting SFAS No. 123R.
The table below illustrates the effect on the Companys net loss for the three and nine months
ended September 30, 2005 had the Company elected to recognize compensation expense for stock
options, consistent with the method prescribed by SFAS No. 123. For purposes of the pro forma
disclosure, the value of options is estimated using the Black-Scholes optionpricing formula
and amortized to expense over the options vesting periods.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, 2005 |
|
September 30, 2005 |
Net loss, as reported |
|
$ |
(1,155 |
) |
|
$ |
(26,184 |
) |
|
|
|
|
|
|
|
|
|
Stock-based employee compensation determined
under the fair value based method |
|
|
(612 |
) |
|
|
(1,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(1,767 |
) |
|
$ |
(27,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share (basic and diluted),
as reported |
|
$ |
(0.01 |
) |
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per common share (basic and
diluted) |
|
$ |
(0.01 |
) |
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
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, 2006 and December 31, 2005 are as follows:
8
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Sold, |
|
|
Securities |
|
But Not |
|
|
Owned |
|
Yet Purchased |
September 30, 2006 |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
171 |
|
|
$ |
|
|
Municipal obligations |
|
|
5 |
|
|
|
|
|
U. S. Government obligations |
|
|
6 |
|
|
|
|
|
Corporate bonds |
|
|
1 |
|
|
|
5 |
|
Commercial paper |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
193 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
1,852 |
|
|
$ |
8,854 |
|
Municipal obligations |
|
|
45 |
|
|
|
|
|
U. S. Government obligations |
|
|
6 |
|
|
|
|
|
Corporate bonds |
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,904 |
|
|
$ |
8,857 |
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased at December 31, 2005 principally represents securities
sold pursuant to an underwriters over-allotment option which was exercised in January 2006.
As of September 30, 2006 and December 31, 2005, approximately $162 and $1,904, respectively, of
the securities owned are deposited with the Companys clearing broker and, pursuant to the
agreement, the securities may be sold or hypothecated by the clearing broker.
4. |
|
Restricted Common Shares of NYSE Group, Inc. |
As of December 31, 2005, Ladenburg owned one membership on the NYSE. Ladenburg had accounted
for its investment in this membership at a cost of $868, in accordance with industry practice.
On April 20, 2005, the NYSE and Archipelago Holdings, Inc. entered into a definitive merger
agreement, as amended and restated on July 20, 2005 (as so amended, the NYSE Merger
Agreement), pursuant to which Archipelago and NYSE agreed to combine their businesses and
become wholly-owned subsidiaries of NYSE Group, Inc. (NYSE Group), a newly-created,
for-profit and publicly-traded holding company (collectively, the NYSE Merger).
On March 7, 2006, the NYSE Merger was consummated, and each NYSE membership became entitled to
receive in exchange for the NYSE membership $300 in cash, plus 80,177 shares of NYSE Group
common stock. In addition, immediately prior to the consummation of the NYSE Merger, the NYSE
announced a permitted dividend to be paid to each NYSE membership in the amount of
approximately $71, which was equivalent to the memberships pro rata portion of the NYSEs
excess cash, as defined in the NYSE Merger Agreement. Ladenburg received the permitted
dividend and the merger consideration relating to its NYSE membership in March 2006.
As a result of the NYSE Merger, Ladenburgs NYSE membership was converted into $371 in cash
(including the permitted dividend) and 80,177 shares of NYSE Group common stock. The shares of
NYSE Group common stock received in the NYSE Merger are subject to a three-year restriction on
transfer. The restriction will be removed in three equal installments on each of March 7, 2007,
2008 and 2009, unless the restrictions are removed earlier by the NYSE Group in its sole
discretion. Ladenburg accounted for its investment in the NYSE Group restricted common stock
at the estimated fair value with changes in fair value reflected in operations. The shares
were valued at a discount from the published market value as a result of the transfer
restrictions.
9
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
On May 5, 2006, Ladenburg participated in a secondary underwriting of its restricted NYSE Group
common stock and sold 51,900 shares for an aggregate amount of $3,128, or average net proceeds
of $60.27 per share, which was $440 less than the carrying value of such shares. After the
sale, Ladenburgs investment in NYSE Group common stock consisted of 1,552 shares restricted
through March 7, 2008 and 26,725 shares restricted through March 7, 2009.
On June 20, 2006, Ladenburg transferred the 28,277 remaining restricted shares to LTS at the
estimated fair value of $1,228 at such date. LTS, in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, accounts for such restricted
investments at cost based on the value on the date of transfer adjusted for other than
temporary impairment. Restricted investments whose restriction lapses within one year from the
balance sheet date will be valued at quoted market price.
Included in revenues for the nine months ended September 30, 2006 is a gain on the NYSE Merger
of $4,859, representing the difference between the estimated fair value of consideration
received on the merger of $5,727 and Ladenburgs carrying value of its membership of $868, and
losses of $1,001, consisting of a realized loss on the sale of 51,900 shares of $440 and an
unrealized loss of $561 representing the decline in the fair value of the 28,277 remaining NYSE
Group restricted common shares on June 20, 2006 as compared to March 7, 2006.
Authorized Shares
At the Companys special meeting held on April 3, 2006, the shareholders of the Company
approved an amendment to the Companys articles of incorporation to increase the number of
authorized shares of common stock from 200,000,000 to 400,000,000.
Employee Stock Purchase Plan
In 2002, the Companys shareholders approved the Ladenburg Thalmann Financial Services Inc.
Qualified Employee Stock Purchase Plan (the Purchase Plan), under which a total of 5,000,000
shares of common stock became available for issuance. On November 1, 2006, the Companys
shareholders approved an amendment to the Purchase Plan to increase the number of shares of
common stock available for issuance under the plan from 5,000,000 to 10,000,000. Under the
Purchase Plan, as currently administered by the Companys compensation committee, all full-time
employees may use a portion of their salary to acquire shares of the Companys common stock at
a discount from the market price of the Companys common stock. Option periods have been
initially set at three month periods 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. In order
for the Purchase Plan to be accounted for as non-compensatory under SFAS No. 123R, effective
January 1, 2006, the discount was decreased to 5% below the market price of the Companys
common stock at the end of such option period. The Purchase Plan is intended to qualify as an
employee stock purchase plan under Section 423 of the Internal Revenue Code. During the
three month and nine month period ended September 30, 2006, 35,236 and 202,810 shares of the
Companys common stock were issued to employees under the Purchase Plan, at a weighted average
purchase price of approximately $1.00 and $1.06 per share, resulting in a capital contribution
of $35 and $215, respectively.
1999 Performance Equity Plan
In 1999, the Company adopted the 1999 Performance Equity Plan (the Option Plan) which, as
amended, provides for the grant of stock options and stock purchase rights to certain
designated employees, officers and directors and certain other persons performing services for
the Company, as designated by the board of directors. Dividends, if any, are not paid on
unexercised stock options. As of September 30, 2006, there were
options to purchase 496,482 shares of common
stock available for issuance under the Option Plan.
10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
On July 13, 2006, the Companys board approved an amendment to the Option Plan, subject to
shareholder approval, to increase the number of shares authorized for issuance thereunder from
10,000,000 to 25,000,000 and to increase the annual limit on grants to any individual from
1,000,000 shares to 1,500,000 shares. On July 13, 2006, in connection with Dr. Frosts
appointment as Chairman of the Board, the Company granted him an option to purchase 1,200,000
shares of the Companys common stock at $0.86 per share, subject to the Companys shareholders
approving the amendment to the Option Plan. On July 18, 2006, the Company granted an
additional aggregate of 1,500,000 options at $0.88 per share to Richard Lampen, Howard Lorber
and Mark Zeitchick, directors of the Company, subject to shareholder approval of the amendment
to the Option Plan. On November 1, 2006, shareholder approval was granted, and accordingly,
all such options are deemed to be granted on such date for accounting purposes. The options
granted to Dr. Frost and the other directors are ten-year options which vest in four equal
annual installments, subject to earlier vesting upon death, disability or change in control.
A summary of the status of the Option Plan at September 30, 2006 and changes during the nine
months then ended are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
|
|
|
|
|
|
|
Average |
|
Contractual |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Term |
|
Intrinsic |
|
|
Shares |
|
Price |
|
(Years) |
|
Value |
Options outstanding, December 31, 2005. |
|
|
8,637,770 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
495,000 |
|
|
|
0.91 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(472,115 |
) |
|
|
0.71 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(391,817 |
) |
|
|
0.84 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, September 30, 2006 |
|
|
8,268,838 |
|
|
|
0.99 |
|
|
|
7.48 |
|
|
$ |
2,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest |
|
|
5,776,897 |
|
|
|
1.12 |
|
|
|
6.98 |
|
|
|
1,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, September 30, 2006 |
|
|
4,661,547 |
|
|
|
1.23 |
|
|
|
6.58 |
|
|
|
1,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Plan Options
Commencing in 2004, the Company granted stock options to certain recruited employees in
conjunction with their employment agreements, which are outside of the Option Plan. In
September 2006, Ladenburg acquired saubstantially all of the securities brokerage accounts and
registered representatives and employees of Broadwall Capital LLC (Broadwall). In connection
with the transaction, Ladenburg engaged several employees of Broadwall to continue as employees
of Ladenburg. The Company granted to various of these individuals options to purchase an
aggregate of 1,500,000 shares of the Companys common stock at an exercise price of $1.05 per
share. The options vested as to 10% of the shares immediately and will vest as to 22.5% of the
shares on each of September 5, 2007, 2008, 2009 and 2010. A summary of the status of these
options at September 30, 2006, and changes during the nine months then ended are presented
below:
11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
|
|
|
|
|
|
|
Average |
|
Contractual |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Term |
|
Intrinsic |
|
|
Shares |
|
Exercise Price |
|
(Years) |
|
Value |
Options outstanding, December 31, 2005. |
|
|
14,000,000 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,500,000 |
|
|
|
1.05 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
( 5,800,000 |
) |
|
|
0.63 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, September 30, 2006 |
|
|
9,700,000 |
|
|
|
0.61 |
|
|
|
8.72 |
|
|
$ |
4,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest |
|
|
4,538,224 |
|
|
|
0.59 |
|
|
|
8.66 |
|
|
|
2,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, September 30, 2006 |
|
|
2,475,000 |
|
|
|
0.55 |
|
|
|
8.57 |
|
|
|
1,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of employee options granted during the nine months
ended September 30, 2006 and 2005 was $0.95 and $0.47, respectively. The fair value of each
option award is estimated on the date of grant using the Black-Scholes option pricing model
using the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
2006 |
|
2005 |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected volatility |
|
|
128.29 |
% |
|
|
74.48 |
% |
Risk-free interest rate |
|
|
4.84 |
% |
|
|
3.74 |
% |
Expected life (in years) |
|
|
6 |
|
|
|
10 |
|
During 2006, the Company took into consideration guidance contained in SFAS No. 123R and SAB
No. 107 when reviewing and developing assumptions for the 2006 grants. The weighted average
expected life for the 2006 grants of 6 years reflects the alternative simplified method
permitted by SAB No. 107, which defines the expected life as the average of the contractual
term of the options and the weighted average vesting period for all option tranches. Expected
volatility for the 2006 option grants is based on historical volatility over the six years
prior to the option grant date.
As of September 30, 2006, there was $1,534 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements. This cost is expected to be recognized over
the vesting periods of the options, which on a weighted-average basis
is approximately 1.62
years.
The total intrinsic value of options exercised during the nine months ended September 30, 2006
and 2005 amounted to $186 and $2, respectively. Tax benefits related to option
exercise were not deemed to be realized as net operating loss carryforwards are available to
offset taxable income computed without giving effect to the deductions related to option
exercises.
Non-cash compensation expense relating to stock options was calculated by using the
Black-Scholes option pricing model, amortizing the value calculated over the vesting period and
applying a forfeiture percentage as estimated by the Companys management, using historical
information. The Company has elected to
12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
recognize compensation cost for option awards that have graded vesting schedules on a straight
line basis over the requisite service period for the entire award. For the three and nine
months ended September 30, 2006, the non-cash compensation expense relating to stock option
agreements granted employees amounted to $167 and $445, respectively.
On September 1, 2005, the Company granted to the non-employee members of its Advisory Board
options to purchase an aggregate of 1,200,000 shares of the Companys common stock at an
exercise price of $0.51 per share. The options, which expire on August 31, 2015, vest 25% on
each of the first four anniversaries of the date of grant. The Company recorded a charge of $59
and $250 for the fair value of the options for the three and nine months ended September 30,
2006, respectively, based on the Black-Scholes option pricing model. The Company will record
additional expense relating to these options during their vesting period with a final adjustment
based on the options fair value on the vesting date.
Employee Stock Purchase Agreements
On March 25, 2005, Ladenburg entered into an employment agreement with a newly employed head of
institutional sales and, in connection therewith, granted him options to purchase 1,500,000
shares of the Companys common stock at an exercise price $0.64 per share. The option, which
expires on March 28, 2015, vests as to 250,000 shares on each of the first four anniversaries
of the date of grant. An additional 125,000 shares were to vest on the third anniversary of
the date of grant and an additional 375,000 shares were to vest on the fourth anniversary of
the date of grant provided that the Commission Shares (defined below) had been purchased. In
addition, he committed to purchase an additional 2,500,000 shares (Commission Shares) of the
Companys common stock at $0.64 per share solely through the use of compensation to be earned
by him. In addition, the Company sold to him 1,000,000 shares of its common stock at a price
of $0.45 per share, on March 28, 2005. Effective April 4, 2006, the employment agreement and
the stock option agreement were amended and, among other things, the employees commitment to
purchase the Commission Shares was eliminated and the vesting requirement based on the purchase
of the Commission Shares was replaced with a vesting requirement based on certain production
levels being met.
During June through August 2005, Ladenburg entered into various employment agreements with
newly employed executives whereby some of the executives committed to purchase up to an
aggregate of 5,275,000 shares of the Companys common stock at prices ranging from $0.53 to
$0.645 per share solely through the use of compensation, as defined, earned by them. In
January 2006, one of the employment agreements was terminated and two of the employment
agreements were restructured and, among other things, the commitments to purchase 4,500,000
shares of the Companys common stock were eliminated. As of September 30, 2006, compensation
was earned by one other executive that would have required the purchase of shares; however,
Ladenburg and the employee agreed to forego the share purchase and Ladenburg agreed to
compensate the employee for the difference on the shares to be
purchased by that date (508,520 shares) between
the contractual purchase price of $0.645 and the October 5, 2006 market price of $1.00.
In 2005, the Company had entered into several employment agreements with newly hired employees,
including the agreements referred to above, pursuant to which the Company sold common stock to
the employees. Where the sales price was below the fair market value of the Companys common
stock on the effective date of the agreements, the Company recorded unearned stock-based
compensation expense of $1,587, representing the difference between fair market value of the
common stock and the sales price. Such compensation is being amortized over the initial term
of the employees employment agreements, which are generally one to two years. During the
three and nine months ended September 30, 2006, the Company amortized non-cash compensation
expense of $77 and $749, respectively, relating to the sales of its common stock to new
employees at prices below fair market value. At September 30, 2006, unearned employee
stock-based compensation amounted to $144 and is presented as a reduction of shareholders
equity in the condensed consolidated statement of financial condition.
13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
Private Placement Offering
On November 30, 2005, the Company completed a private equity offering and received gross
proceeds of approximately $6,221 (representing 13,824,331 shares at $0.45 per share) from
various investors unrelated to the Company and also received binding subscriptions for
aggregate proceeds of approximately $3,779 (representing 8,397,891 shares at $0.45 per share)
from certain of the Companys affiliates and persons with direct or indirect relationships to
it. Following approval by the Companys shareholders and the American Stock Exchange, on April
27, 2006, the Company closed on the remaining portion of its private equity offering, thereby
raising an aggregate of $10,000.
Issuance of Warrants
On August 31, 2006, the Company issued to Gil Hermon seven-year warrants (FVF
Warrants) to purchase 1,500,000 shares of the Companys common stock at an exercise price of
$0.95 per share. The FVF Warrants were issued in connection with the Companys acquisition of
a 10% interest in FVF Partners, LLC (FVF), the general partner of the Florida Value Fund LLP,
a private equity fund formed by Mr. Hermon focused on mid-market companies in Florida. FVF, in
exchange for management services, is entitled to a percentage of profits of the fund. The FVF
Warrants are exercisable as to 500,000 shares immediately and will be exercisable as to 500,000
shares on each of August 31, 2007 and 2008 provided that the second and third installments of
shares shall not vest if the Companys Executive Committee determines, in its sole discretion,
that the Companys investment was not economically beneficial to the Company. Accordingly, the
Company has valued its investment in FVF at $399 based on the value of the 500,000 vested
warrants. Upon the vesting of the 1,000,000 contingent warrants, the Company will increase the
cost of its investment in FVF by the value of such warrants. In addition, the Company earned
an additional 1% interest in FVF valued at $40 as compensation for
introducing investors to Mr. Hermon. The investment in FVF is accounted for under the equity method. The excess of the
carrying value of the investment over the Companys share of the underlying book value of FVF
is being amortized over an estimated life of seven years.
On
September 11, 2006, Ladenburg acquired substantially all of the securities brokerage accounts and
registered representatives and employees of BroadWall. In connection
with this acquisition, the Company issued to BroadWall ten-year warrants to purchase 1,500,000
shares of the Companys common stock at an exercise price of $0.94 per share. The warrants are
exercisable as to 150,000 shares immediately and will become exercisable as to 337,500 shares
on each of September 11, 2007, 2008, 2009 and 2010 contingent upon the continued employment of
two former employees of BroadWall, both of whom have entered into two-year employment
agreements with the Company. Accordingly, the Company has valued 825,000 of the warrants that
vest over the two year term of the employment agreements at $698 representing consideration for
the acquisition. The remaining warrants, representing contingent consideration, will be
recorded as additional purchase price if and when the Company renews the employees employment
contracts. The value of the warrants has been assigned to an intangible, customer accounts,
which is being amortized to expense over an estimated life of 10 years.
The condensed consolidated financial statements for the three and nine-months ended September
30, 2006 include the results of operations of Broadwall from the date of acquisition. The
following unaudited pro forma information represents the Companys condensed consolidated
results of operations as if the acquisition of Broadwall had occurred as of the beginning of
the periods presented. The pro forma amounts of net income (loss) reflect amortization of the
amount ascribed to customer accounts acquired in the acquisition. In addition, pro forma
diluted earnings per share reflects common share equivalents attributable to issuance of the
825,000 warrants calculated by the treasury stock method:
14
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Total revenue |
|
|
10,822 |
|
|
|
9,193 |
|
|
|
34,888 |
|
|
|
22,554 |
|
Net income (loss) |
|
|
560 |
|
|
|
(1,179 |
) |
|
|
4,037 |
|
|
|
(26,250 |
) |
Basic earnings (loss) per share |
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
0.03 |
|
|
|
(0.26 |
) |
Diluted earnings (loss) per share |
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
0.03 |
|
|
|
(0.26 |
) |
Weighted
average shares outstanding basic |
|
|
150,559,806 |
|
|
|
126,384,353 |
|
|
|
147,430,887 |
|
|
|
101,091,673 |
|
Weighted average shares outstanding
diluted |
|
|
154,115,914 |
|
|
|
126,384,353 |
|
|
|
150,596,524 |
|
|
|
101,091,673 |
|
6. |
|
Net Capital Requirements |
As a registered broker-dealer, Ladenburg is subject to the SECs Uniform Net Capital Rule
15c3-1 and the Commodity Futures Trading Commissions Regulation 1.17, which require the
maintenance of minimum net capital. Ladenburg has elected to compute its net capital under the
alternative method allowed by these rules. At September 30, 2006, Ladenburg had net capital,
as defined, of $15,305, which exceeded its minimum capital requirement, as defined by SECs
Uniform Net Capital Rule 15c3-1, of $250, and as defined by the Commodity Futures Trading
Commissions Regulation 1.17, of $500, by $15,055 and $14,800, respectively.
Ladenburg claims an exemption from the provisions of the SECs Rule 15c3-3 pursuant to
paragraph (k)(2)(ii) as it clears its customer transactions through its correspondent broker on
a fully disclosed basis.
Litigation
The Company is a defendant in litigation and may be subject to unasserted claims or
arbitrations primarily in connection with its activities as a securities broker-dealer and
participation in public underwritings. Such litigation and claims involve substantial or
indeterminate amounts and are in varying stages of legal proceedings. As of September 30,
2006, the Companys subsidiaries are involved in several pending arbitrations in which
claimants are seeking substantial amounts of damages.
On May 5, 2003, a suit was filed in the U.S. District Court for the Southern District of
New York by Sedona Corporation against Ladenburg, former employees of Ladenburg, Pershing LLC
and a number of other firms and individuals. The plaintiff alleges, among other things, that
certain defendants (not Ladenburg) purchased convertible securities from plaintiff and then
allegedly manipulated the market to obtain an increased number of shares from the conversion of
those securities. Ladenburg acted as placement agent and not as principal in those
transactions. Plaintiff has alleged that Ladenburg and the other defendants violated federal
securities laws and various state laws. The plaintiff seeks compensatory damages from the
defendants of at least $660,000 and punitive damages of $2,000,000. In August 2005,
Ladenburgs motion to dismiss was granted in part and denied in part; Ladenburgs motion to
reconsider portions of that decision was denied on July 18, 2006. The Company believes the
plaintiffs claims in this action are without merit and intends to vigorously defend against
them.
In July 2004, a suit was filed in the U.S. District Court for the Eastern District of Arkansas
by Pet Quarters, Inc. against Ladenburg, a former employee of Ladenburg and a number of other
firms and individuals. The plaintiff alleges, among other things, that certain defendants (not
Ladenburg) purchased convertible securities from plaintiff and then allegedly manipulated the
market to obtain an increased number of shares from the conversion of those securities.
Ladenburg acted as placement agent and not as principal in those transactions. Plaintiff has
alleged that Ladenburg and the other defendants violated federal securities laws and various
state laws. The plaintiff seeks compensatory damages from the defendants of at least $400,000.
In April 2006, Ladenburgs motion to dismiss was granted in part and denied in part. The
Company believes that the plaintiffs claims are without merit and intends to vigorously defend
against them.
On December 8, 2005, a lawsuit was filed in New York State Supreme Court, New York County, by
Digital Broadcast Corp. against Ladenburg, a Ladenburg employee, and another individual. The
plaintiff alleges, among other things, that in connection with plaintiffs retention of
Ladenburg to assist it in its efforts to obtain
15
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
financing through a private placement of its securities, Ladenburg committed fraud and breach
of fiduciary duty, breach of contract, and breach of the implied covenant of good faith and
fair dealing. The plaintiff seeks compensatory damages in excess of $2,000 and punitive
damages of $10,000. In June 2006, Ladenburg filed a motion to
dismiss the complaint; on November 13, 2006, Ladenburgs
motion was granted in part and denied in part. The Company believes that the plaintiffs claims are without
merit and intends vigorously to defend against them.
With respect to certain arbitration, litigation and regulatory matters, where the Company
believes that it is probable that a liability has been incurred and the amount of loss can be
reasonably estimated, the Company has provided a liability of approximately $622 and $1,958 as
of September 30, 2006 and December 31, 2005, respectively (included in accounts payable and
accrued liabilities). 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 affect on the Companys consolidated financial
position, results of operations or liquidity.
Deferred Underwriting Compensation
Ladenburg is entitled to receive deferred investment banking and underwriting fees from certain
clients whose initial public offerings Ladenburg managed or participated. These clients are
primarily Specified Purpose Acquisition Companies (SPACs) and the payment of deferred fees is
contingent upon the SPACs consummating business combinations. Such fees are not reflected in
the Companys results of operations until the underlying business combinations have been
completed and the fees have been irrevocably earned. Generally, these fees may be received
within eighteen months from the respective date of the business combination, or not received at
all if no transactions are consummated. As of September 30, 2006, Ladenburg had unrecorded
potential deferred fees, net of expenses, amounting to approximately $4,952.
Deferred tax amounts as of September 30, 2006, which consist principally of the tax benefit of
net operating loss carryforwards and accrued expenses, were approximately $25,256. After
consideration of all the evidence, both positive and negative, especially the fact that the
Company has sustained operating losses during 2002 through 2005, management determined that a
valuation allowance at September 30, 2006 was necessary to fully offset the deferred tax assets
based on the likelihood of future realization. At September 30, 2006, the Company had net
operating loss carryforwards of approximately $51,721, expiring in various years from 2015
through 2026. The Companys ability to use such carryforwards to reduce future taxable income
may be subject to limitations attributable to equity transactions in March 2005 that may have
resulted in a change of ownership as defined in Internal Revenue Code Section 382.
9. |
|
Off-Balance-Sheet 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 Ladenburgs 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 broker, as Ladenburg has
agreed to indemnify its clearing broker 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 Companys securities transactions are provided by one clearing
broker. At September 30, 2006 and December 31, 2005, substantially all of the securities owned
and the amounts due
16
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
from clearing broker 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 components of notes payable are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2006 |
|
2005 |
Notes payable (forgivable per terms see
below) in connection with clearing
agreement |
|
$ |
666 |
|
|
$ |
666 |
|
Other notes payable former parent |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,666 |
|
|
$ |
5,666 |
|
|
|
|
|
|
|
|
|
|
The $5,666 of notes payable at September 30, 2006 mature during the year ending December 31,
2006.
Senior Convertible Notes Payable
The Company recorded a pre-tax charge of $19,359 in 2005 reflecting
the expense attributable to the reduction in the conversion price of
$18,010 principal amount of notes held by affiliates that were
converted in March 2005. The net effect on the Companys balance
sheet from the conversion, net of related expenses, was an increase
to shareholders equity of $22,699.
Other Notes Payable
On March 27, 2002, the Company borrowed $2,500 from New Valley, its
former parent. 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.
In November 2002, the Company renegotiated a clearing agreement with
one of its clearing brokers whereby this clearing broker became
Ladenburgs primary clearing broker, clearing substantially all of
Ladenburgs 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. As scheduled, in November 2003, one of the loans
consisting of $1,500 of principal, together with accrued interest of
approximately $90, was forgiven, in November 2004, $667 of
principal, together with accrued interest of approximately $54, was
forgiven and in November 2005, $667 of principal, together with
accrued interest of approximately $97 was forgiven. The balance of
the remaining loan, consisting of $666 of principal, is scheduled to
be forgiven in November 2006. Accrued interest on this loan as of
September 30, 2006 was $141. Upon the forgiveness of the Clearing
Loans, the forgiven amount is accounted for as other revenues.
However, if the clearing agreement is terminated for
17
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
any reason prior to the loan maturity date, the loan, less any amount that has been forgiven
through the date of the termination, plus interest, must be repaid on demand.
Liquidity
The Companys liquidity position has been adversely affected in recent years by its inability
to generate cash from operations. Accordingly, the Company has been forced to cut expenses as
necessary, and has implemented certain cost-cutting procedures throughout its operations.
During 2006, the Company relocated its New York City and Boca Raton, Florida offices to more
efficient and less expensive office space within the same vicinity of the previous locations.
The Companys overall capital and funding needs are continually reviewed to ensure that its
liquidity and capital base can support the estimated needs of its business units. These
reviews take into account business needs as well as regulatory capital requirements of the
Companys broker-dealer subsidiary. If, based on these reviews, it is determined that the
Company requires additional funds to support its liquidity and capital base or to grow its
business, the Company would seek to raise additional capital through other available sources,
including through borrowing additional funds on a short-term basis from the Companys
shareholders, clearing broker or other parties, although there can be no assurance such funding
would be available. Additionally, the Company may attempt to raise funds through a private
placement, a rights offering or other type of financing. If the Company is unable to generate
sufficient cash from operations or is unable to find alternative sources of funding as
described above, it would have an adverse impact on the Companys liquidity and operations.
11. |
|
Net Income (Loss) Per Common Share |
Net income (loss) per common share amounts (basic EPS) are computed by dividing net income
(loss) by the weighted average number of common stock shares, excluding any potential
dilution. Net income (loss) per common share amounts, assuming dilution (diluted EPS), are
computed by reflecting the potential dilution from the exercise of stock options and stock
warrants. In computing diluted EPS for the nine months ended September 30, 2006, incremental
shares of 3,550,616 from stock options assumed to be exercised were used in the calculation.
There were 4,815,168 stock options and warrants that are not included in EPS because including
them would be anti-dilutive.
On October 18, 2006, the Company consummated the transactions contemplated by an agreement and
plan of merger, dated as of September 6, 2006, with Telluride Acquisition, Inc.
(Acquisition), the Companys wholly-owned subsidiary, Telluride Holdings, Inc. (Telluride),
and each of James S. Cassel, Scott Salpeter and Barry Steiner, the stockholders of Telluride.
Telluride is the parent of Capitalink, L.C., a Miami-based investment banking firm which
provides services to middle-market and emerging growth companies. Pursuant to the merger
agreement, Telluride merged with and into Acquisition, with Acquisition continuing as the
surviving company. In exchange for all the capital stock of Telluride, the Company paid
Messrs. Cassel, Salpeter and Steiner $1,000,000 in cash and issued to them (i) 4,000,000 shares
of the Companys common stock and (ii) ten-year warrants to purchase 2,900,000 shares of the
Companys common stock at an exercise price of $0.96 per share. Warrants to purchase 957,000
shares of common stock are immediately exercisable and the remaining warrants will become
immediately exercisable upon their release from escrow as described below. In connection with
the merger, Ladenburg entered into three-year employment agreements with each of Messrs.
Cassel, Salpeter and Steiner. Mr. Cassel will serve as Vice Chairman, Senior Managing Director
and Head of Investment Banking of Ladenburg, and each of Messrs. Salpeter and Steiner will
serve as Managing Directors Investment Banking of Ladenburg. Of the consideration issued to
Messrs. Cassel, Salpeter and Steiner, (x) 2,666,666 of the shares, (y) warrants to purchase
1,943,000 shares of common stock and (z) $666,666.67 in cash has been placed in escrow.
One-half of the escrow amount will be released to the stockholders on June 3, 2007 and
one-half of the escrow amount will be released to the stockholders on January 18, 2008;
provided, however, that (i) if any of such stockholders employment is terminated by Ladenburg
without cause, or by the stockholder for good reason,
18
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share and Per Share Amounts) (Continued)
(Unaudited)
or upon his death or disability, or if the Company undergoes a change of control, then such
stockholders pro rata portion of the escrow amount will be released to him; and (ii) if any of
such stockholders employment is terminated for any reason other than as a result of an event
set forth in the preceding clause, then such stockholders pro rata portion of the escrow
amount will be returned to the Company.
On October 24, 2006, the Company sold its membership on the Chicago Board Options Exchange.
The membership cost $425 and was sold for $1,550, resulting in a gain of $1,125, which will be
recognized in the fourth quarter 2006.
13. |
|
Recently Issued Accounting Principles |
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (an interpretation of FASB Statement No. 109), which is effective for fiscal years
beginning after December 15, 2006 with earlier adoption encouraged. This interpretation was
issued to clarify the accounting for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. The Company has not completed its assessment of the impact of this standard on its
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value and expands disclosures about fair
value measurements. SFAS No. 157 clarifies that fair value should be based on assumptions that
market participants would use when pricing an asset or liability and establishes a fair value
hierarchy of three levels that prioritizes the information used to develop those assumptions.
The fair value hierarchy gives the highest priority to quoted prices in active markets and the
lowest priority to unobservable data. SFAS No. 157 requires fair value measurements to be
separately disclosed by level within the fair value hierarchy. The provisions of SFAS No. 157
will become effective for the Company beginning January 1, 2008. Generally, the provisions of
this statement are to be applied prospectively. Certain situations, however, require
retrospective application as of the beginning of the year of adoption through the recognition
of a cumulative effect of accounting change. Such retrospective application is required for
financial instruments, including derivatives and certain hybrid instruments with limitations on
initial gains or losses under EITF Issue No. 02-3, Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities. The Company has not completed its assessment of the impact of this
standard on its consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB No. 108 provides guidance on how prior year misstatements should be taken into
consideration when quantifying misstatements in current year financial statements for purposes
of determining whether the current years financial statements are materially misstated. The
provisions of SAB No. 108 are required to be applied beginning December 31, 2006. The Company does
not expect the adoption of SAB No. 108 to impact its consolidated financial statements.
19
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
(Dollars in Thousands, Except Share and Per Share Amounts)
Introduction
The condensed consolidated financial statements include our accounts and the
accounts of our wholly-owned subsidiaries. Our principal operating subsidiary is Ladenburg
Thalmann & Co. Inc. (Ladenburg), which is a registered broker-dealer in securities. Our other
subsidiaries primarily provide asset management services.
Recent Developments
Sale of CBOE Seat
As of September 30, 2006, Ladenburg owned one membership on the Chicago Board Options
Exchange. We have accounted for the investment in this membership at a cost of $425, in accordance
with industry practice. On October 24, 2006, we sold such membership for $1,550, resulting in a
gain of $1,125, which will be recognized in the fourth quarter 2006.
Annual Meeting
On November 1, 2006, we held our annual meeting of shareholders. At such annual meeting, our
shareholders (i) elected or re-elected, as the case may be, each of Henry C. Beinstein, Robert J.
Eide, Phillip Frost, Brian S. Genson, Saul Gilinski, Richard M. Krasno, Richard J. Lampen, Howard
M. Lorber, Jeffrey S. Podell, Richard J. Rosenstock and Mark Zeitchick to serve as directors for
the ensuing year and until their successors are elected and qualified; (ii) approved an amendment
to the Option Plan to increase the number of shares of common stock available for issuance under
the plan from 10,000,000 to 25,000,000 and to increase the number of shares of common stock
issuable to individuals in any one year from 1,000,000 to 1,500,000; and (iii) approved an
amendment to the Purchase Plan to increase the number of shares of common stock available for
issuance under the plan from 5,000,000 to 10,000,000.
Acquisitions
On September 11, 2006, Ladenburg acquired a majority of the securities brokerage accounts and
registered representatives and employees of BroadWall Capital LLC, a boutique broker-dealer located
in New York City, which caters to both institutions and private clients. In connection with this
acquisition, we issued to BroadWall ten-year warrants to purchase 1,500,000 shares of our common
stock at an exercise price of $0.94 per share. In connection with the acquisition, David
Rosenberg, the Chief Executive Officer of BroadWall, and Adam Malamed, the President of BroadWall,
became Senior Vice Presidents of Ladenburg and serve as co-heads of Ladenburgs Private Client
Services department. The warrants issued to BroadWall are currently exercisable as to 150,000
shares and will become exercisable as to 337,500 shares on each of September 11, 2007, 2008, 2009
and 2010. However, any unvested portion of the warrants shall terminate if the employment of
Messrs. Rosenberg and Malamed is terminated by Ladenburg for cause or by Messrs. Rosenberg and
Malamed without good reason. Additionally, the warrant shall become fully vested and exercisable
if Ladenburg terminates Messrs. Rosenberg and Malamed without cause, Messrs. Rosenberg and
Malamed terminate their employment with good reason, both Messrs. Rosenberg and Malamed die or
become disabled, or if we undergo a change of control.
On October 18, 2006, we consummated the transactions contemplated by an agreement and plan of
merger, dated as of September 6, 2006, with Telluride Acquisition, Inc., our wholly-owned
subsidiary, Telluride Holdings, Inc. and each of James S. Cassel, Scott Salpeter and Barry Steiner,
the stockholders of Telluride Holdings. Telluride Holdings is the parent of Capitalink, L.C., a
Miami-based investment banking firm which provides services to middle-market and emerging growth
companies. Pursuant to the merger agreement, Telluride Holdings merged with and into Telluride
Acquisition, with Telluride Acquisition continuing as the surviving company. In exchange for all
the capital stock of Telluride Holdings, we paid Messrs. Cassel, Salpeter and Steiner $1,000,000 in
cash and issued to them (i) 4,000,000 shares of our common stock and (ii) ten-year warrants to
purchase 2,900,000 shares of our common stock at an exercise price of $0.96 per share. Warrants to
purchase 957,000 shares of our common stock are immediately exercisable and the remaining warrants
will become immediately exercisable upon their release
20
from escrow as described below. In connection with the merger, Ladenburg entered into three-year
employment agreements with each of Messrs. Cassel, Salpeter and Steiner. Mr. Cassel will serve as
Vice Chairman, Senior Managing Director and Head of Investment Banking of Ladenburg, and each of
Messrs. Salpeter and Steiner will serve as Managing Directors Investment Banking of Ladenburg.
Of the consideration issued to Messrs. Cassel, Salpeter and Steiner, (x) 2,666,666 of the shares,
(y) warrants to purchase 1,943,000 shares of common stock and (z) $666,666.67 in cash has been
placed in escrow. One-half of the escrow amount will be released to the stockholders on June 3,
2007 and one-half of the escrow amount will be released to the stockholders on January 18, 2008;
provided, however, that (i) if any of such stockholders employment is terminated by Ladenburg
without cause, or by the stockholder for good reason, or upon his death or disability, or if we
undergo a change of control, then such stockholders pro rata portion of the escrow amount will be
released to him; and (ii) if any of such stockholders employment is terminated for any reason
other than as a result of an event set forth in the preceding clause, then such stockholders pro
rata portion of the escrow amount will be returned to us.
Change in Location
In October 2006, we relocated our corporate headquarters from New York City to Miami, Florida.
We continue to maintain Ladenburgs investment banking, asset management and institutional and
retail securities brokerage business in New York City.
Private Placement Offering
On November 30, 2005, we completed a private equity offering and received gross proceeds of
approximately $6,221 (representing 13,824,331 shares at $0.45 per share) from various investors
unrelated to us and also received binding subscriptions for aggregate proceeds of approximately
$3,779 (representing 8,397,891 shares at $0.45 per share) from certain of our affiliates and
persons with direct or indirect relationships to us. Following approval by our shareholders and
the American Stock Exchange, on April 27, 2006, we closed on the remaining portion of our private
equity offering, thereby raising an aggregate of $10,000.
Proceeds from Sale of NYSE Seat
As of December 31, 2005, Ladenburg owned one membership on the New York Stock Exchange
(NYSE). Ladenburg has accounted for our investment in this membership at a cost of $868, in
accordance with industry practice. On April 20, 2005, the NYSE and Archipelago Holdings, Inc.
entered into a definitive merger agreement, as amended and restated on July 20, 2005 (as so
amended, the NYSE Merger Agreement), pursuant to which Archipelago and NYSE agreed to combine
their businesses and become wholly-owned subsidiaries of NYSE Group, Inc. (NYSE Group), a
newly-created, for-profit and publicly-traded holding company (collectively, the NYSE Merger).
On March 7, 2006, the NYSE Merger was consummated, and each NYSE membership became entitled to
receive in exchange for the NYSE membership $300 in cash, plus 80,177 shares of NYSE Group common
stock. In addition, immediately prior to the consummation of the NYSE Merger, the NYSE announced a
permitted dividend to be paid to each NYSE membership in the amount of approximately $71, which
was equivalent to the memberships pro rata portion of the NYSEs excess cash, as defined in the
NYSE Merger Agreement. We received the permitted dividend and the merger consideration relating to
our NYSE membership in March 2006.
As a result of the NYSE Merger, Ladenburgs NYSE membership was converted into $371 in cash
(including the permitted dividend) and 80,177 shares of NYSE Group common stock. The shares of
NYSE Group common stock received in the NYSE Merger are subject to a three-year restriction on
transfer. The restriction will be removed in three equal installments on each of March 7, 2007,
2008 and 2009, unless the restrictions are removed earlier by the NYSE Group in its sole
discretion. We have accounted for the investment in the NYSE Group restricted common stock at the
estimated fair value with changes in fair value reflected in operations. The shares were valued at
a discount from the published market value as a result of the transfer restrictions.
Sale of NYSE Group Shares
On May 5, 2006, Ladenburg participated in a secondary underwriting of its restricted NYSE
Group common stock and sold 51,900 restricted shares for an aggregate amount of $3,128, or average
net proceeds of $60.27 per share, which was $440 less than the carrying value of such shares.
After the sale, Ladenburgs investment in NYSE Group common shares consisted of 1,552 shares restricted through March 7,
2008 and 26,725 shares restricted through March 7, 2009.
21
On June 20, 2006, Ladenburg transferred the 28,277 remaining restricted shares to us at the
estimated fair value at such date, of $1,228. We account for restricted investments at cost,
adjusted for other than temporary impairment.
Included in revenues for the nine months ended September 30, 2006 is a gain of $4,859 on the
merger transaction, representing the difference between the estimated fair value of consideration
received on the merger of $5,727 and the carrying value of our membership of $868, and a realized
and unrealized loss of $1,001 consisting of a realized loss on the sale of 51,900 shares of $440
and an unrealized loss of $561 representing the decline in the fair market value of the NYSE Group
restricted common shares on June 20, 2006 as compared to March 7, 2006.
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 Ladenburgs 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 primary clearing broker, as Ladenburg has
agreed to indemnify its primary 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 financial consultants, of $26 and $14 for the nine months ended
September 30, 2006 and 2005, respectively.
Customer Claims, Litigation and Regulatory Matters. In the normal course of business, our
operating subsidiaries have been and continue to be the subject of numerous civil actions and
arbitrations arising out of customer complaints relating to our activities as a broker-dealer, as
an employer and as a result of other business activities. In general, the cases involve various
allegations that our employees had mishandled customer accounts. Due to the uncertain nature of
litigation in general, we are unable to estimate a range of possible loss related to lawsuits filed
against us, but based on our historical experience and consultation with counsel, we typically
reserve an amount we believe will be sufficient to cover any damages assessed against us. We have
accrued approximately $622 and $1,958 for potential arbitration and lawsuit losses as of September
30, 2006 and December 31, 2005, 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, our operating income would be reduced. Such costs may have a
material adverse effect on our future financial position, results of operations or liquidity.
Exit or Disposal Activities. Under SFAS No. 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.
Fair Value. Securities owned and securities sold, but 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.
22
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.
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
timing 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 temporary differences are expected to be recovered or settled.
Deferred tax amounts as of September 30, 2006, which consist principally of the tax benefit of net
operating loss carryforwards and accrued expenses, were $25,256. After consideration of all the
evidence, both positive and negative, especially the fact that we have sustained recurring
operating losses in 2002 through 2005, we have determined that a valuation allowance at September
30, 2006 was necessary to fully offset the deferred tax assets based on the likelihood of future
realization. At September 30, 2006, we had net operating loss carryforwards of approximately
$51,721, expiring in various years from 2015 through 2026. Our ability to use such carryforwards
to reduce future taxable income may be subject to limitations attributable to equity transactions
in March 2005 (see Liquidity and Capital Resources) that may have resulted in a change of
ownership as defined in Internal Revenue Code Section 382.
Expense Recognition of Employee Stock Options. In December 2004, the Financial Accounting
Standards Board issued Statement No. 123R, Shared-Based Payment (SFAS No. 123R), which requires
companies to measure and recognize compensation expense for all stock-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. That cost will be recognized as
compensation expense over the service period, which would normally be the vesting period. The
effective date of SFAS No. 123R for us was January 1, 2006. As permitted by SFAS No. 123 through
December 31, 2005, we accounted for share-based payments to employees using APB Opinion No. 25s
intrinsic value method and, as such, recognize no compensation cost for employee stock options
unless options granted have an exercise price below the market value on the date of grant.
Effective January 1, 2006, non-cash compensation expense relating to stock options is calculated by
using the Black-Scholes option pricing model, amortizing the value calculated over the vesting
period and applying a forfeiture percentage as estimated by us, using historical information.
Results of Operations
Three months ended September 30, 2006 versus three months ended September 30, 2005
Our net income for the three months ended September 30, 2006 was $570, compared to a net loss
of $1,155 for the three months ended September 30, 2005. The net income for the 2006 period
includes $303 of non-cash compensation expense. The net loss for the 2005 period includes a
non-cash compensation charge of $215.
Our revenues for the three months ended September 30, 2006 increased by $1,560 to $10,179 from
$8,619 for the three months ended September 30, 2005 primarily as a result of two large
underwritings representing approximately one-half, of our revenue for
the period, that we were either the lead or
co-manager in the 2006 period offset by a decrease in commissions of $1,891.
Our expenses for the three months ended September 30, 2006 decreased by $165 to
$9,595 from $9,760 for the three months ended September 30, 2005 primarily as a result of decreased
rent and occupancy of $220 and decreased compensation and benefits of $156 offset by an increase of
$300 in professional services in the 2006 period.
23
The $1,891 (39.4%) decrease in commission income primarily resulted from a reduced level of
activity in the retail market for the 2006 period.
The $2,206 (279.2%) increase in net principal transactions was primarily the result of sales
credits from the two large underwritings, where we were either the lead or co-manager in the 2006
period.
The $929 (66.1%) increase in investment banking fees was primarily the result of the two large
underwritings, where we were either the lead or co-manager in the 2006 period.
The $234 (58.2%) increase in investment advisory fees was due to an increase in assets under
management, primarily relating to customers associated with employees we hired in the second and
third quarter of 2005.
The $300 (59.8%) increase in professional services expense was primarily due to audit and
consulting fees related to our compliance with Sarbanes-Oxley Section 404 which is effective for us
as of December 31, 2006.
The $220 (34.2%) decrease in rent and occupancy expense was primarily due to the sublease for
the 34th floor of 590 Madison Avenue, offset by the expense for new office space at 153 East
53rd Street.
The $156 (2.4%) decrease in compensation and benefits is primarily due to a decrease in
salaried employees offset by an increase in producers compensation which is attributed to an
increase in principal transactions, advisory fees and investment banking fees.
Income tax expense was $14 and $14 for the three months ended September 30, 2006 and 2005,
respectively, representing state and local income tax. After consideration of all the evidence,
both positive and negative, especially the fact that we have sustained operating losses during 2002
through 2005, management determined that a valuation allowance at September 30, 2006 was necessary
to fully offset the deferred tax assets based on the likelihood of future realization. The income
tax rate for the 2006 and 2005 periods does not bear a customary relationship to effective tax
rates as a result of unrecognized tax benefit related to net operating losses, the change in
valuation allowances, state and local income taxes and permanent differences.
Nine months ended September 30, 2006 versus nine months ended September 30, 2005
Our net income for the nine months ended September 30, 2006 was $3,977 compared to a net loss
of $26,184 for the nine months ended September 30, 2005. The net income for the 2006 period
includes a $4,859 gain from the NYSE Merger, a $440 realized loss from the sale of 51,900 NYSE
Group shares and $561 of unrealized losses on the NYSE Group shares. In addition, $1,444 of
non-cash compensation expense is included in the 2006 net income. The net loss for the 2005 period
includes $19,359 of non-cash debt conversion expense and $481 of non-cash compensation expense.
Our revenues for the nine months ended September 30, 2006 increased by $11,244 to $32,430 from
$21,186 for the nine months ended September 30, 2005 primarily as a result of the $4,859 gain on
the exchange of our NYSE membership in the NYSE Merger offset by realized and unrealized loss of
$1,001. The remaining increase in revenue of $7,386 in the 2006 period was primarily due to
increased principal transactions of $3,644 and increased syndications and underwriting fees of
$1,527.
Our expenses for the nine months ended September 30, 2006 decreased by $18,930 to
$28,400 from $47,330 for the nine months ended September 30, 2005 primarily as a result of the
$19,359 debt conversion expense in the 2005 period. Adjusted for the debt conversion expense, our
expenses for the 2006 period increased by $429, reflecting increased compensation and benefits of
$1,737 and non-cash compensation of $963, offset by reduced other expenses of $996, professional
services of $712 and rent and occupancy of $441.
The $3,644 (190.5%) increase in net principal transactions is primarily the result of a $3,578
increase in sales credits from underwritings and $340 of net trading profits generated by a
proprietary trader that we hired subsequent to the 2005 period.
The $1,527 (465.5%) increase in syndications and underwritings was primarily the result of an
increase in the number of underwriting transactions in the 2006 period.
24
The $1,107 (152.7%) increase in investment advisory fees was due to an increase in assets
under management, primarily relating to customers associated with the employees we hired in the
second and third quarters of 2005.
The $1,737 (10.6%) increase in compensation and benefits expense was primarily due to an
increase in producers compensation as a result the net increase in revenues, offset by a reduction
in salaries due to layoffs in December 2005.
The $963 (200.2%) increase in non-cash compensation is primarily a result of a) the
recognition of expense attributable to the sale of our common stock to newly hired employees at
prices below market value at the time of sale and b) compensation expense of $445 pursuant to SFAS
No. 123R, relating to stock options, which became effective in the 2006 period.
The $996 (28.4%) decrease in other expenses is primarily due to a decrease in settlements
expense of $100 in the 2006 period compared to $1,085 in the 2005 period.
Income tax expense was $53 and $40 for the nine months ended September 30, 2006 and 2005,
respectively. After consideration of all the evidence, both positive and negative, especially the
fact we have sustained operating losses during 2002 through 2005, management determined that a
valuation allowance at September 30, 2006 was necessary to fully offset the deferred tax assets
based on the likelihood of future realization. The income tax rate for the 2006 and 2005 periods
does not bear a customary relationship to effective tax rates as a result of tax benefit related to
unrecognized net operating losses, the change in valuation allowances, state and local income taxes
and permanent differences.
Liquidity and Capital Resources
Approximately 80.6% of our total assets consist of cash and cash equivalents,
securities owned and receivable from clearing broker, all of which fluctuate depending upon the
levels of customer business and trading activity. Receivables from broker-dealers, which are
primarily from our primary clearing broker, turn over rapidly. As a securities dealer, we may
carry significant levels of securities inventories to meet customer needs. 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. At September 30, 2006, Ladenburgs
regulatory net capital, as defined, was $15,305, which exceeded its minimum capital requirement of
$250 by $15,055. 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 require the intensive use of capital, such as underwriting and trading activities,
and also could restrict our ability to withdraw capital from it, which in turn, could limit our
ability to pay dividends and repay and service our debt. 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 sources of liquidity have been from the sale of our securities and financing activities.
Net cash used in operating activities for the nine months ended September 30, 2006 was $6,615
as compared to $6,026 for the 2005 period.
Net cash used in investing activities amounted to $335 and $233 for the nine months ended
September 30, 2006 and 2005, respectively. These investing activities relate principally to
leasehold improvements and enhancements to computer equipment.
There was $4,154 of cash provided by financing activities for the nine months ended September
30, 2006, reflecting $3,676 of cash provided by our private equity offering, $215 provided by the
issuance of our common stock through our Employee Stock Purchase Plan, and $334 provided by the
exercise of stock options, net of an
25
increase in restricted assets of $70. There was $10,315 of cash provided by financing activities
in the 2005 period, primarily representing $5,169 from the issuance of our common stock, $3,500
from the issuance of promissory notes and $2,803 from our private equity offering, net of $1,155
used to repurchase common stock.
We are obligated under several non-cancellable lease agreements for office space, which
provide for minimum lease payments, net of lease abatement and exclusive of escalation charges, of
$1,421 in 2006 and approximately $5,373 per year until 2015. In addition, one of the leases
obligates us to occupy additional space at the landlords option, which may result in aggregate
additional lease payments of up to $701 through June 2015.
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 LLC
(New Valley), Berliner Effektengesellschaft AG (Berliner) and Frost-Nevada Limited Partnership
(which was subsequently assigned to Frost-Nevada Investments Trust (Frost Trust)). The $10,000
principal amount of notes issued to New Valley and Berliner, the former stockholders of Ladenburg,
bore interest at 7.5% per annum, and the $10,000 principal amount of the note issued to
Frost-Nevada bore interest at 8.5% per annum. The notes were convertible into a total of
11,296,746 shares of our common stock and secured by a pledge of the stock of Ladenburg.
In November 2004, we entered into an amended debt conversion agreement with Frost Trust and
New Valley to convert their notes, with an aggregate principal amount of $18,010, together with
accrued interest, into our common stock. Pursuant to the conversion agreement, the conversion
price of notes held by Frost Trust was reduced from the prior conversion price of $1.54 to $0.40
per share, and the conversion price of the notes held by New Valley was reduced from the prior
conversion price of $2.08 to $0.50 per share.
The debt conversion transaction was approved by our shareholders at our annual shareholders
meeting held on January 12, 2005 and closed on March 11, 2005. As a result, approximately $22,699
of principal and accrued interest was converted into 51,778,678 shares of our common stock, for an
average conversion price of approximately $0.44 per share. Although for accounting purposes, we
recorded a pre-tax charge of approximately $19,359 upon the closing of this transaction, reflecting
the expense attributable to the reduction in the conversion price of the notes to be converted, the
net effect on our balance sheet was an increase to shareholders equity of approximately $22,699
(without giving effect to any sale of common stock related to the private financing). As part of
the debt conversion agreement, each of Frost Trust and New Valley purchased $5,000 of our common
stock at $0.45 per share, resulting in an additional increase to our shareholders equity of
$10,000.
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. As scheduled, in
November 2003, one of the loans consisting of $1,500 of principal, together with accrued interest
of approximately $90, was forgiven, in November 2004, $667 of principal, together with accrued
interest of approximately $54, was forgiven and in November 2005, $667 of principal, together with
accrued interest of approximately $97, was forgiven. The balance of the remaining loan, consisting
of $666 of principal, is scheduled to be forgiven in November 2006. Accrued interest on this loan
as of September 30, 2006 was $127. Upon the forgiveness of the Clearing Loans, the forgiven amount
is accounted for as other revenues. However, if the clearing agreement is terminated for any
reason prior to the loan maturity date, the loan, less any amount that has been forgiven through
the date of the termination, plus interest, must be repaid on demand.
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.
We borrowed $1,750 from New Valley and $1,750 from Frost Trust in 2004 and an additional
$1,750 from each of them in the first quarter of 2005. These notes, together with accrued
interest, payable at 2% above the prime
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rate, were delivered for cancellation in March 2005 as payment, along with $2,890 in cash, for New
Valleys and Frost Trusts purchase of $10,000 of our common stock.
In the normal course of business, our operating subsidiaries have been and continue to be the
subject of numerous civil actions and arbitrations arising out of customer complaints relating to
our activities as a broker-dealer, as an employer and as a result of other business activities. In
general, the cases involve various allegations that our employees had mishandled customer accounts.
We believe that, based on our historical experience and the reserves established by us, the
resolution of the claims presently pending will not have a material adverse effect on our financial
condition. However, although we typically reserve an amount we believe will be sufficient to cover
any damages assessed against us, we have in the past been assessed damages that exceeded our
reserves. If we misjudged the amount of damages that may be assessed against us from pending or
threatened claims, or if we are unable to adequately estimate the amount of damages that will be
assessed against us from claims that arise in the future and reserve accordingly, our financial
condition may be materially adversely affected.
Our liquidity position continues to be adversely affected by our inability in recent years to
generate cash from operations. Accordingly, we have been forced to cut expenses as necessary. We
have implemented cost-cutting procedures throughout our operations, including decreasing our total
number of employees and relocating our New York City and Boca Raton, Florida offices to more
efficient and less expensive office space within the same vicinity as the previous locations. At
September 30, 2006 we had 160 employees. After reviewing our current operations and financial
position, we believe we have adequate cash and regulatory capital to fund our current level of
operating activities through September 30, 2007.
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 current and future business needs as well as regulatory capital requirements of our
broker-dealer subsidiary. If, based on these reviews, it is determined that we require additional
funds to support our liquidity and capital base or to grow our business, we would seek to raise
additional capital through available sources, including through borrowing additional funds on a
short-term basis from our shareholders, clearing broker or other parties, although there can be no
assurance such funding would be available. Additionally, we may seek to raise money through a
private placement, a rights offering or other type of financing. If we are 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, 2006, the fair market value
of our inventories was $193 in long positions and $5 in short positions which was not material to
the Companys consolidated financial position.
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 Managements
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
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Factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005 filed
with the Securities and Exchange Commission and under Item 1A of Part II of this quarterly report
on Form 10-Q important factors that could cause actual results to differ materially from those
contained in any forward-looking statement made by or on behalf of us.
Results actually achieved may differ materially from expected results included in these
forward-looking statements as a result of these or other factors. Due to such uncertainties and
risks, readers are cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date on which such statements are made. We do not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of us.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption Managements 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 Commissions 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.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 7 to our condensed consolidated financial statements included in Part I, Item 1
of this Report.
Item 1A. RISK FACTORS
The following are material changes from the risk factors set forth in Item 1A, Risk
Factors, of our Annual Report or Form 10-K for the year ended December 31, 2005. Please also
refer to that section for additional disclosures regarding the risks and uncertainties related
to our business.
We may be unable to successfully integrate acquired businesses into our existing business and operations.
On
September 11, 2006, Ladenburg acquired substantially all of the securities brokerage accounts
and registered representatives and employees of BroadWall Capital LLC. On October 18, 2006, we
acquired Telluride Holdings, Inc. and its operating subsidiary, Capitalink LC. We may
experience difficulty integrating the operations of these entities into our existing business
and operations. Furthermore, we may not be able retain all of the employees we acquired as a
result of these transactions. If we are unable to effectively address these risks, we may be
required to restructure the acquired business or write-off the value of some or all of the
assets of the acquired business. Moreover, although we have no specific plans to do so at
this time, we may acquire one or more businesses in the future. If we are unable to
successfully integrate such businesses into our existing business and operations in the future,
it could have a material adverse effect on our results of operations.
A substantial portion of our revenue for any period may result from a limited number of transactions.
A large part of our revenue for any period may be derived from a limited number of
underwritings in which we serve as either the lead or co-manager. We cannot assure you that we
will continue to serve as lead or co-manager of similar underwritings in the future. If we are
not able to do so, our revenue may significantly decrease and our results of operations may be
adversely affected.
We may experience significant fluctuations in our quarterly operating results due to the nature of our
business and therefore may fail to meet profitability expectations.
Our revenue and operating results may fluctuate from quarter to quarter and from year to
year due to a combination of factors, including the level of underwritings and advisory
transactions completed by us and the level of fees we receive from those underwritings and
transactions. Accordingly, our operating results may fluctuate significantly due to an
increased or decreased number of transactions in any particular quarter or year.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Other than as reported on Current Reports on Form 8-K filed during the quarter ended
September 30, 2006, no securities of ours that were not registered under the Securities Act of
1933 have been issued or sold by us during such quarter.
Item 6. EXHIBITS
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31.1
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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. |
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31.2
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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. |
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32.1
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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. |
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32.2
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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. |
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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.
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LADENBURG THALMANN FINANCIAL SERVICES INC.
(Registrant)
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Date: November 14, 2006 |
By: |
/s/ Diane Chillemi
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Diane Chillemi |
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Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer) |
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