Ladenburg Thalmann Financial Services
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
Commission File Number 1-15799
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Exact Name Of Registrant As Specified In Its Charter)
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Florida
(State or other jurisdiction of
incorporation or organization)
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65-0701248
(I.R.S. Employer
Identification Number) |
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4400 Biscayne Boulevard, 12th Floor
Miami, Florida
(Address of principal executive offices)
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33137
(Zip Code) |
(212) 409-2000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on |
Title of each class |
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which registered |
Common Stock, par value $.0001 per share
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American Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes [ ] No [X]
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X]
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-K is not contained herein, and will not be contained, to the best of the Registrants
knowledge, in definitive proxy or information statement incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ X ]
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 [ ] Accelerated filer [ X ]
Non-accelerated filer [ ]
As of June 30, 2006 (the last business day of the Registrants most recently completed second
fiscal quarter), the aggregate market value of the Registrants Common Stock (based on the closing
price on the American Stock Exchange on that date) held by non-affiliates of the Registrant was
approximately $78,000,000.
As of March 15, 2007, there were 157,007,938 shares of the Registrants Common Stock
outstanding.
Documents Incorporated by Reference:
Part III (Items 10, 11, 12, 13 and 14) from the definitive Proxy Statement for the 2007 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission no later than 120
days after the end of the Registrants fiscal year covered by this report.
LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K
T A B L E O F C O N T E N T S
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PART I
ITEM 1. BUSINESS.
General
We are engaged in retail and institutional securities brokerage, investment banking services,
asset management services and investment activities through our principal operating subsidiary,
Ladenburg Thalmann & Co. Inc. (Ladenburg). We are committed to establishing a significant
presence in the financial services industry by meeting the varying investment needs of our
corporate, institutional and retail clients.
Ladenburg is a full service broker-dealer that has been a member of the New York Stock
Exchange (NYSE) since 1879. It provides its services principally for middle market and emerging
growth companies and high net worth individuals through a coordinated effort among corporate
finance, capital markets, investment management, brokerage and trading professionals. Ladenburg is
subject to regulation by, among others, the Securities and Exchange Commission (SEC), the NYSE
and the National Association of Securities Dealers, Inc. (NASD) and is a member of the Securities
Investor Protection Corporation (SIPC). Ladenburg had approximately 114 registered
representatives and 58 other full time employees at December 31, 2006. Its private client services
and institutional sales departments serve approximately 60,000 accounts nationwide and its asset
management area provides investment management and financial planning services to numerous
individuals and institutions.
We were incorporated under the laws of the State of Florida in February 1996. Ladenburg was
incorporated under the laws of the State of Delaware in December 1971 and became our wholly-owned
subsidiary in May 2001. Our principal executive offices are located at 4400 Biscayne Boulevard,
12th Floor, Miami, Florida 33137. Ladenburgs principal executive officers are located
at 153 East 53rd Street, New York, New York 10022. Both of our telephone numbers are
(212) 409-2000. Ladenburg has branch offices located in Melville, New York, Miami and Boca Raton,
Florida, Los Angeles, California, New York, New York, Princeton, New Jersey and Lincolnshire,
Illinois.
Ladenburg maintains a website located at www.ladenburg.com. Our corporate filings, including
our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form
8-K, our proxy statements and reports filed by our officers and directors under Section 16(a) of
the Securities Exchange Act, and any amendments to those filings, are available, free of charge, on
Ladenburgs website as soon as reasonably practicable after we electronically file such material
with the SEC. We do not intend for information contained in our website to be a part of this
Annual Report on Form 10-K.
Recent Developments
Acquisitions
On September 11, 2006, Ladenburg acquired substantially all of the securities brokerage
accounts and registered representatives and employees of BroadWall Capital LLC (BroadWall), a
boutique broker-dealer located in New York City, which caters to both institutions and private
clients.
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
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Holdings. Telluride Holdings is a Florida holding company that operates principally through
its subsidiary, Capitalink, L.C., an investment banking firm focused on providing 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.
We continue to explore opportunities to grow our businesses, including through potential
acquisitions of other securities firms, both domestically and internationally. These acquisitions
may involve payments of material amounts of cash or debt or the issuance of significant amounts of
our equity securities, which may be dilutive to our existing shareholders. We cannot assure you
that we will be able to consummate any such potential acquisitions on terms acceptable to us or, if
we do, that any acquired business will be profitable. There is also a risk that we will not be
able to successfully integrate acquired businesses into our existing business and operations.
Debt Exchange
On February 13, 2007, we entered into a Debt Exchange Agreement with New Valley LLC (New
Valley) to retire our remaining outstanding indebtedness. New Valley holds $5,000,000 principal
amount of promissory notes due March 31, 2007. Pursuant to the agreement, New Valley has agreed to
exchange the principal amount of its notes for shares of our common stock at an exchange price of
$1.80 per share, representing the average closing price of our common stock for the 30 trading days
ending on the date of the agreement. The promissory notes will continue to accrue interest through
the closing of the debt exchange. The accrued interest on the notes, which was approximately
$1,500,000 at December 31, 2006, will be paid in cash at or prior to the closing of the
transaction.
The consummation of the transaction is subject to shareholder approval at our annual meeting
of shareholders, which we anticipate holding during the second quarter of 2007. We expect to
consummate the transaction as soon as practicable once shareholder approval is obtained. Upon
closing, the $5,000,000 principal amount of notes will be exchanged for approximately 2,777,778
shares of our common stock. As a result, New Valleys beneficial ownership of our common stock will
increase from approximately 7.2% to approximately 8.7%.
Retail and Institutional Brokerage Business
A significant percentage of our revenues during the last several years have been generated
from the retail and institutional brokerage business of Ladenburg (60% in 2006, 51.3% in 2005 and
82.0% in 2004). Ladenburgs private client services and institutional sales departments currently
serve approximately a total of 60,000 accounts nationwide. Ladenburg charges commissions to our
individual and institutional clients for executing buy and sell orders of securities on national
and regional exchanges. In addition to traditional commission-based accounts, Ladenburg offers a
non-discretionary fee in lieu of commission program that allows retail clients to trade their
portfolio under an all inclusive wrap fee.
Investment Banking Activities
Investment banking fees generated from the investment banking activities of Ladenburg
represent 16.6%, 14.6% and 4.3% of our total revenues in 2006, 2005 and 2004, respectively. Our
investment banking professionals maintain relationships with businesses, private equity firms,
other financial institutions as well as high net worth individuals. Our bankers provide them with
extensive corporate
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finance and investment banking services. At December 31, 2006, we had
approximately 20 professionals in our investment banking
group, located in Miami, Florida and New York, New York.
In addition to providing general investment banking and corporate finance consulting services,
Ladenburg provides the following services:
Underwriting of public equity and debt offerings. Ladenburg has been active as lead
and co-managing underwriters, general underwriters and/or selling group members in numerous public
equity transactions. Participation as a managing underwriter or in an underwriting syndicate
involves both economic and regulatory risks. An underwriter may incur losses if it is unable to
resell the securities it is committed to purchase. In addition, under the federal securities laws,
other laws and court decisions with respect to underwriters liabilities and limitations on the
indemnification of underwriters by issuers, an underwriter is subject to substantial potential
liability for misstatements or omissions of material facts in prospectuses and other communications
with respect to such offerings. Acting as a managing underwriter increases these risks.
Underwriting commitments constitute a charge against net capital and Ladenburgs ability to make
underwriting commitments may be limited by the requirement that it must at all times be in
compliance with regulations regarding its net capital.
SPAC underwritings. Ladenburgs investment banking area is also actively involved in
underwritings of blank check companies known as Specified Purpose Acquisition Companies (SPACs).
These companies are formed for the purpose of raising funds in an initial public offering, a
significant portion of which is placed in trust, and then acquiring a target business, thereby
making the target business public. In recent years, there has been a surge of activity in this
segment of the market, as it provides an opportunity for smaller, privately held companies to
become public by being acquired by SPACs in lieu of going through the rigorous IPO process.
Ladenburg is a leader in underwriting SPAC offerings, having lead or co-managed over $2 billion of
SPAC offerings, and our professionals provide unique deal structures and a proprietary retail
distribution network that adds value and validity to the offering. Compensation derived from these
underwritings include normal discounts and commissions as well as deferred fees that will be
payable to us only upon the SPACs completion of a business combination. Generally, these fees may
be received within 24 months from the respective date of the offering, or not received at all if no
business combination transactions are consummated during such time period. At December 31, 2006,
we are entitled to $13,400,000 of deferred fees for our SPAC-related transactions, or approximately
$8,200,000 net of expenses. These deferred fees are not included in our revenues, however, until a
business combination is completed by the SPAC and we are paid. Accordingly, if the SPACs from
which we are owed deferred fees are unable to consummate business combinations, we will not be
entitled to receive the deferred fees.
Placement of private debt and equity offerings. Ladenburg has extensive experience in
both the equity and debt capital markets and has developed relationships with private equity firms,
mezzanine, senior debt and other institutional financing sources. Ladenburg undertakes a
process-oriented approach to targeting institutional sources. When applicable, Ladenburg also
works with its clients to target other types of investors, including strategic parties with whom a
synergistic relationship might be formed.
Merger, acquisition, and divestiture advisory services. A merger, acquisition or the
sale of all or part of a business can be a key factor in enhancing a companys success and in
advancing its corporate and/or shareholder objectives. Ladenburg reviews a merger or acquisition
clients individual situation and specific needs and then provides that client with targeted
services to better suit the client. Ladenburg also acts as a financial advisor and assists its
clients with merger and acquisition services in a variety of
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scenarios. Capitalink, L.C., a
subsidiary of ours, is a member of M&A International Inc., the worlds largest M&A alliance with 40
office locations in 35 countries who focus primarily on mid-market acquisitions.
Rendering fairness and solvency opinions. Fairness and solvency opinions are issued
through Ladenburg and Capitalink. Capitalink has developed a proven expertise in the fairness
opinion niche of the market and over the past several years has established an unparalleled
reputation in the issuance of thorough and unbiased fairness and solvency opinions. They have also
been actively involved in rendering fairness opinions for SPACs in connection with their business
combinations.
The objective evidence supplied by a fairness or solvency opinion is often necessary in a
variety of situations, including mergers, acquisitions, restructurings, financings and
privatizations. Given recent regulations and growing concerns regarding potential conflicts of
interest between a company and its shareholders, a fairness opinion serves to mitigate the possible
risks and associated litigation. A fairness opinion from a qualified financial advisor is one of
the most effective risk management tools available to assure sound business judgment has been
exercised in varying types of corporate transactions.
Ladenburg and Capitalink provide both fairness and solvency opinions and analyses to boards of
directors, independent committees of boards of directors and shareholders. In addition, the firm
provides objective advice on the valuation of businesses and securities in connection with
transactions involving mergers, acquisitions, leveraged buyouts and restructurings, going-private
transactions and certain other market activities.
Due to the increased scrutiny and regulation arising from inherent conflicts of interest where
investment banks serve as a clients exclusive financial advisor and assist in both the sale of a
company and provide a fairness opinion on the transaction, there has been an increased need for
second fairness opinions from an independent party. Capitalink has experience in issuing these
second opinions and provides unbiased and independent evaluations to assist in these situations.
Financial valuations. The value of a business can become a matter of concern in a
variety of transactions, including but not limited to sale or purchase transactions and
recapitalizations. Valuations are also integral in tax planning and for accounting compliance.
Capitalink has extensive valuation expertise. Capitalinks professionals are uniquely qualified to
determine the value of private companies, closely-held business interests, limited partnership
interests, intellectual property and other intangible assets and corporate securities with
marketability concerns.
Investment Activities
Ladenburg may from time to time seek to realize investment gains by purchasing, selling and
holding securities for its own account on a daily basis. Ladenburg may also from time to time
engage for its own account in the arbitrage of securities. We are required to commit the capital
necessary for use in these investment activities. The amount of capital committed at any
particular time will vary according to market, economic and financial factors, including the other
aspects of our business. Additionally, in connection with our investment banking activities,
Ladenburg frequently receives warrants that entitle it to purchase securities of the corporate
issuers for which it raises capital or provides advisory services.
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Ladenburg Thalmann Asset Management
Ladenburg provides its customers with a broad range of wealth management services in order to
help them manage their financial investments. Its subsidiary, Ladenburg Thalmann Asset Management
Inc. (LTAM), a registered investment adviser, provides clients with discretionary portfolio
management and financial planning, access to money managers and investment funds.
Wealth Management
LTAM offers investment management and planning services primarily to high net-worth
individuals and corporations and institutional investors such as private equity, hedge funds and
funds of funds. A review is performed for each client that entails focusing on the clients
tolerance for risk, capital growth expectations, and current financial position and income
requirements. The review also analyzes whether the client may benefit from, among other services,
income tax planning, estate and gift tax planning, comprehensive retirement planning and cash flow
analysis.
Ladenburg Asset Management Program
LTAM offers its customers the Ladenburg Asset Management Program to assist them in achieving
their desired investment objectives through centralized management of mutual fund and
exchange-traded fund portfolios based on asset allocation models. Features of the program include
active rebalancing at the asset class and security level, minimum account balance, risk analysis,
customized investment policy statements and comprehensive performance reporting.
Alternative Investments
LTAM provides high net worth clients and institutional investors the opportunity to invest in
proprietary and third party alternative investments. These include, but are not limited to, hedge
funds, funds of funds, private equity, venture capital and real estate.
Private Investment Management
LTAM offers a few specialized programs to access professional money managers. The Private
Investment Management program allows internal managers to provide portfolio services to clients on
a discretionary basis with specific styles of investing for an annual asset-based fee. The Private
Investment Management Program Accredited (PIMA) is offered for accredited investors. The internal
PIMA managers manage certain accounts using the same investment strategy used to manage LTAMs
private funds and other investment strategies involving short-selling and use of leverage. In
addition to the annual asset-based fee, certain customers are also charged an incentive fee, if
earned, at the end of each calendar year.
LTAMs Investor Consulting Services is designed to provide clients with access to proven
independent managers usually only available to large institutions, across the spectrum of major
asset classes. LTAM performs due diligence on the managers to ensure that, by maintaining them as
a recommended manager, they may represent a suitable solution for the investor.
Retirement Plan Sponsor Services
LTAM provides investment consulting services to sponsors of certain retirement plans, such as
401(k) plans. These services include: identifying mutual funds for the plan sponsors review and
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selection based on the selection criteria stated in the plans investment policy statement;
assisting in the
planning and coordination of and participating in enrollment and communication meetings; and
providing the plan sponsor a written mutual-fund-by-mutual-fund quarterly performance report for
the purpose of meeting the plan fiduciarys obligation to monitor plan assets. Certain plan
participants may also engage LTAM to manage their plan assets on a discretionary basis.
Research Services
Our research department takes a fresh, critical approach to analyzing primary sources and
developing proprietary research. Many individuals, institutions, portfolio managers and hedge fund
managers, on all levels, have been neglected by brokerage firms ignoring the demands for unbiased
research. Ladenburg provides a superior branded in-depth research product geared only to
action-oriented investment ideas. Our research department focuses on investigating investment
opportunities by utilizing fundamental, technical and quantitative methods to conduct in-depth
analysis. Currently, our research department specializes in small- to mid-cap companies in the
energy sector and on a special situations basis and may expand to additional sectors in the future.
Research is provided on a fee basis to certain institutional accounts. Our research department:
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reviews and analyzes general market conditions and other industry groups; |
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issues written reports on companies, with recommendations on specific
actions to buy, sell or hold; |
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furnishes information to retail and institutional customers; and |
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responds to inquires from customers and account executives. |
Administration, Operations, Securities Transactions Processing and Customer Accounts
Ladenburg does not hold funds or securities for its customers. Instead, it uses the services
of National Financial Services LLC, a Fidelity Investments company, as its clearing agent on a
fully disclosed basis. This clearing agent processes all securities transactions and maintains
customer accounts on a fee basis. Customer accounts are protected through the SIPC for up to
$500,000, of which coverage for cash balances is limited to $100,000. In addition, all customer
accounts are fully protected by an excess securities bond, Excess SIPC, issued by Customer Asset
Protection Company, providing protection for the accounts entire net equity (both cash and
securities). The services of this clearing agent include billing, credit control, and receipt,
custody and delivery of securities. The clearing agent provides operational support necessary to
process, record and maintain securities transactions for Ladenburgs brokerage activities. It
provides these services to Ladenburgs customers at a total cost which we believe is less than it
would cost us to process such transactions on our own. The clearing agent also lends funds to
Ladenburgs customers through the use of margin credit. These loans are made to customers on a
secured basis, with the clearing agent maintaining collateral in the form of saleable securities,
cash or cash equivalents. Ladenburg has agreed to indemnify the clearing broker for losses it may
incur on these credit arrangements.
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Competition
Ladenburg encounters intense competition in all aspects of its business and competes directly
with many other securities firms for clients, as well as registered representatives. Many of its
competitors have significantly greater financial, technical, marketing and other resources than it
does. National retail firms such
as Merrill Lynch, Citigroup Global Markets Inc. and Morgan Stanley dominate the industry.
Ladenburg also competes with numerous regional and local firms. In addition, a number of firms
offer discount brokerage services to retail customers and generally effect transactions at
substantially lower commission rates on an execution only basis, without offering other services
such as investment recommendations and research. Moreover, there is substantial commission
discounting by full-service broker-dealers competing for institutional and retail brokerage
business. A growing number of brokerage firms offer online trading which has further intensified
the competition for brokerage customers. Although Ladenburg offers on-line account access to its
customers to review their account balances and activity, it currently does not offer any online
trading services to its customers. The continued expansion of discount brokerage firms and online
trading could adversely affect the retail business. Other financial institutions, notably
commercial banks and savings and loan associations, offer customers some of the same services and
products presently provided by securities firms. While it is not possible to predict the type and
extent of competing services which banks and other institutions ultimately may offer to customers,
Ladenburg may be adversely affected to the extent those services are offered on a large scale
basis. We try to compete through our advertising and recruiting programs for registered
representatives interested in joining us.
Government Regulation
The securities industry and our business is subject to extensive regulation by the SEC, state
securities regulators and other governmental regulatory authorities. The principal purpose of
these regulations is the protection of customers and the securities markets. The SEC is the
federal agency charged with the administration of the federal securities laws. Much of the
regulation of broker-dealers, however, has been delegated to self-regulatory organizations,
principally the NASD Regulation, Inc., the regulatory arm of the NASD, the NYSE and the Municipal
Securities Rulemaking Board. These self-regulatory organizations adopt rules, subject to approval
by the SEC, which govern its members and conduct periodic examinations of member firms operations.
In November 2006, the NASD and NYSE announced a plan to consolidate their member regulation
operations into a combined organization that will be the sole U.S. private-sector provider of
member firm regulation for securities firms doing business with the public. The plan is intended
to remove duplicative and inconsistent regulation and overlapping jurisdiction among the regulatory
bodies. However, the merger is subject to approval by the SEC and there is no assurance that it
will be approved or if it is, when it might happen. Accordingly, we are still required to comply
with each bodies regulations.
Securities firms are also subject to regulation by state securities commissions in the states
in which they are registered. Ladenburg is a registered broker-dealer with the SEC and a member
firm of the NYSE. It is licensed to conduct activities as a broker-dealer in all 50 states.
Ladenburg Thalmann Europe, Ltd., a wholly-owned subsidiary of Ladenburg, is an authorized
securities broker regulated by the Financial Services Authority of the United Kingdom and, through
the European Communitys passporting provisions, is authorized to conduct business in all of the
member countries of the European Community.
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The regulations to which broker-dealers are subject cover all aspects of the securities
industry, including:
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sales methods and supervision; |
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trading practices among broker-dealers; |
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use and safekeeping of customers funds and securities; |
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capital structure of securities firms; |
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record keeping; and |
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the conduct of directors, officers and employees. |
Additional legislation, changes in rules promulgated by the SEC and by self-regulatory bodies
or changes in the interpretation or enforcement of existing laws and rules often directly affect
the method of operation and profitability of broker-dealers. The SEC and the self-regulatory
bodies may conduct administrative proceedings which can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers, employees or registered representatives.
Net Capital Requirements
As a registered broker-dealer and member of the NYSE, Ladenburg is subject to the SECs net
capital rule, which is designed to measure the general financial integrity and liquidity of a
broker-dealer. Net capital is defined as the net worth of a broker-dealer subject to certain
adjustments. In computing net capital, various adjustments are made to net worth which exclude
assets not readily convertible into cash. Additionally, the regulations require that certain
assets, such as a broker-dealers position in securities, be valued in a conservative manner so as
to avoid over-inflation of the broker-dealers net capital. We compute net capital under the
alternate method permitted by the net capital rule. Under this method, Ladenburg is required to
maintain net capital equal to $250,000. Compliance with the net capital rule limits those
operations of broker-dealers which require the intensive use of their capital, such as underwriting
commitments and principal trading activities. We may from time to time enter into temporary
subordinated loan arrangements to borrow funds on a short-term basis from our shareholders and
clearing broker in order to supplement the capital of our broker-dealer to facilitate underwriting
transactions.
In addition to the above requirements, funds invested as equity capital may not be withdrawn,
nor may any unsecured advances or loans be made to any stockholder of a registered broker-dealer,
if, after giving effect to the withdrawal, advance or loan and to any other withdrawal, advance or
loan as well as to any scheduled payments of subordinated debt which are scheduled to occur within
six months, the net capital of the broker-dealer would fall below 120% of the minimum dollar amount
of net capital required or the ratio of aggregate indebtedness to net capital would exceed 10 to 1.
Further, any funds invested in the form of subordinated debt generally must be invested for a
minimum term of one year and repayment of such debt may be suspended if the broker-dealer fails to
maintain certain minimum net capital levels. For example, scheduled payments of subordinated debt
are suspended in the event that the ratio of aggregate indebtedness to net capital of the
broker-dealer would exceed 12 to 1 or its net capital would be less than 120% of the minimum dollar
amount of net capital required. The net capital rule also prohibits payments
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of dividends,
redemption of stock and the prepayment, or payment in respect of principal or subordinated
indebtedness if net capital, after giving effect to the payment, redemption or repayment, would be
less than the specified percent (120%) of the minimum net capital requirement.
At December 31, 2006, Ladenburg had regulatory net capital of $16,696,000 which exceeded its
minimum net capital requirement, as defined by SECs Uniform Net Capital Rule 15C3-1, of $250,000,
and as defined by the Commodity Futures Trading Commissions Regulation 1.17, of $500,000, by
$16,446,000 and $16,196,000, respectively. Failure to maintain the required net capital may
subject a firm to suspension or
expulsion by the NYSE, the SEC and other regulatory bodies and ultimately may require its
liquidation. Compliance with the net capital rule could limit Ladenburgs operations that require
the intensive use of capital, such as underwriting and trading activities, and also could restrict
our ability to withdraw capital from it, which in turn could limit our ability to pay dividends,
repay debt and redeem or purchase shares of our outstanding capital stock.
Personnel
At December 31, 2006, we had a total of approximately 172 employees, of which 114 are
registered representatives and 58 are other full time employees. These employees are not covered
by a collective bargaining agreement. We consider our relationship with our employees to be good.
ITEM 1A. RISK FACTORS.
You should carefully consider all of the material risks described below regarding our company.
Our business, financial condition or results of operation could be materially adversely affected by
any of these risks.
We have incurred in the past, and may incur in the future, significant operating losses.
Although we had net income for the year ended December 31, 2006, we did incur significant
losses from operations during each of the four years ended December 31, 2005. We cannot assure you
that we will be able to sustain revenue growth, profitability or positive cash flow on either a
quarterly or annual basis. Although we believe that we have adequate cash and regulatory capital to
fund our current level of operating activities through December 31, 2007, if we are unable to
sustain profitability, we may not be financially viable in the future and may have to curtail,
suspend or cease operations.
We may be unable to successfully integrate acquired businesses into our existing business and
operations.
Ladenburg made two acquisitions in 2006. On September 11, 2006, Ladenburg acquired
substantially all of the securities brokerage accounts and registered representatives and employees
of BroadWall Capital. On October 18, 2006, we acquired Telluride Holdings and its operating
subsidiary, Capitalink, L.C. We continue to explore opportunities to grow our businesses, including
through potential acquisitions of other securities firms, both domestically and internationally.
These acquisitions may involve payments of material amounts of cash or debt or the issuance of
significant amounts of our equity securities, which may be dilutive to our existing shareholders.
We may experience difficulty integrating the operations of these entities or any other entities
acquired in the future into our existing business and operations. Furthermore, we may not be able
retain all of the employees we acquire as a result of these transactions. If we are unable to
effectively address these risks, we may be required to restructure the
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acquired businesses or
write-off the value of some or all of the assets of the acquired business. If we are unable to
successfully integrate acquired 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
underwriting 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.
Our revenues may decline if the market for SPAC offerings declines.
A downturn in the market for SPAC transactions could adversely affect our results of
operations. Underwritings for SPAC transactions have been an important source of revenues for us
during 2006 and 2005. SPAC transactions are currently exempt from rules adopted by the SEC to
protect investors of blank check companies, such as Rule 419 under the Securities Act of 1933.
However, the SEC may determine to adopt new rules relating to SPAC transactions which could impact
our ability to successfully underwrite these transactions.
A substantial portion of our underwriting fees is deferred and may not be received by us in certain
situations.
At December 31, 2006, we were owed deferred fees from SPAC underwritings that we participated
in of $13,400,000, or approximately $8,200,000 after expenses. These deferred fees are not
included in our revenues, however, until a business combination is completed by the SPAC and we are
paid. Accordingly, if the SPACs from which we are owed deferred fees are unable to consummate
business combinations, we will not be entitled to receive the deferred fees we are owed. SPACs
face significant competition in consummating business combinations. Since August 2003, based upon
publicly available information, approximately 84 SPACs have completed initial public offerings as
of March 7, 2007. Of these companies, only 19 companies have consummated a business combination,
while 25 other companies have announced they have entered into a definitive agreement for a
business combination, but have not consummated such business combination and four companies have
failed to complete business combinations and have dissolved and returned trust proceeds to their
stockholders. Accordingly, if the SPACs that owe us deferred fees do not consummate business
combinations, we will not receive these fees 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.
11
If we are unable to repay our outstanding indebtedness obligations when due, our operations may be
materially adversely affected.
Currently, we have an aggregate of $5,000,000 principal amount of indebtedness outstanding
owed to our former parent, New Valley, which is due on March 31, 2007. We have entered into an
agreement with New Valley pursuant to which it will exchange the principal amount of indebtedness
for shares of our common stock, subject to approval of our shareholders, and we will pay in cash
the accrued interest on such indebtedness, which was approximately $1,500,000 at December 31, 2006.
If this agreement is not consummated, we may be forced, among other things, to reduce the capital
of Ladenburg to repay this indebtedness which may have an adverse impact on our investment banking
activities.
We are currently subject to extensive securities regulation and the failure to comply with these
regulations could subject us to penalties or sanctions.
The securities industry and our business is subject to extensive regulation by the SEC, state
securities regulators and other governmental regulatory authorities. We are also regulated by
industry self-regulatory organizations, including the NYSE, the NASD and the Municipal Securities
Rulemaking Board. The regulatory environment is also subject to change and we may be adversely
affected as a result of new or revised legislation or regulations imposed by the SEC, other federal
or state governmental regulatory authorities, or self-regulatory organizations. We also may be
adversely affected by changes in the interpretation or enforcement of existing laws and rules by
these governmental authorities and self-regulatory organizations.
Ladenburg is a registered broker-dealer with the SEC and a member firm of the NYSE.
Broker-dealers are subject to regulations which cover all aspects of the securities business,
including:
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sales methods and supervision; |
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trading practices among broker-dealers; |
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use and safekeeping of customers funds and securities; |
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capital structure of securities firms; |
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record keeping; and |
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the conduct of directors, officers and employees. |
Compliance with many of the regulations applicable to us involves a number of risks,
particularly in areas where applicable regulations may be subject to varying interpretation. The
requirements imposed by these regulators are designed to ensure the integrity of the financial
markets and to protect customers and other third parties who deal with us. Consequently, these
regulations often serve to limit our activities, including through net capital, customer protection
and market conduct requirements. Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the NASD Regulation, Inc., the regulatory arm of the
NASD, and the NYSE, which are our primary regulatory agencies. NASD Regulation and the NYSE adopt
rules, subject to approval by the SEC, that govern its members and conducts periodic examinations
of member firms operations. In November 2006, the NASD and NYSE announced a plan to consolidate
their member regulation operations into a combined organization that will be the sole U.S.
private-sector provider of member firm regulation for securities firms doing business with the
public. The plan is intended to remove duplicative and inconsistent regulation and overlapping
jurisdiction among the regulatory bodies. However, the merger is subject to
12
approval by the SEC
and there is no assurance that it will be approved or if it is, when it might happen. Accordingly,
we are still required to comply with each bodies regulations.
If we are found to have violated any applicable regulation, formal administrative or judicial
proceedings may be initiated against us that may result in:
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censure; |
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fine; |
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civil penalties, including treble damages in the case of insider trading violations; |
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the issuance of cease-and-desist orders; |
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the deregistration or suspension of our broker-dealer activities; |
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the suspension or disqualification of our officers or employees; or |
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other adverse consequences. |
The imposition of any of these or other penalties could have a material adverse effect on our
operating results and financial condition.
We may incur significant losses from trading and investment activities due to market fluctuations
and volatility.
We may maintain trading and investment positions in the equity markets. To the extent that we
own assets, i.e., have long positions, in those markets, a downturn in those markets could result
in losses from a decline in the value of those long positions. Conversely, to the extent that we
have sold assets that we do not own, i.e., have short positions, in any of those markets, an upturn
in those markets could expose us to potentially unlimited losses as we attempt to cover our short
positions by acquiring assets in a rising market.
We may from time to time have a trading strategy consisting of holding a long position in one
security and a short position in another security from which we expect to earn revenues based on
changes in the relative value of the two securities. If, however, the relative value of the two
securities changes in a direction or manner that we did not anticipate or against which we are not
hedged, we might realize a loss in those paired positions. In addition, we maintain trading
positions that can be adversely affected by the level of volatility in the financial markets, i.e.,
the degree to which trading prices fluctuate over a particular period, in a particular market,
regardless of market levels.
We may need to raise additional funds in the near future.
Our capital requirements have been adversely affected in past years by our inability to
generate cash from operations. We have been forced to rely on borrowings and proceeds from the sale
of our common stock in order to generate working capital for our operations. Accordingly, we may
need to seek to raise additional capital through other available sources, including through equity
offerings or borrowing additional funds on a short-term basis from third parties, including our
current shareholders and clearing broker. As of December 31, 2006, we had cash and cash equivalents
of approximately $7,000,000. If we
13
are unable to generate cash from operations and are unable to
find other sources of funding, it would have an adverse impact on our liquidity and operations.
We may be prohibited from underwriting securities due to capital limits.
From time to time, our underwriting activities may require that we temporarily receive an
infusion of capital for regulatory purposes. This is predicated on the amount of commitment
Ladenburg makes for each underwriting. In the past, we entered into temporary subordinated loan
arrangements with our current shareholders or clearing firm. Should we no longer be able to receive
such funding from these sources, and if there are no other viable sources available, it would have
an adverse impact on our ability to generate profits,
recruit financial consultants and retain existing customers.
Our expenses may increase due to real estate commitments.
We have ceased using our Madison Avenue (New York City) office space and have subleased the
entire premises to various subtenants. Should any of the sub-tenants not renew or renew for a
sub-rental less than Ladenburgs lease commitments, or not pay their rent for an extended period of
time, it may have a material adverse effect on Ladenburgs financial position and liquidity.
Our business could be adversely affected by a downturn in the financial markets.
As a securities broker-dealer, our business is materially affected by conditions in the
financial markets and economic conditions generally, both in the United States and elsewhere around
the world. Many factors or events could lead to a downturn in the financial markets including war,
terrorism, natural catastrophes and other types of disasters. These types of events could cause
people to begin to lose confidence in the financial markets and their ability to function
effectively. If the financial markets are unable to effectively prepare for these types of events
and ease public concern over their ability to function, our revenues are likely to decline and our
operations will be adversely affected.
Our revenues may decline in adverse market or economic conditions.
Our investment banking revenues, in the form of financial advisory and underwriting fees, are
directly related to the number and size of the transactions in which we participate and therefore
may be adversely affected by any downturn in the securities markets. Additionally, downturn in
market conditions may lead to a decline in the volume of transactions that we execute for our
customers and, therefore, to a decline in the revenues we would otherwise receive from commissions
and spreads. Should these adverse financial and economic conditions appear and persist for any
extended period of time, we will incur a further decline in transactions and revenues that we
receive from commissions and spreads.
We depend on our senior employees and the loss of their services could harm our business.
Our success is dependent in large part upon the services of several of our senior executives
and employees, including those of Ladenburg. We do not maintain and do not intend to obtain key
man insurance on the life of any executive or employee. If our senior executives or employees
terminate their employment with us and we are unable to find suitable replacements in relatively
short periods of time, our operations may be materially and adversely affected.
14
We face significant competition for professional employees.
From time to time, individuals we employ may choose to leave our company to pursue other
opportunities. We have experienced losses of registered representatives, trading and investment
banking professionals in the past, and the level of competition for key personnel remains intense.
We cannot assure you that the loss of key personnel will not occur again in the future. The loss of
a registered representative or a trading or investment banking professional, particularly a senior
professional with a broad range of contacts in an industry, could materially and adversely affect
our operating results.
Our principal shareholders including our directors and officers control a large percentage of our
shares of common stock and can significantly influence our corporate actions.
At the present time, our executive officers, directors and companies that these individuals
are affiliated with beneficially own approximately 38% of our common stock. Accordingly, these
individuals and entities will be able to significantly influence most, if not all, of our corporate
actions, including the election of directors and the appointment of officers. Additionally, this
ownership of our common stock may make it difficult for a third party to acquire control of us,
therefore possibly discouraging third parties from seeking to acquire us. A third party would have
to negotiate any possible transactions with these principal shareholders, and their interests may
be different from the interests of our other shareholders. This may depress the price of our common
stock.
The American Stock Exchange may delist our common stock from quotation on its exchange.
Our common stock is currently quoted on the American Stock Exchange. In order to continue
quotation of our common stock, we must maintain certain financial, distribution and stock price
levels. Generally, we must maintain a minimum amount in shareholders equity (usually between
$2,000,000 and $4,000,000) and a minimum number of public shareholders (usually 300 shareholders).
Additionally, our common stock cannot have what is deemed to be a low selling price as determined
by the Exchange.
If the Exchange delists our common stock from trading on its exchange, we could face
significant material adverse consequences including:
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a limited availability of market quotations for our common stock; |
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a determination that our common stock is a penny stock which will require brokers
trading in our common stock to adhere to more stringent rules and possibly resulting in a
reduced level of trading activity in the secondary trading market for our common stock; |
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a limited amount of news and analyst coverage for our company; and |
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a decreased ability to issue additional securities or obtain additional financing in the future. |
We may lose customers and our revenues may decline due to our lack of online trading service
capability.
A growing number of brokerage firms offer online trading services to their customers in
response to increased customer demand for these services. Currently, we are unable to offer online
trading services, nor do we anticipate having such ability in the near future. Should we offer such
services in the future, the services may not appeal to our current or prospective customers and
these services may not be profitable. Our failure to commence online trading services in the near
future could have a material adverse effect on our business including the loss of our existing
customers to competitors that do offer these services.
15
Additionally, if we commence online trading
services but are unable to attract customers for those services, our revenues will decline.
We rely on one primary clearing broker and the termination of the agreement with this clearing
broker could disrupt our business.
Ladenburg primarily uses one clearing broker to process its securities transactions and
maintain customer accounts on a fee basis. The clearing broker also provides billing services,
extends credit and provides for control and receipt, custody and delivery of securities. Ladenburg
depends on the operational capacity and ability of the clearing broker for the orderly processing
of transactions. In addition, by engaging the processing services of a clearing firm, Ladenburg is
exempt from some capital reserve requirements and
other regulatory requirements imposed by federal and state securities laws. If the clearing
agreement is terminated for any reason, we would be forced to find an alternative clearing firm. We
cannot assure you that we would be able to find an alternative clearing firm on acceptable terms to
us or at all.
Our clearing broker extends credit to our clients and we are liable if the clients do not pay.
Ladenburg permits its clients to purchase securities on a margin basis or sell securities
short, which means that the clearing firm extends credit to the client secured by cash and
securities in the clients account. During periods of volatile markets, the value of the collateral
held by the clearing broker could fall below the amount borrowed by the client. If margin
requirements are not sufficient to cover losses, the clearing broker sells or buys securities at
prevailing market prices, and may incur losses to satisfy client obligations. Ladenburg has agreed
to indemnify the clearing broker for losses it may incur while extending credit to its clients.
We are subject to various risks associated with the securities industry.
As a securities broker-dealer, Ladenburg is subject to uncertainties that are common in the
securities industry. These uncertainties include:
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the volatility of domestic and international financial, bond and stock markets; |
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extensive governmental regulation; |
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litigation; |
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intense competition; |
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substantial fluctuations in the volume and price level of securities; and |
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dependence on the solvency of various third parties. |
As a result, revenues and earnings may vary significantly from quarter to quarter and from year to
year. In periods of low volume, profitability is impaired because certain expenses remain
relatively fixed. Ladenburg is much smaller and has much less capital than many competitors in the
securities industry. In the event of a market downturn, our business could be adversely affected in
many ways. Our revenues are likely to decline in such circumstances and, if we are unable to reduce
expenses at the same pace, our profit margins would erode.
16
Our risk management policies and procedures may leave us exposed to unidentified risks or an
unanticipated level of risk.
The policies and procedures we employ to identify, monitor and manage risks may not be fully
effective. Some methods of risk management are based on the use of observed historical market
behavior. As a result, these methods may not predict future risk exposures, which could be
significantly greater than the historical measures indicate. Other risk management methods depend
on evaluation of information regarding markets, clients or other matters that are publicly
available or otherwise accessible by us. This information may not be accurate, complete, up-to-date
or properly evaluated. Management of operational, legal and regulatory risk requires, among other
things, policies and procedures to properly record and verify a large number of transactions and
events. We cannot assure you that our policies and procedures will effectively
and accurately record and verify this information.
We seek to monitor and control our risk exposure through a variety of separate but
complementary financial, credit, operational and legal reporting systems. We believe that we
effectively evaluate and manage the market, credit and other risks to which we are exposed.
Nonetheless, the effectiveness of our ability to manage risk exposure can never be completely or
accurately predicted or fully assured. For example, unexpectedly large or rapid movements or
disruptions in one or more markets or other unforeseen developments can have a material adverse
effect on our results of operations and financial condition. The consequences of these developments
can include losses due to adverse changes in inventory values, decreases in the liquidity of
trading positions, higher volatility in earnings, increases in our credit risk to customers as well
as to third parties and increases in general systemic risk.
Credit risk exposes us to losses caused by financial or other problems experienced by third
parties.
We are exposed to the risk that third parties that owe us money, securities or other assets
will not perform their obligations. These parties include:
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trading counterparties; |
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customers; |
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clearing agents; |
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exchanges; |
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clearing houses; and |
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other financial intermediaries as well as issuers whose securities we hold. |
These parties may default on their obligations owed to us due to bankruptcy, lack of liquidity,
operational failure or other reasons. This risk may arise, for example, from:
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holding securities of third parties; |
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executing securities trades that fail to settle at the required time due to non-delivery
by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other
financial intermediaries; and |
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extending credit to clients through bridge or margin loans or other arrangements. |
Significant failures by third parties to perform their obligations owed to us could adversely
affect our revenues and perhaps our ability to borrow in the credit markets.
Intense competition from existing and new entities may adversely affect our revenues and
profitability.
The securities industry is rapidly evolving, intensely competitive and has few barriers to
entry. We expect competition to continue and intensify in the future. Many of our competitors have
significantly greater financial, technical, marketing and other resources than we do. Some of our
competitors also offer a wider range of services and financial products than we do and have greater
name recognition and a larger client
base. These competitors may be able to respond more quickly to new or changing opportunities,
technologies and client requirements. They may also be able to undertake more extensive promotional
activities, offer more attractive terms to clients, and adopt more aggressive pricing policies. We
may not be able to compete effectively with current or future competitors and competitive pressures
faced by us may harm our business.
The precautions we take to prevent and detect employee misconduct may not be effective and we could
be exposed to unknown and unmanaged risks or losses.
We run the risk that employee misconduct could occur. Misconduct by employees could include:
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employees binding us to transactions that exceed authorized limits or present unacceptable
risks to us; |
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employees hiding unauthorized or unsuccessful activities from us; or |
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the improper use of confidential information. |
These types of misconduct could result in unknown and unmanaged risks or losses to us including
regulatory sanctions and serious harm to our reputation. The precautions we take to prevent and
detect these activities may not be effective. If employee misconduct does occur, our business
operations could be materially adversely affected.
Failure to comply with net capital requirements could subject us to suspension or revocation by the
SEC or suspension or expulsion by the NASD and the NYSE.
Ladenburg is subject to the SECs net capital rule which requires the maintenance of minimum
net capital. We compute net capital under the alternate method permitted by the net capital rule.
Under this method, Ladenburg is required to maintain net capital equal to $250,000. At December 31,
2006, Ladenburg had net capital of $16,696,000, which exceeded its minimum net capital requirement
by $16,446,000. The net capital rule is designed to measure the general financial integrity and
liquidity of a broker-dealer. In computing net capital, various adjustments are made to net worth
which exclude assets not readily convertible into cash. Additionally, the regulations require that
certain assets, such as a broker-dealers position in securities, be valued in a conservative
manner so as to avoid over-inflation of the broker-dealers net capital. The net capital rule
requires that a broker-dealer maintain a certain minimum level of net capital. The particular
levels vary in application depending upon the nature of the activity undertaken by a firm.
Compliance with the net capital rule limits those operations of broker-dealers which
18
require the
intensive use of their capital, such as underwriting commitments and principal trading activities.
The rule also limits the ability of securities firms to pay dividends or make payments on certain
indebtedness such as subordinated debt as it matures. A significant operating loss or any charge
against net capital could adversely affect the ability of a broker-dealer to expand or, depending
on the magnitude of the loss or charge, maintain its then present level of business. The NASD and
the NYSE may enter the offices of a broker-dealer at any time, without notice, and calculate the
firms net capital. If the calculation reveals a deficiency in net capital, the NASD may
immediately restrict or suspend certain or all of the activities of a broker-dealer, including its
ability to make markets. Ladenburg may not be able to maintain adequate net capital, or its net
capital may fall below requirements established by the SEC, and subject us to disciplinary action
in the form of fines, censure, suspension, expulsion or the termination of business altogether.
Risk of losses associated with securities laws violations and litigation.
Many aspects of our business involve substantial risks of liability. An underwriter is exposed
to substantial liability under federal and state securities laws, other federal and state laws, and
court decisions, including decisions with respect to underwriters liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an underwriter may be
held liable for material misstatements or omissions of fact in a prospectus used in connection with
the securities being offered or for statements made by its securities analysts or other personnel.
In recent years, there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. Our underwriting activities will
usually involve offerings of the securities of smaller companies, which often involve a higher
degree of risk and are more volatile than the securities of more established companies. In
comparison with more established companies, smaller companies are also more likely to be the
subject of securities class actions, to carry directors and officers liability insurance policies
with lower limits or not at all, and to become insolvent. Each of these factors increases the
likelihood that an underwriter of a smaller companies securities will be required to contribute to
an adverse judgment or settlement of a securities lawsuit.
In the normal course of business, our operating subsidiaries have been and continue to be the
subject of numerous civil actions and arbitrations arising out of customer complaints relating to
our activities as a broker-dealer, as an employer and as a result of other business activities. In
general, the cases involve various allegations that our employees had mishandled customer accounts.
We believe that, based on our historical experience and the reserves established by us, the
resolution of the claims presently pending will not have a material adverse effect on our financial
condition. However, although we typically reserve an amount we believe will be sufficient to cover
any damages assessed against us, we have in the past been assessed damages that exceeded our
reserves. If we misjudged the amount of damages that may be assessed against us from pending or
threatened claims, or if we are unable to adequately estimate the amount of damages that will be
assessed against us from claims that arise in the future and reserve accordingly, our financial
condition may be materially adversely affected.
Possible additional issuances will cause dilution.
At December 31, 2006, we had outstanding 155,972,805 shares of common stock and options and
warrants to purchase a total of 25,443,311 shares of common stock. We are authorized to issue up
to 400,000,000 shares of common stock and are therefore able to issue additional shares without
being required under corporate law to obtain shareholder approval. If we issue additional shares,
or if our existing shareholders exercise their outstanding options and warrants, our other
shareholders may find their holdings drastically diluted, which if it occurs, means that they will
own a smaller percentage of our company.
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We may issue preferred stock with preferential rights that may adversely affect your rights.
The rights of our shareholders will be subject to and may be adversely affected by the rights
of holders of any preferred stock that we may issue in the future. Our articles of incorporation
authorize our board of directors to issue up to 2,000,000 shares of blank check preferred stock
and to fix the rights, preferences, privilege and restrictions, including voting rights, of these
shares without further shareholder approval.
The price of our common stock may fluctuate significantly, and this may make it difficult for you
to resell the shares of our common stock at prices you find attractive.
The trading price of our common stock has ranged between $0.62 and $3.75 per share over the
past 52 weeks. We expect that the market price of our common stock will continue to fluctuate.
The market price of our common stock may fluctuate in response to numerous factors, many of
which are beyond our control. These factors include the following:
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variations in quarterly operating results; |
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our announcements of significant contracts, milestones, acquisitions; |
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our relationships with other companies; |
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our ability to obtain needed capital commitments; |
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additions or departures of key personnel; |
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the initiation or outcome of litigation or arbitrations; |
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sales of common stock, conversion of securities convertible into common stock,
exercise of options and warrants to purchase common stock or termination of
stock transfer restrictions; |
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general economic conditions, including conditions in the securities brokerage and
investment banking markets; |
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changes in financial estimates by securities analysts; and |
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fluctuation in stock market price and volume. |
Many of these factors are beyond our control. Any one of the factors noted herein could have an
adverse effect on the value of our common stock.
In addition, the stock market in recent years has experienced significant price and volume
fluctuations that have particularly affected the market prices of equity securities of many
companies and that often have been unrelated to the operating performance of such companies. These
market fluctuations
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have adversely impacted the price of our common stock in the past and may do so
in the future. Furthermore, stockholders may initiate securities class action lawsuits if the
market price of our stock drops significantly, which may cause us to incur substantial costs and
could divert the time and attention of our management. These factors, among others, could
significantly depress the price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Our principal executive offices are located at 4400 Biscayne Boulevard, 12th Floor,
Miami, Florida 33137 where we lease approximately 15,800 square feet of office space. We are
leasing this space pursuant to a month-to-month lease agreement with Frost Real Estate Holdings,
LLC, an entity affiliated with Dr. Phillip Frost, our Chairman of the Board and principal
shareholder. We are currently finalizing a five-year lease
agreement with this entity for this space. The lease will provide for payments of $37,558 per
month in the first year increasing to $44,789 per month in the fifth year, plus applicable sales
tax. The rent is inclusive of operating expenses, property taxes and parking. We will receive a
$60,000 credit for the costs of tenant improvements to be applied against the first years rent.
The principal executive officers of Ladenburg and other subsidiaries of ours are located at
153 East 53rd Street, 49th Floor, New York, New York 10022, where we lease approximately
11,000 square feet of office space pursuant to a lease that expires in July 2008. The lease
provides for payments of $38,000 per month. Our previous New York City office located at 590
Madison Avenue representing approximately 90,000 rentable square feet of office space has been
subleased to various non-related parties at various terms and lease periods. The lease, which we
are still obligated under as the main lessor, expires in June 2015. We also operate several branch
offices located in California, Illinois, Florida, New Jersey and New York.
ITEM 3. LEGAL PROCEEDINGS.
See Note 8 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 1, 2006, we held our annual meeting of shareholders at which we
submitted the following matters to a vote of security holders:
1. Our shareholders elected each of the individuals nominated for election for a term of one
year and until their successors are elected and qualified as follows:
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Votes For |
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Authority Withheld |
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Henry C. Beinstein |
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125,466,808 |
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900,270 |
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Robert J. Eide |
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125,538,972 |
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828,106 |
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Phillip Frost |
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125,603,608 |
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763,470 |
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Brian S. Genson |
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125,539,432 |
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827,646 |
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Saul Gilinski |
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125,607,444 |
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759,634 |
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Richard M. Krasno |
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125,600,576 |
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766,502 |
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Richard J. Lampen |
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125,579,851 |
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787,227 |
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Howard M. Lorber |
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117,893,653 |
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8,473,425 |
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Jeffrey S. Podell |
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125,602,015 |
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765,063 |
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Richard J. Rosenstock |
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123,503,284 |
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2,863,794 |
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Mark Zeitchick |
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123,541,049 |
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2,826,029 |
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2. Our shareholders authorized an amendment to our Amended and Restated 1999 Performance
Equity Plan to increase the number of shares of common stock available for issuance under the plan
from 10,000,000 shares to 25,000,000 shares 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 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For |
|
|
Against |
|
|
|
Abstaining |
|
|
|
Not Voted |
|
|
86,778,105 |
|
|
10,504,248 |
|
|
|
132,913 |
|
|
|
28,951,812 |
|
3. Our shareholders authorized an amendment to our Qualified Employee Stock 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 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For |
|
|
Against |
|
|
|
Abstaining |
|
|
|
Not Voted |
|
|
92,869,843 |
|
|
4,374,777 |
|
|
|
170,646 |
|
|
|
28,951,812 |
|
22
PART II
|
|
|
ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES. |
Our common stock trades on the Exchange under the symbol LTS. The following table sets
forth the high and low prices of the common stock for the periods specified.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High($) |
|
Low($) |
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter*
|
|
$ |
3.75 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$ |
1.49 |
|
|
$ |
0.91 |
|
|
|
Third Quarter
|
|
$ |
1.20 |
|
|
$ |
0.76 |
|
|
|
Second Quarter |
|
$ |
1.98 |
|
|
$ |
0.81 |
|
|
|
First Quarter
|
|
$ |
1.54 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$ |
0.63 |
|
|
$ |
0.42 |
|
|
|
Third Quarter
|
|
$ |
0.66 |
|
|
$ |
0.45 |
|
|
|
Second Quarter |
|
$ |
0.79 |
|
|
$ |
0.52 |
|
|
|
First Quarter
|
|
$ |
0.99 |
|
|
$ |
0.35 |
|
*Through March 15, 2007
Holders
On March 15, 2007, there were approximately 17,100 holders of record of our common stock.
Dividends
To date, we have not paid or declared any dividends on our common stock. The payment of
future dividends, if any, will be at the discretion of our board of directors after taking into
account various factors, including our financial condition, operating results, current anticipated
cash needs as well as any other factors that the board of directors may deem relevant. Our ability
to pay dividends in the future also may be restricted by our operating subsidiarys obligations to
comply with the net capital requirements imposed on broker-dealers by the SEC. We do not intend to
declare any dividends in the foreseeable future, but instead intend on retaining all earnings for
use in our business.
Recent Sales of Unregistered Securities
We did not effect the sale of any unregistered securities during the fourth quarter of 2006
other than those described in Current Reports on Form 8-K.
23
Issuer Purchases of Equity Securities
Our purchases of our common stock during the fourth quarter of 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
of Shares that |
|
|
|
Total |
|
|
|
|
|
|
Purchased as |
|
|
May Yet Be |
|
|
|
Number of |
|
|
Average |
|
|
Part of Publicly |
|
|
Purchased Under |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced Plans |
|
|
the Plans |
|
Period |
|
Purchased |
|
|
per Share |
|
|
or Programs |
|
|
or Programs |
|
October 1 to October 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1 to November 30, 2006(1) |
|
|
451,585 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
|
|
December 1 to December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
451,585 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents delivery of shares to us in payment of exercise price in connection
with exercise of employee stock options for 1,200,000 shares in November 2006. |
24
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below is derived from our audited financial statements.
This selected financial data should be read in conjunction with the section under the caption
Managements Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
|
|
|
|
|
Operating Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
46,858 |
|
|
$ |
30,690 |
|
|
$ |
38,441 |
|
|
$ |
57,420 |
|
|
$ |
76,801 |
|
Total expenses |
|
|
42,010 |
|
|
|
56,607 |
|
|
|
48,354 |
|
|
|
62,618 |
|
|
|
121,668 |
|
Income (loss) from continuing operations
before income taxes |
|
|
4,848 |
(a) |
|
|
(25,917 |
)(b) |
|
|
(9,913 |
) |
|
|
(5,198 |
) |
|
|
(44,867 |
)(c) |
Net income (loss) |
|
|
4,659 |
(a) |
|
|
(25,971 |
)(b) |
|
|
(9,854 |
) |
|
|
(5,490 |
) |
|
|
(46,393 |
)(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common and equivalent share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per Common Share |
|
$ |
0.03 |
|
|
$ |
(0.24 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.13 |
) |
|
$ |
(1.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average Common Shares |
|
|
148,693,521 |
|
|
|
108,948,623 |
|
|
|
45,144,481 |
|
|
|
42,567,798 |
|
|
|
42,025,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average Common Shares |
|
|
153,087,961 |
|
|
|
108,948,623 |
|
|
|
45,144,481 |
|
|
|
42,567,798 |
|
|
|
42,025,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
47,343 |
|
|
$ |
39,299 |
|
|
$ |
21,631 |
|
|
$ |
44,644 |
|
|
$ |
48,829 |
|
Total liabilities, excluding subordinated
liabilities |
|
|
19,009 |
|
|
|
26,332 |
|
|
|
27,657 |
|
|
|
35,180 |
|
|
|
32,620 |
|
Subordinated debt |
|
|
|
|
|
|
|
|
|
|
18,010 |
|
|
|
22,500 |
|
|
|
22,500 |
|
Limited partners interest in
discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,136 |
|
|
|
4,603 |
|
Shareholders equity (capital deficit) |
|
|
28,334 |
|
|
|
12,967 |
|
|
|
(24,036 |
) |
|
|
(16,172 |
) |
|
|
(10,894 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share |
|
$ |
0.18 |
|
|
$ |
0.09 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Average registered representatives |
|
|
97 |
|
|
|
97 |
|
|
|
145 |
|
|
|
196 |
|
|
|
399 |
|
|
|
|
(a) |
|
Includes $4,983 gain on sale of NYSE and CBOE seats, and a charge of $2,885 for non-cash
compensation. |
|
(b) |
|
Includes a $19,359 charge in connection with debt conversion. |
|
(c) |
|
Includes an $18,762 charge for impairment of goodwill. |
25
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
(Dollars in Thousands, Except Per Share Amounts) |
Introduction
We are engaged in retail and institutional securities brokerage, investment banking services,
asset management services and investment activities through our principal operating subsidiary,
Ladenburg. Ladenburg is a full service broker-dealer that has been a member of the NYSE since 1879.
It provides its services principally for middle market and emerging growth companies and high net
worth individuals through a coordinated effort among corporate finance, capital markets, investment
management, brokerage and trading professionals. Ladenburg is subject to regulation by, among
others, the SEC, the NYSE and the NASD and is a member of the SIPC. Ladenburg had approximately 114
registered representatives and 58 other full time employees at December 31, 2006. Its private
client services and institutional sales departments serve approximately 60,000 accounts nationwide
and its asset management area provides investment management and financial planning services to
numerous individuals and institutions.
Our consolidated financial statements include our accounts and the accounts of our
wholly-owned subsidiaries. Our subsidiaries include, among others, Ladenburg, Ladenburg Capital,
Ladenburg Thalmann Europe, Ltd., Ladenburg Asset Management Inc and Telluride Acquisitions Inc.
Ladenburg Capital Fund Management (LCFM) was the sole general partner of the Ladenburg Focus
Fund, L.P., an open-ended private investment fund that invests its capital in publicly traded
equity securities and options strategies. Effective December 31, 2004, we sold LCFM to an entity
owned by three of our directors for $5. Accordingly, LCFM and the limited partnership are presented
as discontinued operations in our 2004 consolidated statements of operations.
Recent Developments
Debt Exchange
In February 2007, we entered into a Debt Exchange Agreement with New Valley to retire our
remaining outstanding indebtedness. New Valley holds $5,000 principal amount of promissory notes
due March 31, 2007. Pursuant to the agreement, New Valley has agreed to exchange the principal
amount of its notes for shares of our common stock at an exchange price of $1.80 per share,
representing the average closing price of our common stock for the 30 trading days ending on the
date of the agreement. The promissory notes will continue to accrue interest through the closing of
the debt exchange. The accrued interest on the notes, which was approximately $1,500 at December
31, 2006, will be paid in cash at or prior to the closing of the transaction.
The consummation of the transaction is subject to shareholder approval at our annual meeting
of shareholders, which we anticipate holding during the second quarter of 2007. We expect to
consummate the transaction as soon as practicable once shareholder approval is obtained. Upon
closing, the $5,000 principal amount of notes will be exchanged for approximately 2,777,778 shares
of our common stock.
26
Sale of CBOE Seat
On October 24, 2006, Ladenburg sold its membership on the Chicago Board Options Exchange for a
gain of $1,125.
Deferred Underwriting Compensation
Ladenburg is entitled to receive deferred investment banking and underwriting fees from
certain clients whose initial public offerings Ladenburg managed and 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 our
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 24 months from the
respective date of the offering, or not received at all if no business combination transactions are
consummated during such time period. As of December 31, 2006, Ladenburg had unrecorded potential
deferred fees for our SPAC-related transactions of $13,400, which, net of expenses, amounted to
approximately $8,200.
Acquisitions
On September 11, 2006, Ladenburg acquired substantially all 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 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 966,666 shares of our 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 became Vice Chairman, Senior Managing Director
and Head of Investment Banking of Ladenburg, and each of Messrs. Salpeter and Steiner became
Managing Directors Investment Banking of Ladenburg. Of the consideration issued to
27
Messrs.
Cassel, Salpeter and Steiner, (x) 2,666,667 of the shares, (y) warrants to purchase 1,933,333
shares of common stock and (z) $667 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.
The Capitalink transaction resulted in an increase of $2,122 additional paid-in capital
resulting from the issuance of 4,000,000 shares of common stock and 966,666 vested warrants. Unearned employee stock-based compensation attributable to unvested equity instruments
amounting to $4,270 will be recognized over the vesting period, of which $823 was recognized
as of December 31, 2006. The 2,666,667 shares of common stock placed in escrow have been considered
outstanding as the former Telluride shareholders are entitled to voting rights.
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, institutional and retail
securities brokerage business in New York City.
Proceeds from Sale of NYSE Seat
As of December 31, 2005, Ladenburg owned one membership on the NYSE, which had been accounted
for 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.
28
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 the NYSE Group common shares 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 us at the
estimated fair value of $1,228 at such date. We account for restricted investments at cost,
adjusted for other than temporary impairment. As of December 31, 2006, the estimated fair value of
the restricted shares was $2,230.
Included in revenues for the year ended December 31, 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 realized losses of
$1,001, consisting of a loss of $440 on the sale of 51,900 shares and a loss of $561 representing
the decline in the fair market value of the 28,277 remaining 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 $18, $37 and $125 for the years ended December
31, 2006, 2005 and 2004, 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 $483 and $1,958 for potential arbitration and lawsuit losses as of December 31, 2006 and
2005, respectively. However, we have in the past been assessed damages that
29
exceeded our reserves.
If we misjudged the amount of damages that may be assessed against us from pending or threatened
claims, or if we are unable to adequately estimate the amount of damages that will be assessed
against us from claims that arise in the future and reserve accordingly, our operating income would
be reduced. Such costs may have a material adverse effect on our future financial position, results
of operations
or liquidity.
Exit or Disposal Activities. During the fourth quarter of 2002, we early adopted SFAS No. 146,
Accounting for Costs Associated with 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.
In May 2003, Ladenburg relocated employees from its former New York City office to its
Melville, New York office. As a result of this move, Ladenburg ceased using one of the several
floors it occupied in its former New York City office, which it subleased in September 2004 for the
remaining term of its lease. The fair value of Ladenburgs obligation with respect to the lease
computed in accordance with SFAS No. 146 was approximately $1,500 at inception of the sublease and
approximated the balance of our deferred rent liability relating to such space. Accordingly, no
charge to operations was required in connection with the sublease. The balance of this liability as
of December 31, 2006 and 2005 was approximately $503 and $364, respectively, and is included in
accrual expenses and other liabilities. The change in the liability results from net cash flows
relating to the space, including certain costs in connection with the sublease.
In the third quarter of 2004, Ladenburg ceased using a portion of another floor of its former
New York City office. Accordingly, the related leasehold improvements were written-off. In
conjunction with the write-off of these leasehold improvements, the unamortized deferred rent
credit representing reimbursement from the landlord for such leasehold improvements was also
written-off. The write-off of unamortized leasehold improvements of $1,275, net of the write-off
of the unamortized deferred rent credit of $729, resulted in a net charge to operations in 2004 of
$546. In November 2004, Ladenburg subleased the space through June 30, 2010, for a sub-rental equal
to its lease commitment with the landlord through the sublease period.
In December 2005, Ladenburg entered into an agreement to sublet the remaining floor of its
former New York City office, commencing no later than March 15, 2006, for a term through the end of
our lease period. Accordingly, the remaining leasehold improvements were written-off as of December
31, 2005. In conjunction with the write-off of leasehold improvements, a portion of the unamortized
deferred rent credit representing reimbursement from the landlord of such leasehold improvements
was also written-off. The write-off of unamortized leasehold improvements of $1,326, net of the
write-off of $1,264 of the $2,093 of unamortized deferred rent credit, resulted in a net charge to
operations in 2005 of $62. The $829 balance of the unamortized deferred rent credit was equivalent
to the fair value of Ladenburgs obligation with respect to the lease. The balance of this
liability at December 31, 2006 was approximately $86 and is included in accrued expenses and other
liabilities. The decrease in this liability results from net cash flows related to the space,
including certain costs in connection with the sublease.
Fair Value. Trading 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
30
value, with related unrealized gains and losses recognized in our results of
operations. The determination of fair value is fundamental to our financial condition and results
of operations and, in certain circumstances, it requires management to make complex judgments.
Fair values are based on listed market prices, where possible. If listed market prices are not
available or if the liquidation of our positions would reasonably be expected to impact market
prices, fair value is
determined based on other relevant factors, including dealer price quotations. Fair values for
certain derivative contracts are derived from pricing models that consider market and contractual
prices for the underlying financial instruments or commodities, as well as time value and yield
curve or volatility factors underlying the positions.
Pricing models and their underlying assumptions impact the amount and timing of unrealized
gains and losses recognized, and the use of different pricing models or assumptions could produce
different financial results. Changes in the fixed income and equity markets will impact our
estimates of fair value in the future, potentially affecting principal trading revenues. The
illiquid nature of certain securities or debt instruments also requires a high degree of judgment
in determining fair value due to the lack of listed market prices and the potential impact of the
liquidation of our position on market prices, among other factors.
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 timing differences are expected to be recovered or settled. Deferred
tax amounts as of December 31, 2006, which consist principally of the tax benefit of net operating
loss carryforwards and accrued expenses, amount to $23,276. After consideration of all the
evidence, both positive and negative, especially the fact we sustained operating losses during 2005
and 2004, we have determined that a valuation allowance at December 31, 2006 was necessary to fully
offset the deferred tax assets based on the likelihood of future realization. At December 31, 2006,
we had net operating loss carryforwards of approximately $49,000, expiring in various years from
2015 through 2026.
Expense Recognition of Employee Stock Options. Effective January 1, 2006, we adopted SFAS
No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R), which requires an entity to measure
the cost of employee, officer and director services received in exchange for an award of equity
instruments, including stock options, based on the grant-date fair value of the award. The cost is
recognized as compensation expense over the service period, which would normally be the vesting
period of the options. SFAS No. 123R supersedes our previous accounting under SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), which permitted us 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
our Amended and Restated 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. We 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
31
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. In addition, balances of unearned compensation attributable to awards granted prior to
the adoption of SFAS No. 123R were netted against additional paid-in capital. As a result of
adopting SFAS 123R, our income before income taxes and net income for the year ended December 31,
2006 were $1,047, or $0.01 per share, lower than if we had continued to account for share-based
compensation under APB No. 25.
Results of Operations
The following table sets forth a summary of financial highlights for the three years ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Total revenue |
|
$ |
46,858 |
|
|
$ |
30,690 |
|
|
$ |
38,441 |
|
Total operating expenses |
|
|
42,010 |
|
|
|
56,607 |
|
|
|
48,354 |
|
Operating income (loss) |
|
|
4,848 |
|
|
|
(25,917 |
) |
|
|
(9,913 |
) |
Net income (loss) |
|
|
4,659 |
|
|
|
(25,971 |
) |
|
|
(9,854 |
) |
EBITDA and other adjustments |
|
|
3,824 |
|
|
|
(4,082 |
) |
|
|
(6,224 |
) |
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
220 |
|
|
|
152 |
|
|
|
15 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
127 |
|
Sale of exchange memberships. |
|
|
4,983 |
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(499 |
) |
|
|
(1,027 |
) |
|
|
(2,189 |
) |
Income tax expense |
|
|
(189 |
) |
|
|
(54 |
) |
|
|
|
|
Depreciation and amortization |
|
|
(754 |
) |
|
|
(811 |
) |
|
|
(1,037 |
) |
Write-off of furniture,
fixtures and leasehold
improvements, net |
|
|
(41 |
) |
|
|
(62 |
) |
|
|
(546 |
) |
Non-cash compensation |
|
|
(2,885 |
) |
|
|
(728 |
) |
|
|
|
|
Debt conversion expense |
|
|
|
|
|
|
(19,359 |
) |
|
|
|
|
Net income (loss) |
|
|
4,659 |
|
|
|
(25,971 |
) |
|
|
(9,854 |
) |
Earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for gains
or losses on sales of assets and non-cash compensation expense, is a key metric we use in
evaluating our financial performance. EBITDA is considered a non-GAAP financial measure as defined
by Regulation G promulgated by the SEC pursuant to the Securities Act of 1933, as amended. We
consider EBITDA, as adjusted, an important measure of our ability to generate cash flows to
repurchase shares, service debt, fund capital expenditures and fund other corporate investing and
financing activities. EBITDA, as adjusted, eliminates the non-cash effect of tangible asset
depreciation and amortization of intangible assets and stock-based compensation. EBITDA should be
considered in addition to, rather than as a substitute for, pre-tax income, net income and cash
flows from operating activities.
Our EBITDA, as adjusted, increased $7,906 in 2006 compared to 2005, and EBITDA, as adjusted,
increased $2,142 in 2005 compared to 2004.
32
Year ended December 31, 2006 compared to year ended December 31, 2005
For the fiscal year ended December 31, 2006, we had net income of $4,659, compared to a net
loss of $25,971 for the fiscal year ended December 31, 2005. The net income for 2006 included a
$4,859 gain from the NYSE Merger, a $440 realized loss from the sale of 51,900 NYSE Group shares
and $561 of realized losses on the NYSE Group shares, and a $1,125 gain from the sale of our CBOE
membership. In addition, $2,885 of non-cash compensation expense was included in the 2006 net
income, including $823 relating to the Capitalink
acquisition. The net loss for 2005 included $19,359 of non-cash debt conversion expense (see
Liquidity and Capital Resources Senior Convertible Notes Payable, Debt Conversion and Private
Financing below) and $728 of non-cash compensation expense.
Our revenues for 2006 increased $16,168 or 52.68% from 2005, primarily as a result of
increased principal transactions of $7,088, increased investment banking fees of $1,840, increased
underwriting fees of $1,577, and increased investment advisory fees of $1,116. In addition we had a
net gain on the sale of exchange memberships for $4,983.
Excluding the debt conversion expense of $19,359 in 2005 and non-cash compensation of $2,885
in 2006 and $728 in 2005, our expenses for 2006 increased $2,605 from 2005 primarily as a result of
increased variable costs, which corresponds with the increase in revenues.
The $7,088 (175.36%) increase in net principal transactions was primarily the result of
increased institutional sales credits from greater participation in initial and secondary public
offerings, including those for which Ladenburg was a lead manager or co-manager of the underwriting
or was part of the selling group.
The $1,840 (41.11%) increase in investment banking fees was primarily the result of an
increase in the number of public offerings where Ladenburg acted as either a lead or co-manager
from 5 offerings in 2005 to 16 offerings in 2006.
The $1,577 (321.18%) increase in syndications and underwritings was primarily the result of
the increase in the number of underwriting transactions in the 2006 period.
The $1,116 (88.22%) 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 $3,979 (17.49%) increase in compensation expense was primarily due to an increase in
producers compensation as a result of the net increase in revenues.
The $536 (22.45%) increase in brokerage, communication and clearance fees is primarily due to
an increase in telephone and data service charges of $262 (16.1%), which is a result of increased
headcount and the expansion of our offices, as well as higher costs to upgrade our information
technology infrastructure. In addition, execution fees that we pay to floor brokers and electronic
communication networks increased $211 (41.3%). These expenses are the result of an increase in our
institutional desk transactions.
The $452 (17.2%) decrease in rent and occupancy (net of sublease revenue) was primarily due to
the subletting of the entire 34th floor of Ladenburgs former New York City office during the first
quarter of 2006 and moving to our current New York City office.
33
We incurred income tax expense of $189 in 2006 as compared to $54 in 2005. After consideration
of all the evidence, both positive and negative, especially the fact we sustained recurring
operating losses in 2005 and 2004, management determined that a valuation allowance at December 31,
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 primarily as a result of unrecognized tax benefits from net
operating losses.
Year ended December 31, 2005 compared to year ended December 31, 2004
For the fiscal year ended December 31, 2005, we had a net loss of $25,971, compared to a net
loss of $9,854 for the fiscal year ended December 31, 2004. The net loss for 2005 included $19,359
of non-cash debt conversion expense and $728 of non-cash compensation expense.
Our revenues for 2005 decreased $7,751 from 2004 primarily as a result of decreased
commissions of $11,485, partially offset by increased investment banking fees of $2,823 and
increased net principal transactions of $1,244. Our revenues were adversely affected by the
decrease in our number of registered representatives from an average of 145 in 2004 to an average
of 97 in 2005.
Excluding the debt conversion expense of $19,359 in 2005, our expenses for 2005 decreased
$11,106 from 2004 primarily as a result of decreased compensation and benefits of $4,941, decreased
interest of $1,162, decreased rent and occupancy (net of sublease revenues) of $1,065 and decreased
other expenses of $2,807.
The $11,485 (41.9%) decrease in commission income was primarily a result of a decrease in the
number of registered representatives we employed during 2005 compared to 2004. We employed an
average of 97 registered representatives during 2005 versus an average of 145 during 2004.
The $1,244 (44.5%) increase in net principal transactions was primarily the result of
increased retail and institutional sales credits from greater participation in public offerings,
including those for which Ladenburg was a lead manager or co-manager of the underwriting or was
part of the selling group.
The $2,823 (170.8%) increase in investment banking fees was primarily the result of increased
lead-managed and co-managed public offerings in 2005 compared to 2004.
The $4,213 (15.2%) decrease in compensation expense was primarily due to the net decrease in
revenues, decreased compensation arrangements for our revenue-producing personnel and various staff
reductions.
The $810 (25.3%) decrease in brokerage, communication and clearance fees was primarily due to
the decrease in the amount of agency commission transactions in 2005 compared to 2004.
The $1,065 (28.8%) decrease in rent and occupancy (net of sublease revenue) was primarily due
to the subletting of the entire 33rd floor and the remaining un-sublet portion of the 35th floor of
Ladenburgs former New York City office during the third quarter of 2004. Due to these sublets, our
rent and occupancy expense decreased by approximately $1,750 per year.
34
The write-off of leasehold improvements, net is a result of subletting two floors of
Ladenburgs New York City office, one in 2004 and the other in 2005. During the third quarter of
2004, Ladenburg ceased using a portion of the 35th floor of its New York City office. Accordingly,
the related leasehold improvements were written-off. In conjunction with the write-off of these
leasehold improvements, the unamortized deferred rent credit representing reimbursement from the
landlord for such leasehold improvements was also written-off. The write-off of unamortized
leasehold improvements of $1,275, net of the write-off of the unamortized deferred rent credit of
$729, resulted in a net charge to operations of $546 in 2004. In December 2005, Ladenburg entered
into an agreement to sublet the 34th floor of its New York City office, commencing March 15, 2006,
for a term through the end of its lease period. Accordingly, the remaining leasehold improvements
were written-off as of December 31, 2005. In conjunction with the write-off of leasehold
improvements, a portion of the unamortized deferred rent credit representing reimbursement from the
landlord for such
leasehold improvements was also written-off. The write-off of unamortized leasehold
improvements of $1,326, net of the write-off of $1,264 of the $2,093 of unamortized deferred rent
credit, resulted in a net charge to operations in 2005 of $62.
We incurred an income tax expense of $54 in 2005. In 2004, we incurred an income tax benefit
of $127, primarily due to the filing of certain state and local income tax returns on combined
basis for the fiscal year ended September 30, 2003, which reduced our overall income tax liability.
After consideration of all the evidence, both positive and negative, especially the fact we have
sustained recurring operating losses, management determined that a valuation allowance at December
31, 2005 was necessary to fully offset the deferred tax assets based on the likelihood of future
realization. The income tax rate for the 2005 and 2004 periods does not bear a customary
relationship to effective tax rates primarily as a result of unrecognized tax benefits from net
operating losses.
Liquidity and Capital Resources
Approximately 78% of our total assets at December 31, 2006 are liquid, consisting of cash and
cash equivalents, trading securities owned and receivables from broker-dealers, all of which
fluctuate, depending upon the levels of customer business and trading activity. Receivables from
broker-dealers, which are primarily from our primary clearing broker, turn over rapidly. As a
securities dealer, we may carry significant levels of securities inventories to meet customer
needs. 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 December 31, 2006, Ladenburgs
regulatory net capital, as defined, of $16,696, exceeded minimum capital requirements, as defined
by SECs Uniform Net Capital Rule 15c3-1, of $250 and as defined by Commodity Futures Trading
Commissions Regulation 1.17, of $500, by $16,446 and $16,196, respectively. Failure to maintain
the required net capital may subject Ladenburg to suspension or expulsion by the NYSE, the SEC and
other regulatory bodies and ultimately may require its liquidation. The net capital rule also
prohibits the payment of dividends, redemption of stock and prepayment or payment of principal of
subordinated indebtedness if net capital, after giving effect to the payment, redemption or
prepayment, would be less than specified percentages of the minimum net capital requirement.
Compliance with the net capital rule could limit the operations of Ladenburg that requires the
intensive use of capital, such as underwriting and trading activities, and also could restrict our
ability to withdraw capital from it, which in turn, could limit our ability to pay dividends and
repay and service our debt.
35
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 future off-balance-sheet market risk, since its ultimate obligation
may exceed the amount recognized in the financial statements.
Our sources of liquidity in recent years have been primarily from the sale of our securities
and financing activities.
We continue to explore opportunities to grow our businesses, including through potential
acquisitions of other securities firms, both domestically and internationally. These acquisitions
may involve payments of material amounts of cash or debt or the issuance of significant amounts of
our equity securities, which may be dilutive to our existing shareholders. We cannot assure you
that we will be able to consummate
any such potential acquisitions on terms acceptable to us or, if we do, that any acquired
business will be profitable. There is also a risk that we will not be able to successfully
integrate acquired businesses into our existing business and operations.
Net cash used in operating activities for the year ended December 31, 2006 was $8,997 as
compared to $6,872 for the 2005 period. The increase in net cash used in operating activities was
primarily due to a decrease in securities sold, but not yet purchased of $6,820 in 2006 compared to
an increase of $8,829 in 2005 and offset by an increase in receivables from clearing brokers of
$3,904 in 2006 compared to an increase of $10,599 in 2005 and a decrease in trading securities
owned and NYSE Group Inc. common stock, not readily marketable of $1,735 in 2006 compared to an
increase in trading securities of $1,751 in 2005.
Net cash provided by investing activities for the year ended December 31, 2006 was $525
compared to net cash flows used in investing activities of $237 for the 2005 period. These
investing activities relate principally to proceeds from sale of exchange memberships, offset by
purchase of customer relationships, leasehold improvements and enhancements to computer equipment.
There was $4,519 of cash provided by financing activities for the year ended December 31,
2006, reflecting $3,675 of cash provided by our private equity offering, $929 provided by the
issuance of our common stock other than private equity offering, and an increase in restricted
assets of $85. There was $16,325 of cash provided by financing activities in the 2005 period. The
2005 activity primarily represented the issuance of $14,233 of common stock and $3,500 of notes
payable, net of the repurchase of $1,155 of common stock
At December 31, 2006, we are obligated under several non-cancelable lease agreements for
office space, which provide for future minimum lease payments aggregating approximately $48,000
through 2015, exclusive of escalation charges and have subleased vacant space under subleases which
entitle us to receive rents aggregating approximately $35,000 through such date. The obligation
excludes the lease referred to in the following paragraph. 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 $470 through June 2015.
In February 2006, Ladenburg Capital entered into a settlement agreement with the landlord for
its office space in New York City which Ladenburg Capital was forced to vacate during 2001 due to
the events of September 11, 2001. Under the terms of the settlement with the landlord (who had
filed for bankruptcy reorganization), the subsidiary paid the landlord $1,900 following approval of
the settlement
36
by the bankruptcy court in March 2006. The lease, had it not terminated as a result
of the events of September 11, 2001, would have expired by its terms in March 2010. The liability
provided at December 31, 2004 in connection with this matter was increased by $240 with a
corresponding increase in rent expense for the year ended December 31, 2005 to reflect the
settlement agreement.
Senior Convertible Notes Payable, Debt Conversion and Private Financing
In conjunction with the acquisition of Ladenburg in May 2001, we issued a total of $20,000
principal amount of senior convertible notes due December 31, 2005, secured by a pledge of the
stock of Ladenburg. The $10,000 principal amount of notes issued to the former Ladenburg
stockholders, including $8,010 to New Valley, bore interest at 7.5% per annum, and $10,000
principal amount of notes issued to Frost-Nevada, Limited Partnership (Frost-Nevada), which was
subsequently assigned to Frost-Nevada Investments Trust (Frost Trust), of which Frost-Nevada is
the sole and exclusive beneficiary, bore interest at 8.5% per annum. Dr. Phillip Frost, the
Chairman of our Board of Directors, is the sole stockholder of the general partner of Frost-Nevada.
The notes were convertible into a total of 11,296,746 shares of common stock.
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 shares of 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. As part of the debt conversion agreement, each
of Frost Trust and New Valley agreed to purchase $5,000 of our common stock for $0.45 per share.
The debt conversion transaction was approved by our shareholders at our annual shareholder
meeting held on January 12, 2005 and closed on March 11, 2005. The transactions were effective as
of February 22, 2005 and resulted in the following:
|
|
|
The $10,000 senior convertible promissory note to Frost Trust and related
accrued interest through February 22, 2005 of $2,761 was converted at $0.40 per share
into 31,902,320 shares of our common stock. |
|
|
|
|
The $8,010 senior convertible promissory note to New Valley and related
accrued interest through February 22, 2005 of $1,928 was converted at $0.50 per share
into 19,876,358 shares of our common stock. |
|
|
|
|
Frost-Trust acquired 11,111,111 shares of our common stock at $0.45 per
share in exchange for a cash payment of $1,445 and the cancellation of our $3,500 of
notes payable and related accrued interest of $55 described below. |
|
|
|
|
New Valley acquired 11,111,111 shares of our common stock at $0.45 per
share in exchange for a cash payment of $1,445 and the cancellation of our $3,500 of
notes payable and related accrued interest of $55 described below. |
|
|
|
|
We recorded a pre-tax charge of $19,359 in 2005 reflecting the expense
attributable to the reduction in the conversion price of the notes that were converted.
The net effect on our balance sheet from the conversion, net of related expenses, was
an increase to shareholders equity of $22,699 (without giving effect to any sale of
common stock relating to the private financing). |
37
Other Notes Payable
On March 27, 2002, we borrowed $2,500 from New Valley, our 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 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 (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 December 2006, New Valley agreed to extend the
maturity of the 2002 Loans to March 31, 2007.
In February 2007, we entered into a Debt Exchange Agreement with New Valley to retire our
remaining outstanding indebtedness. New Valley holds $5,000 principal amount of promissory notes
due March 31, 2007. Pursuant to the agreement, New Valley has agreed to exchange the principal
amount of its notes for
shares of our common stock at an exchange price of $1.80 per share, representing the average
closing price of our common stock for the 30 trading days ending on the date of the agreement. The
promissory notes will continue to accrue interest through the closing of the debt exchange. The
accrued interest on the notes, which was approximately $1,500 at December 31, 2006, will be paid in
cash at or prior to the closing of the transaction.
The consummation of the transaction is subject to shareholder approval at our annual meeting
of shareholders, which we anticipate holding during the second quarter of 2007. We expect to
consummate the transaction as soon as practicable once shareholder approval is obtained. Upon
closing, the $5,000 principal amount of notes will be exchanged for approximately 2,777,778 shares
of our common stock.
In December 2002, an affiliate of Ladenburgs clearing broker loaned us an aggregate of $3,500
(the Clearing Loans). The Clearing Loans and related accrued interest were forgivable over a
four-year period, provided Ladenburg continued to clear its transactions through this 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 and $146 of accrued
interest, was forgiven in November 2006. Upon the forgiveness of the Clearing Loans, the forgiven
amount was accounted for as other revenues.
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 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
(see above).
In December 2004, Ladenburg received a $2,000 temporary subordinated loan from each of Dr.
Frost and New Valley to provide additional regulatory capital required for an underwriting
participation. Upon completion of the underwriting during the same month, the $4,000 was repaid
with interest at the rate of prime plus 2%. Interest amounted to $2.
38
In December 2005, Ladenburg received a $15,000 temporary subordinated loan from Dr. Frost to
provide additional regulatory capital required for an underwriting participation. Upon completion
of the underwriting during the same month, the $15,000 was repaid plus a $300 fixed amount of
interest.
In December 2006, Ladenburg received a temporary subordinated loan in the amount of $2,000
from LTS, $12,000 from Dr. Frost and $8,000 from its clearing firm to provide additional regulatory
capital required for an underwriting participation. The temporary subordinated loans from us and
Dr. Frost were subordinated by their terms to the loan from the clearing broker. Upon completion of
the underwriting during the same month, the loans were repaid with interest at the rate of LIBOR
plus 2%, which amounted to $49. In addition, Dr. Frost was paid an additional commitment fee of
$50.
In August 2006, Ladenburg received a $3,500 temporary subordinated loan from us to provide
additional regulatory capital required for an underwriting participation. In September 2006, the
$3,500 was repaid with interest at the rate of 9%, which amounted to $22.
Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes information about our contractual obligations as of December 31,
2006
and the effects these obligations are expected to have on our liquidity and cash flow in the
future years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period ($) |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
Contractual Obligations |
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
Long-Term Debt, including interest of $1,504(1) |
|
$ |
6,504 |
|
|
$ |
6,504 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Capital Lease Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases(2) |
|
|
48,345 |
|
|
|
5,879 |
|
|
|
11,640 |
|
|
|
10,781 |
|
|
|
20,045 |
|
Other Long-Term Liabilities Reflected on our
Balance Sheets under GAAP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
54,849 |
|
|
$ |
12,383 |
|
|
$ |
11,640 |
|
|
$ |
10,781 |
|
|
$ |
20,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest is accrued at 1% above the prime rate on the $5,000 principal loans from our
former parent. The interest is payable upon maturity of the loans. See Notes 12 and 21 to
our consolidated financial statements. |
|
(2) |
|
Excludes sublease rentals of $34,750. See Note 8 to our consolidated financial
statements. |
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
39
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 December 31, 2006, the fair market value of
our inventories was $204 in long positions and $2,037 in short positions. We performed an
entity-wide analysis of our financial instruments and assessed the related risk. Based on this
analysis, in the opinion of management, the market risk associated with our financial instruments
at December 31, 2006 will not have a material adverse effect on our consolidated financial position
or results of operations.
Special Note Regarding Forward-Looking Statements
We and our representatives may from time to time make oral or written forward-looking
statements within the meaning of the Private Securities 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 Factors in Item 1A above,
important factors that could cause actual results to differ materially from those contained in any
forward-looking statement made by or on behalf of us.
Results actually achieved may differ materially from expected results included in these
forward-looking statements as a result of these or other factors. Due to such uncertainties and
risks, readers are cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date on which such statements are made. We do not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of us.
|
|
|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
The information under the caption Managements Discussion and Analysis of Financial Condition
and Results of Operations Market Risk is incorporated herein by reference.
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
See the Consolidated Financial Statements and Notes thereto, together with the report thereon
of Eisner LLP dated March 16, 2007, beginning on page F-1 of this report.
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. |
None.
40
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are our controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange 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.
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.
Managements Report on Internal Control Over Financial Reporting
Our internal control over financial reporting is a process designed by, or under the
supervision of, our chief executive officer and chief financial officer and effected by our board
of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of our financial statements for external
purposes in accordance with generally accepted accounting principles. Internal control over
financial reporting includes policies and procedures that pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the transactions and dispositions of our
assets; provide reasonable assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with the
authorization of our board of directors and management; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Under the supervision and with the participation of our management, including our chief
executive officer and chief financial officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the criteria established in Internal Control Integrated
Framework, our management concluded that our internal control over financial reporting was
effective as of December 31, 2006.
Managements assessment of the effectiveness of internal control over financial reporting as
of December 31, 2006 did not include the internal controls of Capitalink because it was acquired by
us in October 2006. Capitalink is included in the 2006 consolidated financial statements and
constituted $2,574,000 of total assets as of December 31, 2006 and $953,000 of total revenues and a
net loss of $923,000 for the year then ended.
Our managements assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2006 has been audited by Eisner LLP, an independent registered
certified public accounting firm, as stated in their report which is included below.
41
Attestation Report of the Companys Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Ladenburg Thalmann Financial Services Inc.
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting under Item 9A, that Ladenburg Thalmann Financial Services
Inc. and its subsidiaries (the Company) maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Managements Report on Internal Control over Financial
Reporting, managements assessment of the effectiveness of internal control over financial
reporting as of December 31, 2006 did not include the internal controls of Capitalink L.C.
(Capitalink) because it was acquired by the Company in October 2006. Capitalink is included in
the 2006 consolidated financial statements and constituted $2,574,000 of total assets as of
December 31, 2006 and $953,000 of total revenues and a net loss of $923,000 for the year then
ended. Our audit of internal control over financial
42
reporting of the Company also did not include
an evaluation of the internal control over financial reporting of Capitalink.
In our opinion, managements assessment that the Company maintained effective internal control
over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based
on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006, based on COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company as of December 31,
2006 and 2005, and the related consolidated statements of operations, changes in shareholders
equity (capital deficit), and cash flows for each of the three years in the period ended December
31, 2006, and our report dated March 16, 2007 expressed an unqualified opinion thereon.
/s/ Eisner LLP
New York, New York
March 16, 2007
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth
quarter that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
This information will be contained in our definitive Proxy Statement for our 2007 Annual
Meeting of Shareholders, to be filed with the SEC not later than 120 days after the end of our
fiscal year covered by this report pursuant to Regulation 14A under the Securities Exchange Act of
1934, and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
This information will be contained in the Proxy Statement and incorporated
herein by reference.
43
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
This information will be contained in the Proxy Statement and incorporated herein by
reference.
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
This information will be contained in the Proxy Statement and incorporated herein by
reference.
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
This information will be contained in the Proxy Statement and incorporated herein by
reference.
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
(a)(1): Index to 2006 Consolidated Financial Statements
The Consolidated Financial Statements and the Notes thereto, together with the report thereon
of Eisner LLP dated March 16, 2007, appear beginning on page F-1 of this report.
(a)(2): Financial Statement Schedules
Financial statement schedules not included in this report have been omitted because they are
not applicable or the required information is shown in the Consolidated Financial Statements or the
Notes thereto.
(a)(3): Exhibits Filed
The following is a list of exhibits filed herewith as part of this Annual Report on Form 10-K.
44
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated |
|
|
|
|
|
|
|
|
By Reference from |
|
|
|
|
Exhibit Number |
|
Description |
|
Document |
|
No. in Document |
|
Page |
3.1
|
|
Articles of Incorporation
|
|
A
|
|
|
3.1 |
|
|
|
|
3.2
|
|
Articles of Amendment to the Articles
of Incorporation, dated August 24,
1999
|
|
B
|
|
|
3.2 |
|
|
|
|
3.3
|
|
Articles of Amendment to the Articles
of Incorporation, dated April 3, 2006
|
|
C
|
|
|
3.1 |
|
|
|
|
3.4
|
|
Bylaws
|
|
A
|
|
|
3.2 |
|
|
|
|
4.1
|
|
Form of common stock certificate
|
|
A
|
|
|
4.1 |
|
|
|
|
4.2
|
|
Promissory Note, dated March 27, 2002,
issued to New Valley Corporation
|
|
D
|
|
|
4.1 |
|
|
|
|
10.1
|
|
Amended and Restated 1999 Performance
Equity Plan*
|
|
E
|
|
|
4.1 |
|
|
|
|
10.2
|
|
Form of Stock Option Agreement, dated
as of May 7, 2001, between the Company
and certain directors*
|
|
F
|
|
|
10.3 |
|
|
|
|
10.2.1
|
|
Schedule of Stock Option Agreements in
the form of Exhibit 10.2, including
material detail in which such
documents differ from Exhibit 10.2*
|
|
F
|
|
|
10.3.1 |
|
|
|
|
10.3
|
|
Stock Option Agreement, dated as of
January 10, 2002, between the Company
and Richard J. Lampen*
|
|
G
|
|
|
10.2 |
|
|
|
|
10.4
|
|
Form of Stock Option Agreement, dated
January 10, 2002, between the Company
and each of Victor M. Rivas, Richard
J. Rosenstock, Mark Zeitchick and
Vincent A. Mangone*
|
|
G
|
|
|
10.3 |
|
|
|
|
10.4.1
|
|
Schedule of Stock Option Agreements in
the form of Exhibit 10.4, including
material detail in which such
documents differ from Exhibit 10.4*
|
|
G
|
|
|
10.3.1 |
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated |
|
|
|
|
|
|
|
|
By Reference from |
|
|
|
|
Exhibit Number |
|
Description |
|
Document |
|
No. in Document |
|
Page |
10.5
|
|
Ladenburg Thalmann Financial Services
Inc. Qualified Employee Stock Purchase
Plan*
|
|
H
|
|
Exhibit A
|
|
|
|
10.6
|
|
Form of Stock Option Agreement, dated
November 15, 2002, between the Company
and each of Bennett S. LeBow, Howard
M. Lorber, Henry C. Beinstein, Robert
J. Eide and Richard J. Lampen*
|
|
I
|
|
|
10.48 |
|
|
|
|
10.7.1
|
|
Schedule of Stock Option Agreements in
the form of Exhibit 10.7, including
material detail in which such
documents differ from Exhibit 10.7*
|
|
I
|
|
|
10.48.1 |
|
|
|
|
10.8
|
|
Form of Stock Option Agreement, dated
September 17, 2003, between the
Company and each of Howard M. Lorber,
Henry C. Beinstein, Robert J. Eide and
Richard J. Lampen*
|
|
J
|
|
|
10.1 |
|
|
|
|
10.8.1
|
|
Schedule of Stock Option Agreements in
the form of Exhibit 10.7, including
material detail in which such
documents differ from Exhibit 10.7*
|
|
J
|
|
|
10.1.1 |
|
|
|
|
10.9
|
|
Stock Option Agreement, dated as of
March 25, 2005, between Ladenburg
Thalmann Financial Services Inc. and
Michael Philipps*
|
|
K
|
|
|
10.1 |
|
|
|
|
10.10
|
|
Stock Option Agreement, dated July 13,
2006, issued to Dr. Phillip Frost*
|
|
L
|
|
|
10.2 |
|
|
|
|
10.11
|
|
Warrant issued to BroadWall Capital LLC
|
|
M
|
|
|
10.1 |
|
|
|
|
10.12
|
|
Form of Stock Option Agreement issued
to employees of BroadWall
|
|
M
|
|
|
10.2 |
|
|
|
|
10.13
|
|
Letter Agreement, dated September 14,
2006, between Ladenburg Thalmann
Financial Services Inc. and Vector
Group Ltd.
|
|
N
|
|
|
10.1 |
|
|
|
|
10.14
|
|
Agreement and Plan of Merger, dated as
of September 6, 2006, between
Ladenburg Thalmann Financial Services
Inc., Telluride Acquisition, Inc.,
Telluride Holdings, Inc. and the
stockholders of Telluride Holdings,
Inc.
|
|
O
|
|
|
10.1 |
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated |
|
|
|
|
|
|
|
|
By Reference from |
|
|
|
|
Exhibit Number |
|
Description |
|
Document |
|
No. in Document |
|
Page |
10.15
|
|
Form of Warrant to be issued to the
stockholders of Telluride Holdings,Inc.
|
|
O
|
|
|
10.2 |
|
|
|
|
10.16
|
|
Amendment to Employment Agreement
between Ladenburg Thalmann Financial
Services Inc., Ladenburg Thalmann &
Co. Inc. and Mark Zeitchick.*
|
|
|
|
P |
10.3 |
|
|
|
|
10.17
|
|
Debt Exchange Agreement, dated as of
February 13, 2007, among Ladenburg
Thalmann Financial Services Inc. and
New Valley LLC.
|
|
Q
|
|
|
10.1 |
|
|
|
|
21
|
|
List of Subsidiaries
|
|
|
|
|
|
|
|
Filed Herewith |
|
23.1
|
|
Consent of Eisner LLP
|
|
|
|
|
|
|
|
Filed Herewith |
|
31.1
|
|
Certification of Chief Executive
Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
Filed Herewith |
|
31.2
|
|
Certification of Chief Financial
Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
Filed Herewith |
|
32.1
|
|
Certification of Chief Executive
Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
Filed Herewith |
|
32.2
|
|
Certification of Chief Financial
Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
Filed Herewith |
|
|
|
A. |
|
Registration statement on Form SB-2 (File No. 333-31001). |
|
B. |
|
Annual report on Form 10-K for the year ended August 24, 1999. |
|
C. |
|
Quarterly report on Form 10-Q for the quarter ended June 30, 2006. |
|
D. |
|
Quarterly report on Form 10-Q for the quarter ended March 31, 2002. |
|
E. |
|
Registration statement on Form S-8 (File No. 333-139254). |
|
F. |
|
Quarterly report on Form 10-Q for the quarter ended June 30, 2001. |
|
G. |
|
Registration statement on Form S-3 (File No. 333-81964). |
|
H. |
|
Definitive proxy statement filed with the SEC on October 3, 2002 relating to the annual
meeting of shareholders held on November 6, 2002. |
|
I. |
|
Annual report on Form 10-K for the year ended December 31, 2002. |
|
J. |
|
Quarterly report on Form 10-Q for the quarter ended September 30, 2003. |
47
|
|
|
K. |
|
Current report on Form 8-K, dated March 25, 2005 and filed with the SEC on March 31, 2005. |
|
L. |
|
Current report on Form 8-K, dated July 10, 2006 and filed with the SEC on August 3, 2006. |
|
M. |
|
Current report on Form 8-K, dated September 11, 2006 and filed with the SEC on September 12,
2006. |
|
N. |
|
Current report on Form 8-K, dated September 21, 2006 and filed with the SEC on September 27,
2006. |
|
O. |
|
Current report on Form 8-K, dated September 6, 2006 and filed with the SEC on September 7,
2006. |
|
P. |
|
Current report on Form 8-K/A, dated September 6, 2006 and filed with the SEC on October 24,
2006. |
|
Q. |
|
Current report on Form 8-K, dated February 13, 2007 and filed with the SEC on February 14,
2007. |
|
* |
|
Management Compensation Contract |
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Registrant)
Dated: March 16, 2007
|
|
|
By: |
/s/ Diane Chillemi
|
|
|
|
Name: |
Diane Chillemi |
|
|
|
Title: |
Vice President and Chief Financial Officer |
|
|
POWER OF ATTORNEY
The undersigned directors and officers of Ladenburg Thalmann Financial Services Inc. hereby
constitute and appoint Diane Chillemi, Richard J. Lampen and Mark Zeitchick, and each of them, with
full power to act without the other and with full power of substitution and resubstitution, our
true and lawful attorneys-in-fact with full power to execute in our name and behalf in the
capacities indicated below, this Annual Report on Form 10-K and any and all amendments thereto and
to file the same, with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby ratify and confirm all that such attorneys-in-fact,
or any of them, or their substitutes shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated
on March 16, 2007.
|
|
|
Signatures |
|
Title |
|
|
|
/s/ Richard J. Lampen
Richard J. Lampen
|
|
President and Chief Executive Officer (Principal
Executive Officer) |
|
|
|
/s/ Diane Chillemi
Diane Chillemi
|
|
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer) |
|
|
|
/s/ Henry C. Beinstein
Henry C. Beinstein
|
|
Director |
|
|
|
/s/ Robert J. Eide
Robert J. Eide
|
|
Director |
49
|
|
|
Signatures |
|
Title |
|
|
|
/s/ Phillip Frost, M.D.
Phillip Frost, M.D.
|
|
Director |
|
|
|
/s/ Brian S. Genson
Brian S. Genson
|
|
Director |
|
|
|
/s/ Saul Gilinski
Saul Gilinski
|
|
Director |
|
|
|
/s/ Dr. Richard M. Krasno
Dr. Richard M. Krasno
|
|
Director |
|
|
|
/s/ Howard M. Lorber
Howard M. Lorber
|
|
Director |
|
|
|
/s/ Jeffrey S. Podell
Jeffrey S. Podell
|
|
Director |
|
|
|
/s/ Richard J. Rosenstock
Richard J. Rosenstock
|
|
Director |
|
|
|
/s/ Mark Zeitchick
Mark Zeitchick
|
|
Director |
50
LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006
ITEMS 8 and 15(a) (1) AND (2)
INDEX TO FINANCIAL STATEMENTS
Financial Statements of the Registrant and its subsidiaries required to be included in
Items 8 and 16(a) (1) and (2) are listed below:
FINANCIAL STATEMENTS:
|
|
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|
|
Page |
Ladenburg Thalmann Financial Services Inc. Consolidated Financial Statements |
|
|
|
|
F-2 |
|
|
F-3 |
|
|
F-4 |
|
|
F-5 |
|
|
F-7 |
|
|
F-9 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Ladenburg Thalmann Financial Services Inc.
We have audited the accompanying consolidated statements of financial condition of Ladenburg
Thalmann Financial Services Inc. and its subsidiaries (the Company) as of December 31, 2006 and
2005, and the related consolidated statements of operations, changes in shareholders equity
(capital deficit) and cash flows for each of the three years in the period ended December 31, 2006.
These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Ladenburg Thalmann Financial Services Inc. and its
subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of
accounting for stock-based compensation effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2006, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 16, 2007 expressed an unqualified opinion thereon.
/s/ Eisner LLP
New York, New York
March 16, 2007
F-2
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,983 |
|
|
$ |
10,936 |
|
Trading securities owned |
|
|
204 |
|
|
|
1,904 |
|
Receivables from clearing brokers |
|
|
24,851 |
|
|
|
20,947 |
|
Receivable from other brokers |
|
|
4,249 |
|
|
|
|
|
Exchange memberships owned, at historical cost |
|
|
120 |
|
|
|
1,413 |
|
NYSE Group Inc. common stock, not readily marketable |
|
|
1,228 |
|
|
|
|
|
Investment in fund manager |
|
|
448 |
|
|
|
|
|
Furniture, equipment and leasehold improvements, net |
|
|
706 |
|
|
|
966 |
|
Restricted assets |
|
|
1,398 |
|
|
|
1,313 |
|
Intangible assets, net of accumulated amortization of $144 |
|
|
3,035 |
|
|
|
|
|
Other assets |
|
|
4,121 |
|
|
|
1,820 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
47,343 |
|
|
$ |
39,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased |
|
$ |
2,037 |
|
|
$ |
8,857 |
|
Accrued compensation |
|
|
3,764 |
|
|
|
2,488 |
|
Accounts payable and accrued liabilities |
|
|
5,152 |
|
|
|
6,735 |
|
Deferred rent |
|
|
1,552 |
|
|
|
1,529 |
|
Accrued interest to former parent |
|
|
1,504 |
|
|
|
1,056 |
|
Notes payable, including $5,000 to former parent |
|
|
5,000 |
|
|
|
5,667 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
19,009 |
|
|
|
26,332 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8) |
|
|
|
|
|
|
|
|
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 in 2006 and 2005, respectively; shares issued and outstanding,
155,972,805 in 2006 and 141,590,529 in 2005 |
|
|
15 |
|
|
|
14 |
|
Additional paid-in capital |
|
|
132,346 |
|
|
|
122,532 |
|
Unearned employee stock-based compensation |
|
|
|
|
|
|
(893 |
) |
Accumulated deficit |
|
|
(104,027 |
) |
|
|
(108,686 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
28,334 |
|
|
|
12,967 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
47,343 |
|
|
$ |
39,299 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-3
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
$ |
15,123 |
|
|
$ |
15,937 |
|
|
$ |
27,422 |
|
Principal transactions, net |
|
|
11,130 |
|
|
|
4,042 |
|
|
|
2,798 |
|
Investment banking fees |
|
|
6,316 |
|
|
|
4,476 |
|
|
|
1,653 |
|
Investment advisory fees |
|
|
2,381 |
|
|
|
1,265 |
|
|
|
193 |
|
Interest and dividends |
|
|
2,790 |
|
|
|
2,082 |
|
|
|
1,495 |
|
Syndications and underwritings |
|
|
2,068 |
|
|
|
491 |
|
|
|
496 |
|
Gain on NYSE merger transaction |
|
|
4,859 |
|
|
|
|
|
|
|
|
|
Realized loss on NYSE Group Inc. restricted common stock |
|
|
(1,001 |
) |
|
|
|
|
|
|
|
|
Gain on sale of CBOE membership |
|
|
1,125 |
|
|
|
|
|
|
|
|
|
Other income |
|
|
2,067 |
|
|
|
2,397 |
|
|
|
4,384 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
46,858 |
|
|
|
30,690 |
|
|
|
38,441 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
26,735 |
|
|
|
22,756 |
|
|
|
27,697 |
|
Non-cash compensation |
|
|
2,885 |
|
|
|
728 |
|
|
|
|
|
Brokerage, communication and clearance fees |
|
|
2,923 |
|
|
|
2,387 |
|
|
|
3,197 |
|
Rent and occupancy, net of sublease revenue |
|
|
2,183 |
|
|
|
2,635 |
|
|
|
3,700 |
|
Professional services |
|
|
2,558 |
|
|
|
3,054 |
|
|
|
3,393 |
|
Interest |
|
|
499 |
|
|
|
1,027 |
|
|
|
2,189 |
|
Depreciation and amortization |
|
|
754 |
|
|
|
811 |
|
|
|
1,037 |
|
Write-off of furniture, fixtures and leasehold improvements, net |
|
|
41 |
|
|
|
62 |
|
|
|
546 |
|
Debt conversion expense |
|
|
|
|
|
|
19,359 |
|
|
|
|
|
Other |
|
|
3,432 |
|
|
|
3,788 |
|
|
|
6,595 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
42,010 |
|
|
|
56,607 |
|
|
|
48,354 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes (benefit) |
|
|
4,848 |
|
|
|
(25,917 |
) |
|
|
(9,913 |
) |
Income taxes (benefit) |
|
|
189 |
|
|
|
54 |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
4,659 |
|
|
|
(25,971 |
) |
|
|
(9,786 |
) |
Loss from discontinued operations, net of limited partners interest and
income taxes |
|
|
|
|
|
|
|
|
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,659 |
|
|
$ |
(25,971 |
) |
|
$ |
(9,854 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) per Common Share (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.03 |
|
|
$ |
(0.24 |
) |
|
$ |
(0.22 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.03 |
|
|
$ |
(0.24 |
) |
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computation: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
148,693,521 |
|
|
|
108,948,623 |
|
|
|
45,144,481 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
153,087,961 |
|
|
|
108,948,623 |
|
|
|
45,144,481 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-4
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS EQUITY (CAPITAL DEFICIT)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in |
|
|
Stock-based |
|
|
Accumulated |
|
|
|
|
|
|
Common Stock |
|
|
Capital |
|
|
Compensation |
|
|
Deficit |
|
|
Total |
|
|
|
Shares |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003 |
|
|
43,627,130 |
|
|
$ |
4 |
|
|
$ |
56,685 |
|
|
$ |
|
|
|
$ |
(72,861 |
) |
|
$ |
(16,172 |
) |
Issuance of shares of common stock in
connection with settlement of arbitration
claims |
|
|
2,000,000 |
|
|
|
1 |
|
|
|
1,419 |
|
|
|
|
|
|
|
|
|
|
|
1,420 |
|
Issuance of shares of common stock under
employee stock purchase plan |
|
|
918,842 |
|
|
|
|
|
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
479 |
|
Exercise of stock options |
|
|
137,298 |
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
91 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,854 |
) |
|
|
(9,854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
|
46,683,270 |
|
|
|
5 |
|
|
|
58,674 |
|
|
|
|
|
|
|
(82,715 |
) |
|
|
(24,036 |
) |
Issuance of shares of common stock under
employee stock purchase plan |
|
|
686,096 |
|
|
|
|
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
307 |
|
Exercise of stock options |
|
|
44,767 |
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
Issuance of shares of common stock under
performance equity plan |
|
|
580,000 |
|
|
|
|
|
|
|
374 |
|
|
|
(113 |
) |
|
|
|
|
|
|
261 |
|
Issuance of shares of common stock to
employees pursuant to stock purchase
agreements |
|
|
10,391,666 |
|
|
|
1 |
|
|
|
6,149 |
|
|
|
(1,474 |
) |
|
|
|
|
|
|
4,676 |
|
Stock options granted to Advisory Board |
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
34 |
|
Amortization of unearned employee
stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
694 |
|
|
|
|
|
|
|
694 |
|
Conversion of senior convertible notes |
|
|
51,778,678 |
|
|
|
5 |
|
|
|
42,053 |
|
|
|
|
|
|
|
|
|
|
|
42,058 |
|
Issuance of shares of common stock to former
debtholders pursuant to private equity
offering, net of expenses of $87 |
|
|
22,222,222 |
|
|
|
2 |
|
|
|
9,911 |
|
|
|
|
|
|
|
|
|
|
|
9,913 |
|
Issuance of shares of common stock to
unrelated parties pursuant to private equity
offering, net of expenses of $56 |
|
|
13,824,331 |
|
|
|
1 |
|
|
|
6,164 |
|
|
|
|
|
|
|
|
|
|
|
6,165 |
|
Repurchase and retirement of shares of
common stock |
|
|
(4,620,501 |
) |
|
|
|
|
|
|
(1,155 |
) |
|
|
|
|
|
|
|
|
|
|
(1,155 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,971 |
) |
|
|
(25,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
248,298 |
|
|
|
|
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
|
267 |
|
Exercise of stock options, net of 451,585
shares tendered in payment of exercise price. |
|
|
1,469,607 |
|
|
|
|
|
|
|
489 |
|
|
|
|
|
|
|
|
|
|
|
489 |
|
Stock options granted to Advisory Board |
|
|
|
|
|
|
|
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
312 |
|
Elimination of unearned employee stock-based
compensation to additional paid-in capital
upon adoption of SFAS No. 123R |
|
|
|
|
|
|
|
|
|
|
(893 |
) |
|
|
893 |
|
|
|
|
|
|
|
|
|
Amortization of unearned employee
stock-based compensation issued in 2005 |
|
|
|
|
|
|
|
|
|
|
803 |
|
|
|
|
|
|
|
|
|
|
|
803 |
|
Stock-based compensation to employees in 2006 |
|
|
|
|
|
|
|
|
|
|
1,770 |
|
|
|
|
|
|
|
|
|
|
|
1,770 |
|
Issuance of shares of common stock 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 |
|
F-5
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS EQUITY (CAPITAL DEFICIT)
(Dollars in thousands) - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in |
|
|
Stock-based |
|
|
Accumulated |
|
|
|
|
|
|
Common Stock |
|
|
Capital |
|
|
Compensation |
|
|
Deficit |
|
|
Total |
|
|
|
Shares |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued for interest in fund manager |
|
|
|
|
|
|
|
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
399 |
|
Warrants and common stock issued for acquisition
of Capitalink |
|
|
4,000,000 |
|
|
|
|
|
|
|
2,122 |
|
|
|
|
|
|
|
|
|
|
|
2,122 |
|
Issuance of shares of common stock to employees
pursuant to stock purchase agreements |
|
|
266,480 |
|
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
172 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,659 |
|
|
|
4,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
155,972,805 |
|
|
$ |
15 |
|
|
$ |
132,346 |
|
|
$ |
|
|
|
$ |
(104,027 |
) |
|
$ |
28,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-6
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,659 |
|
|
$ |
(25,971 |
) |
|
$ |
(9,854 |
) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
591 |
|
|
|
811 |
|
|
|
1,037 |
|
Write-off of furniture, fixtures and leasehold improvements, net |
|
|
41 |
|
|
|
62 |
|
|
|
546 |
|
Adjustment to deferred rent |
|
|
(149 |
) |
|
|
(1,305 |
) |
|
|
(992 |
) |
Amortization of intangible assets |
|
|
144 |
|
|
|
|
|
|
|
|
|
Amortization of investment in fund manager |
|
|
19 |
|
|
|
|
|
|
|
|
|
Accrued interest |
|
|
448 |
|
|
|
681 |
|
|
|
2,069 |
|
Forgiveness of promissory note payable |
|
|
(666 |
) |
|
|
(667 |
) |
|
|
(667 |
) |
Debt conversion expense |
|
|
|
|
|
|
19,359 |
|
|
|
|
|
Non-cash compensation expense |
|
|
2,885 |
|
|
|
728 |
|
|
|
|
|
Limited partners interest in discontinued operations |
|
|
|
|
|
|
|
|
|
|
522 |
|
Gain on NYSE merger transaction in excess of proceeds of sale of $3,128 |
|
|
(1,732 |
) |
|
|
|
|
|
|
|
|
Realized loss on NYSE Group Inc. |
|
|
1,001 |
|
|
|
|
|
|
|
|
|
Gain on sale of CBOE membership |
|
|
(1,125 |
) |
|
|
|
|
|
|
|
|
Gain on debt cancellation |
|
|
|
|
|
|
|
|
|
|
(1,310 |
) |
Gain on sale of discontinued operations |
|
|
|
|
|
|
|
|
|
|
(105 |
) |
Other |
|
|
(68 |
) |
|
|
88 |
|
|
|
337 |
|
(Increase) decrease in operating assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities owned |
|
|
1,735 |
|
|
|
(1,751 |
) |
|
|
860 |
|
Receivables from clearing broker |
|
|
(3,904 |
) |
|
|
(10,599 |
) |
|
|
10,897 |
|
Receivables from other broker-dealers |
|
|
(4,249 |
) |
|
|
|
|
|
|
|
|
Due from affiliates |
|
|
(1 |
) |
|
|
121 |
|
|
|
326 |
|
Other assets |
|
|
(620 |
) |
|
|
2,042 |
|
|
|
428 |
|
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased |
|
|
(6,820 |
) |
|
|
8,829 |
|
|
|
(4,042 |
) |
Accrued compensation |
|
|
1,276 |
|
|
|
479 |
|
|
|
(188 |
) |
Accounts payable and accrued liabilities |
|
|
(2,462 |
) |
|
|
255 |
|
|
|
(726 |
) |
Due to affiliates |
|
|
|
|
|
|
(34 |
) |
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(8,997 |
) |
|
|
(6,872 |
) |
|
|
(828 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of relationships and customer accounts |
|
|
(1,026 |
) |
|
|
|
|
|
|
|
|
Purchases of furniture, equipment and leasehold improvements |
|
|
(369 |
) |
|
|
(237 |
) |
|
|
(398 |
) |
Net proceeds from sale of furniture and equipment |
|
|
|
|
|
|
|
|
|
|
29 |
|
Proceeds from sales of exchange memberships |
|
|
1,920 |
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued operations |
|
|
|
|
|
|
|
|
|
|
401 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
525 |
|
|
|
(237 |
) |
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity offerings |
|
|
3,675 |
|
|
|
8,968 |
|
|
|
|
|
Issuance of common stock other than private equity offerings |
|
|
929 |
|
|
|
5,265 |
|
|
|
571 |
|
Repurchase of common stock |
|
|
|
|
|
|
(1,155 |
) |
|
|
|
|
Issuance of subordinated notes payable |
|
|
20,000 |
|
|
|
15,000 |
|
|
|
4,000 |
|
Issuance of other notes payable |
|
|
|
|
|
|
3,500 |
|
|
|
3,500 |
|
Repayment of subordinated notes payable |
|
|
(20,000 |
) |
|
|
(15,000 |
) |
|
|
(6,500 |
) |
Repayment of senior convertible notes payable |
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
(Increase) decrease in restricted assets |
|
|
(85 |
) |
|
|
(253 |
) |
|
|
3 |
|
Distributions to limited partners of discontinued operations |
|
|
|
|
|
|
|
|
|
|
(2,628 |
) |
Contributions from limited partners of discontinued operations |
|
|
|
|
|
|
|
|
|
|
1,158 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
4,519 |
|
|
|
16,325 |
|
|
|
(896 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(3,953 |
) |
|
|
9,216 |
|
|
|
(1,692 |
) |
Cash and cash equivalents, beginning of year |
|
|
10,936 |
|
|
|
1,720 |
|
|
|
3,412 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
6,983 |
|
|
$ |
10,936 |
|
|
$ |
1,720 |
|
|
|
|
|
|
|
|
|
|
|
F-7
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
139 |
|
|
$ |
323 |
|
|
$ |
74 |
|
Taxes paid |
|
|
344 |
|
|
|
26 |
|
|
|
29 |
|
Non-cash financing transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Warrant issued for acquisition of customer accounts |
|
$ |
698 |
|
|
$ |
|
|
|
$ |
|
|
Warrant issued for interest in fund manager |
|
|
399 |
|
|
|
|
|
|
|
|
|
Warrant and common stock issued for acquisition of Capitalink |
|
|
2,122 |
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
Settlement of liability with shares of common stock |
|
|
|
|
|
|
|
|
|
|
1,420 |
|
See accompanying notes to consolidated financial statements
F-8
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
1. |
|
Description of Business |
|
|
The 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 and investment banking
services. |
|
|
|
Ladenburg is a full service broker-dealer that has been a member of the New York Stock
Exchange (NYSE) since 1879. Ladenburg clears its customers transactions through a
correspondent clearing broker on a fully disclosed basis. Broker-dealer activities include
principal and agency trading, 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, brokerage and trading
professionals. Ladenburg is subject to regulation by, among others, the Securities and
Exchange Commission (SEC), the NYSE, National Association of Securities Dealers, Inc.
(NASD), Commodities Futures Trading Commission and National Futures Association. (See
Note 6.) |
|
|
|
All significant intercompany balances and transactions have been eliminated. |
|
|
|
2. |
|
Summary of Significant Accounting Policies |
|
|
The preparation of these financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. |
|
|
|
The Company considers all highly liquid financial instruments with an original maturity of
three months or less to be cash equivalents. |
|
|
|
Securities owned and securities sold, but not yet purchased, which are traded on a national
securities exchange or listed on NASDAQ are valued at the last reported sales prices of the
year. Futures contracts are also valued at their last reported sales price. Securities
owned, which have exercise or holding period restrictions, are valued at fair value as
determined by the Companys management. Unrealized gains and losses resulting from changes
in valuation are reflected in principal transactions. See Note 5 for valuation of NYSE
Group Inc. common stock. |
|
|
|
Exchange memberships owned are valued at cost. |
|
|
|
Principal transactions, agency commissions and related clearing expenses are recorded on a
trade-date basis. |
|
|
|
Investment banking revenue includes underwriting and private placement agency fees earned
through participation in public offerings and private placements of equity and convertible
debt securities and fees earned as financial advisor in mergers and acquisitions and
similar transactions. Underwriting revenue is earned in securities offerings in which
Ladenburg acts as an underwriter. Management fees and underwriting and private placement
fees are recorded on the offering date, when it can be determined that the fees have been
irrevocably earned. Merger and acquisition fees and other advisory service revenue are
generally earned and recognized only upon successful completion of the engagement. |
|
|
|
Underwriting revenue is presented net of related expenses. As co-manager for registered
equity underwriting transactions, management must estimate Ladenburgs share of
transaction-related expenses incurred by the lead
|
F-9
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
manager. Such amounts are adjusted to reflect actual expenses in the period in which
Ladenburg receives the final settlement, typically 90 days following the closing
transaction. |
|
|
|
Investment advisory and other asset management fees are received quarterly, in advance, but
are recognized as earned on a pro rata basis over the term of the contract. |
|
|
|
Dividends are recorded on an ex-dividend date basis and interest is recorded on an accrual
basis. |
|
|
|
Depreciation of furniture and equipment is provided by the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are amortized on a
straight-line basis over the lease term. |
|
|
|
Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs
Associated with Exit or Disposal Activities requires that a cost associated with an exit
or disposal activity be recognized and measured initially at its fair value in the period
in which the liability is incurred. For operating leases, a liability for costs that will
continue to be incurred under the lease for its remaining term without economic benefit to
the entity shall be recognized and measured at its fair value when the entity ceases using
the right conveyed by the lease (the cease-use date). The fair value of the liability at
the cease-use date shall be determined based on the remaining lease rentals, reduced by
estimated sublease rentals that could be reasonably obtained for the property. (See Note
8.) |
|
|
|
Effective January 1, 2006, the Company has adopted SFAS No. 123 (Revised 2004), Share-Based
Payment (SFAS No. 123R), which requires an entity to measure the cost of employee,
officer and director services received in exchange for an award of equity instruments,
including stock options, based on the grant-date fair value of the award. The cost is
recognized as compensation expense over the service period, which would normally be the
vesting period of the options. 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. In addition, balances of unearned compensation
attributable to awards granted prior to the adoption of SFAS No. 123R were netted against
additional paid-in capital. As a result of adopting SFAS No. 123R, the Companys income
before income taxes and net income for the year ended December 31, 2006 were $1,047, or
$0.01 per share, lower than if it had continued to account for share-based compensation
under APB No. 25. |
|
|
|
The table below illustrates the effect on the Companys net loss for the years ended
December 31, 2005 and 2004 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. (See
Note 15.) |
F-10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net loss, as reported |
|
$ |
(25,971 |
) |
|
$ |
(9,854 |
) |
Stock-based employee compensation determined under the fair value based method |
|
|
(2,314 |
) |
|
|
(1,269 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(28,285 |
) |
|
$ |
(11,123 |
) |
|
|
|
|
|
|
|
Net loss per Common Share (basic and diluted), as reported |
|
$ |
(0.24 |
) |
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
Pro forma net loss per Common Share (basic and diluted) |
|
$ |
(0.26 |
) |
|
$ |
(0.25 |
) |
|
|
|
|
|
|
|
|
|
Certain reclassifications have been made to prior period financial information to conform
to the current period presentation. |
|
|
|
3. |
|
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 SEC issued Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements. SAB 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 adoption of SAB No.108 did not have any impact on the Companys
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 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
adjustment to the opening balance of retained earnings. Such retrospective application is
required for positions in a financial instrument that trades in an active market held by a
broker-dealer that was measured at fair value using a blockage factor which is no longer
permitted upon application of this statement. The Company has not completed its assessment
of the impact of this standard on its consolidated financial statements. |
|
|
|
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value that are not currently required
to be measured at fair value. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007, with early adoption permitted provided the entity also elects to apply
the provisions of SFAS No. 157. The Company is currently evaluating the impact of adopting
SFAS No. 159 on its consolidated financial statements. |
|
|
|
4. |
|
Securities Owned and Securities Sold, But Not Yet Purchased |
|
|
The components of securities owned and securities sold, but not yet purchased as of
December 31, 2006 and 2005 are as follows: |
F-11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
Securities |
|
|
Sold, But Not |
|
|
|
Owned |
|
|
Yet Purchased |
|
December 31, 2006 |
|
|
|
|
|
|
|
|
Common stock and warrants |
|
$ |
197 |
|
|
$ |
2,032 |
|
U.S. Government obligations |
|
|
6 |
|
|
|
|
|
Corporate bonds |
|
|
1 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
$ |
204 |
|
|
$ |
2,037 |
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
Common stock and warrants |
|
$ |
1,852 |
|
|
$ |
8,854 |
|
U.S. Government obligations |
|
|
6 |
|
|
|
|
|
Municipal obligations |
|
|
45 |
|
|
|
|
|
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 December 31, 2006 and 2005, approximately $167 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. |
|
|
|
5. |
|
Sales of Exchange Memberships |
|
|
NYSE |
|
|
|
As of December 31, 2005, Ladenburg owned one membership on the NYSE, which had been
accounted for 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. |
|
|
|
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 |
F-12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
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. As of December 31, 2006, the estimated fair value of the restricted
shares was $2,230. |
|
|
|
Included in revenues for the year ended December 31, 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 realized losses of $1,001, consisting of a loss of $440 on the sale of 51,900 shares
and a 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. |
|
|
|
CBOE |
|
|
|
On October 24, 2006, Ladenburg sold its membership on the Chicago Board of Options Exchange
(CBOE). The membership cost $425 and was sold for $1,550, resulting in a gain of $1,125. |
|
|
|
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 December 31, 2006, Ladenburg had net
capital, as defined, of $16,696, 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 $16,446 and $16,196, 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. |
|
|
|
7. |
|
Furniture, Equipment and Leasehold Improvements |
|
|
Components of furniture, equipment and leasehold improvements included in the consolidated
statements of financial condition were as follows: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Cost: |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
$ |
606 |
|
|
$ |
529 |
|
Computer equipment |
|
|
1,179 |
|
|
|
3,835 |
|
Furniture and fixtures |
|
|
602 |
|
|
|
1,272 |
|
Other |
|
|
1,388 |
|
|
|
2,377 |
|
|
|
|
|
|
|
|
|
|
|
3,775 |
|
|
|
8,013 |
|
Less accumulated depreciation and amortization |
|
|
(3,069 |
) |
|
|
(7,047 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
706 |
|
|
$ |
966 |
|
|
|
|
|
|
|
|
|
|
|
8. |
|
Commitments and Contingencies |
|
|
Operating Leases |
|
|
|
The Company is obligated under several non-cancelable lease agreements for office space,
expiring in various years through June 2015. Certain leases have provisions for escalation
based on specified increases in costs incurred by the landlord. The Company is subleasing a
portion of its office space. The subleases expire at various dates through June 2015. |
F-13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
As of December 31, 2006, the future minimum lease payments, and future sublease rentals
were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending |
|
Lease |
|
|
Sublease |
|
|
|
|
December 31, |
|
Commitments |
|
|
Rentals |
|
|
Net |
|
2007 |
|
$ |
5,879 |
|
|
$ |
5,117 |
|
|
$ |
762 |
|
2008 |
|
|
6,083 |
|
|
|
5,645 |
|
|
|
438 |
|
2009 |
|
|
5,557 |
|
|
|
5,336 |
|
|
|
221 |
|
2010 |
|
|
5,389 |
|
|
|
4,018 |
|
|
|
1,371 |
|
2011 |
|
|
5,392 |
|
|
|
3,340 |
|
|
|
2,052 |
|
Thereafter |
|
|
20,045 |
|
|
|
11,294 |
|
|
|
8,751 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
48,345 |
|
|
$ |
34,750 |
|
|
$ |
13,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the above, one of the leases obligates the Company to occupy additional
space at the landlords option, which may result in aggregate additional lease payments of
up to $470 through June 2015. |
|
|
|
Commencing, in 2006, the Company leased office space pursuant to a month to month lease
from an entity affiliated with Dr. Frost, the Companys Chairman of the Board. Rent
expense under such lease amounted to $33 in 2006. |
|
|
|
Deferred rent shown in the consolidated statements of financial condition represents the
difference between rent payable calculated over the life of the leases on a straight-line
basis (net of lease incentives) and rent payable on a cash basis. |
|
|
|
In February 2006, the Companys subsidiary, Ladenburg Capital Management Inc. (Ladenburg
Capital), entered into a settlement agreement with the landlord for its office space in
New York City which Ladenburg Capital was forced to vacate during 2001 due to the events of
September 11, 2001. Under the terms of the settlement with the landlord (who had filed for
bankruptcy reorganization), the subsidiary paid the landlord $1,900 following approval of
the settlement by the bankruptcy court in March 2006. The lease, had it not terminated as a
result of the events of September 11, 2001, would have expired by its terms in March 2010.
The liability provided at December 31, 2004 in connection with this matter was increased by
$240 with a corresponding increase in rent expense for the year ended December 31, 2005 to
reflect the settlement agreement. |
|
|
|
In May 2003, Ladenburg relocated employees from its former New York City office to its
Melville, New York office. As a result of this move, Ladenburg ceased using one of the
several floors it occupied in its former New York City office, which it subleased in
September 2004 for the remaining term of its lease. The fair value of the Companys
obligation with respect to the lease computed in accordance with SFAS No. 146 was
approximately $1,500 at inception of the sublease and approximated the balance of the
Companys deferred rent liability relating to such space. Accordingly, no charge to
operations was required in connection with the sublease. The balance of this liability as
of December 31, 2006 and 2005 was approximately $503 and $364, respectively, and is
included in accrued expenses and other liabilities. The change in this liability results
from net cash flows relating to the space, including certain costs in connection with the
sublease. |
|
|
|
In the third quarter of 2004, Ladenburg ceased using a portion of another floor of its
former New York City office. Accordingly, the related leasehold improvements were
written-off. In conjunction with the write-off of these leasehold improvements, the
unamortized deferred rent credit representing reimbursement from the landlord for such
leasehold improvements was also written-off. The write-off of unamortized leasehold
improvements of $1,275, net of the write-off of the unamortized deferred rent credit of
$729, resulted in a net charge to operations in 2004 of $546. In November 2004, Ladenburg
subleased the space through June 30, 2010, for a sub-rental equal to its lease commitment
with the landlord through the sublease period. |
|
|
|
In December 2005, Ladenburg entered into an agreement to sublet the remaining floor of its
former New York City office, commencing no later than March 15, 2006, for a term through
the end of its lease period. Accordingly, the remaining leasehold improvements were
written-off as of December 31, 2005. In conjunction with the write-off of leasehold
improvements, a portion of the unamortized deferred rent credit representing reimbursement
from the landlord for such leasehold improvements was also written-off. The write-off of
unamortized leasehold improvements of $1,326, net of the write-off of $1,264 of the $2,093
of unamortized deferred rent credit resulted in a net charge to operations in 2005 of $62.
The $829 balance of the unamortized |
F-14
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
deferred rent credit was equivalent to the fair value of the Companys obligation with
respect to the lease. The balance of this liability as of December 31, 2006 was
approximately $86 and is included in accrued expenses and other liabilities. The decrease
in this liability results from net cash flows relating to the space, including certain
costs in connection with the sublease. |
|
|
|
At December 31, 2006 and 2005, Ladenburg had utilized a letter of credit in the amount of
$1,000 which in both years was collateralized by $1,094 of Ladenburgs investment in a
money market fund that is classified as restricted assets on the consolidated statements of
financial condition. The letter of credit is used as collateral for the lease of the
Companys former New York City office space. Pursuant to the lease agreement, the
requirement to maintain this letter of credit facility expired on December 31, 2006 and the
restriction was removed from the investment in February 2007. |
|
|
|
Litigation and Regulatory Matters |
|
|
|
In September 2005, Ladenburg and Ladenburg Capital settled their claim with the insurance
carrier relating to the events of September 11, 2001, for a total of $2,350. The excess of
the insurance reimbursement over the $2,118 receivable previously reflected in other
assets, amounted to $232 which was included in other income in the Companys statement of
operations for 2005. In addition, the insurance carrier reimbursed Ladenburg Capital for an
additional $150 in April 2006 for a portion of the payment Ladenburg Capital made to its
New York City landlord in settling its obligation relating to the vacated premises. |
|
|
|
In May 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; in July 2006,
Ladenburgs motion to reconsider portions of that decision was denied. A motion to dismiss
certain of the claims as re-pleaded by plaintiff is currently pending. The Company believes
the plaintiffs claims are without merit and intends to vigorously defend against them. |
|
|
|
In May 2004, the NASD contacted Ladenburg regarding an informal investigation into past
activities by it, Ladenburg Capital and certain of their employees involving potential
violations of NASD Rule 2440 and NASD Interpretive Memorandum 2440(c)(5) relating to fair
prices and commissions. On September 15, 2004, Ladenburg received a Wells Letter from the
staff of the NASD. The Wells Letter stated that the staff of the NASD intends to recommend
that disciplinary action be brought against Ladenburg for violating certain conduct rules
of the NASD, including NASD Conduct Rule 2440 and NASD Interpretive Memorandum 2440(c)(5)
relating to fair prices and commissions, and Section 10(b) of the Securities Exchange Act
of 1934, as amended. The NASD previously delivered similar Wells Letters to five employees
of Ladenburg generally alleging violations by them of the same NASD and SEC rules.
Ladenburg and the NASD have resolved this matter. On March 23, 2005, without admitting or
denying the NASDs allegations or findings, Ladenburg consented to entry of an Acceptance,
Waiver and Consent in which the NASD found that Ladenburg violated NASD Conduct Rule 2440,
NASD Interpretive Memorandum 2440(c)(5), and NASD Conduct Rules 2110 (by virtue of
violating Sections 17(a)(2) and (3) of the Securities Act of 1933), 3010 and 2110. In
connection with the settlement, Ladenburg reimbursed customers approximately $1,200, plus
interest. Ladenburg was also censured and agreed to a fine in the amount of $275. A
liability of $1,555 related to the settlement was provided at December 31, 2004 with a
corresponding charge to operations for the year then ended. The $275 fine was paid in March
2005, and in June 2005, Ladenburg reimbursed these customers approximately $1,200 plus $153
of interest. In addition, Ladenburg has implemented recommendations made by an independent
consultant relating to Ladenburgs policies and procedures concerning the above-mentioned
NASD rules. |
|
|
|
In July 2004, the Company entered into settlement agreements with several individuals who
had brought arbitration claims against Ladenburg and Ladenburg Capital, arising out of
customer complaints relating to their |
F-15
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
activities as broker-dealers. Ladenburg Capital paid to the plaintiffs a total of $1,500 in
cash upon execution of the agreements and agreed to pay them a total of $400 in cash due in
four equal annual installments of $100 on each of July 15, 2005, 2006, 2007 and 2008.
Additionally, the Company issued to the plaintiffs a total of 2,000,000 shares of its
common stock valued at $1,420 ($0.71 per share). These agreements include the settlement of
a previously disclosed October 2003 arbitration award for $1,100 for which a loss had been
provided during 2003 and which the Company was seeking to have vacated. This settlement
resulted in a $2,220 charge to operations in 2004. |
|
|
|
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 this
action 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. |
|
|
|
In December 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 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 November 2006,
Ladenburgs motion to dismiss was granted in part and denied in part; the remaining claims
against Ladenburg are the claims for fraud and breach of contract. The Company believes
that the plaintiffs claims are without merit and intends vigorously to defend against
them. |
|
|
|
The Company is a defendant in other 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 December 31,
2006, the Companys subsidiaries are involved in several pending arbitrations in which
claimants are seeking substantial amounts of damages. 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. Such liability amounted to approximately
$483 at December 31, 2006 and $1,958 at December 31, 2005 (included in accounts payable and
accrued liabilities). During the fiscal years ended December 31, 2006, 2005 and 2004,
respectively, various settlements, including the settlements described above, resulted in a
net charge to operations of $35, $1,221, and $2,987 (included in other expenses). With
respect to other pending matters, the Company is unable to estimate a range of possible
loss; however, in the opinion of management, after consultation with counsel, the ultimate
resolution of these matters should not have a material adverse effect on the 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 in. 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 24 months from the respective date of the offering, or
not received at all if no business combination transactions are consummated during such
time period. As of December 31, 2006, Ladenburg had unrecorded potential deferred fees for
SPAC-related transactions of $13,400, which, net of expenses, amounted to approximately
$8,200. |
F-16
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
The Company files a consolidated federal income tax return and certain combined state and
local income tax returns with its subsidiaries. The Company is on a fiscal tax year ending
September 30th. |
|
|
|
Income taxes (benefit) consists of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and |
|
|
|
|
|
|
Federal |
|
|
Local |
|
|
Total |
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
100 |
|
|
$ |
89 |
|
|
$ |
189 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100 |
|
|
$ |
89 |
|
|
$ |
189 |
|
|
|
|
|
|
|
|
|
|
|
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
54 |
|
|
$ |
54 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
54 |
|
|
$ |
54 |
|
|
|
|
|
|
|
|
|
|
|
|
2004: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
(127 |
) |
|
$ |
(127 |
) |
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
(127 |
) |
|
$ |
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate (34%) to pretax
income(loss) from continuing operations as a result of the following differences: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Income (loss) from continuing operations before income taxes (benefit) |
|
$ |
4,848 |
|
|
$ |
(25,917 |
) |
|
$ |
(9,913 |
) |
|
|
|
|
|
|
|
|
|
|
Provision (benefit) under statutory U.S. tax rates |
|
|
1,648 |
|
|
|
(8,812 |
) |
|
|
(3,370 |
) |
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductibility of debt conversion expense |
|
|
|
|
|
|
6,582 |
|
|
|
|
|
Unrecognized net operating losses |
|
|
|
|
|
|
2,012 |
|
|
|
3,337 |
|
Utilization of net operating loss carryforward |
|
|
(1,346 |
) |
|
|
|
|
|
|
|
|
Other nondeductible items |
|
|
|
|
|
|
236 |
|
|
|
70 |
|
State taxes |
|
|
89 |
|
|
|
36 |
|
|
|
(84 |
) |
Other, net |
|
|
(202 |
) |
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) |
|
$ |
189 |
|
|
$ |
54 |
|
|
$ |
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for taxes in accordance with SFAS No. 109, Accounting for Income
Taxes, which requires the recognition of tax benefits or expense on the temporary
differences between the tax basis and book basis of its assets and liabilities. Deferred
tax assets and liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those differences are expected to be recovered
or settled. |
F-17
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
Deferred tax amounts are comprised of the following at December 31: |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Deferred tax assets (liabilities): |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
22,524 |
|
|
$ |
23,876 |
|
Accrued expenses |
|
|
1,654 |
|
|
|
1,141 |
|
Compensation and benefits |
|
|
510 |
|
|
|
330 |
|
Depreciation and amortization |
|
|
(22 |
) |
|
|
(90 |
) |
Unrealized gains |
|
|
(340 |
) |
|
|
(201 |
) |
Intangibles |
|
|
(1,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,276 |
|
|
|
25,056 |
|
Valuation allowance |
|
|
(23,276 |
) |
|
|
(25,056 |
) |
|
|
|
|
|
|
|
Net deferred taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
After consideration of all the evidence, both positive and negative, especially the fact
the Company sustained operating losses during 2005 and 2004, management has determined that
a valuation allowance at December 31, 2006 and 2005 was necessary to fully offset the
deferred tax assets based on the likelihood of future realization. At December 31, 2006,
the Company had net operating loss carryforwards of approximately $49,000, expiring in
various years from 2015 through 2026. |
|
|
Ladenburg has a 401(k) retirement plan (the Plan) which allows eligible employees to
invest a percentage of their pretax compensation, limited to the statutory maximum. The
Plan also allows Ladenburg to make matching and/or discretionary contributions. Ladenburg
did not make made matching contributions for 2006, 2005 or 2004. |
|
|
|
11. |
|
Off-Balance-Sheet Risk and Concentrations of Credit Risk |
|
|
Ladenburg does not carry accounts for customers or perform custodial functions related to
customers securities. Ladenburg introduces all of its customer transactions, which are not
reflected in these financial statements, to its primary clearing broker, which maintains
the customers accounts and clears such transactions. Additionally, the primary clearing
broker provides the clearing and depository operations for 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 currently provided by
one clearing broker, a large financial institution. At December 31, 2006 and 2005,
substantially all of the securities owned and the amounts due from clearing brokers
reflected in the consolidated statements of financial condition are positions held at and
amounts due from the one clearing broker. The Company is subject to credit risk should this
clearing broker be unable to fulfill its obligations. |
|
|
|
In the normal course of its business, Ladenburg enters into transactions in financial
instruments with off-balance sheet risk. These financial instruments consist of financial
futures contracts, written equity index option contracts and securities sold, but not yet
purchased. As of December 31, 2006 and 2005, Ladenburg was not contractually obligated for
any equity index or financial futures contracts. Ladenburg sold securities that it does
not currently own and will therefore be obligated to purchase such securities at a future
date. These obligations have been recorded in the financial statements at December 31, 2006
and 2005 at market values of the related securities and Ladenburg will incur a loss if the
market value of the securities increases subsequent to December 31, 2006 (see Note 4). |
F-18
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
The Company and its subsidiaries maintain cash in bank deposit accounts, which, at times,
may exceed federally insured limits. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash. |
|
|
The components of notes payable are as follows: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Notes payable in connection with clearing agreement |
|
$ |
|
|
|
$ |
666 |
|
Notes payable to former parent due March 31, 2007 |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,000 |
|
|
$ |
5,666 |
|
|
|
|
|
|
|
|
|
|
Senior Convertible Notes Payable |
|
|
|
In conjunction with the acquisition of Ladenburg in May 2001, LTS issued a total of $20,000
principal amount of senior convertible notes due December 31, 2005, secured by a pledge of
the stock of Ladenburg. The $10,000 principal amount of notes issued to New Valley
Corporation (New Valley) and Berliner Effektengesellschaft AG (Berliner), the former
Ladenburg shareholders, bore interest at 7.5% per annum, and $10,000 principal amount of
notes issued to Frost-Nevada, Limited Partnership (Frost-Nevada), which was subsequently
assigned to Frost-Nevada Investments Trust (Frost Trust), of which Frost-Nevada is the
sole and exclusive beneficiary, bore interest at 8.5% per annum. Dr. Phillip Frost, the
Chairman of the Companys Board of Directors, is the sole stockholder of the general
partner of Frost-Nevada. The notes were convertible into a total of 11,296,746 shares of
common stock. |
|
|
|
On June 28, 2002, New Valley, Berliner and Frost-Nevada agreed with the Company to forbear
until May 15, 2003 payment of the interest due to them under the senior convertible
promissory notes held by these entities on the interest payment dates of the notes
commencing June 30, 2002 through March 2003. The holders of the senior convertible
promissory notes subsequently agreed to extend the interest forbearance period to May 13,
2005 with respect to interest payments due through March 31, 2005. Interest on the
deferred amounts accrued at 8% on the New Valley and Berliner notes and 9% on the Frost
Trust note. During the second quarter of 2004, the Company repurchased from Berliner
$1,990 principal amount of the notes, plus $320 of accrued interest, for $1,000 in cash.
As a result, the Company recorded a gain on debt cancellation of $1,310 (included in other
income) during the second quarter of 2004. |
|
|
|
In November 2004, the Company 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 common stock of the Company. 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. As part of the debt conversion agreement, each of Frost Trust and New Valley agreed
to purchase $5,000 of the Companys common stock for $0.45 per share. |
|
|
|
The debt conversion transaction was approved by the Companys shareholders at the annual
shareholder meeting held on January 12, 2005 and closed on March 11, 2005. The transactions
were effective as of February 22, 2005 and resulted in the following: |
|
|
|
The $10,000 senior convertible promissory note to Frost Trust and related
accrued interest through February 22, 2005 of $2,761 was converted at $0.40 per
share into 31,902,320 shares of the Companys common stock. |
|
|
|
|
The $8,010 senior convertible promissory note to New Valley and related
accrued interest through February 22, 2005 of $1,928 was converted at $0.50 per
share into 19,876,358 shares of the Companys common stock. |
F-19
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
|
Frost-Trust acquired 11,111,111 shares of the Companys common stock at $0.45
per share in exchange for a cash payment of $1,445 and the cancellation of the
Companys $3,500 of notes payable and related accrued interest of $55 described
below. |
|
|
|
|
New Valley acquired 11,111,111 shares of the Companys common stock at $0.45
per share in exchange for a cash payment of $1,445 and the cancellation of the
Companys $3,500 of notes payable and related accrued interest of $55 described
below. |
|
|
|
|
The Company recorded a pre-tax charge of $19,359 in 2005 reflecting the
expense attributable to the reduction in the conversion price of the notes that
were converted. The net effect on the Companys balance sheet from the conversion,
net of related expenses, was an increase to shareholders equity of $22,699
(without giving effect to any sale of common stock relating to the private
financing). |
|
|
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 December 2006, New
Valley agreed to extend the maturity of the 2002 Loans to March 31, 2007. See Note 21
Subsequent Event. |
|
|
|
In December 2002, an affiliate of Ladenburgs clearing broker loaned the Company an
aggregate of $3,500 (the Clearing Loans). The Clearing Loans and related accrued interest
were forgivable over a four-year period, provided Ladenburg continued to clear its
transactions through this 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 and $146 of accrued interest, was forgiven
in November 2006. Upon the forgiveness of the Clearing Loans, the forgiven amount was
accounted for as other revenues. |
|
|
|
The carrying amounts of notes payable to New Valley and to the clearing broker approximate
fair value because of their variable interest rates which periodically adjust to reflect
changes on overall market interest rates. |
|
|
|
The Company 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 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 the Companys common stock (see above). |
|
|
|
In December 2004, Ladenburg received a $2,000 temporary subordinated loan from each of Dr.
Frost and New Valley to provide additional regulatory capital required for an underwriting
participation. Upon completion of the underwriting during the same month, the $4,000 was
repaid with interest at the rate of prime plus 2%. Interest amounted to $2. |
|
|
|
In December 2005, Ladenburg received a $15,000 temporary subordinated loan from Dr. Frost
to provide additional regulatory capital required for an underwriting participation. Upon
completion of the underwriting during the same month, the $15,000 was repaid plus a $300
fixed amount of interest. |
F-20
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
In December 2006, Ladenburg received a temporary subordinated loan in the amount of $2,000
from LTS, $12,000 from Dr. Frost and $8,000 from its clearing firm to provide additional
regulatory capital required for an underwriting participation. The temporary subordinated
loan from LTS and Dr. Frost was subordinated by its terms to the loan from the clearing
broker. Upon completion of the underwriting during the same month, the loans were repaid
with interest at the rate of LIBOR plus 2%, which amounted to $49. In addition, Dr. Frost
was paid an additional commitment fee of $50. |
|
|
|
In August 2006, Ladenburg received a $3,500 temporary subordinated loan from LTS to provide
additional regulatory capital required for an underwriting participation. In September
2006, the $3,500 was repaid with interest at the rate of 9%, which amounted to $22. |
|
|
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. |
|
|
|
Repurchase of Common Stock |
|
|
|
On April 14, 2005, the Company repurchased 4,620,501 shares of the Companys common stock
from Berliner, pursuant to a written agreement between the Company and Berliner. Pursuant
to the agreement, the Company paid Berliner $1,155, or $0.25 per share, for the shares. The
shares were returned to the status of authorized but unissued shares. |
|
|
|
In November 2006, the Company acquired 451,585 shares of the Companys common stock from
Ladenburg employees and a former employee pursuant to option agreements allowing the
tendering of shares for consideration in exercising options. The fair market value of the
shares on the date of exercise was $594. The shares were returned to the status of
authorized but unissued shares. |
|
|
|
Private Equity Offering to Former Debtholders |
|
|
|
In connection with the conversion of the Companys senior convertible notes payable which
closed on March 11, 2005, Frost Trust and New Valley each purchased $5,000 of the Companys
common stock for $0.45 per share (see Note 12). |
|
|
|
Private Equity Offering to Others |
|
|
|
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 of 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. |
F-21
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
Warrants |
|
|
|
As of December 31, 2006, outstanding warrants to acquire the Companys common stock were as
follows: |
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Number |
|
Expiration Date |
|
Price |
|
|
of Shares |
|
2013 |
|
$ |
.95 |
|
|
|
500,000 |
(a) |
2016 |
|
|
.94 |
|
|
|
825,000 |
(b) |
2016 |
|
|
.88 |
|
|
|
966,667 |
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,291,667 |
|
|
|
|
|
|
|
|
|
|
(a) |
|
Does not include unvested warrants to acquire 1,000,000 shares, the
exercisability of which is contingent upon the sole discretion of the Companys
Executive Committee (see Note 16). |
|
|
(b) |
|
Does not include unvested warrants to acquire 675,000 shares, the exercisability
of which is contingent upon the renewal of certain employment contracts (see Note
17). |
|
|
(c) |
|
Does not include unvested warrants to acquire 1,933,333 shares, placed in escrow,
the exercisability of which is contingent upon continued employment by certain
employees (see Note 17). |
|
|
On August 31, 2001, New Valley and Frost-Nevada each loaned the Company $1,000. As
consideration for the loans, the Company issued to each of them a five-year immediately
exercisable warrant to purchase 100,000 shares of its common stock at an exercise price of
$1.00 per share. The warrants expired August 31, 2006 pursuant to their terms. |
|
|
Basic net earnings per share is computed using the weighted-average number of common
shares outstanding. The dilutive effect of potential common shares outstanding is included
in diluted net earnings per share. The computations of basic and diluted per share data
for 2006, 2005 and 2004 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net income (loss) |
|
$ |
4,659 |
|
|
$ |
(25,971 |
) |
|
$ |
(9,854 |
) |
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares |
|
|
148,693,521 |
|
|
|
108,948,623 |
|
|
|
45,144,481 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options |
|
|
3,826,008 |
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock |
|
|
127,754 |
|
|
|
|
|
|
|
|
|
Common stock held in escrow (Note 17) |
|
|
440,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
153,087,961 |
|
|
|
108,948,623 |
|
|
|
45,144,481 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.03 |
|
|
$ |
(0.24 |
) |
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.03 |
|
|
$ |
(0.24 |
) |
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share is based on the weighted average number of common
shares outstanding during the year. During 2006, 2005 and 2004, options and warrants to
purchase 4,976,583, 22,837,770, and 9,137,431 common shares, respectively, and in 2005 and
2004, 1,640,350, and 11,296,747 common shares, respectively, issuable upon the conversion
of notes payable were not included in the computation of diluted income (loss) per share as
the effect would have been anti-dilutive. |
F-22
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
|
15. |
|
Stock Compensation Plans |
|
|
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 at
the end of each option period. 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. Prior thereto, the discount was up to 15% of the market
price of the Companys common stock at the beginning and end of each option period,
whichever was lower. The Purchase Plan is intended to qualify as an employee stock
purchase plan under Section 423 of the Internal Revenue Code. The Plan became effective
November 6, 2002 and the first option period commenced April 1, 2003. During 2006, 248,298
shares of the Companys common stock were issued to employees under this plan, at prices
ranging from $0.95 to $1.368; during 2005, 686,096 shares were issued at prices ranging
from $0.39 to $0.50 per share; and during 2004, 918,842 shares were issued at prices
ranging from $0.43 to $0.73, resulting in a capital contribution of $267, $307 and $479,
for 2006, 2005 and 2004, respectively. |
|
|
|
1999 Performance Equity Plan |
|
|
|
In 1999, the Company adopted 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 and its
subsidiaries, as designated by the board of directors. On November 1, 2006, the Companys
shareholders 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 annual limit on grants to any individual from 1,000,000 shares to 1,500,000
shares. Awards include stock options, stock appreciation rights, restricted stock,
deferred stock, stock reload options and/or other stock-based awards. Dividends, if any,
are not paid on unexercised stock options. The Option Plan is administered by the
compensation committee of the Board of Directors of LTS. Stock options granted under the
Option Plan may be incentive stock options and non-qualified stock options. An incentive
stock option may be granted only through May 27, 2009 and may only be exercised within ten
years of the date of grant (or five years in the case of an incentive stock option granted
to an optionee who at the time of the grant possesses more than 10% of the total combined
voting power of all classes of stock of LTS (10% Shareholder). The exercise price of
both incentive and non-qualified options may not be less than 100% of the fair market value
of LTSs common stock, provided, however, that the exercise price of an incentive stock
option granted to a 10% Shareholder shall not be less than 110% of the fair market value of
LTSs common stock. Options granted under the Option Plan generally vest in equal amounts
on each of the anniversaries over three or four years. As of December 31, 2006, there were
options to purchase 12,473,432 shares of common stock available for issuance under the
Option Plan. |
|
|
|
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 obtained, 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. |
F-23
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
A summary of the status of the Option Plan at December 31, 2006 and changes during the
years ended December 31, 2006, 2005 and 2004 are presented below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Contractual |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Term |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
(Years) |
|
|
Value |
|
Options outstanding, December 31, 2003 |
|
|
5,453,030 |
|
|
$ |
1.76 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
4,599,500 |
|
|
|
0.86 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(137,298 |
) |
|
|
0.66 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(2,277,801 |
) |
|
|
1.95 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(200,000 |
) |
|
|
4.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2004 |
|
|
7,437,431 |
|
|
|
1.09 |
|
|
|
7.33 |
|
|
$ |
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
3,524,500 |
|
|
|
0.56 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(44,767 |
) |
|
|
0.47 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(2,279,394 |
) |
|
|
0.69 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2005 |
|
|
8,637,770 |
|
|
|
0.97 |
|
|
|
7.98 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
3,775,000 |
|
|
|
0.95 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(721,192 |
) |
|
|
0.68 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(648,267 |
) |
|
|
0.86 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2006 |
|
|
11,043,311 |
|
|
|
0.99 |
|
|
|
7.92 |
|
|
|
4,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest |
|
|
6,491,855 |
|
|
|
1.11 |
|
|
|
7.14 |
|
|
|
2,572 |
|
Options exercisable, December 31, 2006 |
|
|
4,484,135 |
|
|
|
1.23 |
|
|
|
6.28 |
|
|
|
1,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 engaged several employees of BroadWall Capital LLC (see Note 17)
to continue as employees of Ladenburg. The Company granted to certain 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 granted outside the Option Plan at December 31,
2006, and changes during the years ended December 31, 2006, 2005 and 2004 are presented
below: |
F-24
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Contractual Term |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
(Years) |
|
|
Value |
|
Options outstanding, December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,500,000 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2004 |
|
|
1,500,000 |
|
|
|
0.75 |
|
|
|
9.19 |
|
|
$ |
0 |
|
Granted |
|
|
14,000,000 |
|
|
|
0.58 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,500,000 |
) |
|
|
0.75 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2005 |
|
|
14,000,000 |
|
|
|
0.58 |
|
|
|
9.32 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,500,000 |
|
|
|
1.05 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,200,000 |
) |
|
|
0.50 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(5,800,000 |
) |
|
|
0.63 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2006 |
|
|
8,500,000 |
|
|
|
0.63 |
|
|
|
8.50 |
|
|
|
5,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest |
|
|
3,954,195 |
|
|
|
0.63 |
|
|
|
8.48 |
|
|
|
2,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2006 |
|
|
1,275,000 |
|
|
|
0.60 |
|
|
|
8.42 |
|
|
|
786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of employee options granted during the years
ended December 31, 2006, 2005 and 2004 was $0.86, $0.45 and $0.77, 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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected volatility |
|
|
125.83 |
% |
|
|
74.71 |
% |
|
|
79.70 |
% |
Risk-free interest rate |
|
|
4.85 |
% |
|
|
3.78 |
% |
|
|
3.33 |
% |
Expected life (in years) |
|
|
6 |
|
|
|
10 |
|
|
|
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. |
F-25
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
As of December 31, 2006, there was $2,327 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 1.49 years. |
|
|
|
The total intrinsic value of options exercised during the years ended December 31, 2006,
2005, and 2004 amounted to $1,277, $4, and $104 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 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 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 year ended December 31, 2006, the non-cash
compensation expense relating to stock option agreements granted employees amounted to
$762. In addition, the non-cash compensation expense related to warrants granted to
employees in connection with the Capitalink L.C. (Capitalink) acquisition amounted to
$285 (see Note 17). |
|
|
|
On September 1, 2005, the Company granted to certain advisors options to purchase an
aggregate of 1,200,000 shares of the Companys common stock at an exercise price of $0.51
per share under the Option Plan. 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
$312 and $34 for the fair value of the options for the years ended December 31, 2006, and
2005, 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 |
|
|
|
During March 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 7,775,000 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 three of the employment
agreements have been restructured and, among other things, the commitments to purchase
7,000,000 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. The remaining 266,480 shares were purchased
in December 2006 for $172 and resulted in a compensation charge of $185 and an increase in
additional paid-in capital of $357. |
|
|
|
In 2005, the Company had entered into several employment agreements with newly hired
employees, including the agreements referred to in the preceding paragraph, pursuant to
which the Company sold common stock to the employees. Where the sales price was below the
fair market value of the stock on the effective date of the agreements, the Company
recorded unearned stock-based compensation expense aggregating $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 years ended December 31, 2006
and 2005, the Company amortized non-cash compensation expense of $803 and $694,
respectively, relating to the sales of its common stock to new employees at prices below
fair market value. At December 31, 2006, unearned employee stock-based compensation
amounted to $90. |
F-26
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
|
16. |
|
Investment in Fund Manager |
|
|
On August 31, 2006, the Company issued to an individual 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 this individual 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 1.7% interest in FVF valued at $68 as compensation for introducing investors to
FVF. 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. |
|
|
BroadWall |
|
|
|
On September 11, 2006, Ladenburg acquired substantially all of the securities brokerage
accounts and registered representatives and employees of BroadWall Capital LLC
(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. Such
individuals had a 40% ownership interest in BroadWall. 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, together
with legal costs related to the acquisition, has been assigned to customer accounts
(included in intangible assets, net), which is being amortized to expense over an estimated
life of 10 years. |
|
|
|
Capitalink |
|
|
|
On October 18, 2006, the Company, for an aggregate consideration amounting to $7,392,
acquired Telluride Holdings, Inc. (Telluride) through a merger into a newly formed
subsidiary of the Company. Telluride owned 100% of Capitalink L.C. (Capitalink), a
registered broker-dealer providing investment banking services. The consideration
consisted of $1,000 in cash, 4,000,000 shares of the Companys common stock valued at
$3,840 and ten-year warrants to purchase 2,900,000 shares of the Companys common stock at
an exercise price of $0.96 per share valued at $2,552. Warrants to purchase 966,666 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
Tellurides three shareholders. |
|
|
|
In connection with the transaction, 2,666,667 of the shares of common stock, warrants to
purchase 1,933,333 shares of common stock and $667 in cash have been placed in escrow
contingent upon continued employment of the selling shareholders, one-half of which will be
released to the shareholders on June 3, 2007 and the balance on January 18, 2008.
Accordingly, the fair value of the consideration placed in escrow of $4,937 will be
accounted for as compensation over the 15 months it is held in escrow. Compensation
expense of $823 has been recognized in 2006 and is estimated to amount to $3,948 for 2007
and $166 in 2008. The remaining consideration of $2,455 has been accounted for as purchase
price, of which $173 has been allocated to trade |
F-27
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
name with an estimated 10 year life and $2,282 has been allocated to relationships with an
estimated four year life. The transaction resulted in an increase of $2,122 to additional
paid-in capital resulting from the issuance of 4,000,000 shares of common stock and 966,666
vested warrants. Unearned employee stock-based compensation attributable to unvested
equity instruments amounting to $4,270 will be recognized over the vesting period, of which
$823 was recognized as of December 31, 2006. The 2,666,667 shares of common stock placed
in escrow have been considered outstanding as the former Telluride shareholders are
entitled to voting rights. |
|
|
|
The consolidated financial statements for the years ended December 31, 2006 and 2005
include the results of operations of BroadWall and Capitalink from the dates of
acquisition. The following unaudited pro forma information represents the Companys
condensed consolidated results of operations as if the acquisitions of BroadWall and
Capitalink had occurred as of the beginning of the periods presented. The pro forma amounts
of net income (loss) reflect amortization of the amounts ascribed to intangibles acquired
in the acquisitions and amortization of unearned employee stock-based compensation. In
addition, pro forma basic per share date reflect the vested common shares issued and pro
forma diluted per share data reflect common share equivalents attributable to unvested
common shares and warrants calculated by the treasury stock method: |
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
Total revenue |
|
$ |
52,817 |
|
|
$ |
36,729 |
|
Net income (loss) |
|
|
3,997 |
|
|
|
(29,102 |
) |
Basic income (loss) per share |
|
$ |
0.03 |
|
|
$ |
(0.26 |
) |
Diluted income (loss) per share |
|
$ |
0.03 |
|
|
$ |
(0.26 |
) |
Weighted average shares outstanding basic |
|
|
152,087,128 |
|
|
|
111,615,290 |
|
Weighted average shares outstanding diluted |
|
|
156,217,149 |
|
|
|
111,615,290 |
|
|
|
As of December 31, 2006, intangible assets subject to amortization, all of which were
acquired during 2006, consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
Customer accounts |
|
$ |
724 |
|
|
$ |
22 |
|
Relationships |
|
|
2,282 |
|
|
|
119 |
|
Trade name |
|
|
173 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
$ |
3,179 |
|
|
$ |
144 |
|
|
|
Aggregate amortization expense amounted to $144 for the year ended December 31, 2006. The
weighted-average amortization period for total amortizable intangibles is 5.72 years.
Estimated amortization expense for each of the five succeeding years is as follows: |
|
|
|
|
|
2007 |
|
$ |
660 |
|
2008 |
|
$ |
660 |
|
2009 |
|
$ |
660 |
|
2010 |
|
$ |
542 |
|
2011 |
|
$ |
90 |
|
|
|
|
19. |
|
Related Party Transactions |
|
|
See Note 8 with respect to real estate leased from a related party. |
|
|
|
See Note 20 with respect to sale of subsidiary to related parties. |
|
|
|
See Note 12 with respect to loans from related parties. |
F-28
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
See Note 13 with respect to purchases of common stock by related parties. |
|
|
|
In September 2006, the Company entered into a letter agreement with Vector Group Ltd., the
parent of New Valley, pursuant to which Vector Group has agreed to make available to the
Company the services of Richard Lampen, Vector Groups Executive Vice President, to serve
as the Companys President and Chief Executive Officer and to provide certain other
financial and accounting services, including assistance with complying with Section 404 of
the Sarbanes-Oxley Act of 2002. In consideration for such services, the Company will pay
Vector Group an annual fee of $250,000, plus any direct, out-of-pocket costs, fees and
other expenses incurred by Vector or Mr. Lampen in connection with providing such services,
and will indemnify Vector Group. The agreement is terminable by either party upon 30 days
prior written notice. Four other directors of the Company also serve as directors of
Vector Group. |
|
|
|
Howard Lorber, Vice Chairman of the Companys Board of Directors, is a consultant to (and,
prior to January 2005, was the chairman of) Hallman & Lorber Associates, Inc., a private
consulting and actuarial firm, and related entities, which receive commissions from
insurance policies written for the Company. These commissions amounted to approximately
$23, $92 and $114 in 2006, 2005 and 2004, respectively. |
|
|
|
20. |
|
Discontinued Operations |
|
|
One of the Companys wholly-owned subsidiaries, Highland Fund Management Inc. (f/k/a
Ladenburg Capital Fund Management Inc.) (LCFM), was sold as of December 31, 2004 to an
entity owned by three of the Companys directors. LCFM is the general partner of a limited
partnership investment fund. The Company received $5 in exchange for all of the outstanding
common stock of LCFM. This resulted in a gain of $5 which is reflected in discontinued
operations for 2004. Accordingly, the accounts of the limited partnership were no longer
consolidated with the Companys accounts effective December 31, 2004, and the results of
operations of the limited partnership for 2004 were reclassified and presented as loss from
discontinued operations in the accompanying statements of operations. The limited partners
equity in LCFM is shown as limited partners interest in discontinued operations. In
addition, in March 2004, the Company sold one of its registered investment advisor
subsidiaries, Financial Partners Capital Management, Inc. (FPCM), to one of its
employees. FPCM provided investment advisory and financial planning services. The Company
received $396 in exchange for all of the outstanding common stock of FPCM and recorded a
gain on sale of $100. FPCMs results of operations through March 31, 2004, together with
the gain on sale, are reflected as discontinued operations. Revenues attributable to
discontinued operations amounted to $1,425 in 2004. |
|
|
In February 2007, the Company entered into a Debt Exchange Agreement with New Valley to
retire the Companys remaining outstanding indebtedness. New Valley holds $5,000 principal
amount of promissory notes due March 31, 2007. Pursuant to the agreement, New Valley has
agreed to exchange the principal amount of its notes for shares of the Companys common
stock at an exchange price of $1.80 per share, representing the average closing price of
the Companys common stock for the 30 trading days ending on the date of the agreement. The
promissory notes will continue to accrue interest through the closing of the debt exchange.
The accrued interest on the notes, which was approximately $1,500 at December 31, 2006,
will be paid in cash at or prior to the closing of the transaction. |
|
|
|
The consummation of the transaction is subject to shareholder approval at the annual
meeting of the Companys shareholders, which is anticipated to be held during the second
quarter of 2007. The Company expects to consummate the transaction as soon as practicable
once shareholder approval is obtained. Upon closing, the $5,000 principal amount of notes
will be exchanged for approximately 2,777,778 shares of LTSs common stock. |
F-29
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) (Continued)
|
|
|
22. |
|
Quarterly Financial Data (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters |
|
|
|
1st |
|
|
2nd |
|
|
3rd |
|
|
4th |
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
14,794 |
(a) |
|
$ |
7,457 |
|
|
$ |
10,179 |
|
|
$ |
14,428 |
(a) |
Expenses |
|
|
10,048 |
(b) |
|
|
8,757 |
(b) |
|
|
9,595 |
(b) |
|
|
13,610 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes |
|
|
4,746 |
|
|
|
(1,300 |
) |
|
|
584 |
|
|
|
818 |
|
Net income (loss) |
|
$ |
4,732 |
|
|
$ |
(1,325 |
) |
|
$ |
570 |
|
|
$ |
682 |
|
Basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per Common Share(d) |
|
$ |
0.03 |
|
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Basic weighted average Common Shares |
|
|
141,591,068 |
|
|
|
150,043,231 |
|
|
|
150,559,806 |
|
|
|
152,440,248 |
|
Diluted weighted average Common Shares |
|
|
142,289,965 |
|
|
|
150,043,231 |
|
|
|
154,110,421 |
|
|
|
160,710,680 |
|
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
6,682 |
|
|
$ |
5,885 |
|
|
$ |
8,619 |
|
|
$ |
9,504 |
|
Expenses |
|
|
29,706 |
(c) |
|
|
7,864 |
|
|
|
9,760 |
|
|
|
9,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations before income taxes |
|
|
(23,024 |
) |
|
|
(1,979 |
) |
|
|
(1,141 |
) |
|
|
227 |
|
Net (loss) income |
|
$ |
(23,036 |
) |
|
$ |
(1,993 |
) |
|
$ |
(1,155 |
) |
|
$ |
213 |
|
Basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per Common Share(d) |
|
$ |
(0.42 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
Basic and diluted weighted average
Common Shares |
|
|
55,343,460 |
|
|
|
121,269,264 |
|
|
|
126,384,353 |
|
|
|
132,348,668 |
|
|
|
|
(a) |
|
Includes $3,858 gain on sale of NYSE seat in the first and second quarters 2006 ($4,859 gain in first quarter 2006 and $1,001 loss in second quarter 2006) and $1,125 gain on
sale of CBOE membership in the fourth quarter 2006. |
|
(b) |
|
Includes $678, $463, $303, and $1,441 charge for non-cash compensation in the first,
second, third and fourth quarters of 2006, respectively. |
|
(c) |
|
Includes $19,359 charge ($0.35 per common share) for debt conversion expense (see Note
12). |
|
(d) |
|
The sum of the quarterly income (loss) per share does not equal the income (loss) per
share for the year, because per share data for each quarter and for the year are
independently computed. Loss per common share for the quarter ended March 31, 2005 is
based on a lower number of shares than the number of shares used in subsequent quarters
and the full year due to the large issuance of shares upon the conversion of debt and
the private equity offering in March 2005, resulting in a higher loss per common share
(see Notes 12 and 13). |
F-30