Florida | 65-0701248 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) | |
153 East 53rd Street | ||
New York, New York | 10022 | |
(Address of principal executive offices) | (Zip Code) |
1
March 31, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 3,984 | $ | 10,936 | ||||
Securities owned, at market value |
998 | 1,904 | ||||||
Receivable from clearing broker |
16,196 | 20,947 | ||||||
Receivables from other broker-dealers |
2,371 | | ||||||
Exchange memberships owned, at historical cost (Note 4) |
545 | 1,413 | ||||||
NYSE Group Inc. common stock, not readily marketable, at fair value (Note 4) |
5,276 | | ||||||
Furniture, equipment and leasehold improvements, net |
855 | 966 | ||||||
Restricted assets |
1,614 | 1,313 | ||||||
Other assets |
2,115 | 1,820 | ||||||
Total assets |
$ | 33,954 | $ | 39,299 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Securities sold, but not yet purchased |
$ | 127 | $ | 8,857 | ||||
Accrued compensation |
2,824 | 2,488 | ||||||
Accounts payable and accrued liabilities |
4,054 | 6,634 | ||||||
Deferred rent credit |
1,565 | 1,529 | ||||||
Accrued interest |
114 | 101 | ||||||
Accrued interest to former parent |
1,160 | 1,056 | ||||||
Notes payable, including $5,000 to former parent |
5,667 | 5,667 | ||||||
Total liabilities |
15,511 | 26,332 | ||||||
Commitments and contingencies |
| | ||||||
Shareholders equity: |
||||||||
Preferred stock, $.0001 par value; 2,000,000 shares authorized; none issued |
| | ||||||
Common stock, $.0001 par value; 400,000,000 and 200,000,000
shares authorized; shares issued and outstanding,
141,639,043 and 141,590,529 |
14 | 14 | ||||||
Additional paid-in capital |
122,771 | 122,532 | ||||||
Unearned employee stock-based compensation |
(388 | ) | (893 | ) | ||||
Accumulated deficit |
(103,954 | ) | (108,686 | ) | ||||
Total shareholders equity |
18,443 | 12,967 | ||||||
Total liabilities and shareholders equity |
$ | 33,954 | $ | 39,299 | ||||
2
Three Months Ended | ||||||||
March 31, | ||||||||
2006 | 2005 | |||||||
Revenues: |
||||||||
Commissions |
$ | 5,274 | $ | 3,869 | ||||
Principal transactions, net |
1,550 | 581 | ||||||
Investment banking fees |
805 | 1,296 | ||||||
Investment advisory fees |
571 | 117 | ||||||
Interest and dividends |
652 | 379 | ||||||
Syndications and underwritings |
835 | 118 | ||||||
Gain on NYSE merger transaction |
4,859 | | ||||||
Unrealized loss on NYSE Group Inc. restricted
common stock |
(80 | ) | | |||||
Other |
328 | 322 | ||||||
Total revenues |
14,794 | 6,682 | ||||||
Expenses: |
||||||||
Compensation and benefits |
6,607 | 5,391 | ||||||
Non-cash compensation |
678 | 223 | ||||||
Brokerage, communication and clearance fees |
669 | 601 | ||||||
Rent and occupancy, net of sublease revenues |
688 | 677 | ||||||
Professional services |
468 | 1,118 | ||||||
Interest |
124 | 439 | ||||||
Depreciation and amortization |
172 | 215 | ||||||
Debt conversion expense |
| 19,359 | ||||||
Other |
642 | 1,683 | ||||||
Total expenses |
10,048 | 29,706 | ||||||
Income (loss) before income taxes |
4,746 | (23,024 | ) | |||||
Income taxes |
14 | 12 | ||||||
Net income (loss) |
$ | 4,732 | $ | (23,036 | ) | |||
Income (loss) per Common Share: |
||||||||
Basic |
$ | 0.03 | $ | (0.42 | ) | |||
Diluted |
$ | 0.03 | $ | (0.42 | ) | |||
Number of shares used in computation: |
||||||||
Basic |
141,591,068 | 55,343,460 | ||||||
Diluted |
142,289,965 | 55,343,460 | ||||||
3
Unearned | ||||||||||||||||||||||||
Additional | Employee | |||||||||||||||||||||||
Common Stock | Paid-In | Stock-based | Accumulated | |||||||||||||||||||||
Shares | Amount | Capital | Compensation | Deficit | Total | |||||||||||||||||||
Balance, December 31, 2005 |
141,590,529 | $ | 14 | $ | 122,532 | $ | (893 | ) | $ | (108,686 | ) | $ | 12,967 | |||||||||||
Issuance of shares of
common stock under
employee stock purchase
plan |
48,514 | | 66 | | | 66 | ||||||||||||||||||
Stock options granted to
Advisory Board |
| | 35 | | | 35 | ||||||||||||||||||
Amortization of unearned
employee stock-based
compensation |
| | | 505 | | 505 | ||||||||||||||||||
Expense relating to
employee stock options
granted |
| | 138 | | | 138 | ||||||||||||||||||
Net income |
| | | | 4,732 | 4,732 | ||||||||||||||||||
Balance, March 31, 2006 |
141,639,043 | $ | 14 | $ | 122,771 | $ | (388 | ) | $ | (103,954 | ) | $ | 18,443 | |||||||||||
4
Three months Ended March 31, | ||||||||
2006 | 2005 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 4,732 | $ | (23,036 | ) | |||
Adjustments to reconcile net income (loss) to
net cash used in operating activities: |
||||||||
Depreciation and amortization |
172 | 215 | ||||||
Amortization of deferred rent credit |
36 | 1 | ||||||
Accrued interest |
117 | 420 | ||||||
Debt conversion expense |
| 19,359 | ||||||
Non-cash compensation expense |
678 | 223 | ||||||
Gain on NYSE merger transaction |
(4,489 | ) | | |||||
Decrease (increase) in operating assets: |
||||||||
Securities owned |
906 | 11 | ||||||
NYSE Group Inc. common stock, not readily marketable |
80 | | ||||||
Receivable from clearing broker |
4,751 | (377 | ) | |||||
Receivable from other broker-dealers |
(2,371 | ) | | |||||
Due from affiliates |
| 121 | ||||||
Other assets |
(295 | ) | 320 | |||||
Increase (decrease) in operating liabilities: |
||||||||
Securities sold, but not yet purchased |
(8,730 | ) | (24 | ) | ||||
Accrued compensation |
336 | (692 | ) | |||||
Accounts payable and accrued liabilities |
(2,579 | ) | 983 | |||||
Due to affiliates |
| (33 | ) | |||||
Net cash used in operating activities |
(6,656 | ) | (2,509 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchase of furniture, equipment and leasehold improvements |
(102 | ) | (103 | ) | ||||
Net proceeds received from sale of furniture |
41 | | ||||||
Net cash used in investing activities |
(61 | ) | (103 | ) | ||||
Cash flows from financing activities: |
||||||||
Increase in restricted assets |
(301 | ) | (5 | ) | ||||
Issuance of common stock other than private equity offering |
66 | 1,563 | ||||||
Issuance of other notes payable |
| 3,500 | ||||||
Private equity offering |
| 2,803 | ||||||
Net cash (used in) provided by financing activities |
(235 | ) | 7,861 | |||||
Net (decrease) increase in cash and cash equivalents |
(6,952 | ) | 5,249 | |||||
Cash and cash equivalents, beginning of period |
10,936 | 1,720 | ||||||
Cash and cash equivalents, end of period |
$ | 3,984 | $ | 6,969 | ||||
5
Three months Ended March 31, | ||||||||
2006 | 2005 | |||||||
Supplemental cash flow information: |
||||||||
Interest paid |
$ | | $ | | ||||
Taxes paid |
199 | | ||||||
Non-cash financing transactions: |
||||||||
Conversion of senior convertible notes ($18,010) and accrued interest
($4,689) into common shares |
$ | | $ | 22,699 | ||||
Common
shares purchased pursuant to private placement by exchanging
notes payable ($7,000) and accrued interest ($110) |
| 7,110 |
6
1. | Principles of Reporting | |
The condensed consolidated financial statements include the accounts of Ladenburg Thalmann Financial Services Inc. (LTS or the Company), a holding company, and its subsidiaries, all of which are wholly-owned. The principal operating subsidiary of LTS is Ladenburg Thalmann & Co. Inc. (Ladenburg), which is a registered broker-dealer in securities. The Companys other subsidiaries primarily provide asset management services. All significant intercompany balances and transactions have been eliminated. | ||
The interim financial data as of March 31, 2006 and for the three months ended March 31, 2006 and 2005 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. Because of the nature of the Companys business, the results of any interim period are not necessarily indicative of results for the full year. | ||
The condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by generally accepted accounting principles for complete financial statement presentation. The notes to the consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission (SEC) provide additional disclosures and a description of accounting policies. | ||
Organization | ||
Ladenburg is a full service broker-dealer that has been a member of the New York Stock Exchange (NYSE) since 1879. Ladenburg clears its customers transactions through a correspondent clearing broker on a fully disclosed basis. Broker-dealer activities include 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 4.) | ||
2. | Accounting Change | |
Effective January 1, 2006, the Company has adopted SFAS No. 123 (Revised 2004), Share-Based Payment, which requires a public entity to measure the cost of employee, officer and director services received in exchange for an award of equity instruments based on the grant-date fair value of the award. SFAS No. 123R supersedes the Companys previous accounting under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), which permitted the Company to account for such compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). Pursuant to APB No. 25, and related interpretations, no compensation cost had been recognized in connection with the issuance of stock options, as all options granted under the Companys 1999 Performance Equity Plan (the Option Plan) and all options granted outside the Option Plan had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The Company adopted SFAS No. 123R using the modified prospective transition method, which requires that compensation cost be recorded as earned 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 for compensation cost 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. The Companys |
7
condensed consolidated financial statements as of and for the three months ended March 31, 2006 reflect the impact of SFAS No. 123R. In accordance with the modified prospective transition method, the Companys condensed consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R. As a result of adopting SFAS 123R, the Companys income before income taxes and net income for the three months ended March 31, 2006 are $138 lower than if it had continued to account for share-based compensation under APB No. 25. For the three months ended March 31, 2006, basic and diluted net income per share would have been the same as the figures reported, had the Company had not adopted SFAS No. 123R. | ||
The table below illustrates the effect on the Companys net loss for the three months ended March 31, 2005 had the Company elected to recognize compensation expense for stock options, consistent with the method prescribed by SFAS No. 123. For purposes of the pro forma disclosure, the value of options is estimated using the Black-Scholes option pricing formula and amortized to expense over the options vesting periods. |
Three Months Ended | ||||
March 31, | ||||
2005 | ||||
Net loss, as reported |
$ | (23,036 | ) | |
Stock-based employee compensation
determined under the fair value
based method |
(524 | ) | ||
Pro forma net loss |
$ | (23,560 | ) | |
Net loss per Common Share (basic and diluted), as
reported |
$ | (0.42 | ) | |
Pro forma net loss per Common Share (basic and diluted) |
$ | (0.43 | ) | |
3. | Securities Owned and Securities Sold, But Not Yet Purchased | |
The components of securities owned and securities sold, but not yet purchased, as of March 31, 2006 and December 31, 2005 are as follows: |
Securities Sold, | ||||||||
Securities | But Not | |||||||
Owned | Yet Purchased | |||||||
March 31, 2006 |
||||||||
Common stock |
$ | 968 | $ | 123 | ||||
Municipal obligations |
14 | | ||||||
U. S. Government obligations |
6 | | ||||||
Corporate bonds |
10 | 4 | ||||||
$ | 998 | $ | 127 | |||||
December 31, 2005 |
||||||||
Common stock |
$ | 1,852 | $ | 8,854 | ||||
Municipal obligations |
45 | | ||||||
U. S. Government obligations |
6 | | ||||||
Corporate bonds |
1 | 3 | ||||||
$ | 1,904 | $ | 8,857 | |||||
8
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 March 31, 2006 and December 31, 2005, approximately $968 and $1,904, respectively, of the securities owned are deposited with the Companys clearing broker and, pursuant to the agreement, the securities may be sold or hypothecated by the clearing broker. | ||
4. | Restricted Common Shares of NYSE Group, Inc. | |
As of December 31, 2005 the Company owned one membership on the NYSE. The Company has accounted for its investment in this membership at a cost of $868, in accordance with industry practice. On April 20, 2005, the NYSE and Archipelago Holdings, Inc. entered into a definitive merger agreement, as amended and restated on July 20, 2005 (as so amended, the NYSE Merger Agreement), pursuant to which Archipelago and NYSE agreed to combine their businesses and become wholly-owned subsidiaries of NYSE Group, Inc. (NYSE Group), a newly-created, for-profit and publicly-traded holding company (collectively, the NYSE Merger). | ||
On March 7, 2006, the NYSE Merger was consummated, and each NYSE membership became entitled to receive in exchange for the NYSE membership $300 in cash, plus 80,177 shares of NYSE Group common stock. In addition, immediately prior to the consummation of the NYSE Merger, the NYSE announced a permitted dividend to be paid to each NYSE membership in the amount of approximately $71, which was equivalent to the memberships pro rata portion of the NYSEs excess cash, as defined in the NYSE Merger Agreement. The Company received the permitted dividend and the merger consideration relating to its NYSE membership in March 2006. | ||
As a result of the NYSE Merger, the Companys 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. The Company accounts 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. Included in revenues for the 2006 first quarter is a gain of $4,859, representing the difference between the estimated fair value of consideration received of $5,727 and the Companys carrying value of its membership of $868 and an unrealized loss of $80 representing the difference between the fair market value of the NYSE Group restricted common shares on March 31, 2006 versus March 7, 2006, resulting in an aggregate gain of $4,779 in the quarter ended March 31, 2006. See Note 12, Subsequent Event. | ||
5. | Shareholders Equity | |
Authorized Shares |
9
At the Companys annual 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 shares to 400,000,000 shares. | ||
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. Under the Purchase Plan, as currently administered by the Companys compensation committee, all full-time employees may use a portion of their salary to acquire shares of the Companys common stock at a discount from the market price of the Companys common stock. Option periods have been initially set at three month periods and commence on January 1, April 1, July 1, and October 1 of each year and end on March 31, June 30, September 30 and December 31 of each year. In order for the Plan to be accounted for as non-compensatory under SFAS 123R, effective January 1, 2006, the discount was decreased to 5% below the market price of the Companys common stock at the end of such option period. The Purchase Plan is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. During the three-month period ended March 31, 2006, 48,514 shares of the Companys common stock were issued to employees under the Purchase Plan, at approximately $1.37 per share, resulting in a capital contribution of $66. | ||
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, as designated by the board of directors. There are 10,000,000 shares of common stock authorized for issuance under the Option Plan and the limit on grants to any individual is 1,000,000 shares per calendar year. Dividends, if any, are not paid on unexercised stock options. As of March 31, 2006, there were 9,236,265 shares of common stock available for issuance under the Option Plan, of which options to purchase 8,504,770 shares have been granted. | ||
A summary of the status of the Option Plan at March 31, 2006 and changes during the three months then ended are presented below: |
Weighted- | ||||||||||||||||
Average | ||||||||||||||||
Remaining | ||||||||||||||||
Weighted-Average | Contractual | Aggregate | ||||||||||||||
Exercise | Term | Intrinsic | ||||||||||||||
Shares | Price | (Years) | Value | |||||||||||||
Options outstanding, December 31, 2005 |
8,637,770 | $ | 0.97 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(133,000 | ) | 0.77 | |||||||||||||
Expired |
| | ||||||||||||||
Options outstanding, March 31, 2006 |
8,504,770 | 0.97 | 7.82 | $ | 5,631 | |||||||||||
Vested or expected to vest |
5,376,323 | 1.24 | 6.83 | 3,058 | ||||||||||||
Options exercisable, March 31, 2006 |
3,585,253 | 1.38 | 6.33 | 1,872 | ||||||||||||
Non-Plan Options |
10
Commencing in 2004, the Company has also granted stock options to certain recruited employees in conjunction with their employment agreements, which are outside of the Option Plan. A summary of the status of these options at March 31, 2006, and changes during the three months then ended are presented below: |
Weighted- | ||||||||||||||||
Average | ||||||||||||||||
Weighted- | Remaining | |||||||||||||||
Average | Contractual | Aggregate | ||||||||||||||
Exercise | Term | Intrinsic | ||||||||||||||
Shares | Price | (Years) | Value | |||||||||||||
Options outstanding, December 31, 2005 |
14,000,000 | $ | 0.58 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
( | ) | | |||||||||||||
Forfeited |
(5,800,000 | ) | 0.63 | |||||||||||||
Expired |
( | ) | | |||||||||||||
Options outstanding, March 31, 2006 |
8,200,000 | 0.53 | 8.99 | $ | 7,427 | |||||||||||
Vested or expected to vest |
4,232,237 | 0.51 | 8.97 | 3,923 | ||||||||||||
Options exercisable, March 31, 2006 |
1,825,000 | 0.48 | 8.95 | 1,743 | ||||||||||||
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. | ||
On September 1, 2005, the Company granted its Advisory Board stock options to purchase an aggregate of 1,200,000 shares of the Companys common stock at an exercise price $0.51 per share. The options, which expire on August 31, 2015, will vest 25% on each of the first four anniversaries of the date of grant. The Company recorded a charge of $35 for the fair value of the options for the three months ended March 31, 2006 based on the Black-Scholes option pricing model utilizing the following assumptions: no dividends, risk-free interest rate of 4.50%, volatility of 113.4%, and term of nine and half years. 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. | ||
As of March 31, 2006, there was $2,077 of total unrecognized compensation cost related to non-vested share-based compensation arrangements under the Option Plan and for non-Option Plan options. This cost is expected to be recognized over the vesting periods of the options, which on a weighted-average basis is approximately 3.5 years. | ||
Non-cash compensation expense relating to stock options, was calculated by using the Black-Scholes option pricing model, amortizing the value calculated over the vesting period and applying a forfeiture percentage as estimated by the Companys management, using historical information. For the three months ended March 31, 2006, the non-cash compensation expense relating to stock option agreements amounted to $138. | ||
Employee Stock Purchase Agreements and Non-Option Plan Grants |
11
On March 25, 2005, Ladenburg entered into an employment agreement with a newly employed director of institutional sales and in connection therewith granted him options to purchase 1,500,000 shares of the Companys common stock at an exercise price $0.64 per share. The option, which expires on March 28, 2015, will vest as to 250,000 shares on each of the first four anniversaries of the date of grant. An additional 125,000 shares will vest on the third anniversary of the date of grant and an additional 375,000 shares will vest on the fourth anniversary of the date of grant provided that the Commission Shares (defined below) have been purchased. In addition, he committed to purchase an additional 2,500,000 shares (Commission Shares) of the Companys common stock at $0.64 per share solely through the use of compensation to be earned by him. In addition, the Company sold to him 1,000,000 shares of its common stock at an exercise price of $0.45 per share, on March 28, 2005. Effective April 4, 2006, the employment agreement and the stock option agreement were amended and among other things, the directors commitment to purchase the Commission Shares was eliminated and the vesting requirement based on the purchase of the Commission Shares was replaced with a vesting requirement based on certain production levels being met. | ||
During June through August 2005, Ladenburg entered into various employment agreements with newly employed executives whereby some of the executives committed to purchase up to an aggregate of 5,275,000 shares of the Companys common stock at prices ranging from $0.53 to $0.645 per share solely through the use of compensation, as defined, earned by them. In January 2006, one of the employment agreements was terminated and two of the employment agreements were restructured and among other things, the commitments to purchase shares of the Companys common stock were cancelled. As of March 31, 2006, no compensation was earned by these executives that would have required the purchase of shares | ||
In 2005, the Company had entered into several employment agreements with newly hired employees including the agreements referred to above, pursuant to which the Company sold common stock to the employees. Where the sales price was below the fair market value of the stock on the effective date of the agreements, the Company recorded unearned stock-based compensation expense of $1,587, representing the difference between fair market value of the common stock and the sales price. Such compensation is being amortized over the initial term of the employees employment agreements, which are generally one to two years. During the three months ended March 31, 2006, the Company amortized non-cash compensation expense of $505 relating to the sales of its common stock to new employees at prices below fair market value. At March 31, 2006, unearned employee stock-based compensation amounted to $388 and is presented as a reduction of shareholders equity in the condensed consolidated statement of financial condition. | ||
Private Placement Offering | ||
On November 30, 2005, the Company completed a private equity offering and received gross proceeds of approximately $6,221 (representing 13,824,331 shares at $0.45 per share) from various investors unrelated to the Company and also received binding subscriptions for aggregate proceeds of approximately $3,779 (representing 8,397,891 shares at $0.45 per share) from certain of the Companys affiliates and persons with direct or indirect relationships to it. Following approval by the Companys shareholders and the American Stock Exchange, on April 27, 2006, the Company closed on the remaining portion of its private equity offering, thereby raising an aggregate of $10,000. The funds received from the private equity offering will be used for general corporate purposes. | ||
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. In March 2006, LTS made capital contributions to Ladenburg in the amount of $4,800. At March 31, 2006, Ladenburg had net capital, as defined, of $9,922, which exceeded its minimum capital requirement of $250 by $9,672. |
12
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. | Contingencies | |
The Company is a defendant in litigation and may be subject to unasserted claims or arbitrations primarily in connection with its activities as a securities broker-dealer and participation in public underwritings. Such litigation and claims involve substantial or indeterminate amounts and are in varying stages of legal proceedings. As of March 31, 2006, the Companys subsidiaries are involved in several pending arbitrations in which claimants are seeking substantial amounts of damages. | ||
On May 5, 2003, a suit was filed in the U.S. District Court for the Southern District of New York by Sedona Corporation against Ladenburg, former employees of Ladenburg, Pershing LLC and a number of other firms and individuals. The plaintiff alleges, among other things, that certain defendants (not Ladenburg) purchased convertible securities from plaintiff and then allegedly manipulated the market to obtain an increased number of shares from the conversion of those securities. Ladenburg acted as placement agent and not as principal in those transactions. Plaintiff has alleged that Ladenburg and the other defendants violated federal securities laws and various state laws. The plaintiff seeks compensatory damages from the defendants of at least $660,000 and punitive damages of $2,000,000. In August 2005, Ladenburgs motion to dismiss was granted in part and denied in part; Ladenburgs motion to reconsider portions of that decision is currently pending. The Company believes the plaintiffs claims in this action are without merit and intends to vigorously defend against them. | ||
In July 2004, a suit was filed in the U.S. District Court for the Eastern District of Arkansas by Pet Quarters, Inc. against Ladenburg, a former employee of Ladenburg and a number of other firms and individuals. The plaintiff alleges, among other things, that certain defendants (not Ladenburg) purchased convertible securities from plaintiff and then allegedly manipulated the market to obtain an increased number of shares from the conversion of those securities. Ladenburg acted as placement agent and not as principal in those transactions. Plaintiff has alleged that Ladenburg and the other defendants violated federal securities laws and various state laws. The plaintiff seeks compensatory damages from the defendants of at least $400,000. In April 2006, Ladenburgs motion to dismiss was granted in part and denied in part. The Company believes that the plaintiffs claims are without merit and intends to vigorously defend against them. | ||
On December 8, 2005, a lawsuit was filed in New York State Supreme Court, New York County, by Digital Broadcast Corp. against Ladenburg, a Ladenburg employee, and another individual. The plaintiff alleges, among other things, that in connection with plaintiffs retention of Ladenburg to assist it in its efforts to obtain 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. Ladenburgs deadline to answer or to move to dismiss has been extended pending the plaintiffs amendment of the complaint. The Company believes that the plaintiffs claims are without merit and intends vigorously to defend against them. | ||
With respect to certain arbitration, litigation and regulatory, where the Company believes that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company has provided a liability of approximately $565 and $1,958 as of March 31, 2006 and December 31, 2005, respectively (included in accounts payable and accrued liabilities). | ||
8. | Income Taxes | |
No provision for income taxes was required for the three months ended March 31, 2006 as the Company reflected the benefit of utilizing a portion of its net operating loss carryforward. |
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Deferred tax amounts as of March 31, 2006, which consist principally of the tax benefit of net operating loss carryforwards and accrued expenses, amounts to approximately $22,487. After consideration of all the evidence, both positive and negative, especially the fact the Company has sustained operating losses during 2005, 2004, 2003 and 2002, management has determined that a valuation allowance at March 31, 2006 was necessary to fully offset the deferred tax assets based on the likelihood of future realization. At March 31, 2006, the Company had net operating loss carryforwards of approximately $51,969, expiring in various years from 2015 through 2026. The Companys ability to use such carryforwards to reduce future taxable income may be subject to limitations attributable to equity transactions in March 2005 (see Note 10) that may have resulted in a change of ownership as defined in Internal Revenue Code Section 382. | ||
9. | Off-Balance-Sheet Risk | |
Ladenburg does not carry accounts for customers or perform custodial functions related to customers securities. Ladenburg introduces all of its customer transactions, which are not reflected in these financial statements, to its primary clearing broker, which maintains the customers accounts and clears such transactions. Additionally, the primary clearing broker provides the clearing and depository operations for Ladenburgs proprietary securities transactions. These activities may expose the Company to off-balance-sheet risk in the event that customers do not fulfill their obligations with the clearing broker, as Ladenburg has agreed to indemnify its clearing broker for any resulting losses. The Company continually assesses risk associated with each customer who is on margin credit and records an estimated loss when management believes collection from the customer is unlikely. | ||
The clearing operations for the Companys securities transactions are provided by one clearing broker. At March 31, 2006 and December 31, 2005, substantially all of the securities owned and the amounts due from clearing broker reflected in the consolidated statement of financial condition are positions held at and amounts due from one clearing broker, a large financial institution. The Company is subject to credit risk should this clearing broker be unable to fulfill its obligations. | ||
10. | Notes Payable | |
The components of notes payable are as follows: |
March 31, | December 31, | |||||||
2006 | 2005 | |||||||
Notes payable (forgivable per terms
see below) in connection with clearing
agreement |
$ | 666 | $ | 666 | ||||
Other notes payable |
5,000 | 5,000 | ||||||
Total |
$ | 5,666 | $ | 5,666 | ||||
The $5,666 of notes payable at March 31, 2006 mature during the year ending December 31, 2006. | ||
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 stockholders, bore interest at 7.5% per annum, and the $10,000 principal amount of notes issued to Frost-Nevada, Limited Partnership (Frost-Nevada), |
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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, a director of the Company, 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 and secured by a pledge of the stock of Ladenburg. | ||
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. As of December 31, 2004, accrued interest payments as to which a forbearance was received from Frost Trust and New Valley, amounted to $4,429. 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 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. | ||
Frost Trust agreed that it would not sell, transfer or assign any shares it received as a result of the foregoing transactions for a period of one year from the date of the agreement except to its affiliated entities. | ||
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. | ||
| 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). |
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| As a result of the debt conversion and private financing, the beneficial ownership of Frost-Trust increased from 18.5% to 37.2% at date of conversion. | ||
| As a result of the debt conversion and private financing, the beneficial ownership of New Valley increased from 9.4% to 25.7% at date of conversion. |
Other Notes Payable | ||
On March 27, 2002, the Company borrowed $2,500 from New Valley, its former parent. The loan, which bears interest at 1% above the prime rate, was due on the earlier of December 31, 2003 or the completion of one or more equity financings where the Company receives at least $5,000 in total proceeds. The terms of the loan restrict the Company from incurring or assuming any indebtedness that is not subordinated to the loan so long as the loan is outstanding. On July 16, 2002, the Company borrowed an additional $2,500 from New Valley (collectively with the March 2002 loan, the 2002 Loans) on the same terms as the March 2002 loan. In November 2002, New Valley agreed in connection with the Clearing Loans (defined below) to extend the maturity of the 2002 Loans to December 31, 2006 and to subordinate the 2002 Loans to the repayment of the Clearing Loans. | ||
In November 2002, the Company renegotiated a clearing agreement with one of its clearing brokers whereby this clearing broker became Ladenburgs primary clearing broker, clearing substantially all of Ladenburgs business (the Clearing Conversion). As part of the new agreement with this clearing agent, Ladenburg is realizing significant cost savings from reduced ticket charges and other incentives. In addition, under the new clearing agreement, an affiliate of the clearing broker loaned the Company an aggregate of $3,500 (the Clearing Loans) in December 2002. The Clearing Loans and related accrued interest are forgivable over various periods, up to four years from the date of the Clearing Conversion, provided Ladenburg continues to clear its transactions through the primary clearing broker. As scheduled, in November 2003, one of the loans consisting of $1,500 of principal, together with accrued interest of approximately $90, was forgiven, in November 2004, $667 of principal, together with accrued interest of approximately $54, was forgiven and in November 2005, $667 of principal, together with accrued interest of approximately $97 was forgiven. The balance of the remaining loan, consisting of $666 of principal, is scheduled to be forgiven in November 2006. Accrued interest on this loan as of March 31, 2006 was $114. Upon the forgiveness of the Clearing Loans, the forgiven amount is accounted for as other revenues. However, if the clearing agreement is terminated for any reason prior to the loan maturity date, the loan, less any amount that has been forgiven through the date of the termination, plus interest, must be repaid on demand. | ||
Liquidity | ||
The Companys liquidity position continues to be adversely affected by its inability in recent years to generate cash from operations. Accordingly, the Company has been forced to cut expenses as necessary. In order to accomplish this, the Company has implemented certain cost-cutting procedures throughout its operations. In addition, the Company relocated its New York City and Boca Raton, Florida offices to more efficient and less expensive office space within the same vicinity of the previous locations. | ||
The Companys overall capital and funding needs are continually reviewed to ensure that its liquidity and capital base can support the estimated needs of its business units. These reviews take into account business needs as well as regulatory capital requirements of the Companys broker-dealer subsidiary. If, based on these reviews, it is determined that the Company requires additional funds to support its liquidity and capital base, the Company would seek to raise additional capital through other available sources, including through borrowing additional funds on a short-term basis from the Companys significant shareholders or from other parties, including the Companys clearing broker, although there can be no assurance such funding would be available. Additionally, the Company may attempt to raise funds through a private placement, a rights offering or other type of financing. If the Company continues to be unable to generate cash from operations and is unable to find alternative sources of funding as described above, it would have an adverse impact on the Companys liquidity and operations. |
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11. | Net Income (Loss) Per Common Share | |
Net income (loss) per common share amounts (basis EPS) are computed by dividing net income (loss) by the weighted average number of common stock shares, excluding any potential dilution. Net income (loss) per common share amounts, assuming dilution (diluted EPS), are computed by reflecting the potential dilution from the exercise of stock options and stock warrants. In computing diluted EPS for the three months ended March 31, 2006, incremental shares of 2,948,501 from stock options assumed to be exercised were used in the calculation. There were potentially dilutive shares from stock options and stock warrants of 2,879,450 and 200,000, respectively, that are not included in EPS because including them would be anti-dilutive. | ||
12. | Subsequent Event | |
On May 5, 2006, the Company 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 $396 less than the carrying value of such shares at March 31, 2006. After the sale, the Companys investment in NYSE Group common shares consisted of 1,552 shares restricted through March 7, 2008 and 26,725 shares restricted through March 7, 2009. |
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Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Amounts) |
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Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED (Dollars in Thousands, Except Share and Per Share Amounts) |
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Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED (Dollars in Thousands, Except Share and Per Share Amounts) |
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Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED (Dollars in Thousands, Except Share and Per Share Amounts) |
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Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED (Dollars in Thousands, Except Share and Per Share Amounts) |
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Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED (Dollars in Thousands, Except Share and Per Share Amounts) |
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Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED (Dollars in Thousands, Except Share and Per Share Amounts) |
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3.1.1 | Certificate of Amendment to Articles of Incorporation. | ||
31.1 | Certification of Chief Executive Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Chief Financial Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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LADENBURG THALMANN FINANCIAL SERVICES INC. (Registrant) |
||||
Date: May 15, 2006 | By: | /s/ Salvatore Giardina | ||
Salvatore Giardina | ||||
Vice President and Chief Financial Officer
(Duly Authorized Officer and Chief Accounting Officer) |
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