Ladenburg Thalmann Financial Services Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-15799
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, 12
th Floor
Miami, Florida
(Address of principal executive offices)
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33137
(Zip Code) |
(212) 409-2000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of August 6, 2008, there were 162,916,098 shares of the registrants common stock
outstanding.
LADENBURG THALMANN FINANCIAL SERVICES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
TABLE OF CONTENTS
1
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
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June 30, |
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2008 |
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December 31, |
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(Unaudited) |
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2007 |
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ASSETS |
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Cash and cash equivalents |
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$ |
12,482 |
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$ |
8,595 |
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Securities owned: |
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Marketable, at fair value |
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1,324 |
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3,139 |
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NYSE Euronext restricted common stock, at fair value in 2008 and at historical
cost in 2007 |
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1,158 |
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|
1,158 |
|
Receivables from clearing brokers |
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28,466 |
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|
35,881 |
|
Receivables from other broker-dealers |
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3,058 |
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15,511 |
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Accounts receivable, net |
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852 |
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1,528 |
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Exchange memberships owned, at historical cost |
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120 |
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120 |
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Investment in fund manager |
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352 |
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386 |
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Furniture, equipment and leasehold improvements, net |
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1,916 |
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791 |
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Restricted assets |
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950 |
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545 |
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Intangible assets, net |
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20,087 |
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19,927 |
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Goodwill |
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23,591 |
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23,546 |
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Unamortized debt issue cost |
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2,720 |
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Other assets |
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3,567 |
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3,005 |
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Total assets |
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$ |
100,643 |
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$ |
114,132 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Securities sold, but not yet purchased, at fair value |
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$ |
11 |
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$ |
946 |
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Accrued compensation |
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4,642 |
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6,693 |
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Commissions and fees payable |
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4,027 |
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4,641 |
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Accounts payable and accrued liabilities |
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5,602 |
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5,644 |
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Deferred rent |
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2,474 |
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1,566 |
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Accrued interest |
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218 |
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671 |
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Notes payable |
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32,933 |
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39,868 |
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Total liabilities |
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49,907 |
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60,029 |
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Contingencies (Note 8) |
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Shareholders equity: |
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Preferred stock, $.0001 par value; 2,000,000 shares authorized; none issued |
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Common stock, $.0001 par value; 400,000,000 shares authorized; shares
issued
and outstanding, 162,899,431 in 2008 and 161,698,071 in 2007 |
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16 |
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16 |
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Additional paid-in capital |
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151,622 |
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148,723 |
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Accumulated deficit |
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(100,902 |
) |
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(94,636 |
) |
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Total shareholders equity |
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50,736 |
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|
54,103 |
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Total liabilities and shareholders equity |
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$ |
100,643 |
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$ |
114,132 |
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See accompanying notes to condensed consolidated financial statements
2
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues: |
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Investment banking |
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$ |
1,787 |
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$ |
12,040 |
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$ |
9,207 |
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$ |
21,465 |
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Commissions and fees |
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20,370 |
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4,917 |
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39,487 |
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9,661 |
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Asset management |
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687 |
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673 |
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1,483 |
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1,386 |
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Principal transactions |
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504 |
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(15 |
) |
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157 |
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106 |
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Interest and dividends |
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995 |
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651 |
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2,021 |
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1,316 |
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Unrealized (loss) gain on NYSE Euronext
restricted common stock |
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(217 |
) |
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(24 |
) |
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33 |
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Other income |
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1,106 |
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285 |
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1,668 |
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480 |
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Total revenues |
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25,232 |
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18,527 |
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54,023 |
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34,447 |
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Expenses: |
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Compensation and benefits |
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9,594 |
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10,685 |
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20,486 |
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20,926 |
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Commissions and fees |
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12,062 |
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24,111 |
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Non-cash compensation |
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1,498 |
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1,406 |
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3,067 |
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2,724 |
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Brokerage, communication and clearance fees |
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1,156 |
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919 |
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2,239 |
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1,865 |
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Rent and occupancy, net of sublease revenue |
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732 |
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413 |
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1,050 |
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|
748 |
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Professional services |
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1,303 |
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1,346 |
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2,507 |
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2,010 |
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Interest |
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1,202 |
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|
152 |
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2,357 |
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|
272 |
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Depreciation and amortization |
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703 |
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249 |
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1,343 |
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585 |
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Loss on extinguishment of debt |
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1,833 |
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1,833 |
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Other |
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2,126 |
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1,413 |
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3,067 |
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2,432 |
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Total expenses |
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30,376 |
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18,416 |
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60,227 |
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33,395 |
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Income (loss) before income taxes |
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(5,144 |
) |
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111 |
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(6,204 |
) |
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1,052 |
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Income tax expense |
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89 |
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|
94 |
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62 |
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161 |
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|
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Net income (loss) |
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$ |
(5,233 |
) |
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$ |
17 |
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|
$ |
(6,266 |
) |
|
$ |
891 |
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Net income (loss) per common share: |
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|
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|
|
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|
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|
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Basic |
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$ |
(0.03 |
) |
|
$ |
0.00 |
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|
$ |
(0.04 |
) |
|
$ |
0.01 |
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Diluted |
|
$ |
(0.03 |
) |
|
$ |
0.00 |
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|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
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|
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|
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Weighted average common shares outstanding: |
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|
|
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|
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Basic |
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|
162,709,005 |
|
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|
155,103,973 |
|
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162,105,035 |
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|
154,601,128 |
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Diluted |
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162,709,005 |
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|
167,742,762 |
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|
162,105,035 |
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|
167,645,224 |
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|
See accompanying notes to condensed consolidated financial statements
3
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS EQUITY
(Dollars in thousands)
(Unaudited)
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Additional |
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Common Stock |
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Paid-In |
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Accumulated |
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Shares |
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Amount |
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Capital |
|
Deficit |
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Total |
Balance, December 31, 2007 |
|
|
161,698,071 |
|
|
$ |
16 |
|
|
$ |
148,723 |
|
|
$ |
(94,636 |
) |
|
$ |
54,103 |
|
Issuance of shares of common stock under employee stock purchase plan |
|
|
126,515 |
|
|
|
|
|
|
|
216 |
|
|
|
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|
216 |
|
Exercise of stock options, net of 128,657 shares tendered in payment of exercise price and 255,183 options used in cashless exercise |
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1,353,538 |
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|
|
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|
153 |
|
|
|
|
|
|
|
153 |
|
Stock options granted to members of former Advisory Board and consultants |
|
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|
|
|
|
|
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|
135 |
|
|
|
|
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|
|
135 |
|
Stock-based compensation to employees |
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|
5,800 |
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|
|
|
|
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|
2,932 |
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|
|
|
|
|
|
2,932 |
|
Stock retired under stock repurchase plan |
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(534,493 |
) |
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|
|
|
|
|
(1,012 |
) |
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|
|
|
|
|
(1,012 |
) |
Common stock issued in Punk, Ziegel & Company, L.P. acquisition |
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|
250,000 |
|
|
|
|
|
|
|
475 |
|
|
|
|
|
|
|
475 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,266 |
) |
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|
(6,266 |
) |
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|
|
|
Balance, June 30, 2008 |
|
|
162,899,431 |
|
|
$ |
16 |
|
|
$ |
151,622 |
|
|
$ |
(100,902 |
) |
|
$ |
50,736 |
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
4
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
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|
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|
Six months ended June 30, |
|
|
2008 |
|
2007 |
Cash flows from operating activities: |
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|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(6,266 |
) |
|
$ |
891 |
|
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities: |
|
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|
|
|
|
|
|
Depreciation and amortization |
|
|
203 |
|
|
|
162 |
|
Adjustment to deferred rent |
|
|
(78 |
) |
|
|
10 |
|
Amortization of debt discount |
|
|
386 |
|
|
|
|
|
Amortization of intangible assets |
|
|
1,106 |
|
|
|
423 |
|
Amortization of debt issue cost |
|
|
349 |
|
|
|
|
|
Amortization of investment in fund manager |
|
|
34 |
|
|
|
|
|
Accrued interest |
|
|
217 |
|
|
|
228 |
|
Non-cash compensation expense |
|
|
3,067 |
|
|
|
2,724 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
1,833 |
|
Loss on disposal of fixed assets |
|
|
|
|
|
|
114 |
|
Unrealized gain on NYSE Euronext restricted common stock |
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
(Increase) decrease in operating assets: |
|
|
|
|
|
|
|
|
Securities owned |
|
|
1,815 |
|
|
|
(874 |
) |
Receivables from clearing brokers |
|
|
8,581 |
|
|
|
(3,301 |
) |
Receivables from other broker-dealers |
|
|
12,452 |
|
|
|
(3,486 |
) |
Accounts receivable, net |
|
|
1,340 |
|
|
|
(303 |
) |
Other assets |
|
|
(284 |
) |
|
|
408 |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased |
|
|
(934 |
) |
|
|
(1,090 |
) |
Accrued compensation |
|
|
(2,783 |
) |
|
|
2,295 |
|
Commission and fees payable |
|
|
(614 |
) |
|
|
|
|
Accounts payable and accrued liabilities |
|
|
(1,269 |
) |
|
|
(2,679 |
) |
|
|
|
Net cash provided by (used in) operating activities |
|
|
17,319 |
|
|
|
(2,678 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additional cash paid for Investacorp acquisition |
|
|
(46 |
) |
|
|
|
|
Payment for acquisition, net of cash received |
|
|
(2,056 |
) |
|
|
|
|
Acquisition of relationships and customer accounts |
|
|
|
|
|
|
(92 |
) |
Purchases of furniture, equipment and leasehold improvements |
|
|
(293 |
) |
|
|
(261 |
) |
(Increase) decrease in restricted assets |
|
|
(5 |
) |
|
|
1,086 |
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(2,400 |
) |
|
|
733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuance of common stock under stock plans |
|
|
369 |
|
|
|
792 |
|
Repurchases of common stock |
|
|
(1,012 |
) |
|
|
|
|
Principal payments on notes payable |
|
|
(10,390 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(11,033 |
) |
|
|
792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
3,887 |
|
|
|
(1,153 |
) |
Cash and cash equivalents, beginning of period |
|
|
8,595 |
|
|
|
6,983 |
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
12,482 |
|
|
$ |
5,830 |
|
|
|
|
5
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
2,056 |
|
|
$ |
1,732 |
|
Taxes paid |
|
|
41 |
|
|
|
15 |
|
Non-cash financing transactions: |
|
|
|
|
|
|
|
|
Lease commitment capitalized as part of Capitalink acquisition |
|
|
|
|
|
|
463 |
|
Issuance of shares of common stock in exchange for promissory
notes payable to former parent |
|
|
|
|
|
|
5,000 |
|
Acquisition of Punk, Ziegel & Company, L.P: |
|
|
|
|
|
|
|
|
Assets acquired |
|
$ |
5,046 |
|
|
|
|
|
Liabilities assumed |
|
|
(2,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
2,770 |
|
|
|
|
|
Stock issued in acquisition |
|
|
(475 |
) |
|
|
|
|
Cash acquired in acquisition |
|
|
(239 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash paid in acquisition |
|
$ |
2,056 |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
6
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
1. |
|
Description of Business and Basis of Presentation |
|
|
|
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 subsidiaries of LTS are Ladenburg Thalmann
& Co. Inc. (Ladenburg) and, since October 19, 2007, the date of the acquisition, Investacorp,
Inc. (collectively with related companies, Investacorp), which are registered securities
broker-dealers. |
|
|
|
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, investment banking and asset management. 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, asset management,
brokerage and trading professionals. Ladenburg is subject to regulation by, among others, the
Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA),
Commodities Futures Trading Commission (CFTC), Municipal Securities Rulemaking Board (MSRB)
and National Futures Association (NFA). (See Note 5.) |
|
|
|
Investacorp is a registered broker-dealer and investment advisor that has been serving the
independent registered representative community since 1978. Investacorp clears its customers
transactions through correspondent clearing brokers on a fully-disclosed basis. Investacorp
derives revenue from commissions and advisory fees, primarily from the sale of mutual funds,
variable annuity products and other financial products and services. Investacorp is subject to
regulation by, among others, the SEC, FINRA and the MSRB. (See Note 5.) |
|
|
|
The interim financial data as of June 30, 2008 and for the three and six months ended June 30,
2008 and 2007 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 to fairly state the Companys 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 fiscal year. |
|
|
|
The condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q
do not include all information and notes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with accounting principles
generally accepted in the United States of America. The statement of financial condition at
December 31, 2007 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, 2007, filed with the SEC, provide additional disclosures and a description of
accounting policies. |
|
|
|
Certain prior year items have been reclassified to conform to the current periods
presentation. All significant intercompany balances and transactions have been eliminated. |
|
2. |
|
Recently Issued Accounting Principles |
|
|
|
In April 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3).
FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. FSP
FAS 142-3 is intended to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to
|
7
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)(Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
|
measure the fair value of the asset under SFAS 141(R) and other U.S. generally accepted
accounting principles. FSP FAS 142-3 is effective for fiscal years beginning after December 15,
2008. Earlier application is not permitted. The Company does not believe the adoption of FSP FAS 142-3 will have a
material effect on its condensed consolidated financial statements. |
|
|
|
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS 162 identifies a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in conformity with
U.S. generally accepted accounting principles for nongovernmental entities. SFAS 162 is
effective 60 days following the SECs approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Company does not believe
the adoption of SFAS 162 will have a
material effect on its condensed consolidated financial statements. |
|
3. |
|
Acquisitions |
|
|
|
Investacorp |
|
|
|
On October 19, 2007, the Company acquired all of the outstanding shares of Investacorp for
approximately $30,000 in cash and a promissory note in the aggregate principal amount of
$15,000. The Company paid the sellers approximately $5,200 representing Investacorps retained
earnings plus paid-in-capital, which is included in the total purchase price above. In
connection with financing the acquisition, the Company entered into a $30,000 revolving credit
agreement with Frost Gamma Investments Trust (Frost Gamma), an entity affiliated with Dr.
Phillip Frost, the chairman of the Board and principal shareholder of the Company. (See Note
7.) |
|
|
|
Punk Ziegel |
|
|
|
On May 2, 2008, Punk, Ziegel & Company, L.P. (Punk Ziegel), a specialty investment bank based
in New York City, was merged into Ladenburg. The Company paid the sellers $2,770, representing
Punk Ziegels retained earnings plus paid-in-capital. Pro forma data is not presented since the
Punk Ziegel acquisition was not a material business combination. |
|
|
|
The unaudited condensed consolidated financial statements include the results of operations of
Investacorp from the date of acquisition. The following unaudited pro forma information
represents the Companys consolidated results of operations as if the acquisition of Investacorp
had occurred at the beginning of 2007. The pro forma amount of net income reflects amortization
of the amounts ascribed to intangibles acquired in the acquisition, amortization of employee
stock-based compensation and interest expense on debt used to finance the Investacorp
acquisition. |
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2007 |
Total revenue |
|
$ |
36,849 |
|
|
$ |
68,790 |
|
Net income |
|
$ |
(834 |
) |
|
$ |
(769 |
) |
Basic income per share |
|
$ |
(0.01 |
) |
|
$ |
(0.00 |
) |
Diluted income per share |
|
$ |
(0.01 |
) |
|
$ |
(0.00 |
) |
Weighted average common shares outstanding basic |
|
|
155,103,973 |
|
|
|
154,601,128 |
|
Weighted average common shares outstanding diluted |
|
|
155,103,973 |
|
|
|
154,601,128 |
|
The unaudited pro forma financial information is not intended to represent or be indicative of
the Companys consolidated results of operations that would have been reported had the
acquisitions been completed as of the beginning of the period presented, nor should it be taken
as indicative of the Companys future consolidated results of operations.
8
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)(Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
4. |
|
Securities Owned and Securities Sold, but Not Yet Purchased |
|
|
|
Fair Value Measurements |
|
|
|
The Company adopted SFAS No. 157, Fair Value Measurements, in the first quarter of 2008. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value and requires
enhanced disclosures about fair value measurements. As defined in SFAS No. 157, fair value is
the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In determining fair value, the
Company often utilizes certain assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk and/or the risks inherent in the inputs to
the valuation technique. These inputs can be readily observable, market corroborated, or
generally unobservable firm inputs. The fair value hierarchy ranks the quality and reliability
of the information used to determine fair values. Financial assets and liabilities carried at
fair value will be classified and disclosed in one of the following three categories: |
|
|
|
Level 1 valued based on quoted prices at the measurement date for identical assets or
liabilities trading in active markets. Financial instruments in this category generally include
listed equity securities. |
|
|
|
Level 2 valued using the Black-Scholes option pricing model, discounted for restrictions on
marketability. This model considers various assumptions, including time value, volatility
factors and current market and contractual prices for the underlying financial instruments.
Financial instruments in this category include certain corporate equities that are not actively
traded or are otherwise restricted. |
|
|
|
Level 3 valuations derived from valuation techniques in which one or more significant inputs
is not readily observable. |
|
|
|
As of June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
Securities owned, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and warrants |
|
$ |
422 |
|
|
$ |
902 |
|
|
|
|
|
|
$ |
1,324 |
|
NYSE Euronext common stock |
|
|
|
|
|
|
1,158 |
|
|
|
|
|
|
|
1,158 |
|
|
|
|
Total |
|
$ |
422 |
|
|
$ |
2,060 |
|
|
$ |
|
|
|
$ |
2,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
Securities sold, but not yet
purchased, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and warrants |
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
$ |
11 |
|
|
|
|
Total |
|
$ |
11 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11 |
|
|
|
|
The adoption of SFAS No. 157 did not have a material effect on the Companys condensed
consolidated financial statements.
As of June 30, 2008 and December 31, 2007, approximately $395 and $3,112, respectively, of
securities owned were deposited with the Companys subsidiaries clearing brokers. Pursuant to
the clearing agreements with such clearing brokers, the securities may be sold or hypothecated
by such clearing brokers.
Securities sold, but not yet purchased, at fair value represent obligations of the Companys
subsidiaries to purchase the specified financial instrument at the then current market
price. Accordingly, these transactions
9
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)(Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
|
result in off-balance-sheet risk as the Companys subsidiaries ultimate obligation to
repurchase such securities may exceed the amount recognized in the condensed consolidated
statements of financial condition. |
|
|
|
Restricted Common Stock of NYSE Euronext |
|
|
|
The Company owns NYSE Euronext common stock resulting from the conversion of Ladenburgs
membership interest in the NYSE. Certain of these shares are subject to transfer restrictions. |
|
|
|
On March 7, 2007, 1,552 of the 28,277 NYSE Euronext shares owned by the Company began the last
year of transfer restrictions and were classified as trading securities. Accordingly, such shares were valued at fair value as opposed to cost, resulting in an unrealized loss of $24 for
the three months ended June 30, 2007. In June 2007, the transfer restrictions on the 1,552
shares were removed by the issuer. These shares are included in marketable securities at June
30, 2008 and December 31, 2007. |
|
|
|
On March 7, 2008, the last tranche of 26,725 NYSE Euronext shares began the last year of
restriction and are classified as trading securities at June 30, 2008 and valued at fair
value, resulting in an unrealized loss of $217 and $0 for the three and six months ended
June 30, 2008, respectively. |
|
|
|
Fair Value Option |
|
|
|
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, 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, with changes in fair value
recognized in earnings as they occur. SFAS No. 159 permits the fair value option election on an
instrument-by-instrument basis at initial recognition of an asset or liability or upon an event
that gives rise to a new basis of accounting for that instrument. The difference between
carrying value and fair value at the election date is recorded as a transition adjustment to
opening retained earnings. SFAS No. 159 became effective January 1, 2008; however, the Company
did not elect to apply the fair value option to any assets or liabilities that are not currently
required to be measured at fair value. |
|
5. |
|
Net Capital Requirements |
|
|
|
Ladenburg is a registered broker-dealer and futures commission merchant and, accordingly, is
subject to Rule 15c3-1 (the Net Capital Rule) under the Securities Exchange Act of 1934, as
amended (the Exchange Act) and Rule 1.17 under the CFTC. The Net Capital Rule specifies
minimum net capital requirements for all registered broker-dealers and is designed to measure
financial integrity and liquidity. Ladenburg has elected to compute its net capital under the
alternative method allowed by these rules. At June 30, 2008, Ladenburg had net capital, as
defined by the Net Capital Rule, of $21,211, which exceeded its minimum net capital requirement,
as defined by the Net Capital Rule, of $500, by $20,711. |
|
|
|
Investacorp is also subject to the Net Capital Rule, which requires the maintenance of minimum
net capital and requires that the ratio of aggregate indebtedness to net capital, both as
defined by the Net Capital Rule, shall not exceed 15 to 1. At June 30, 2008, Investacorp had
net capital of $3,999, which was $3,686 in excess of its required net capital of $313.
Investacorps net capital ratio was 1.2 to 1. |
|
|
|
Ladenburg and Investacorp claim exemption from the provisions of the SECs Rule 15c3-3 pursuant
to paragraph (k)(2)(ii) as they clear their customer transactions through correspondent brokers
on a fully-disclosed basis. |
|
6. |
|
Income Taxes |
|
|
|
A provision for income taxes, which amounted to approximately $89 and $62 for the three and six
months ended June 30, 2008, respectively, was a result of certain state and local taxes not
measured on income and certain state taxes measured on income. As a result of a valuation
allowance recorded to offset deferred tax assets at June 30, 2008, no tax benefit was provided
during such periods. As a result of utilizing a portion of its net operating loss
carryforwards, no provision for federal income taxes, other than an alternative minimum tax, |
10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)(Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
|
is reflected in the accompanying condensed consolidated statements of operations for the three
and six months periods ended June 30, 2007. |
|
7. |
|
Notes Payable |
|
|
|
The components of notes payable are as follows: |
|
|
|
|
|
|
|
|
|
|
|
June |
|
December |
|
|
30, |
|
31, |
|
|
2008 |
|
2007 |
Note payable to former principal shareholder of Investacorp, net of $892 and $1,277 |
|
|
|
|
|
|
|
|
of unamortized discount at June 30, 2008 and December 31, 2007, respectively |
|
$ |
10,933 |
|
|
$ |
12,937 |
|
Note payable to affiliate of principal shareholder of LTS, net of $3,069 of |
|
|
|
|
|
|
|
|
unamortized discount at December 31, 2007 |
|
|
22,000 |
|
|
|
26,931 |
|
|
|
|
Total |
|
$ |
32,933 |
|
|
$ |
39,868 |
|
|
|
|
|
|
Investacorp Note |
|
|
|
On October 19, 2007, as part of the purchase price for the Investacorp acquisition, the Company
issued a three-year, non-negotiable promissory note in the aggregate principal amount of $15,000
to Investacorps then principal shareholder. The note bears interest at 4.11% per annum and is
payable in 36 equal monthly installments. The note was recorded at $13,550 based on an imputed
interest rate of 11%. The Company has pledged the stock of Investacorp as security for the
payment of the note. The note contains customary events of default, which if uncured, entitle
the holder to accelerate the due date of the unpaid principal amount of, and all accrued and
unpaid interest on, the note. |
|
|
|
Frost Gamma Credit Agreement |
|
|
|
On October 19, 2007, in connection with the Investacorp acquisition, the Company entered into a
$30,000 revolving credit agreement with Frost Gamma. Borrowings under the credit agreement have
a five-year term and bear interest at a rate of 11% per annum, payable quarterly. Frost Gamma
received a one-time funding fee of $150. The note issued under the credit agreement contains
customary events of default, which if uncured, entitle the holder to accelerate the due date of
the unpaid principal amount of, and all accrued and unpaid interest on, such note. Pursuant to
the credit agreement, the Company granted to Frost Gamma a warrant to purchase 2,000,000 shares
of the Companys common stock. The warrant is exercisable at any time during a ten-year period
at an exercise price of $1.91 per share, the closing price of the Companys common stock on the
acquisition date. The warrant was valued at $3,200 based on the Black-Scholes option pricing
model, and effective January 1, 2008, the unamortized portion has been reclassified from debt
discount to debt issue cost, which is being amortized by the straight-line method over the
five-year term of the revolving credit agreement. |
|
|
|
In February 2008, the Company repaid $8,000 of the $30,000 of outstanding borrowings under the
Frost Gamma credit agreement. The Company may repay outstanding amounts at any time prior to
the maturity date of October 19, 2012, without penalty, and may reborrow up to the full amount
of the agreement. |
|
8. |
|
Contingencies |
|
|
|
Litigation and Regulatory Matters |
|
|
|
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 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 |
11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)(Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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 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.
On April 9, 2007, the court issued an order staying this action pending the final outcome of an
arbitration involving parties other than Ladenburg. The Company believes that the plaintiffs
claims are without merit and intends to vigorously defend against them.
In December 2005, a suit 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, breach of fiduciary duty and breach of contract. The plaintiff seeks
compensatory damages in excess of $100,000. In November 2006, Ladenburgs motion to dismiss was
granted in part and denied in part. In July 2008, Ladenburg filed a motion for summary
judgment, which is currently pending. The Company believes that the plaintiffs claims are
without merit and intends to vigorously defend against them.
In July 2008, a suit was filed in the Circuit Court for the 17th Judicial Circuit, Broward
County, Florida, by BankAtlantic and BankAtlantic Bancorp, Inc. against Ladenburg and a
Ladenburg research analyst. The plaintiffs allege, among other things, that research reports
issued by defendants were false and defamatory, and that defendants are liable for defamation
per se and negligence; the amount of the alleged damages are
unspecified. Defendants intend to move to dismiss the complaint. The Company
believes that the allegations are without merit and intends to vigorously defend against them.
In the ordinary course of business, the Companys subsidiaries are defendants in litigation and
arbitration proceedings and may be subject to unasserted claims or arbitrations primarily in
connection with their activities as securities broker-dealers or as a result of participation in
public underwritings. Such litigation and claims may involve substantial or indeterminate
amounts and are in varying stages of legal proceedings. 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 included an estimation of such amount in accounts payable and accrued
liabilities.
The ultimate resolution may differ materially from the amounts reserved. Such liability
amounted to approximately $728 at June 30, 2008 and $768 at December 31, 2007. 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 is not anticipated to 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 in which it participated. These
clients are Specified Purpose Acquisition Companies (SPACs), and the payment of deferred fees is
contingent upon the SPACs consummating business combinations. Such fees and their related
expenses 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. During
the second quarter of 2008, Ladenburg did not receive any deferred fees. During the six months
12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)(Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
|
ended June 30, 2008, Ladenburg received deferred fees of $2,411 (included in investment banking
revenues) and incurred commissions and related expenses of $949. As of June 30, 2008, Ladenburg
had unrecorded
potential deferred fees for SPAC-related transactions of $41,361, which, net of commissions and
related expenses, amounted to approximately $24,462. |
|
9. |
|
Shareholders Equity |
|
|
|
Repurchase Program |
|
|
|
In March 2007, the Companys board of directors authorized the repurchase of up to 2,500,000
shares of the Companys common stock, from time to time, on the open market or in privately
negotiated transactions, depending on market conditions. The repurchase program is funded using
approximately 15% of the Companys EBITDA, as adjusted. During the six months ended June 30,
2008, 534,493 shares of the Companys common stock were repurchased for $1,012 under the
program. |
|
|
|
Stock Compensation Plans |
|
|
|
The Company granted 1,308,500 and 1,458,500 stock options to employees and consultants in the
three and six month periods ended June 30, 2008, respectively. The fair value of each option
award is estimated on the date of grant using the Black-Scholes option pricing model. The fair
value of options granted in the three and six month periods ending June 30, 2008 were $1,977 and
$2,204. As of June 30, 2008, there was $12,343 of unrecognized
compensation cost for stock-based compensation, of which $1,004 related to the
2008 grants. This cost is expected to be recognized over the vesting periods of the options,
which on a weighted-average basis is approximately 1.33 years for all
grants and approximately 3.84 years for the 2008 grants. |
|
|
|
The total intrinsic value of options exercised during the three and six months ended June 30,
2008 amounted to $711 and $2,559. The total intrinsic value of options exercised during the
three and six months ended June 30, 2007 amounted to $926 and $1,627, respectively. |
|
10. |
|
Per Share Data |
|
|
|
Basic earnings per share (EPS) is computed by dividing net income (loss) by the weighted
average number of common shares outstanding. Diluted EPS includes the determinants of basic EPS
and, in addition, gives effect to dilutive potential common shares. |
13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)(Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
(5,233 |
) |
|
$ |
17 |
|
|
$ |
(6,266 |
) |
|
$ |
891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic weighted-average common
shares outstanding |
|
|
162,709,005 |
|
|
|
155,103,973 |
|
|
|
162,105,035 |
|
|
|
154,601,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
9,608,951 |
|
|
|
|
|
|
|
10,071,491 |
|
Warrants to purchase common stock |
|
|
|
|
|
|
1,259,225 |
|
|
|
|
|
|
|
1,150,932 |
|
Common stock held in escrow |
|
|
|
|
|
|
1,770,613 |
|
|
|
|
|
|
|
1,821,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
|
|
|
|
12,638,789 |
|
|
|
|
|
|
|
13,044,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding and dilutive potential
common shares |
|
|
162,709,005 |
|
|
|
167,742,762 |
|
|
|
162,105,035 |
|
|
|
167,645,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.03 |
) |
|
$ |
0.00 |
|
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.03 |
) |
|
$ |
0.00 |
|
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2008 and 2007, options and warrants to purchase
29,427,045 and 3,407,735 common shares, respectively, were not included in the computation of
diluted income (loss) per share as the effect would have been anti-dilutive. |
|
11. |
|
Segment Information |
|
|
|
As a result of the Investacorp acquisition on October 19, 2007, the Company has two operating
segments. For periods prior to October 19, 2007, the Company had only one segment. The
Ladenburg segment includes the retail and institutional securities brokerage, investment banking
services, asset management services and investment activities conducted by Ladenburg. The
Investacorp segment includes the broker-dealer and investment advisory services provided by
Investacorp to its independent registered representatives. |
|
|
|
Segment information for the three months ended June 30, 2008 was as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ladenburg |
|
Investacorp |
|
Corporate |
|
Total |
Revenues |
|
$ |
9,499 |
|
|
$ |
15,911 |
|
|
$ |
(178 |
) |
|
$ |
25,232 |
|
Pre-tax income (loss) |
|
|
(2,196 |
) |
|
|
149 |
|
|
|
(3,097 |
) |
|
|
(5,144 |
) |
Identifiable assets |
|
|
41,433 |
|
|
|
50,698 |
|
|
|
8,512 |
|
|
|
100,643 |
|
Depreciation and
amortization |
|
|
335 |
|
|
|
351 |
|
|
|
17 |
|
|
|
703 |
|
Capital expenditures |
|
|
154 |
|
|
|
19 |
|
|
|
|
|
|
|
173 |
|
Segment information for the six months ended June 30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ladenburg |
|
Investacorp |
|
Corporate |
|
Total |
Revenues |
|
$ |
22,603 |
|
|
$ |
31,370 |
|
|
$ |
50 |
|
|
$ |
54,023 |
|
Pre-tax income (loss) |
|
|
(1,512 |
) |
|
|
712 |
|
|
|
(5,404 |
) |
|
|
(6,204 |
) |
Identifiable assets |
|
|
41,433 |
|
|
|
50,698 |
|
|
|
8,512 |
|
|
|
100,643 |
|
Depreciation and
amortization |
|
|
607 |
|
|
|
702 |
|
|
|
34 |
|
|
|
1,343 |
|
Capital expenditures |
|
|
270 |
|
|
|
23 |
|
|
|
|
|
|
|
293 |
|
14
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)(Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12. |
|
Subsequent Event |
|
|
|
On July 9, 2008, the Company entered into a definitive merger agreement to acquire
privately-held Triad Advisors, Inc. (Triad), a leading independent broker-dealer and
investment advisor with headquarters in Norcross, Georgia. Following the merger, Triad will
become a wholly-owned subsidiary of the Company. |
|
|
|
All outstanding shares of Triads common stock will be converted into the right to receive at the merger closing an aggregate of $7,500 in
cash, $12,500 in Company common stock and a three year, $5,000 promissory note bearing interest at 2.5% per annum and payable quarterly (the Note). The common shares will be subject to certain
transfer restrictions. In addition, Triads shareholders will
receive $2,000 in Company common stock as reimbursement for Triads net worth of not less than $3,500. The selling stockholders are required to repay to the Company cash equal to the amount that the closing date net worth of Triad is less than $3,500. In the event that Triad meets
certain profit targets during the three-year period following completion of the merger, the
Company will also pay up to $15,000 to Triads shareholders, half of which would be payable in
the Companys common stock (Additional Contingent Consideration). For purposes of
determining the number of shares of the Companys common stock to be issued in payment of the
stock portion of the consideration, the parties used a stock price of
$1.814 per share. A total of 7,993,385 shares of Company common stock
will be issued at closing, and up to an additional 4,134,509 shares
may be issued as part of the Additional Contingent Consideration. Under the merger agreement, the Company is
entitled to setoff for indemnification claims against the Note and any Additional Contingent
Consideration.
The
Company also will pledge the Triad stock to Triads shareholders, pursuant to a pledge
agreement, as security for the payment of the Note. The Note will
contain customary events of default, which if uncured, will entitle the Note holders to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the Note. |
|
|
|
The completion of the merger is subject to certain regulatory approvals and normal and
customary closing conditions. The Company currently expects to complete the merger in the
third quarter of 2008. |
15
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) |
Overview
We are engaged in investment banking services, retail and institutional securities
brokerage, asset management services and investment activities through our principal operating
subsidiaries, Ladenburg Thalmann & Co. Inc. (Ladenburg) and, since October 19, 2007,
Investacorp, Inc. (collectively with related companies, Investacorp). 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, asset management, brokerage and trading professionals.
Ladenburg is subject to regulation by, among others, the SEC, FINRA, CFTC, NFA and the MSRB and
is a member of the SIPC. Ladenburg had 126 registered representatives and 84 other full time
employees at June 30, 2008. Its private client services and institutional sales departments
serve approximately 14,000 accounts nationwide, and its asset management area provides
investment management and financial planning services to numerous individuals and institutions.
Investacorp is an independent broker-dealer and investment advisor, which had
approximately 500 independent contractor registered representatives, approximately $8 billion
in client assets and approximately 80 full time employees at June 30, 2008. Investacorp, which
is headquartered in Miami Lakes, Florida, is subject to regulation by, among others, the SEC,
the FINRA, the MSRB and state insurance regulators and is a member of the SIPC. Investacorps
national network of independent registered representatives primarily serves retail clients.
We are a leader in underwriting offerings by blank check companies known as Specified
Purpose Acquisition Companies (SPACs). The revenues associated with these offerings have been
an important contributor to our investment banking business since 2005. 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, although the number of new SPAC offerings, as well as the equity capital markets
generally, have declined significantly during the first six months of 2008. Unfavorable market
conditions during the first six months of 2008 have resulted in a decrease in the number of
SPAC public offerings in which Ladenburg acted as either a lead or co-manager, from sixteen
offerings in the first six months of 2007 to four offerings in the first six months of 2008.
Since 2005, Ladenburg has led or co-managed 39 SPAC offerings raising approximately $8 billion,
and we believe our professionals provide unique deal structures and a proprietary retail
distribution network that adds value and validity to SPAC offerings. Compensation derived from
these underwritings includes normal discounts and commissions, as well as deferred fees that
become payable to us only upon the SPACs completion of a business combination. Such deferred
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 transaction is consummated during such time period. During the first
six months of 2008, Ladenburg received deferred fees of $2,411 (included in investment banking
revenues) and incurred commissions and related expenses of $949. As of June 30, 2008,
Ladenburg had unrecorded potential deferred fees for our SPAC-related transactions of $41,361,
which, net of expenses, amounted to approximately $24,462.
We have two operating segments which correspond to our two principal broker-dealer
subsidiaries, Ladenburg and Investacorp.
16
Recent Developments
Pending Triad Advisors Acquisition
On July 9, 2008, we entered into a definitive merger agreement to acquire privately-held
Triad Advisors, Inc. (Triad), a leading independent broker-dealer and investment advisor,
serving the independent registered representative community. Triad has approximately 380
registered representatives and investment advisory representatives nationwide and approximately
$9 billion in client assets. Triad generated consolidated revenues of approximately $60,000 in
its fiscal year ended December 31, 2007.
We believe that the Triad acquisition will significantly expand our presence in the
independent broker-dealer area, one of the fastest growing segments of the financial services
industry. Together with Investacorp, we would have approximately 900 independent financial
advisors and $17 billion in client assets.
Following the merger, Triads existing management team will operate Triad as a stand-alone
business based out of its Norcross, Georgia headquarters. All outstanding shares of Triads
common stock will be converted into the right to receive at the merger closing an aggregate of
$7,500 in cash, $12,500 in our common stock and a three-year, $5,000
promissory note bearing interest at 2.5% per annum and payable
quarterly (theNote). The common shares will be subject to certain
transfer restrictions. In addition, Triads shareholders will
receive $2,000 in our common stock as reimbursement for Triads
net worth of not less than $3,500. The selling stockholders are
required to repay to us cash equal to the amount that the
closing date net worth of Triad is less than $3,500. In the event that Triad meets certain profit
targets during the three-year period following the merger closing, we will also pay up to
$15,000 to Triads shareholders, half of which would be
payable in our common stock (Additional Contingent Consideration). For purposes of determining the number of shares of our common
stock to be issued in payment of the stock portion of the consideration, we will use a stock
price of $1.814 per share. A total of 7,993,385 shares of our common
stock will be issued at closing, and up to an additional 4,134,509
shares may be issued as part of the Additional Contingent
Consideration. Under the merger agreement, we are entitled to setoff for
indemnification claims against the Note and any Additional Contingent Consideration. We have
agreed to pledge the Triad stock to Triads shareholders under a pledge agreement as security
for the payment of the Note. The Note will contain customary events of default, which if
uncured, will entitle the Note holders to accelerate the due date of the unpaid principal amount
of, and all accrued and unpaid interest on, the Note.
We expect to complete the merger in the third quarter of 2008, following the satisfaction
of the closing conditions, including receipt of certain regulatory approvals.
Punk, Ziegel Acquisition
On May 2, 2008, Punk, Ziegel & Company, L.P. (Punk Ziegel), a specialty investment bank
based in New York City, was merged into Ladenburg. As a result, Ladenburg offers Punk Ziegels
full range of research, equity market making, corporate finance, retail brokerage and asset
management services, focused on high growth sectors within the healthcare technology,
biotechnology, life sciences and financial services industries.
Acquisition Strategy
We continue to explore opportunities to grow our businesses, including through acquisitions
of other securities, investment banking and investment advisory firms, both domestically and
internationally. These acquisitions may involve payments of material amounts of cash, incurrence
of material indebtedness, or the issuance of significant amounts of our equity securities, which
may be dilutive to our existing shareholders and/or may increase our leverage. We cannot assure
you that we will be able to consummate any such potential acquisitions on terms acceptable to us
or at all, or 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.
Critical Accounting Policies
There are no material changes from the critical accounting policies set forth in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations, of our
Annual Report on Form 10-K for the year ended December 31, 2007 and Item 2 of our Quarterly
Report on Form 10-Q for the three months ended March 31, 2008. Please refer to those sections
for disclosures regarding the critical accounting policies related to our business.
17
Results of Operations
The following discussion provides an assessment of our results of operations, capital
resources and liquidity and should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included elsewhere in this report. The
unaudited condensed consolidated financial statements include our accounts and the accounts of
Ladenburg, Investacorp and our other wholly-owned subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Total revenue |
|
$ |
25,232 |
|
|
$ |
18,527 |
|
|
$ |
54,023 |
|
|
$ |
34,447 |
|
Total expenses |
|
|
30,376 |
|
|
|
18,416 |
(1) |
|
|
60,227 |
|
|
|
33,395 |
(1) |
Pre-tax income (loss) |
|
|
(5,144 |
) |
|
|
111 |
|
|
|
(6,204 |
) |
|
|
1,052 |
|
Net income (loss) |
|
|
(5,233 |
) |
|
|
17 |
(1) |
|
|
(6,266 |
) |
|
|
891 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA as adjusted |
|
|
(1,809 |
) |
|
|
3,698 |
|
|
|
419 |
|
|
|
6,383 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
68 |
|
|
|
53 |
|
|
|
144 |
|
|
|
83 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,202 |
) |
|
|
(152 |
) |
|
|
(2,357 |
) |
|
|
(272 |
) |
Income tax expense |
|
|
(89 |
) |
|
|
(94 |
) |
|
|
(62 |
) |
|
|
(161 |
) |
Depreciation and amortization |
|
|
(703 |
) |
|
|
(249 |
) |
|
|
(1,343 |
) |
|
|
(585 |
) |
Non-cash compensation |
|
|
(1,498 |
) |
|
|
(1,406 |
) |
|
|
(3,067 |
) |
|
|
(2,724 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
(1,833 |
) |
|
|
|
|
|
|
(1,833 |
) |
Net income (loss) |
|
|
(5,233 |
) |
|
|
17 |
|
|
|
(6,266 |
) |
|
|
891 |
|
|
|
|
(1) |
|
Includes $1,833 loss on extinguishment of debt. |
Earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for
gains or losses on sales of assets, non-cash compensation expense, and loss on extinguishment
of debt, 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 under the
Securities Act of 1933, as amended. We consider EBITDA, as adjusted, important in evaluating
our financial performance on a consistent basis across various periods. Due to the
significance of non-recurring items, EBITDA, as adjusted, enables our Board of Directors and
management to monitor and evaluate our business on a consistent basis. We use EBITDA, as
adjusted, as a primary measure, among others, to analyze and evaluate financial and strategic
planning decisions regarding future operating investments and potential acquisitions. We
believe that EBITDA, as adjusted, eliminates items that are not part of our core operations,
such as interest expense and debt extinguishment expense, or do not involve a cash outlay, such
as stock-related 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.
Second quarter 2008 EBITDA, as adjusted, was a loss of $1,809, a decrease of $5,507 over
second quarter 2007 EBITDA, as adjusted, of $3,698. EBITDA, as adjusted, for the six months
ended June 30, 2008, was $419, a decrease of $5,964 over EBITDA, as adjusted, of $6,383 for
the 2007 comparable period. The decrease in EBITDA for both the three months ended June 30,
2008 and the six months ended June 30, 2008 compared to the prior year periods is primarily
due to the decline in investment banking revenues.
As a result of the Investacorp acquisition on October 19, 2007, we have two operating
segments. For periods prior to October 19, 2007, we had only one segment. The Ladenburg
segment includes the retail and institutional securities brokerage, investment banking services,
asset management services and investment activities conducted by Ladenburg. The Investacorp
segment includes the broker-dealer and investment advisory services provided by Investacorp to
its independent registered representatives.
18
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Six months ended |
|
|
|
ended June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
Ladenburg |
|
$ |
9,499 |
|
|
$ |
22,603 |
|
Investacorp |
|
|
15,911 |
|
|
|
31,370 |
|
Corporate |
|
|
(178 |
) |
|
|
50 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
25,232 |
|
|
$ |
54,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss): |
|
|
|
|
|
|
|
|
Ladenburg |
|
$ |
(2,196 |
) |
|
$ |
(1,512 |
) |
Investacorp |
|
|
149 |
|
|
|
712 |
|
Corporate |
|
|
(3,097 |
) |
|
|
(5,404 |
) |
|
|
|
|
|
|
|
Total pre-tax loss |
|
$ |
(5,144 |
) |
|
$ |
(6,204 |
) |
|
|
|
|
|
|
|
Three months ended June 30, 2008 versus three months ended June 30, 2007
Our net loss for the quarter ended June 30, 2008 was $5,233 compared to net income of $17
for the quarter ended June 30, 2007. The decrease in net income of $5,250 is due to the
decrease in investment banking transactions, primarily SPAC offerings, and an increase in
interest expense of $1,050, from debt incurred in connection with the Investacorp acquisition,
which was partially offset by net income from Investacorp of $185. The decrease in investment
banking transactions was due to difficult market conditions across the investment banking
industry.
Our total revenues for the three months ended June 30, 2008 increased $6,705, or 36%,
from the 2007 period, primarily as a result of a $15,453 increase in commissions and fees, a
$519 increase in principal transactions, a $344 increase in interest and dividends and an $821
increase in other income, partially offset by a decrease in investment banking of $10,253, and
a $193 decrease in unrealized gain on our shares of NYSE Euronext common stock. The 2008
second quarter revenues included $14,669 of commissions and fee revenue from Investacorp,
which was not included in the 2007 period.
Excluding non-cash compensation expense of $1,498 in the 2008 period and $1,406 in the
2007 period and extinguishment of debt of $1,833 in the 2007 period, our total expenses
increased $13,701, or 90%, from the 2007 period, primarily as a result of expenses attributable
to Investacorps operations of $15,762 (primarily commissions and fees expense of $12,062),
which were not included in 2007. In addition, interest expense increased by $1,050 due to
increased debt outstanding in the 2008 period and compensation and benefits decreased by
$1,091. Compensation and benefits expense declined due to lower investment banking revenues.
The $10,253 (85%) decrease in investment banking revenue in the second quarter of 2008
primarily resulted from unfavorable market conditions and a decrease in the number of SPAC
offerings in which Ladenburg acted as either a lead or co-manager, to no offerings in the 2008
quarter compared to eight offerings in the 2007 comparable quarter.
The $15,453 (314%) increase in commissions and fees revenue in the second quarter of 2008
is primarily attributable to the addition of Investacorp, which had $14,669 in commissions and
fees and the Punk Ziegel acquisition, which increased Ladenburgs institutional sales force by
13 individuals.
The $519 (3,460%) increase in principal transactions revenue was primarily due to
unrealized gains in securities received from investment banking transactions.
The $344 (53%) increase in interest and dividends is primarily attributable to the
addition of Investacorp, which had $386 in interest and dividends.
The $193 (804%) decrease in unrealized loss on NYSE Euronext common stock is attributable
to the decline in the market price of outstanding shares.
19
The $821 (288%) increase in other income is attributed to the addition of Investacorp,
which had $856 in other income.
The $1,091 (10%) decrease in compensation and benefits expense was primarily due to an
increase in salaries, bonuses and employee benefits of $2,917, offset by a $4,006 decrease in
producers compensation, which is directly correlated to revenue production. The increase in
salaries, bonuses and benefits is due to an increase in the average headcount for salaried
Ladenburg employees primarily as a result of the Punk Ziegel merger and an increase of $1,674 for Investacorps employees in the 2008 period.
The $92 (7%) increase in non-cash compensation expense is primarily due to increased
employee compensation expense of $982, attributable to option grants to employees and directors
(including $537 to Investacorp employees), partially offset by a decrease of $854 for the
amortization of unearned compensation for our warrants and common stock held in escrow for the
principal shareholders of Capitalink, which was amortized over 15 months beginning on October
18, 2006, the date of acquisition, and a decrease of $36 for the amortization of unearned
compensation from stock issued to employees in 2005 at below market prices.
The $237 (26%) increase in brokerage, communication and clearance fees expense is
primarily attributable to increased institutional trading and Investacorp expense of $117.
The $319 (77%) increase in rent and occupancy, net of sublease revenue, expense is
primarily attributable to the inclusion of office lease expense for Punk Ziegel of $191 and
Investacorp of $92 in the second quarter of 2008.
The $1,050 (691%) increase in interest expense is a result of debt incurred in connection
with the Investacorp acquisition. An approximate $34,000 average balance was outstanding in
the second quarter of 2008, as compared with an average debt outstanding of $5,000 in the 2007
period.
The $454 (182%) increase in depreciation and amortization expense is primarily due to
Investacorp expense of $351, of which $343 is attributed to the amortization of intangible
assets related to the Investacorp acquisition.
The $713 (50%) increase in other expense is primarily attributable to Investacorp expense
of $665.
We had income tax expense of $89 for the three months ended June 30, 2008 as compared to
income tax expense of $94 for the three months ended June 30, 2007. After consideration of all
the evidence, both positive and negative, management determined that a valuation allowance at
June 30, 2008 was necessary to fully offset the deferred tax assets based on the likelihood of
future realization.
Six months ended June 30, 2008 versus six months ended June 30, 2007
Our net loss for the six months ended June 30, 2008 was $6,266 compared to net income of
$891 for the six months ended June 30, 2007. The decrease in net income of $7,157 is
attributed to the decrease in investment banking transactions, primarily SPAC offerings, and an
increase in interest expense of $2,085, from debt incurred in connection with the Investacorp
acquisition, which was partially offset by net income from Investacorp of $623. The net income
for the 2008 period included $3,067 of non-cash compensation, and net income for the 2007
period included a $1,833 loss on extinguishment of debt and $2,724 of non-cash compensation
expense.
Our total revenues for the six months ended June 30, 2008 increased $19,576, or 57%, from
the 2007 period, primarily as a result of increased commissions and fees of $29,826, an
increase in interest and dividends of $705, a $1,188 increase in other income, partially
offset by a decrease in investment banking of $12,258. The 2008 revenues included $31,370 of
revenue from Investacorp, which was not included in 2007.
Excluding non-cash compensation expense of $3,067 in the first half of 2008 and $2,724 in
the 2007 period and loss on extinguishment of debt of $1,833 in the 2007 period, our total
expenses increased $28,322, or 98%, from the 2007 period, primarily as a result of expenses
attributable to Investacorps operations of $30,658 (primarily commissions and fees expense of
$24,111), which were not included in 2007. In addition, interest expense increased by $2,085
due to increased debt outstanding in the 2008 period.
20
The $12,258 (57%) decrease in investment banking revenue was primarily due to unfavorable
market conditions and a decrease in the number of SPAC offerings in which Ladenburg acted as
either a lead or co-manager, from four offerings in the 2008 period compared to 14 offerings in
the 2007 period. The decrease related to new SPAC offerings was $14,475 and was partially
offset by deferred revenues realized from successful SPAC business combinations of $2,411 and
an increase in advisory, merger and acquisitions and valuation fees of $565.
The $29,826 (309%) increase in commissions and fees revenue in the 2008 period is
primarily attributable to the addition of Investacorp, which had $29,364 in commissions and
fees.
The $51 (48%) increase in principal transactions revenue was primarily due to unrealized
gains, partially offset by realized losses, in securities received as underwriting
consideration.
The $705 (54%) increase in interest and dividends is primarily attributable to the
addition of Investacorp, which had $777 in interest and dividends.
The $1,188 (248%) increase in other income is due to the addition of Investacorp, which
had $1,229 in other income.
The $440 (2%) decrease in compensation and benefits expense was primarily the result of an
increase in salaries, bonuses and employee benefits of $4,657 offset by a $5,096 decrease in
producers compensation, which is directly correlated to revenue production. The increase in
salaries, bonuses and benefits is due to an increase in the average headcount for salaried
Ladenburg employees primarily as a result of the Punk Ziegel Merger and an increase of $3,231 for Investacorps employees in the 2008 period.
The $343 (13%) increase in non-cash compensation expense is primarily due to increased
compensation expense of $1,888 attributable to option grants to employees, directors and
consultants (including $1,073 to Investacorp employees), partially offset by a decrease of
$1,455 for the amortization of unearned compensation for our warrants and common stock held in
escrow for the principal shareholders of Capitalink, which was amortized over 15 months
beginning on October 18, 2006, the date of acquisition, and a decrease of $90 for the
amortization of unearned compensation from stock issued to employees in 2005 at below market
prices.
The $374 (20%) increase in brokerage, communication and clearance fees expense is
primarily attributable to increased institutional trading and the addition of Investacorp
expenses of $239.
The $497 (25%) increase in professional services expense during the 2008 period is
primarily due to an increase in legal, audit and consulting fees in the first half of 2008.
The $2,085 (767%) increase in interest expense is a result of debt incurred in connection
with the Investacorp acquisition. An approximate $35,000 average balance was outstanding in
the 2008 period, as compared with an average debt outstanding of $5,000 in the 2007 period.
The $758 (130%) increase in depreciation and amortization expense is primarily due to
Investacorp expense of $702, of which $685 is attributed to the amortization of intangible
assets related to the acquisition.
We had income tax expense of $62 for 2008 as compared to income tax expense of $161 for
2007. After consideration of all the evidence, both positive and negative, management
determined that a valuation allowance at June 30, 2008 was necessary to fully offset the
deferred tax assets based on the likelihood of future realization.
Liquidity and Capital Resources
Approximately 46% and 56% of our total assets at June 30, 2008 and December 31, 2007,
respectively, consisted of cash and cash equivalents, securities owned and receivables from
clearing brokers and other broker-dealers, all of which fluctuate, depending upon the levels of
customer business and trading and investment banking activity. As a securities dealer, we may
carry a significant inventory of securities 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.
21
Each of Ladenburg and Investacorp is subject to the SECs net capital rules. Ladenburg is
also subject to the net capital rules of the CFTC. Therefore, Ladenburg and Investacorp are
subject to certain restrictions on the use of capital and their related liquidity. At June 30,
2008, Ladenburgs regulatory net capital, as defined by applicable rules, of $21,211, exceeded
minimum capital requirements of $500, by $20,711. At June 30, 2008, Investacorps regulatory
net capital, as defined by applicable rules, of $3,999, exceeded minimum capital requirements
of $313, by $3,686. Failure to maintain the required net capital may subject Ladenburg and
Investacorp to suspension or expulsion by FINRA, the SEC or other regulatory bodies, and
ultimately may require their 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 and Investacorp that require
the intensive use of capital, such as underwriting and trading activities, and could also
restrict our ability to withdraw capital from our subsidiaries, which in turn, could limit our
ability to pay dividends and repay and service our debt.
In addition to regulatory net capital restrictions, Investacorp is also contractually
restricted from declaring a dividend to us which would result in its retained earnings and
paid-in capital falling below the lesser of the then outstanding principal balance of the note
issued to Investacorps former principal shareholder and $5,000. At June 30, 2008, the
outstanding principal balance of this note was $11,825.
Each of Ladenburg and Investacorp, as guarantor of its customer accounts to its clearing
brokers, is exposed to off-balance-sheet risk in the event that its customers do not fulfill
their obligations with the clearing brokers. In addition, to the extent Ladenburg and
Investacorp maintain a short position in any securities, they are exposed to future
off-balance-sheet market risk, since their ultimate obligation may exceed the amount recognized
in the financial statements.
Our primary sources of liquidity include our cash flow from operations, the sale of our
securities and other financing activities, which include borrowings under our $30,000 revolving
credit agreement. In February 2008, we repaid $8,000 of the $30,000 of outstanding borrowings
under the revolving credit agreement. We may repay or reborrow outstanding amounts at any time
prior to the maturity date of October 19, 2012, without penalty. In July 2008, Ladenburg paid a
$7,500 dividend to us that will be used to fund the pending Triad acquisition.
Net cash flows provided by operating activities for the six months ended June 30, 2008 were
$17,319 as compared to cash flows used in operating activities of $2,678 for the six months
ended June 30, 2007. The increase in net cash provided by operating activities was primarily
due to a decrease in receivables from other broker-dealers of $12,452 in 2008 compared to an
increase of $3,486 in 2007, a decrease in receivables from clearing brokers of $8,581 in 2008
compared to an increase of $3,301 in 2007, partially offset by a decrease in securities owned at
market value of $1,815 in 2008 compared to an increase of $874 in 2007, and a decrease in
securities sold, but not yet purchased of $934 in 2008 compared to a decrease of $1,090 in 2007,
a decrease in accrued compensation of $2,783, in 2008 compared to an increase of $2,295 in 2007
and a decrease in accounts payable and accrued liabilities of $1,269 compared to a decrease of
$2,679 in 2007.
Net cash flows used in investing activities amounted to $2,875 for the six months ended
June 30, 2008 compared to net cash flows provided by investing activities of $733 in the
comparable period in 2007. These investing activities relate principally to the activity in
restricted assets, purchase of customer relationships, leasehold improvements and enhancements
to computer equipment.
Net cash flows used in financing activities amounted to $10,557 for the six months ended
June 30, 2008 compared to cash flows provided by financing activities of $792 in the comparable
period in 2007. This decrease was primarily due to the partial repayment of notes payable in
the amount of $10,390, our repurchase of our common stock for $1,012 in 2008 and an increase in
the issuance of common stock under stock plans to $845 in 2008 as compared to $792 in 2007.
In March 2007, our board of directors authorized the repurchase of up to 2,500,000 shares
of our common stock from time to time on the open market or in privately negotiated
transactions, depending on market
conditions. The repurchase program is funded using approximately 15% of our EBITDA, as
adjusted. From inception through June 30, 2008, 867,022 shares have been repurchased under the
program for $1,624.
22
Off-Balance-Sheet Risk and Concentration of Credit Risk
Our two principal broker-dealer subsidiaries, Ladenburg and Investacorp, do not carry
accounts for customers or perform custodial functions related to customers securities. They
introduce all of their customer transactions, which are not reflected in these financial
statements, to their clearing brokers, which maintain the customers accounts and clear
customers transactions. Additionally, the clearing brokers provide the clearing and depository
operations for proprietary securities transactions. These activities may expose us to
off-balance-sheet risk in the event that customers do not fulfill their obligations with the
clearing brokers, as each of Ladenburg and Investacorp has agreed to indemnify their clearing
brokers for any resulting losses. Each of Ladenburg and Investacorp 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 Ladenburgs and Investacorps securities transactions are
primarily provided by one clearing broker, a large financial institution. At June 30, 2008 and
December 31, 2007, substantially all of the securities owned and the amounts due from clearing
brokers reflected in our condensed consolidated statements of financial condition are positions
held at, and amounts due from, this one clearing broker. We are subject to credit risk should
this clearing broker be unable to fulfill its obligations.
In the normal course of its business, Ladenburg and Investacorp may enter 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 June 30, 2008 and December 31, 2007, Ladenburg and Investacorp were not
contractually obligated for any equity index or financial futures contracts; however, Ladenburg
sold securities that it does not own and is therefore obligated to purchase such securities at a
future date. These obligations have been recorded in our statements of financial condition at
market values of the related securities, and Ladenburg will incur a loss if the market value of
the securities increases subsequent to June 30, 2008. See Note 4 to our condensed consolidated
financial statements for further information.
We and our subsidiaries maintain cash in bank deposit accounts, which, at times, may exceed
federally insured limits. We have not experienced any losses in such accounts and believe we are
not exposed to any significant credit risk on cash.
Market Risk
Market risk generally represents the risk of loss that may result from the potential change
in the value of a financial instrument as a result of fluctuations in interest and currency
exchange rates, equity and commodity prices, changes in the implied volatility of interest
rates, foreign exchange rates, equity and commodity prices and also changes in the credit
ratings of either the issuer or its related country of origin. Market risk is inherent to both
derivative and non-derivative financial instruments and, accordingly, the scope of our market
risk management procedures extends beyond derivatives to include all market-risk sensitive
financial instruments.
Current and proposed underwriting, corporate finance, merchant banking and other
commitments are subject to due diligence reviews by our senior management, as well as
professionals in the appropriate business and support units involved. Credit risk related to
various financing activities is reduced by the industry practice of obtaining and maintaining
collateral. We monitor our exposure to counterparty risk through the use of credit exposure
information, the monitoring of collateral values and the establishment of credit limits.
We maintain inventories of trading securities. At June 30, 2008, the fair market value of
our inventories was $2,482 in long positions and $11 in short positions. We performed an
entity-wide analysis and assessed the risk of our financial instruments. Based on this analysis,
in the opinion of management, the market risk associated with our financial instruments at June
30, 2008 is not likely to have a material adverse effect on our consolidated financial position
or results of operations.
Recently Issued Accounting Principles
In April 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3).
FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine
23
the useful life of a recognized intangible asset under Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. FSP
FAS 142-3 is intended to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141(R) and other U.S. generally accepted accounting principles.
FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier
application is not permitted. We do not believe the adoption of FSP FAS 142-3 will have a
material effect on our condensed consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS 162 identifies a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in conformity with
U.S. generally accepted accounting principles for nongovernmental entities. SFAS 162 is
effective 60 days following the SECs approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. We do not believe the adoption
of SFAS 162 will have a material
effect on our condensed consolidated financial statements.
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 SEC 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 our Annual Report on Form 10-K for the year ended December
31, 2007 and in this report 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.
Further, readers should keep in mind that our quarterly revenues and profits can fluctuate
materially depending on many factors, including the number, size and timing of completed
offerings and other transactions. Accordingly, our revenues and profits in any particular
quarter may not be indicative of future results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption Managements Discussion and Analysis of Financial
Condition and Results of Operations Market Risk is incorporated herein by reference.
24
Item 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we have evaluated the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of
the period covered by this report, and, based on that evaluation, our principal executive
officer and principal financial officer have concluded that these controls and procedures are
effective. There were no changes in our internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)) during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Disclosure controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs 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 our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding disclosure.
25
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 8 to our condensed consolidated financial statements included in Part I, Item 1
of this report.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Our purchases of our common stock during the three months ended June 30, 2008 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 (1) |
|
April 1 to April 30, 2008 |
|
|
17,100 |
|
|
$ |
1.88 |
|
|
|
17,100 |
|
|
|
1,860,371 |
|
May 1 to May 31, 2008 |
|
|
147,148 |
|
|
|
1.90 |
|
|
|
147,148 |
|
|
|
1,713,223 |
|
June 1 to June 30, 2008 |
|
|
80,245 |
|
|
|
1.85 |
|
|
|
80,245 |
|
|
|
1,632,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
244,493 |
|
|
$ |
1.88 |
|
|
|
244,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In March 2007, we announced that our board of directors had authorized the repurchase of up
to 2,500,000 shares of our common stock, from time to time, on the open market or in
privately negotiated transactions, depending on market conditions. The repurchase program is
funded using approximately 15% of our EBITDA, as adjusted. Since inception through June 30,
2008, 867,022 shares had been repurchased under the program. |
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 6, 2008, we held our annual meeting of shareholders. The following director
nominees were elected by our shareholders for a one-year term and until their successors are
elected and qualified:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authority |
|
|
Votes For |
|
Withheld |
Henry C. Beinstein |
|
|
124,885,637 |
|
|
|
5,477,337 |
|
Robert J. Eide |
|
|
125,059,912 |
|
|
|
5,303,062 |
|
Dr. Phillip Frost |
|
|
123,913,895 |
|
|
|
6,449,079 |
|
Brian S. Genson |
|
|
125,075,455 |
|
|
|
5,287,519 |
|
Saul Gilinski |
|
|
125,269,746 |
|
|
|
5,093,228 |
|
Dr. Richard M. Krasno |
|
|
125,072,513 |
|
|
|
5,290,461 |
|
Richard J. Lampen |
|
|
125,285,611 |
|
|
|
5,077,363 |
|
Howard M. Lorber |
|
|
124,421,833 |
|
|
|
5,941,141 |
|
Jeffrey S. Podell |
|
|
125,260,813 |
|
|
|
5,102,161 |
|
Richard J. Rosenstock |
|
|
125,276,655 |
|
|
|
5,086,319 |
|
Mark Zeitchick |
|
|
125,154,644 |
|
|
|
5,208,330 |
|
26
Item 6. EXHIBITS
31.1 |
|
Certification of Chief Executive Officer, pursuant to Exchange Act Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
|
Certification of Chief Financial Officer, pursuant to Exchange Act Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
LADENBURG THALMANN FINANCIAL
SERVICES INC.
(Registrant)
|
|
Date: August 11, 2008 |
By: |
/s/ Brett H. Kaufman
|
|
|
|
Brett H. Kaufman |
|
|
|
Vice President and Chief Financial Officer
(Duly Authorized Officer and Chief
Accounting Officer) |
|
|
28