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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2007
Commission File Number 1-15799
LADENBURG THALMANN FINANCIAL SERVICES
INC.
(Exact Name Of Registrant As Specified In Its Charter)
Florida
(State or other jurisdiction of
incorporation or organization)
4400 Biscayne Boulevard, 12th Floor
Miami, Florida
(Address of principal executive offices)
65-0701248
(I.R.S. Employer
Identification Number)
33137
(Zip Code)
(212) 409-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, par value $.0001 per share
American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Exchange Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 Regulation S-K is not
contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statement incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
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 June 30, 2007 (the last business day of the registrant’s most recently completed second fiscal quarter),
the aggregate market value of the registrant’s common stock (based on the closing price on the American Stock
Exchange on that date) held by non-affiliates of the registrant was approximately $200,000,000.
As of March 3, 2008, there were 161,740,406 shares of the registrant’s common stock outstanding.
Documents Incorporated by Reference:
Part III (Items 10, 11, 12, 13 and 14) from the definitive Proxy Statement for the 2008 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of
the Registrant’s fiscal year covered by this report.
LADENBURG THALMANN FINANCIAL SERVICES INC.
Form 10-K
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A.
Item 9B.
Controls and Procedures
Other Information
Item 10.
Item 11.
Item 12.
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Item 14.
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
PART IV
SIGNATURES
EX-21 Subsidiaries
EX-23.1 Consent of Eisner LLP
EX-31.1 Section 302 CEO Certification
EX-31.2 Section 302 CFO Certification
EX-32.1 Section 906 CEO Certification
EX-32.2 Section 906 CFO Certification
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ITEM 1. BUSINESS.
General
PART I
We are engaged in retail and institutional securities brokerage, investment banking services, asset
management services and investment activities through our subsidiaries, Ladenburg Thalmann & Co. Inc.
(“Ladenburg”) and 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.
Investacorp is a leading independent broker-dealer and investment adviser that has been serving the
independent registered representative community since 1978. We acquired Investacorp in October 2007.
Each of Ladenburg and Investacorp is subject to regulation by, among others, the Securities and
Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”), and the Municipal
Securities Rulemaking Board (“MSRB”) and is a member of the Securities Investor Protection Corporation
(“SIPC”).
Ladenburg’s private client services and institutional sales departments serve approximately 12,000
accounts nationwide and its asset management area provides investment management and financial planning
services to numerous individuals and institutions. At December 31, 2007, Investacorp’s 500 registered
representatives served approximately 200,000 accounts nationwide and Investacorp had more than
$8.5 billion in client assets.
We were incorporated under the laws of the State of Florida in February 1996. Our principal executive
offices are located at 4400 Biscayne Boulevard, 12th Floor, Miami, Florida 33137. Our telephone number is
(212) 409-2000. Ladenburg’s principal executive offices are located at 153 East 53rd Street, New York, New
York 10022. Ladenburg has branch offices located in Melville, New York, Miami and Boca Raton, Florida,
Lincolnshire, Illinois, Los Angeles, California, Princeton, New Jersey, Columbus, Ohio and Houston, Texas.
Investacorp’s principal executive offices are located at 15450 New Barn Road, Miami Lakes, Florida 33014.
Investacorp’s independent registered representatives are located in approximately 350 offices in 41 states.
Our corporate filings, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our
current reports on Form 8-K, our proxy statements and reports filed by our officers and directors under
Section 16(a) of the Securities Exchange Act, and any amendments to those filings, are available, free of
charge, on Ladenburg’s website, www.ladenburg.com, as soon as reasonably practicable after we
electronically file or furnish such material with the SEC. We do not intend for information contained in our
website, or those of our subsidiaries, to be a part of this annual report on Form 10-K. In February 2004, our
board of directors adopted a code of ethics that applies to our directors, officers and employees as well as
those of our subsidiaries. Requests for copies of our code of ethics should be sent in writing to Ladenburg
Thalmann Financial Services Inc., 4400 Biscayne Blvd., 12th Floor, Miami, FL 33137, Attn: Corporate
Counsel.
Caution Concerning Forward-Looking Statements and Risk Factors
This annual report on Form 10-K includes certain “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on management’s current
expectations or beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary
materially from the expectations contained herein due to changes in economic, business, competitive,
strategic and/or regulatory factors, and other factors affecting the operation of our businesses. For more
detailed information about these factors, and risk factors with respect to our operations, see Item 1A, “Risk
Factors,” and “Management’s Discussion and Analysis of Results of Operations and Financial Condition —
Special Note Regarding Forward-
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Looking Statements” below. We are under no obligation to (and expressly disclaim any obligation to) update
or alter any forward-looking statements, whether as a result of new information, subsequent events or
otherwise.
Recent Developments
Punk, Ziegel Acquisition
On March 4, 2008, we entered into a definitive merger agreement to merge Punk, Ziegel & Company, L.P.
into Ladenburg. Punk Ziegel is a privately-held specialty investment bank providing a full range of research,
equity market making, corporate finance, retail brokerage and asset management services centered on high
growth sectors within the healthcare technology, biotechnology, life sciences and financial services
industries. Punk, Ziegel, which is based in New York City, has approximately 45 employees and is known for
its highly focused, in-depth research and corporate finance advice, particularly in the healthcare and financial
services industries. The transaction is expected to close in the second quarter of 2008 and is subject to
customary closing conditions, including approval from FINRA.
Investacorp Acquisition
On October 19, 2007, we acquired all of the outstanding shares of privately-held Investacorp. At the
closing, we paid $25,000,000 to the sellers, Bruce A. Zwigard and an affiliated trust. In addition, we issued a
three-year, non-negotiable promissory note in the aggregate principal amount of $15,000,000 to Mr. Zwigard.
The note bears interest at 4.11% per annum and is payable in 36 equal monthly installments. We have
pledged the stock of Investacorp to Mr. Zwigard as security for the payment of the note. The note contains
customary events of default, which if uncured, entitle Mr. Zwigard to accelerate the due date of the unpaid
principal amount of, and all accrued and unpaid interest on, the note. We also paid the sellers an additional
amount of approximately $5,200,000, representing Investacorp’s retained earnings plus paid-in capital.
In connection with his continued employment with Investacorp, we granted Mr. Zwigard employee stock
options to purchase a total of 3,000,000 shares of our common stock at $1.91, the closing price of our
common stock on October 19, 2007. The Zwigard options vest over a three-year period (subject to certain
exceptions), have a ten-year term and were issued pursuant to a non-plan option agreement. Additionally we
issued to certain Investacorp employees options to purchase a total of 1,150,000 shares of common stock
under our option plan. These options vest in four equal annual installments and have an exercise price of
$1.91.
Frost Gamma Revolving Credit Agreement
In connection with the Investacorp acquisition, on October 19, 2007, we entered into a $30,000,000
revolving credit agreement with Frost Gamma Investments Trust (“Frost Gamma”), an entity affiliated with
Dr. Phillip Frost, our Chairman of the Board and our principal shareholder. 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 $150,000. 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, we granted to
Frost Gamma a warrant to purchase 2,000,000 shares of our common stock. The warrant is exercisable for a
ten-year period and the exercise price is $1.91. During the first quarter of 2008, we repaid approximately
$8,000,000 of the $30,000,000 of outstanding borrowings under the credit agreement.
Debt Exchange
In February 2007, we entered into a debt exchange agreement with New Valley LLC. New Valley agreed
to exchange the $5,000,000 principal amount of our promissory notes held by New Valley for shares of our
common stock at an exchange price of $1.80 per share, representing the average closing price of our common
stock for the 30 trading days ending on the date of the debt exchange agreement. Our shareholders approved
the transaction at our annual shareholders meeting on June 29, 2007. On that date, we issued 2,777,778 shares
of our common stock in exchange for the $5,000,000 principal amount of notes and we paid accrued interest
on the notes of $1,732,000 to New Valley. The exchange resulted in a loss of $1,833,000 representing the
excess of the quoted market value of the
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2,777,778 shares of stock at the date of the exchange agreement ($2.46 per share) over the carrying amount of
the notes.
Acquisition Strategy
We continue to explore opportunities to grow our businesses, including through potential acquisitions of
other securities and investment banking firms, both domestically and internationally. These acquisitions may
involve payments of material amounts of cash or debt or the issuance of significant amounts of our equity
securities, which may be dilutive to our existing shareholders 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, if
we do, that any acquired business will be profitable. There is also a risk that we will not be able to successfully
integrate acquired businesses into our existing business and operations.
Business Segments
Effective as of October 19, 2007 (the date when we acquired Investacorp), we have two operating
segments which correspond to our two principal broker-dealer subsidiaries, Ladenburg and Investacorp.
Financial and other information by segment for the year ended December 31, 2007 is set forth in Note 17 to
our consolidated financial statements.
Ladenburg
Ladenburg’s principal business areas are: retail and institutional brokerage, investment banking,
investment activities, asset management and research.
Retail and Institutional Brokerage Business
A significant percentage of our revenues during the last several years has been generated from
Ladenburg’s retail and institutional brokerage business. Ladenburg’s private client services and institutional
sales departments currently serve a total of approximately 12,000 accounts nationwide. Ladenburg charges
commissions to our individual and institutional clients for executing buy and sell orders of securities on
national and regional exchanges and over the counter. In addition to traditional commission-based accounts,
Ladenburg, through its registered investment adviser subsidiary, Ladenburg Thalmann Asset Management
Inc., offers a non-discretionary fee in lieu of commission program that allows retail clients to establish a non-
discretionary account within which they may trade their portfolio under an all inclusive wrap fee through
Ladenburg’s registered investment advisor.
Investment Banking Activities
Investment banking revenues consist of underwriting revenues, strategic advisory revenues and private
placement fees. Underwriting revenues arise from securities offerings in which Ladenburg acts as an
underwriter and include management fees, selling concessions and underwriting fees, net of related syndicate
expenses. Revenues generated from the investment banking activities of Ladenburg represented 58%, 40%
and 26% of our total revenues in 2007, 2006 and 2005, respectively. Our investment banking professionals
maintain relationships with businesses, private equity firms, other financial institutions as well as high net
worth individuals. Our bankers provide them with extensive corporate finance and investment banking
services. At March 3, 2008, we had approximately 20 professionals in Ladenburg’s investment banking group,
located in Miami, Florida, New York, New York, Columbus, Ohio and Houston, Texas.
In addition to providing general investment banking and corporate finance consulting services,
Ladenburg provides the following services:
Underwriting of public equity and debt offerings. Ladenburg has been active as lead and co-managing
underwriter, general underwriter and/or a selling group member in numerous public equity transactions.
Participation as a managing underwriter or in an underwriting syndicate involves both economic and
regulatory risks. An underwriter may incur losses if it is unable to resell the securities it is committed to
purchase. In addition, under the
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federal securities laws, other laws and court decisions with respect to underwriters’ liabilities and limitations
on the indemnification of underwriters by issuers, an underwriter is subject to substantial potential liability for
misstatements or omissions of material facts in prospectuses and other communications with respect to such
offerings. Acting as a managing underwriter increases these risks. Underwriting commitments constitute a
charge against net capital and Ladenburg’s ability to make underwriting commitments may be limited by the
requirement that it must at all times be in compliance with regulations regarding its net capital.
SPAC underwritings. 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 quarter 2008. Since 2005,
Ladenburg had lead or co-managed 35 SPAC offerings raising approximately $7 billion, and our professionals
provide unique deal structures and a proprietary retail distribution network that adds value and validity to the
offering. Compensation derived from these underwritings includes normal discounts and commissions as well
as deferred fees that will be payable to us only upon the SPAC’s completion of a business combination.
Generally, these fees may be received within 24 months from the respective date of the offering, or not
received at all if no business combination transactions are consummated during such time period. During the
fourth quarter of 2007, Ladenburg received deferred fees of $9,700,000 (included in investment banking
revenues) and incurred commissions and related expenses of $3,500,000. As of December 31, 2007, we had
unrecorded potential deferred fees for our SPAC-related transactions of $39,500,000, which, net of
commissions and related expenses, amounted to approximately $23,500,000.
Placement of private debt and equity offerings. Ladenburg has extensive experience in both the equity
and debt capital markets and has developed relationships with private equity firms, mezzanine, senior debt
and other institutional financing sources. Ladenburg undertakes a process-oriented approach to targeting
institutional sources. When applicable, Ladenburg also works with its clients to target other types of investors,
including strategic parties with whom a synergistic relationship might be formed.
Ladenburg has recently expanded its private placement activities to include PIPE (private investment in
public equity) transactions and has added additional personnel dedicated to this practice area. Ladenburg
intends to use its relationships with both public companies seeking to engage in PIPE transactions, as well as
hedge funds and other institutional investors. We believe there is a significant opportunity for continued
growth in this area given issuers’ continuing desire to identify and pursue faster and less costly financing
alternatives to traditional follow-on public offerings and institutional investors’ continuing interest in
participating in these financing transactions.
Merger, acquisition, and divestiture advisory services. A merger, acquisition or the sale of all or part of a
business can be a key factor in enhancing a company’s success and in advancing its corporate and/or
shareholder objectives. Ladenburg reviews a merger or acquisition client’s individual situation and specific
needs and then provides that client with targeted services to better suit the client. Ladenburg also acts as a
financial advisor and assists its clients with merger and acquisition services in a variety of scenarios.
Ladenburg is a member of M&A International Inc., the world’s largest M&A alliance, with 42 members that
focus primarily on mid-market acquisitions that have offices in 38 countries.
Rendering fairness and solvency opinions. Fairness and solvency opinions are issued through
Ladenburg, which has developed a proven expertise in the fairness and solvency opinion market. Ladenburg
has also been actively involved in rendering fairness opinions for SPACs in connection with business
combinations.
Fairness and solvency opinions are often necessary or requested in a variety of situations, including
mergers, acquisitions, restructurings, financings and privatizations. Given recent regulations and growing
concerns regarding potential conflicts of interest between a company and its shareholders, a fairness opinion
serves to mitigate the possible risks and associated litigation. A fairness opinion from a qualified financial
advisor is one of the most effective risk management tools available to assure sound business judgment has
been exercised in varying types of corporate transactions.
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Ladenburg provides both fairness and solvency opinions and analyses to boards of directors, independent
committees of boards of directors and shareholders. In addition, the firm provides objective advice on the
valuation of businesses and securities in connection with transactions involving mergers, acquisitions,
leveraged buyouts and restructurings, going-private transactions and certain other market activities.
Due to the increased scrutiny and regulation arising from inherent conflicts of interest where investment
banks serve as a client’s exclusive financial advisor and assist in both the sale of a company and provide a
fairness opinion on the transaction, there has been an increased need for “second” fairness opinions from an
independent party. Ladenburg has experience in issuing these “second” opinions and provides unbiased and
independent evaluations to assist in these situations.
Financial valuations. The value of a business can become a matter of concern in a variety of transactions,
including but not limited to sale or purchase transactions and recapitalizations. Valuations are also integral in
tax planning and for accounting compliance. Ladenburg has extensive valuation expertise. Ladenburg’s
professionals are uniquely qualified to determine the value of private companies, closely-held business
interests, limited partnership interests, intellectual property and other intangible assets and corporate
securities with marketability concerns.
Investment Activities
Ladenburg may from time to time seek to realize investment gains by purchasing, selling and holding
securities for its own account on a daily basis. Ladenburg may also from time to time engage for its own
account in the arbitrage of securities. We are required to commit the capital necessary for use in these
investment activities. The amount of capital committed at any particular time will vary according to market,
economic and financial factors, including the other aspects of our business. Additionally, in connection with
our investment banking activities, Ladenburg frequently receives warrants that entitle it to purchase securities
of the corporate issuers for which it raises capital or provides advisory services.
Asset Management
Ladenburg Asset Management Program
Ladenburg Thalmann Asset Management, Inc. (“LTAM”) offers its customers the Ladenburg Asset
Management Program (LAMP) to assist them in achieving their desired investment objectives through
centralized management of mutual fund and exchange-traded fund portfolios based on asset allocation
models. Features of the program include active rebalancing at the asset class and security level, minimum
account balance, risk analysis, customized investment policy statements and comprehensive performance
reporting.
Private Investment Management
LTAM offers specialized programs to access professional money managers. The Private Investment
Management program allows internal managers to provide portfolio services to clients on a discretionary basis
with specific styles of investing for an annual asset-based fee. The Private Investment Management Program
Accredited (“PIMA”) is offered for accredited investors. The internal PIMA managers manage certain accounts
using the same investment strategy used to manage LTAM’s private funds and other investment strategies
involving short-selling and use of leverage. In addition to the annual asset-based fee, certain customers are
also charged an incentive fee, if earned, at the end of each calendar year.
LTAM’s Investor Consulting Services are designed to provide clients with access to proven independent
managers usually only available to large institutions, across the spectrum of major asset classes. LTAM
performs due diligence on the managers to ensure that, by maintaining them as a recommended manager, they
may represent a suitable solution for the investor.
Retirement Plan Sponsor Services
LTAM provides investment consulting services to sponsors of certain retirement plans, such as 401(k)
plans. These services include: identifying mutual funds for the plan sponsor’s review and final selection based
on the
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selection criteria stated in the plan’s investment policy statement; assisting in the planning and coordination
of, and participating in, enrollment and communication meetings; and providing to the plan sponsor a written
mutual-fund-by-mutual-fund quarterly performance report for the purpose of meeting the plan fiduciary’s
obligation to monitor plan assets. Certain plan participants may also engage LTAM to manage their plan
assets on a discretionary basis.
Alternative Investments
LTAM provides high net worth clients and institutional investors the opportunity to invest in proprietary
and third party alternative investments. These include, but are not limited to, hedge funds, funds of funds,
private equity, venture capital and real estate.
Ladenburg Architect Program
LTAM provides its customers the Ladenburg Architect Program as a non-discretionary, fee-based,
advisory account that allows them to maintain control over the management of the account and choose from a
diverse group of securities while partnering with their Financial Consultant. The program features quarterly
performance monitoring, check writing, a debit card and online account access.
Third Party Advisory Services
Together with its affiliate, LTAM provides investment consulting services to the clients of Investacorp
Advisory Services, Inc. (“IAS”), Investacorp’s registered investment advisor. Under these arrangements, IAS
provides certain services to its clients and LTAM provides the remaining advisory and account management
services.
Research Services
Ladenburg’s research department takes a fresh, critical approach to analyzing primary sources and
developing proprietary research. Many individuals, institutions, portfolio managers and hedge fund managers,
on all levels, have been neglected by brokerage firms ignoring the demands for unbiased research. Ladenburg
provides a superior branded in-depth research product geared only to action-oriented investment ideas.
Ladenburg’s research department focuses on investigating investment opportunities by utilizing fundamental,
technical and quantitative methods to conduct in-depth analysis. Currently, our research department
specializes in small- to mid-cap companies in the power and electric utilities, exploration and production, oil
services, medical devices and restaurant sectors and on a special situations basis and may expand to
additional sectors in the future. Research is provided on a fee basis to certain institutional accounts. Our
research department:
• reviews and analyzes general market conditions and other industry groups;
• issues written reports on companies, with recommendations on specific actions to buy, sell or hold; or
hold;
• furnishes information to retail and institutional customers; and
• responds to inquires from customers and account executives.
Upon completion of the pending Punk Ziegel acquisition, Ladenburg will also provide research coverage in
the healthcare and financial institutions sectors.
Investacorp
Overview
Investacorp participates in the independent distribution channel for financial services products and
services. Investacorp considers the independent distribution channel to include firms:
• that are not owned or controlled by a financial services products manufacturer;
• that are not required to place all or a substantial portion of their new business with a single financial
services products manufacturer; and
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• in which the sales representatives are free to sell the products of multiple manufacturers.
Broker-dealers serving the independent channel, such as Investacorp, often referred to as independent
broker-dealers, tend to offer extensive product and financial planning services and heavily emphasize
packaged products such as mutual funds and variable annuities. We believe that the financial services
industry is witnessing an increase in the number of independent broker-dealer representatives and registered
investment advisors as registered representatives are leaving large national firms to form their own small firms.
These new small firms need client and back office support services and access to technology and such firms
typically become affiliated with an independent broker-dealer. Further, individuals are increasingly
transferring their assets from mutual funds to other managed products such as those offered by Investacorp. We
expect these trends to continue and possibly accelerate in the future.
Investacorp supports approximately 500 independent contractor registered representatives in providing
products and services to their clients in approximately 350 branch offices located in 41 states. Approximately
one-quarter of the registered representatives are located in Florida. A significant number of Investacorp’s
registered representatives also are located in New York. The number of registered representatives in these
offices ranges from one to 16. Many of Investacorp’s registered representatives provide financial planning
services to their clients, wherein the financial advisor evaluates a client’s financial needs and objectives,
develops a detailed plan, and then implements the plan with the client’s approval. When the implementation
of such objectives involves the purchase or sale of securities (including the placement of assets within a
managed account) such transactions may be effected through Investacorp, for which Investacorp earns either a
commission or a fee. Representatives may be permitted to conduct other approved businesses unrelated to
their Investacorp activities such as offering fixed insurance products, accounting, estate planning and tax
services, among others.
A registered representative who becomes affiliated with Investacorp establishes his or her own office and
is solely responsible for the payment of all expenses associated with the operation of the branch office
(including rent, utilities, furniture, equipment, stock quotations, and general office supplies); although all of
that branch’s revenues from securities brokerage transactions accrue to Investacorp. Because Investacorp’s
registered representatives bear the responsibility for these expenses, Investacorp pays them a significant
percentage of the commissions they generate, typically at least 80%. This compares with a payout rate of
approximately 25% to 50% to financial advisors working in a traditional brokerage setting where the
brokerage firm bears substantially all of the costs of maintaining its sales forces, including providing
employee benefits, office space, sales assistants, telephone service and supplies. The independent brokerage
model permits Investacorp to expand its base of revenue and its network for the retail distribution of
investment products without the capital expenditures that would be required to open company-owned offices
and the additional administrative and other costs of hiring financial advisors as in-house employees.
Investacorp’s registered representatives must possess a sufficient level of commission brokerage business
and experience to enable the individual to independently support his or her own office. Financial
professionals such as insurance agents, financial planners, and accountants, who already provide financial
services to their clients, often affiliate with Investacorp. These professionals then offer financial products and
services to their clients through Investacorp and earn commissions and fees for these transactions and services.
Investacorp’s registered representatives have the ability to structure their own practices and to specialize in
different areas of the securities business, subject to Investacorp’s supervisory procedures as well as compliance
with all applicable regulatory requirements.
Investacorp provides full support services to each of its registered representatives, including: access to
stock and options execution; products such as insurance, mutual funds, unit trusts and investment advisory
programs; and research, compliance, supervision, accounting and related services.
Each representative is required to obtain and maintain in good standing each license required by the SEC
and FINRA to conduct the type of securities business in which he or she engages, and to register in the various
states in which he/she has customers. Investacorp is ultimately responsible for supervising all of its registered
representatives wherever they are located. We can incur substantial liability from improper actions of any of
Investacorp’s registered representatives.
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While an increasing number of clients are electing asset-based fee alternatives to the traditional
commission schedule, in most cases Investacorp charges commissions on variable annuity, mutual fund,
equity and fixed income transactions. Investacorp primarily derives revenue from commissions from the sale
of variable annuity products and mutual funds by its independent registered representatives.
Investacorp’s Asset Management Business
Third Party Programs
IAS makes available to its clients various third-party, non-proprietary timing services, non-proprietary
asset allocation services and non-proprietary wrap fee programs, which use individual money managers. IAS’s
solicitors and servicing investment adviser representatives refer and/or recommend their clients to these
programs based upon their clients’ financial objectives or assist their clients in choosing from an approved list
of third-party investment advisor sponsors that provide these particular types of services.
IAS TARGET Account Series
The IAS TARGET Account Series offers clients accounts whereby they can choose to invest in a diverse
group of securities and pay a fee for services which include advisory, administrative, and processing
functions. Alternatively, the client can employ a third-party money manager to manage the client’s TARGET
Account.
Financial Planning Services
IAS through certain select IAS investment adviser representatives may provide consultation and financial
planning services which may include: estate planning, retirement and financial goal planning, educational
funding, asset allocation and insurance needs analysis, as well as general analysis and planning. The IAS
investment adviser representative prepares a written financial plan based upon the client’s stated goals, needs
and investment profile.
Investacorp’s Insurance Business
Almost all of Investacorp’s financial planners are also authorized agents of insurance underwriters.
Investacorp has the capability of processing insurance business through Valor Insurance, our wholly-owned
subsidiaries which are licensed insurance brokers, as well as through other licensed insurance brokers. The
Valor Insurance entities hold insurance agency licenses in 46 states for the purpose of facilitating the sale of
insurance and annuities for Investacorp’s registered representatives to the retail customer. We retain no risk of
insurance related to the insurance and annuity products Investacorp’s registered representatives sell.
Investacorp’s Strategy
Investacorp’s business plan is focused on increasing its network of registered representatives, its revenues
and its client assets as described below.
• Recruiting experienced financial professionals. Investacorp actively recruits experienced financial
professionals. These efforts are supported by advertising, targeted direct mail and inbound and
outbound telemarketing. Although Investacorp will continue to attempt to recruit those financial
advisors who serve as financial planners (who sell primarily annuities, insurance and mutual funds), it
also intends to pursue financial advisors who focus on the sale of different types of securities, namely
equities and fixed income products.
• Provide technological solutions to its employees and independent representatives. Investacorp
believes that it is imperative that it continues to possess state-of-the-art technology so that its
employees and independent registered representatives can effectively facilitate, measure and record
business activity in a timely, accurate and efficient manner. By continuing its commitment to provide a
highly capable technology platform to process business, Investacorp believes that it can achieve
economies of scale and potentially reduce the need to hire additional personnel.
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• Build recurring revenue. Over the past several years, Investacorp has recognized the trend toward
increased investment advisory business and is focused on building its fee based investment advisory
business. Investacorp believes that fee based investment advisory services may be better for certain
clients. While these fees generate substantially lower first year revenue than most commission products,
the recurring nature of these fees provides a platform for accelerating future revenue growth.
• Acquire other independent brokerage firms. Investacorp may also pursue the acquisition of other
independent brokerage firms. The ability to realize growth through acquisitions, however, will depend
on the availability of suitable broker-dealer candidates and Investacorp’s ability to successfully
negotiate favorable terms. There can be no assurance that Investacorp will be able to consummate any
such acquisitions. Further, there are costs associated with the integration of new businesses and
personnel, which may be more than anticipated.
• Assist registered representatives to increase their sales. Investacorp is aligned with its registered
representatives in seeking to increase their sales and improve productivity. Investacorp continues to
undertake initiatives to assist its registered representatives with client recruitment, training, compliance
and product support. In addition, Investacorp continues to focus on improving back-office support to
allow its representatives more time to focus on recruiting activity, training and increasing sales, rather
than administrative burdens.
Administration, Operations, Securities Transactions Processing and Customer Accounts
Neither Ladenburg nor Investacorp holds funds or securities for its customers. Instead, Ladenburg uses the
services of National Financial Services LLC, a Fidelity Investments® company, and Investacorp uses the
services of National Financial Services LLC, Bear Stearns Securities Corp. and Ridge Clearing and
Outsourcing Solutions, Inc. as their clearing agents on a fully disclosed basis. The clearing agents process all
securities transactions and maintain customer accounts on a fee basis. Customer accounts are protected
through the SIPC for up to $500,000, of which coverage for cash balances is limited to $100,000. In addition,
all customer accounts are fully protected by an excess securities bond, “Excess SIPC”, providing protection
for the account’s entire net equity (both cash and securities). Clearing agent services include billing, credit
control, and receipt, custody and delivery of securities. The clearing agent provides operational support
necessary to process, record and maintain securities transactions for Ladenburg’s and Investacorp’s brokerage
activities. It provides these services to Ladenburg’s and Investacorp’s customers at a total cost which we
believe is less than it would cost us to process such transactions on our own. The clearing agent also lends
funds to Ladenburg’s and Investacorp’s customers through the use of margin credit. These loans are made to
customers on a secured basis, with the clearing agent maintaining collateral in the form of saleable securities,
cash or cash equivalents. We have agreed to indemnify the clearing brokers for losses they may incur on these
credit arrangements.
Seasonality and Cyclical Factors
Our revenues typically are affected by the traditional U.S. vacation seasons, such as July, August and
December. Our revenues may be more adversely affected by cyclical factors, such as the current financial
market downturn as well as problems or recessions in the U.S. or global economies. These downturns may
cause investor concern, which has historically resulted in fewer investment banking transactions and less
investing by institutional and retail investors through broker-dealers, thereby reducing our revenues and
potential profits. Such conditions might also expose us to the risk of being unable to raise additional capital
to offset related significant reductions in revenues.
Competition
We encounter intense competition in all aspects of our business and compete directly with many other
providers of financial services for clients as well as registered representatives. We compete directly with many
other national and regional full service financial services firms, discount brokers, investment advisers, broker-
dealer subsidiaries of major commercial bank holding companies, insurance companies and other companies
offering financial services in the U.S., globally, and through the Internet. Many of our competitors have
significantly greater
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financial, technical, marketing and other resources than we do. In addition, a number of firms offer discount
brokerage services to retail customers and generally effect transactions at substantially lower commission rates
on an “execution only” basis, without offering other services such as investment recommendations and
research. Moreover, there is substantial commission discounting by full-service broker-dealers competing for
institutional and retail brokerage business. A growing number of brokerage firms offer online trading which
has further intensified the competition for brokerage customers. Although Ladenburg and Investacorp offer
on-line account access to their customers to review their account balances and activity, they currently do not
offer any online trading services to their customers. The continued expansion of discount brokerage firms and
online trading could adversely affect our business. In addition, competition is increasing from other financial
institutions, notably banking institutions, insurance companies and other organizations, which offer
customers some of the same services and products presently provided by securities firms. We seek to compete
through the quality of our registered representatives and investment bankers, our level of service, the products
and services we offer and our expertise in certain areas.
In the financial services industry, there is significant competition for qualified personnel. Our ability to
compete effectively is substantially dependent on our continuing ability to attract, retain and motivate
qualified registered representatives, investment bankers, trading professionals, portfolio managers and other
revenue-producing or specialized personnel.
Government Regulation
The securities industry, including our business, is subject to extensive regulation by the SEC, state
securities regulators and other governmental regulatory authorities. The principal purpose of these regulations
is the protection of customers and the securities markets. The SEC is the federal agency charged with the
administration of the federal securities laws. Much of the regulation of broker-dealers, however, has been
delegated to self-regulatory organizations, principally FINRA and the Municipal Securities Rulemaking
Board. These self-regulatory organizations adopt rules, subject to approval by the SEC, which govern their
members and conduct periodic examinations of member firms’ operations.
Securities firms are also subject to regulation by state securities commissions in the states in which they
are registered. Ladenburg is a registered broker-dealer with the SEC and a member firm of the NYSE.
Investacorp is a registered broker-dealer with the SEC. Each of Ladenburg and Investacorp is licensed to
conduct activities as a broker-dealer in all 50 states.
Ladenburg Thalmann Europe, Ltd., a wholly-owned subsidiary of Ladenburg, is an authorized securities
broker regulated by the Financial Services Authority of the United Kingdom and, through the European
Community’s passporting provisions, is authorized to conduct business in all of the member countries of the
European Community.
The regulations to which broker-dealers are subject cover all aspects of the securities industry, including:
• sales methods and supervision;
• trading practices among broker-dealers;
• use and safekeeping of customers’ funds and securities;
• capital structure of securities firms;
• record keeping;
• conduct of directors, officers and employees; and
• advertising, including regulations related to telephone solicitation.
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As registered investment advisors under the Investment Advisers Act of 1940, LTAM and IAS are subject
to the requirements of regulations under both the Investment Advisers Act and certain state securities laws and
regulations. Such requirements relate to, among other things:
• limitations on the ability of investment advisors to charge performance-based or non-refundable fees to
clients;
• record-keeping and reporting requirements;
• disclosure requirements;
• limitations on principal transactions between an advisor or its affiliates and advisory clients; and
• general anti-fraud prohibitions.
Additional legislation, changes in rules promulgated by the SEC and by self-regulatory bodies or changes
in the interpretation or enforcement of existing laws and rules often directly affect the method of operation
and profitability of broker-dealers. The SEC and the self-regulatory bodies may conduct administrative
proceedings which can result in censure, fine, suspension or expulsion of a broker-dealer, its officers,
employees or registered representatives.
Net Capital Requirements
Our registered broker-dealer subsidiaries are subject to the SEC’s net capital rule, which is designed to
measure the general financial integrity and liquidity of a broker-dealer. Net capital is defined as the net worth
of a broker-dealer subject to certain adjustments. In computing net capital, various adjustments are made to
net worth which exclude assets not readily convertible into cash. Additionally, the regulations require that
certain assets, such as a broker-dealer’s position in securities, be valued in a conservative manner so as to
avoid over-inflation of the broker-dealer’s net capital.
Ladenburg is subject to the SEC’s Uniform Net Capital Rule 15c3-1 and the Commodity Futures Trading
Commission’s Regulation 1.17. Ladenburg has elected to compute its net capital under the alternative method
allowed by these rules. At December 31, 2007, Ladenburg had net capital, as defined, of approximately
$26,659,000, which exceeded its minimum capital requirement of $500,000 by $26,159,000. Ladenburg
claims an exemption from the provisions of the SEC’s Rule 15c3-3 pursuant to paragraph (k)(2)(ii) as it clears
its customer transactions through its correspondent broker on a fully disclosed basis.
Investacorp is also subject to SEC Rule 15c3-1, which requires the maintenance of minimum net capital
and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1.
At December 31, 2007, Investacorp had net capital of approximately $2,496,000, which was $2,163,000 in
excess of its required net capital of $333,000. At December 31, 2007, Investacorp’s net capital ratio was 2 to 1.
Compliance with the net capital rule limits those operations of broker-dealers which require the intensive
use of their capital, such as underwriting commitments and principal trading activities. In the past, Ladenburg
has entered into, and from time to time in the future may enter into, temporary subordinated loan arrangements
to borrow funds on a short-term basis from our shareholders or clearing broker in order to supplement the
capital of our broker-dealers to facilitate underwriting transactions.
In addition to the above requirements, funds invested as equity capital may not be withdrawn, nor may
any unsecured advances or loans be made to any stockholder of a registered broker-dealer, if, after giving
effect to the withdrawal, advance or loan and to any other withdrawal, advance or loan as well as to any
scheduled payments of subordinated debt which are scheduled to occur within six months, the net capital of
the broker-dealer would fall below 120% of the minimum dollar amount of net capital required or the ratio of
aggregate indebtedness to net capital would exceed 10 to 1. Further, any funds invested in the form of
subordinated debt generally must be invested for a minimum term of one year and repayment of such debt
may be suspended if the broker-dealer fails to maintain certain minimum net capital levels. For example,
scheduled payments of subordinated debt are suspended in the event that the ratio of aggregate indebtedness
to net capital of the broker-dealer would exceed 12 to 1 or its net capital would be less than 120% of the
minimum dollar amount of net capital required. The net capital rule also
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prohibits payments of dividends, redemption of stock and the prepayment, or payment in respect of principal
or subordinated indebtedness if net capital, after giving effect to the payment, redemption or repayment,
would be less than the specified percent (120%) of the minimum net capital requirement.
Failure to maintain the required net capital may subject a firm to suspension or expulsion by FINRA, the
SEC and other regulatory bodies and ultimately may require its liquidation. Compliance with the net capital
rule could limit Ladenburg’s operations that require the intensive use of capital, such as underwriting and
trading activities, and also could restrict our ability to withdraw capital from it, which in turn could limit our
ability to pay dividends, repay debt and redeem or purchase shares of our outstanding capital stock.
In addition to regulatory net capital restrictions, Investacorp also is 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 Zwigard note and $5,000,000. At December 31, 2007, the
outstanding principal balance of the Zwigard note was $14,214,218.
Geographic Area
We are domiciled in the United States and virtually all of our revenue is attributed to activities in the
United States. All of our long-lived assets are located in the United States.
Personnel
At December 31, 2007, Ladenburg had a total of approximately 173 employees, of which 107 are
registered representatives and 66 are other full time employees. In addition, Investacorp had approximately
500 registered representatives and 75 full time employees. None of our employees are covered by a collective
bargaining agreement. We consider our relationship with our employees and independent contractors to be
good.
ITEM 1A. RISK FACTORS.
You should carefully consider all of the material risks described below regarding our company. Our
business, financial condition or results of operation could be materially adversely affected by any of these
risks. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also
may materially and adversely affect our business operations.
Risk Factors Relating to Our Business
We have incurred in the past, and may incur in the future, significant operating losses.
Although we had net income for the years ended December 31, 2007 and 2006, we did incur significant
losses from operations during each of the four years ended December 31, 2005. We cannot assure you that we
will be able to sustain revenue growth, profitability or positive cash flow on either a quarterly or annual basis.
Although we believe that we have adequate cash and regulatory capital to fund our current level of operating
activities through December 31, 2008, if we are unable to sustain profitability, we may not be financially
viable in the future and may have to curtail, suspend or cease operations.
A large portion of our revenue for any period may result from a limited number of underwriting
transactions.
A large part of our revenue for any period may be derived from a limited number of underwritings in
which Ladenburg serves as either the lead or co-manager. We cannot assure you that Ladenburg will continue
to serve as lead or co-manager of similar underwritings in the future. If Ladenburg is not able to do so, our
revenue may significantly decrease and our results of operations may be adversely affected.
Our revenues may decline if the market for SPAC offerings declines.
The number of new SPAC offerings, as well as the equity capital markets generally, have declined
significantly during the first quarter 2008. A continued downturn in the market for SPAC transactions could
adversely affect our
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results of operations. Underwritings for SPAC transactions have been an important source of revenues for us
since 2005. SPAC transactions are currently exempt from rules adopted by the SEC to protect investors of
blank check companies, such as Rule 419 under the Securities Act of 1933. However, the SEC may determine
to adopt new rules relating to SPAC transactions which could impact our ability to successfully underwrite
these transactions.
Deferred underwriting fees may not be received by us in certain situations.
At December 31, 2007, we were owed deferred fees from SPAC underwritings that Ladenburg participated
in of $39,500,000, or approximately $23,500,000 after expenses. These deferred fees are not included in our
revenues, however, until a business combination is completed by the SPAC and Ladenburg is paid.
Accordingly, if the SPACs from which we are owed deferred fees are unable to consummate business
combinations, we will not be entitled to receive the deferred fees we are owed. SPACs face significant
competition in consummating business combinations. Since August 2003, based upon publicly available
information, approximately 155 SPACs have completed initial public offerings as of March 1, 2008. Of these
companies, only 47 companies have consummated a business combination, while 23 other companies have
announced they have entered into a definitive agreement for a business combination, but have not
consummated such business combination and ten companies have failed to complete business combinations
and have dissolved and returned trust proceeds to their stockholders. Accordingly, if the SPACs that owe us
deferred fees do not consummate business combinations, we will not receive these fees and our results of
operations may be adversely affected.
We may experience significant fluctuations in our quarterly operating results due to the nature of our
business and therefore may fail to meet profitability expectations.
Our revenue and operating results may fluctuate from quarter to quarter and from year to year due to a
combination of factors, including the level of underwritings and advisory transactions completed by us and
the level of fees we receive from those underwritings and transactions. Accordingly, our results of operations
may fluctuate significantly due to an increased or decreased number of transactions in any particular quarter
or year.
Our financial leverage may impair our ability to obtain financing and limits cash flow available for
operations.
Our indebtedness may:
• limit our ability to obtain additional financing for working capital, regulatory capital requirements,
acquisitions or general corporate purposes;
• require us to dedicate a substantial portion of cash flows from operations to the payment of principal
and interest on our indebtedness, resulting in less cash available for operations and other purposes; and
• increase our vulnerability to downturns in our business or in general economic conditions.
Our ability to satisfy our obligations and to reduce our total debt depends on our future operating
performance and prospects. Our future operating performance is subject to many factors, including economic,
financial and competitive factors, which may be beyond our control. As a result, we may not be able to
generate sufficient cash flow, and future financings may not be available to provide sufficient net proceeds, to
meet these obligations.
Our business is dependent on fees generated from the distribution of financial products
An important portion of our revenues is derived from fees generated from the distribution of financial
products such as mutual funds and variable annuities by the Investacorp registered representatives, and to a
lesser extent, Ladenburg’s registered representatives. Changes in the structure or amount of the fees paid by
the sponsors of these products could directly affect our revenues and profits.
In addition, there have been suggestions from regulatory agencies and other industry participants that
Rule 12b-1 distribution fees in the mutual fund industry should be reconsidered and, potentially, reduced or
eliminated. Any reduction or restructuring of Rule 12b-1 distribution fees could have a material adverse effect
on our results of operations.
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Our business could be adversely affected by a downturn in the financial markets.
Our business is materially affected by conditions in the financial markets and economic conditions
generally, both in the United States and elsewhere around the world. Many factors or events could lead to a
downturn in the financial markets including war, terrorism, natural catastrophes and other types of disasters.
These types of events could cause people to begin to lose confidence in the financial markets and their ability
to function effectively. If the financial markets are unable to effectively prepare for these types of events and
ease public concern over their ability to function, our results of operations will be adversely affected.
Our investment banking revenues, in the form of financial advisory and underwriting fees, are directly
related to the number and size of the transactions in which we participate and therefore may be adversely
affected by any downturn in the securities markets. Additionally, downturn in market conditions may lead to a
decline in assets under management or the volume of transactions that we execute for our customers and,
therefore, to a decline in the revenues we would otherwise receive from commissions, fees and spreads. Should
these adverse financial and economic conditions appear and persist for any extended period of time, we will
incur a further decline in transactions and revenues that we receive from commissions, fees and spreads.
Misconduct by our employees and independent registered representatives is difficult to detect and deter
and could harm our business, results of operations or financial condition.
Misconduct by our employees and independent registered representatives could result in violations of
law by us, regulatory sanctions and/or serious reputational or financial harm.
Misconduct could include:
• binding us to transactions that exceed authorized limits;
• hiding unauthorized or unsuccessful activities resulting in unknown and unmanaged risks or losses;
• improperly using or disclosing confidential information;
• recommending transactions that are not suitable;
• engaging in fraudulent or otherwise improper activity;
• engaging in unauthorized or excessive trading to the detriment of customers; or
• otherwise not complying with laws or our control procedures.
We cannot always deter misconduct by our employees and independent registered representatives, and
the precautions we take to prevent and detect this activity may not be effective in all cases. Prevention and
detection among our independent registered representatives, who are not employees of our company and tend
to be located in small, decentralized offices, presents additional challenges. We also cannot assure that
misconduct by our employees and independent registered representatives will not lead to a material adverse
effect on our business or results of operations.
We may incur significant losses from trading and investment activities due to market fluctuations and
volatility.
We may maintain trading and investment positions in the equity markets. To the extent that we own
assets, i.e., have long positions, in those markets, a downturn in those markets could result in losses from a
decline in the value of those long positions. Conversely, to the extent that we have sold assets that we do not
own, i.e., have short positions, in any of those markets, an upturn in those markets could expose us to
potentially unlimited losses as we attempt to cover our short positions by acquiring assets in a rising market.
We may from time to time have a trading strategy consisting of holding a long position in one security
and a short position in another security from which we expect to earn revenues based on changes in the
relative value of the two securities. If, however, the relative value of the two securities changes in a direction
or manner that we did not anticipate or against which we are not hedged, we might realize a loss in those
paired positions. In addition, we
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maintain trading positions that can be adversely affected by the level of volatility in the financial markets,
i.e., the degree to which trading prices fluctuate over a particular period, in a particular market, regardless of
market levels.
We may be prohibited from underwriting securities due to capital limits.
From time to time, our underwriting activities may require that we temporarily receive an infusion of
capital for regulatory purposes. This is predicated on the amount of commitment Ladenburg makes for each
underwriting. In the past, we entered into temporary subordinated loan arrangements with our shareholders or
clearing firm. Should we no longer be able to receive such funding from these sources, and if there are no other
viable sources available, it would have an adverse impact on our ability to generate profits, recruit financial
consultants and retain existing customers.
Our capital markets and strategic advisory engagements are singular in nature and do not generally
provide for subsequent engagements.
Ladenburg’s investment banking clients generally retain it on a short-term, engagement-by-engagement
basis in connection with specific capital markets or mergers and acquisitions transactions, rather than on a
recurring basis under long-term contracts. As these transactions are typically singular in nature and our
engagements with these clients may not recur, Ladenburg must seek out new engagements when its current
engagements are successfully completed or are terminated. As a result, high activity levels in any period are
not necessarily indicative of continued high levels of activity in any subsequent period. If we are unable to
generate a substantial number of new engagements that generate fees from new or existing clients, our
business and results of operations would likely be adversely affected.
We depend on our senior employees and the loss of their services could harm our business.
Our success is dependent in large part upon the services of several of our senior executives and
employees, including those of Ladenburg and Investacorp. We do not maintain and do not intend to obtain
key man insurance on the life of any executive or employee. If our senior executives or employees terminate
their employment with us and we are unable to find suitable replacements in relatively short periods of time,
our business and results of operations may be materially and adversely affected.
We face significant competition for professional employees.
From time to time, individuals we employ may choose to leave our company to pursue other
opportunities. We have experienced losses of registered representatives, trading and investment banking
professionals in the past, and the level of competition for key personnel remains intense. We cannot assure
you that the loss of key personnel will not occur again in the future. The loss of a registered representative or a
trading or investment banking professional, particularly a senior professional with a broad range of contacts in
an industry, could materially and adversely affect our results of operations.
Poor performance of the investment products and services recommended or sold to asset management
clients may have a material adverse effect on our business.
Investacorp’s and Ladenburg’s investment advisory contracts with their clients are generally terminable
upon 30 days’ notice. These clients can terminate their relationship, reduce the aggregate amount of assets
under management or shift their funds to other types of accounts with different rate structures for any number
of reasons, including investment performance, changes in prevailing interest rates, financial market
performance and personal client liquidity needs. Poor performance of the investment products and services
recommended or sold to such clients relative to the performance of other products available in the market or
the performance of other investment management firms tends to result in the loss of accounts. The decrease in
revenue that could result from such an event could have a material adverse effect on our results of operations.
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Systems failures could significantly disrupt our business.
Our business depends on our and our clearing firms’ ability to process, on a daily basis, a large number of
transactions across numerous and diverse markets and the transactions we process have become increasingly
complex. We rely heavily on our communications and financial, accounting and other data processing
systems, including systems provided by our clearing brokers and service providers. We face operational risk
arising from mistakes made in the confirmation or settlement of transactions or from transactions not being
properly recorded, evaluated or accounted.
If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption
of our business, liability to clients, regulatory intervention or reputational damage. Any failure or interruption
of our systems, the systems of our clearing brokers, or third party trading systems could cause delays or other
problems in our securities trading activities, which could have a material adverse effect on our operating
results. In addition, our clearing brokers provide our principal disaster recovery system. We cannot assure you
that we or our clearing brokers will not suffer any systems failures or interruption, including ones caused by
earthquake, fire, other natural disasters, power or telecommunications failure, act of God, act of war, terrorism,
or otherwise, or that our or our clearing brokers’ back-up procedures and capabilities in the event of any such
failure or interruption will be adequate. The inability of our or our clearing brokers’ systems to accommodate
an increasing volume of transactions could also constrain our ability to expand our business.
Our expenses may increase due to real estate commitments.
We have subleased office space in various locations to subtenants. Should any of the sub-tenants not pay
their rent for an extended period of time, it may have a material adverse effect on our results of operations.
Our risk management policies and procedures may leave us exposed to unidentified risks or an
unanticipated level of risk.
The policies and procedures we employ to identify, monitor and manage risks may not be fully effective.
Some methods of risk management are based on the use of observed historical market behavior. As a result,
these methods may not predict future risk exposures, which could be significantly greater than the historical
measures indicate. Other risk management methods depend on evaluation of information regarding markets,
clients or other matters that are publicly available or otherwise accessible by us. This information may not be
accurate, complete, up-to-date or properly evaluated. Management of operational, legal and regulatory risk
requires, among other things, policies and procedures to properly record and verify a large number of
transactions and events. We cannot assure you that our policies and procedures will effectively and accurately
record and verify this information.
We seek to monitor and control our risk exposure through a variety of separate but complementary
financial, credit, operational and legal reporting systems. We believe that we effectively evaluate and manage
the market, credit and other risks to which we are exposed. Nonetheless, the effectiveness of our ability to
manage risk exposure can never be completely or accurately predicted or fully assured. For example,
unexpectedly large or rapid movements or disruptions in one or more markets or other unforeseen
developments can have a material adverse effect on our results of operations and financial condition. The
consequences of these developments can include losses due to adverse changes in inventory values, decreases
in the liquidity of trading positions, higher volatility in earnings, increases in our credit risk to customers as
well as to third parties and increases in general systemic risk.
Risk Factors Relating to Our Industry
Each of Ladenburg and Investacorp rely on clearing brokers and the termination of the agreements with
any one of these clearing brokers could disrupt our business.
Ladenburg primarily uses one clearing broker and Investacorp currently uses three clearing brokers to
process securities transactions and maintain customer accounts on a fee basis. The clearing brokers also
provide billing services, extend credit and provide for control and receipt, custody and delivery of securities.
Ladenburg and Investacorp depend on the operational capacity and ability of the clearing brokers for the
orderly processing of transactions. In addition, by engaging the processing services of a clearing firm, each of
Ladenburg and Investacorp
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is exempt from some capital reserve requirements and other regulatory requirements imposed by federal and
state securities laws. If any of these clearing agreements were terminated for any reason, we would be forced to
find an alternative clearing firm. We cannot assure you that we would be able to find an alternative clearing
firm on acceptable terms to us or at all. In addition, the loss of any particular clearing firm could hamper
Investacorp’s ability to recruit and retain its independent registered representatives.
Our clearing brokers extend credit to our clients and we are liable if the clients do not pay.
Each of Ladenburg and Investacorp permits its clients to purchase securities on a margin basis or sell
securities short, which means that the clearing firm extends credit to the client secured by cash and securities
in the client’s account. During periods of volatile markets, the value of the collateral held by the clearing
broker could fall below the amount borrowed by the client. If margin requirements are not sufficient to cover
losses, the clearing broker sells or buys securities at prevailing market prices, and may incur losses to satisfy
client obligations. Each of Ladenburg and Investacorp has agreed to indemnify the clearing broker for losses
it may incur while extending credit to its clients.
Credit risk exposes us to losses caused by financial or other problems experienced by third parties.
We are exposed to the risk that third parties that owe us money, securities or other assets will not perform
their obligations. These parties include:
• trading counterparties;
• customers;
• clearing agents;
• other broker-dealers;
• exchanges;
• clearing houses; and
• other financial intermediaries as well as issuers whose securities we hold.
These parties may default on their obligations owed to us due to bankruptcy, lack of liquidity,
operational failure or other reasons. This risk may arise, for example, from:
• holding securities of third parties;
• executing securities trades that fail to settle at the required time due to non-delivery by the
counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial
intermediaries; and
• extending credit to clients through bridge or margin loans or other arrangements.
Significant failures by third parties to perform their obligations owed to us could adversely affect our
revenues and perhaps our ability to borrow in the credit markets.
Intense competition from existing and new entities may adversely affect our revenues and profitability.
The securities industry is rapidly evolving, intensely competitive and has few barriers to entry. We expect
competition to continue and intensify in the future. Many of our competitors have significantly greater
financial, technical, marketing and other resources than we do. Some of our competitors also offer a wider
range of services and financial products than we do and have greater name recognition and a larger client
base. These competitors may be able to respond more quickly to new or changing opportunities, technologies
and client requirements. They may also be able to undertake more extensive promotional activities, offer more
attractive terms to clients, and adopt more aggressive pricing policies. We may not be able to compete
effectively with current or future competitors and competitive pressures faced by us may harm our business.
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Our business and results of operations may be negatively affected by errors and omissions claims.
Our subsidiaries are subject to claims and litigation in the ordinary course of business resulting from
alleged and actual errors and omissions in placing insurance, effecting securities transactions and rendering
investment advice. These activities involve substantial amounts of money. Since errors and omissions claims
against our subsidiaries or their registered representatives may allege liability for all or part of the amounts in
question, claimants may seek large damage awards. These claims can involve significant defense costs. Errors
and omissions could include, for example, failure, whether negligently or intentionally, to effect securities
transactions on behalf of clients, to choose suitable investments for any particular client, to supervise a
registered representative or to provide insurance carriers with complete and accurate information. It is not
always possible to prevent or detect errors and omissions, and the precautions our subsidiaries take may not be
effective in all cases. Moreover, our subsidiaries do not carry errors and omissions insurance coverage and
many of their registered representatives do not carry such coverage either. Our liability for significant and
successful errors and omissions claims may materially and negatively affect our results of operations.
We are subject to various risks associated with the securities industry.
We are subject to uncertainties that are common in the securities industry. These uncertainties include:
• the volatility of domestic and international financial, bond and stock markets;
• extensive governmental regulation;
• litigation;
• intense competition;
• substantial fluctuations in the volume and price level of securities; and
• dependence on the solvency of various third parties.
As a result, revenues and earnings may vary significantly from quarter to quarter and from year to year. In
periods of low volume, profitability is impaired because certain expenses remain relatively fixed. We are
much smaller and have much less capital than many competitors in the securities industry. In the event of a
market downturn, our business could be adversely affected in many ways. Our revenues are likely to decline in
such circumstances and, if we are unable to reduce expenses at the same pace, our profit margins would erode.
Legal liability may harm our business.
Many aspects of our business involve substantial risks of liability. An underwriter is exposed to
substantial liability under federal and state securities laws, other federal and state laws, and court decisions,
including decisions with respect to underwriters’ liability and limitations on indemnification of underwriters
by issuers. For example, a firm that acts as an underwriter may be held liable for material misstatements or
omissions of fact in a prospectus used in connection with the securities being offered or for statements made
by its securities analysts or other personnel. In recent years, there has been an increasing incidence of
litigation involving the securities industry, including class actions that seek substantial damages. Our
underwriting activities often involve offerings of the securities of smaller companies, which may involve a
higher degree of risk and are more volatile than the securities of more established companies. In comparison
with more established companies, smaller companies are also more likely to be the subject of securities class
actions, to carry directors and officers liability insurance policies with lower limits or not at all, and to become
insolvent. Each of these factors increases the likelihood that an underwriter of a smaller company’s securities
will be required to contribute to an adverse judgment or settlement of a securities lawsuit.
In the normal course of business, our operating subsidiaries have been and continue to be the subject of
numerous civil actions and arbitrations arising out of customer complaints relating to our activities as a
broker-dealer, as an employer or as a result of other business activities. In general, the cases involve various
allegations that our employees or registered representatives had mishandled customer accounts. We believe
that, based on our historical experience and the reserves established by us, the resolution of the claims
presently pending will not have
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a material adverse effect on our financial condition. However, although we typically reserve an amount we
believe will be sufficient to cover any damages assessed against us, we have in the past been assessed damages
that exceeded our reserves. If we misjudged the amount of damages that may be assessed against us from
pending or threatened claims, or if we are unable to adequately estimate the amount of damages that will be
assessed against us from claims that arise in the future and reserve accordingly, our financial condition may be
materially adversely affected.
Risk Factors Relating to the Regulatory Environment
We are currently subject to extensive securities regulation and the failure to comply with these regulations
could subject us to penalties or sanctions.
The securities industry and our business is subject to extensive regulation by the SEC, state securities
regulators and other governmental regulatory authorities. We are also regulated by industry self-regulatory
organizations, including FINRA and the Municipal Securities Rulemaking Board. The regulatory
environment is also subject to change and we may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, other federal or state governmental regulatory authorities, or
self-regulatory organizations. We also may be adversely affected by changes in the interpretation or
enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations.
Each of Ladenburg and Investacorp is a registered broker-dealer with the SEC and FINRA. Broker-dealers
are subject to regulations which cover all aspects of the securities business, including:
• sales methods and supervision;
• trading practices among broker-dealers;
• use and safekeeping of customers’ funds and securities;
• capital structure of securities firms;
• record keeping; and
• conduct of directors, officers and employees.
Compliance with many of the regulations applicable to us involves a number of risks, particularly in areas
where applicable regulations may be subject to varying interpretation. The requirements imposed by these
regulators are designed to ensure the integrity of the financial markets and to protect customers and other third
parties who deal with us. Consequently, these regulations often serve to limit our activities, including through
net capital, customer protection and market conduct requirements. Much of the regulation of broker-dealers
has been delegated to self-regulatory organizations, principally FINRA. FINRA adopts rules, subject to
approval by the SEC, that govern broker-dealers and conducts periodic examinations of firms’ operations.
If we are found to have violated any applicable regulation, formal administrative or judicial proceedings
may be initiated against us that may result in:
• censure;
• fine;
• civil penalties, including treble damages in the case of insider trading violations;
• the issuance of cease-and-desist orders;
• the deregistration or suspension of our broker-dealer activities;
• the suspension or disqualification of our officers or employees; or
• other adverse consequences.
The imposition of any of these or other penalties could have a material adverse effect on our operating
results and financial condition.
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Implementation of FINRA Rule 2821, which governs the sale of variable annuity products, may impact
our financial performance.
FINRA recently adopted Rule 2821, which governs the sale of variable annuity products. Rule 2821
currently is scheduled to go into effect in May 2008. Investacorp will be required to train its registered
representatives on new processes for the sale of these products and delays in completing annuity sales may
occur. Accordingly, our revenue may be negatively impacted by delays in the sales process for annuities and
our expenses will increase as a result of compliance and technology costs associated with the implementation
of this new rule.
Legislative, judicial or regulatory changes to the classification of independent contractors could increase
our operating expenses.
From time to time, various legislative or regulatory proposals are introduced at the federal or state levels
to change the status of independent contractors’ classification to employees for either employment tax
purposes (withholding, social security, Medicare and unemployment taxes) or other benefits available to
employees. Currently, most individuals are classified as employees or independent contractors for
employment tax purposes based on 20 “common law” factors, rather than any definition found in the Internal
Revenue Code or Internal Revenue Service regulations. Investacorp classifies its registered representatives as
independent contractors for all purposes, including employment tax and employee benefit purposes. There
can be no assurance that legislative, judicial, or regulatory (including tax) authorities will not introduce
proposals or assert interpretations of existing rules and regulations that would change the
employee/independent contractor classification of Investacorp’s registered representatives. The costs
associated with potential changes, if any, with respect to these independent contractor classifications could
have a material adverse effect on us, including our results of operations and financial condition.
Failure to comply with net capital requirements could subject us to suspension or revocation by the SEC
or suspension or expulsion by FINRA.
Each of Ladenburg and Investacorp is subject to the SEC’s net capital rule which requires the
maintenance of minimum net capital. In addition, Ladenburg is subject to the net capital requirements of
Commodity Futures Trading Commission’s Regulation 1.17. At December 31, 2007, each of Ladenburg and
Investacorp exceeded its minimum net capital requirement. The net capital rule is designed to measure the
general financial integrity and liquidity of a broker-dealer. In computing net capital, various adjustments are
made to net worth which exclude assets not readily convertible into cash. Additionally, the regulations
require that certain assets, such as a broker-dealer’s position in securities, be valued in a conservative manner
so as to avoid over-inflation of the broker-dealer’s net capital. The net capital rule requires that a broker-dealer
maintain a certain minimum level of net capital. The particular levels vary in application depending upon the
nature of the activity undertaken by a firm. Compliance with the net capital rule limits those operations of
broker-dealers which require the intensive use of their capital, such as underwriting commitments and
principal trading activities. The rule also limits the ability of securities firms to pay dividends or make
payments on certain indebtedness such as subordinated debt as it matures. A significant operating loss or any
charge against net capital could adversely affect the ability of a broker-dealer to expand or, depending on the
magnitude of the loss or charge, maintain its then present level of business. FINRA may enter the offices of a
broker-dealer at any time, without notice, and calculate the firm’s net capital. If the calculation reveals a
deficiency in net capital, FINRA may immediately restrict or suspend certain or all of the activities of a
broker-dealer, including its ability to make markets. Ladenburg and/or Investacorp may not be able to
maintain adequate net capital, or their net capital may fall below requirements established by the SEC or the
CFTC, as applicable, and subject us to disciplinary action in the form of fines, censure, suspension, expulsion
or the termination of business altogether.
A change in the tax treatment of insurance products or a determination that these products are not
insurance contracts for federal tax purposes could reduce the demand for these products, which may
reduce our revenue.
The market for many insurance products sold by Investacorp’s registered representatives is based in large
part on the favorable tax treatment, including the tax-free build up of cash values and the tax-free nature of
death benefits
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that these products receive relative to other investment alternatives. A change in the tax treatment of
insurance products or a determination by the IRS that certain of these products are not insurance contracts for
federal tax purposes could remove many of the tax advantages policyholders seek in these policies. In
addition, the IRS from time to time releases guidance on the tax treatment of products. If the provisions of the
tax code were changed or new federal tax regulations and IRS rulings and releases were issued in a manner
that would make it more difficult for holders of these insurance contracts to qualify for favorable tax treatment
or subject holders to special tax reporting requirements, the demand for the insurance contracts could
decrease, which may reduce our revenue and negatively affect our business.
Risk Factors Relating to Strategic Acquisitions and the Integration of Acquired Operations
We may be unable to successfully integrate acquired businesses into our existing business and operations.
We made one acquisition in 2007 and two acquisitions in 2006 and have agreed to make another in 2008.
We continue to explore opportunities to grow our businesses, including through potential acquisitions of
other securities firms, both domestically and internationally. These acquisitions may involve payments of
material amounts of cash or debt or the issuance of significant amounts of our equity securities, which may be
dilutive to our existing shareholders. We may experience difficulty integrating the operations of these entities
or any other entities acquired in the future into our existing business and operations. Furthermore, we may not
be able retain all of the employees we acquire as a result of these transactions. If we are unable to effectively
address these risks, we may be required to restructure the acquired businesses or write-off the value of some or
all of the assets of the acquired business. If we are unable to successfully integrate acquired businesses into
our existing business and operations in the future, it could have a material adverse effect on our results of
operations.
We may be adversely affected if the firms we acquire do not perform as expected.
Even if we are successful in completing acquisitions, we may be adversely affected if the acquired firms
do not perform as expected. The firms we acquire may perform below expectations after the acquisition for
various reasons, including legislative or regulatory changes that affect the products in which a firm
specializes, the loss of key clients, employees and/or registered representatives after the acquisition closing,
general economic factors and the cultural incompatibility of an acquired firm’s management team with us. The
failure of firms to perform as expected at the time of acquisition may have an adverse effect on our earnings
and revenue growth rates, and may result in impairment charges and/or generate losses or charges to earnings.
We face numerous risks and uncertainties as we expand our business.
We expect the growth of our business to come primarily from internal expansion and through
acquisitions. As we expand our business, there can be no assurance that our financial controls, the level and
knowledge of our personnel, our operational abilities, our legal and compliance controls and our other
corporate support systems will be adequate to manage our business and our growth. The ineffectiveness of any
of these controls or systems could adversely affect our business and prospects. In addition, as we acquire new
businesses, we face numerous risks and uncertainties integrating their controls and systems into ours,
including financial controls, accounting and data processing systems, management controls and other
operations. A failure to integrate these systems and controls, and even an inefficient integration of these
systems and controls, could adversely affect our business and prospects.
Risk Factors Relating to Owning Our Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell
the shares of our common stock at prices you find attractive.
The trading price of our common stock has ranged between $1.49 and $3.18 per share over the past
52 weeks. We expect that the market price of our common stock will continue to fluctuate.
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The market price of our common stock may fluctuate in response to numerous factors, many of which are
beyond our control. These factors include the following:
• variations in quarterly operating results;
• general economic and business conditions, including conditions in the securities brokerage and
investment banking markets;
• our announcements of significant contracts, milestones or acquisitions;
• our relationships with other companies;
• our ability to obtain needed capital commitments;
• additions or departures of key personnel;
• the initiation or outcome of litigation or arbitration proceedings;
• sales of common stock, conversion of securities convertible into common stock, exercise of options and
warrants to purchase common stock or termination of stock transfer restrictions;
• changes in financial estimates by securities analysts; and
• fluctuation in stock market price and volume.
Many of these factors are beyond our control. Any one of the factors noted herein could have an adverse
effect on the value of our common stock.
In addition, the stock market in recent years has experienced significant price and volume fluctuations
that have particularly affected the market prices of equity securities of many companies and that often have
been unrelated to the operating performance of such companies. These market fluctuations have adversely
impacted the price of our common stock in the past and may do so in the future. Furthermore, shareholders
may initiate securities class action lawsuits if the market price of our stock drops significantly, which may
cause us to incur substantial costs and could divert the time and attention of our management. These factors,
among others, could significantly depress the price of our common stock.
Our principal shareholders including our directors and officers control a large percentage of our shares
of common stock and can significantly influence our corporate actions.
As of March 3, 2008, our executive officers, directors and companies that these individuals are affiliated
with beneficially owned approximately 48% our common stock. Accordingly, these individuals and entities
will be able to significantly influence most, if not all, of our corporate actions, including the election of
directors and the appointment of officers. Additionally, this ownership of our common stock may make it
difficult for a third party to acquire control of us, therefore possibly discouraging third parties from seeking to
acquire us. A third party would have to negotiate any possible transactions with these principal shareholders,
and their interests may be different from the interests of our other shareholders. This may depress the price of
our common stock.
Possible additional issuances will cause dilution.
At December 31, 2007, we had outstanding 161,698,071 shares of common stock and options and
warrants to purchase a total of 28,233,417 shares of common stock. We are authorized to issue up to
400,000,000 shares of common stock and are therefore able to issue additional shares without being required
under corporate law to obtain shareholder approval. If we issue additional shares, or if our existing
shareholders exercise their outstanding options and warrants, our other shareholders may find their holdings
drastically diluted, which if it occurs, means that they will own a smaller percentage of our company.
We may issue preferred stock with preferential rights that may adversely affect your rights.
The rights of our shareholders will be subject to and may be adversely affected by the rights of holders of
any preferred stock that we may issue in the future. Our articles of incorporation authorize our board of
directors to issue
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up to 2,000,000 shares of “blank check” preferred stock and to fix the rights, preferences, privilege and
restrictions, including voting rights, of these shares without further shareholder approval.
We do not expect to pay any cash dividends in the foreseeable future.
We intend to retain any future earnings to fund the development and growth of our business. We therefore
do not anticipate paying cash dividends in the foreseeable future. Accordingly, you must rely on sales of your
shares of common stock after price appreciation, which may never occur, as the only way to realize any future
gains on your investment. In addition, our ability to pay dividends in the future also may be restricted by the
net capital requirements imposed on our broker-dealer subsidiaries by the SEC and by covenants contained in
our outstanding debt agreements.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Our principal executive offices are located at 4400 Biscayne Boulevard, 12th Floor, Miami, Florida
33137, where we lease approximately 15,800 square feet of office space. The lessor is Frost Real Estate
Holdings, LLC, an entity affiliated with Dr. Phillip Frost, our Chairman of the Board and principal
shareholder. Our lease expires in January 2012.
Ladenburg’s principal executive offices are located at 153 East 53rd Street, 49th Floor, New York, New
York 10022, where it leases approximately 11,000 square feet of office space pursuant to a lease that expires
in July 2008. All of the office space from Ladenburg’s previous New York City office located at 590 Madison
Avenue has been subleased to various non-related parties at various terms and lease periods. The lease, which
Ladenburg is still obligated under as the main lessor, expires in June 2015. Ladenburg also operates several
branch offices located in California, Illinois, Florida, New Jersey, New York, Ohio and Texas.
Investacorp’s principal executive offices are located at 15450 New Barn Road, Miami Lakes, Florida
33014, where it leases approximately 15,100 square feet of office space under a lease that expires in July
2011. Investacorp’s independent registered representatives are responsible for the leases for office space they
occupy.
ITEM 3. LEGAL PROCEEDINGS.
See Note 11 to our consolidated financial statements included in Part II, Item 8 of this annual report on
Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock trades on the American Stock Exchange under the symbol “LTS.” The following table
sets forth the high and low sales prices of our common stock for the periods specified:
Period
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
2007
2006
High
Low
High
Low
$3.74
3.18
2.60
2.35
$1.18
2.11
1.49
1.72
$1.54
1.98
1.20
1.49
$0.44
0.81
0.76
0.91
As of March 3, 2008, there were approximately 4,127 holders of record of our common stock.
Dividends
To date, we have not paid or declared any dividends on our common stock. The payment of future
dividends, if any, will be at the discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current anticipated cash needs as well as any other factors
that the board of directors may deem relevant. Our ability to pay dividends in the future also may be restricted
by the net capital requirements imposed on our broker-dealer subsidiaries by the SEC and by covenants
contained in our outstanding debt agreements.
Recent Sales of Unregistered Securities
We did not effect the sale of any unregistered securities during the fourth quarter of 2007 other than those
described in current reports on Form 8-K.
Issuer Purchases of Equity Securities
Our purchases of our common stock during the fourth quarter of 2007 were as follows:
Period
October 1 to October 31, 2007
November 1 to November 30, 2007
December 1 to December 31, 2007
Total
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum
Number
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs(1)
—
—
67,539
67,539
2,235,010
2,235,010
2,167,471
2,167,471
Total
Number of
Shares
Purchased
Average Price
Paid
per Share
—
—
67,539 $
67,539 $
—
—
1.92
1.92
(1) 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 being funded using approximately 15% of our
EBITDA, as adjusted. Since inception through December 31, 2007, 332,529 shares had been repurchased
under the program.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below is derived from our audited consolidated financial statements.
This selected financial data should be read in conjunction with the section under the caption “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial
statements and the notes thereto included elsewhere in this annual report on Form 10-K:
2007
2006
2005
2004
2003
(In thousands, except per share amounts)
Year Ended December 31,
$
95,826(a) $
85,922
46,858
42,010
$
30,690
56,607
$
38,441 $
48,354
57,420
62,618
9,904(b)
9,391(b)
4,848(c)
4,659(c)
(25,917)(b)
(25,971)(b)
(9,913)
(9,854)
(5,198)
(5,490)
Operating Results:
Total revenues
Total expenses
Income (loss) from continuing
operations before income taxes
Net income (loss)
Per common and equivalent share:
Basic and diluted:
Income (loss) per common share
$
0.06
$
0.03
$
(0.24)
$
(0.22) $
(0.13)
Basic weighted average common shares 157,355,540
Diluted weighted average common
148,693,521
108,948,623
45,144,481 42,567,798
shares
168,484,469
153,087,961
108,948,623
45,144,481 42,567,798
Balance Sheet Data:
Total assets
Total liabilities, excluding subordinated
liabilities
Subordinated debt
Limited partners’ interest in
discontinued operations
Shareholders’ equity (capital deficit)
$
114,132
$
47,343
$
39,299
$
21,631 $
44,644
60,029
—
—
54,103
19,009
—
—
28,334
26,332
—
—
12,967
27,657
18,010
35,180
22,500
—
(24,036)
3,136
(16,172)
Other Data:
Book value per share
$
0.33
$
0.18
$
0.09
$
— $
—
(a)
(b)
(c)
Includes $12,191 of revenue from Investacorp (acquired October 19, 2007) and a charge of $6,694 for
non-cash compensation.
Includes losses on extinguishment of debt of $1,833 in 2007 and $19,359 in 2005.
Includes $4,983 net gain on sale of NYSE and CBOE memberships and a charge of $2,885 for non-cash
compensation.
ITEM 7. MANAGEMENT’S 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 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 and the MSRB
and is a member of the SIPC. Ladenburg had approximately 107 registered representatives and 66 other full
time employees at December 31, 2007. Its private client services and institutional sales departments serve
approximately 22,000 accounts
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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 adviser, which had approximately 500
independent contractor registered representatives, more than $8.5 billion in client assets and approximately
75 other full time employees at December 31, 2007. 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. Investacorp’s 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 quarter 2008. Since 2005, Ladenburg had lead
or co-managed 35 SPAC offerings raising approximately $7 billion, and our professionals provide unique deal
structures and a proprietary retail distribution network that adds value and validity to the offering.
Compensation derived from these underwritings include normal discounts and commissions as well as
deferred fees that will be payable to us only upon the SPAC’s completion of a business combination.
Generally, these fees may be received within 24 months from the respective date of the offering, or not
received at all if no business combination transactions are consummated during such time period. During the
fourth quarter of 2007, Ladenburg received deferred fees of $9,700 (included in investment banking revenues)
and incurred commissions and related expenses of $3,500. As of December 31, 2007, we had unrecorded
potential deferred fees for our SPAC-related transactions of $39,500, which, net of commissions and related
expenses, amounted to approximately $23,500.
We have two operating segments which correspond to our two principal broker-dealer subsidiaries,
Ladenburg and Investacorp.
Recent Developments
Punk, Ziegel Acquisition
On March 4, 2008, we entered into a definitive merger agreement to merge Punk, Ziegel & Company, L.P.
into Ladenburg. Punk Ziegel is a privately-held specialty investment bank providing a full range of research,
equity market making, corporate finance, retail brokerage and asset management services centered on high
growth sectors within the healthcare technology, biotechnology, life sciences and financial services
industries. Punk Ziegel, which is based in New York City, has 45 employees and is known for its highly
focused, in-depth research and corporate finance advice, particularly in the healthcare and financial services
industries. The transaction is expected to close in the second quarter of 2008 and is subject to customary
closing conditions, including FINRA approval.
Investacorp Acquisition
On October 19, 2007, we acquired all of the outstanding shares of privately-held Investacorp. At the
closing, we paid $25,000 to the sellers, Bruce A. Zwigard and an affiliated trust. In addition, we issued a three-
year, non-negotiable promissory note in the aggregate principal amount of $15,000 to Mr. Zwigard. The note
bears interest at 4.11% per annum and is payable in 36 equal monthly installments. We have pledged the
stock of Investacorp to Mr. Zwigard as security for the payment of the note. The note contains customary
events of default, which if uncured, entitle Mr. Zwigard to accelerate the due date of the unpaid principal
amount of, and all accrued and unpaid interest on, the note. We also paid the sellers an additional amount of
approximately $5,200, representing Investacorp’s retained earnings plus paid-in capital.
In connection with his continued employment with Investacorp, we granted Mr. Zwigard employee stock
options to purchase a total of 3,000,000 shares of our common stock at $1.91, the closing price of our
common stock on October 19, 2007. The Zwigard options vest over a three-year period (subject to certain
exceptions), have a ten-year term and were issued pursuant to a non-plan option agreement. Additionally we
issued to certain other
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Investacorp employees options to purchase a total of 1,150,000 shares of common stock under our option
plan. These options vest in four equal annual installments and have an exercise price of $1.91.
Frost Gamma Revolving Credit Agreement
In connection with the Investacorp acquisition, on October 19, 2007, we entered into a $30,000 revolving
credit agreement with Frost Gamma Investments Trust, an entity affiliated with Dr. Phillip Frost, our Chairman
of the Board and our principal shareholder. 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, we granted to Frost Gamma a warrant to purchase
2,000,000 shares of our common stock. The warrant is exercisable for a ten-year period and the exercise price
is $1.91. During the first quarter of 2008, we have repaid $8,000 of the $30,000 of outstanding borrowings
under the credit agreement.
Debt Exchange
In February 2007, we entered into a debt exchange agreement with New Valley LLC. New Valley agreed
to exchange the $5,000 principal amount of our promissory notes held by New Valley for shares of our
common stock at an exchange price of $1.80 per share, representing the average closing price of our common
stock for the 30 trading days ending on the date of the debt exchange agreement. Our shareholders approved
the transaction at our annual shareholders meeting on June 29, 2007. On that date, we issued 2,777,778 shares
of our common stock in exchange for the $5,000 principal amount of notes and we paid accrued interest on
the notes of $1,732 to New Valley. The exchange resulted in a loss of $1,833 representing the excess of the
quoted market value of the 2,777,778 shares of stock at the date of the exchange agreement ($2.46 per share)
over the carrying amount of the notes.
Acquisition Strategy
We continue to explore opportunities to grow our businesses, including through potential acquisitions of
other securities and investment banking firms, both domestically and internationally. These acquisitions may
involve payments of material amounts of cash or debt or the issuance of significant amounts of our equity
securities, which may be dilutive to our existing shareholders 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, if
we do, that any acquired business will be profitable. There is also a risk that we will not be able to successfully
integrate acquired businesses into our existing business and operations. See “Item 1A. Risk Factors — Risk
Factors Relating to Strategic Acquisitions and the Integration of Acquired Operations”.
Critical Accounting Policies
General. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses. Actual results could differ from those estimates.
Clearing Arrangements. Neither Ladenburg nor Investacorp carries accounts for customers or performs
custodial functions related to customers’ securities. Each of Ladenburg and Investacorp introduces all of its
customer transactions, which are not reflected in these financial statements, to its clearing broker or brokers,
which maintain the customers’ accounts and clear such transactions. Additionally, the clearing brokers
provide the clearing and depository operations for Ladenburg’s and Investacorp’s 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 broker, as we have agreed to indemnify the clearing brokers for any
resulting losses. We continually assess risk associated with each customer who is on margin credit and record
an estimated loss when we believe collection from the customer is unlikely. We incurred losses from these
arrangements, prior to any recoupment from our registered representatives, of $58, $18 and $37 for the years
ended December 31, 2007, 2006 and 2005, respectively.
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Customer Claims, Litigation and Regulatory Matters. In the ordinary course of business, our operating
subsidiaries have been and continue to be the subject of numerous civil actions and arbitrations arising out of
customer complaints relating to their activities as a broker-dealer, as an employer or supervisor and as a result
of other business activities. In general, the cases involve various allegations that our employees or
independent registered representatives had mishandled customer accounts. Due to the uncertain nature of
litigation in general, we are unable to estimate a range of possible loss related to lawsuits filed against us, but
based on our historical experience and consultation with counsel, we typically reserve an amount we believe
will be sufficient to cover any damages assessed against us. We have accrued $768 at December 31, 2007 and
$483 at December 31, 2006 for potential arbitration and lawsuit losses. However, we have in the past been
assessed damages that exceeded our reserves. If we misjudged the amount of damages that may be assessed
against us from pending or threatened claims, or if we are unable to adequately estimate the amount of
damages that will be assessed against us from claims that arise in the future and reserve accordingly, our
operating income would be reduced. Such costs may have a material adverse effect on our future financial
position, results of operations or liquidity.
Exit or Disposal Activities. During the fourth quarter of 2002, we early adopted SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities”. Under SFAS No. 146, a cost associated
with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in
which the liability is incurred. For operating leases, a liability for costs that will continue to be incurred under
the lease for its remaining term without economic benefit to the entity shall be recognized and measured at its
fair value when the entity ceases using the right conveyed by the lease (the “cease-use date”). The fair value of
the liability at the “cease-use date” shall be determined based on the remaining lease rentals, reduced by
estimated sublease rentals that could be reasonably obtained for the property.
Fair Value. “Trading securities owned” and “Securities sold, but not yet purchased” on our consolidated
statements of financial condition are carried at fair value or amounts that approximate fair value, with related
unrealized gains and losses recognized in our results of operations. The determination of fair value is
fundamental to our financial condition and results of operations and, in certain circumstances, it requires
management to make complex judgments.
Fair values are based on listed market prices, where possible. If listed market prices are not available or if
the liquidation of our positions would reasonably be expected to impact market prices, fair value is
determined based on other relevant factors, including dealer price quotations. Fair values for certain
derivative contracts are derived from pricing models that consider market and contractual prices for the
underlying financial instruments or commodities, as well as time value and yield curve or volatility factors
underlying the positions.
Pricing models and their underlying assumptions impact the amount and timing of unrealized gains and
losses recognized, and the use of different pricing models or assumptions could produce different financial
results. Changes in the fixed income and equity markets will impact our estimates of fair value in the future,
potentially affecting principal trading revenues. The illiquid nature of certain securities or debt instruments
also requires a high degree of judgment in determining fair value due to the lack of listed market prices and
the potential impact of the liquidation of our position on market prices, among other factors.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157”, which
defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 clarifies that fair value should be based on assumptions that market participants
would use when pricing an asset or liability and establishes a fair value hierarchy of three levels that
prioritizes the information used to develop those assumptions. The provisions of SFAS No. 157 became
effective for us beginning January 1, 2008. Generally, the provisions of this statement are to be applied
prospectively. Certain situations, however, require retrospective application as of the beginning of the year of
adoption through the recognition of a cumulative effect adjustment to the opening balance of retained
earnings. Such retrospective application is required for positions in a financial instrument that trades in a
certain market held by a broker-dealer that was measured at a fair value using a blockage factor which is no
longer permitted upon application of this statement. We expect that the adoption of SFAS No. 157 will not
have a material impact on our financial statements.
Valuation of Deferred Tax Assets. We account for taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes,” which requires the recognition of tax benefits or expense on the timing differences
between the tax
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basis and book basis of its assets and liabilities. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which those timing differences are
expected to be recovered or settled. Deferred tax amounts as of December 31, 2007, which consist principally
of the tax benefit of net operating loss carryforwards and accrued expenses, amount to $18,050. After
consideration of all the evidence, both positive and negative, especially the fact we sustained a cumulative
pre-tax loss for the periods 2005 through 2007, we have determined that a valuation allowance at
December 31, 2007 was necessary to fully offset the deferred tax assets based on the likelihood of future
realization. At December 31, 2007, we had net operating loss carryforwards of approximately $34,000,
expiring in various years from 2015 through 2026.
Expense Recognition of Employee Stock Options. Effective January 1, 2006, we adopted SFAS No. 123
(Revised 2004), Share-Based Payment (“SFAS No. 123R”), which requires an entity to measure the cost of
employee, officer and director services received in exchange for an award of equity instruments, including
stock options, based on the grant-date fair value of the award. The cost is recognized as compensation expense
over the service period, which would normally be the vesting period of the options. SFAS No. 123R
supersedes our previous accounting under SFAS No. 123, Accounting for Stock-Based Compensation
(“SFAS No. 123”), which permitted us to account for such compensation under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). Pursuant to APB No. 25, and
related interpretations, no compensation cost had been recognized in connection with the issuance of stock
options, as all options granted under our Amended and Restated 1999 Performance Equity Plan (the “Option
Plan”) and all options granted outside the Option Plan had an exercise price equal to or greater than the
market value of the underlying common stock on the date of grant. We adopted SFAS No. 123R using the
modified prospective transition method, which requires that compensation cost be recorded as earned, (i) for
all unvested stock options outstanding at the beginning of the first fiscal year of adoption of SFAS No. 123R
based upon the grant- date fair value estimated in accordance with the original provisions of SFAS No. 123
and (ii) for all share-based payments granted subsequent to the adoption, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123R. In addition, balances of unearned
compensation attributable to awards granted prior to the adoption of SFAS No. 123R were netted against
additional paid-in capital.
Intangible assets. Intangible assets are being amortized over their estimated useful lives generally on a
straight-line basis. Intangible assets subject to amortization are tested for recoverability whenever events or
changes in circumstances indicate that the carrying amount may be not recoverable. We assess the
recoverability of our intangible assets by determining whether the unamortized balance can be recovered over
the assets’ remaining life through undiscounted forecasted cash flows. If undiscounted forecasted cash flows
indicate that the unamortized amounts will not be recovered, an adjustment will be made to reduce such
amounts to an amount consistent with forecasted future cash flows discounted at a rate commensurate with the
risk associated with achieving future discounted cash flows. Future cash flows are based on trends of historical
performance and our estimate of future performances, giving consideration to existing and anticipated
competitive and economic conditions.
Goodwill. Goodwill, which was recorded in connection with the Investacorp acquisition, is not subject to
amortization and is tested for impairment annually, or more frequently if events or changes in circumstances
indicate that the asset may be impaired. The impairment test consists of a comparison of the fair value of the
reporting unit with its carrying amount. Fair value is typically based upon future cash flows discounted at a
rate commensurate with the risk involved or market based comparables. If the carrying amount of the reporting
unit exceeds its fair value then an analysis will be performed to compare the implied fair value of goodwill
with its carrying amount of goodwill. An impairment loss will be recognized in an amount equal to excess of
the carrying amount over the implied fair value. After an impairment loss is recognized, the adjusted carrying
amount of goodwill is its new accounting basis.
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 audited condensed consolidated financial statements
and related notes included elsewhere in this report. Our consolidated financial statements include our
accounts and the accounts of Ladenburg, Investacorp (since October 19, 2007) and our other wholly-owned
subsidiaries.
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Total revenue
Total operating expenses
Operating income (loss)
Net income (loss)
EBITDA, as adjusted
Add:
Interest income
Sale of exchange memberships
Less:
Interest expense
Income tax expense
Depreciation and amortization
Write-off of furniture, fixtures and leasehold improvements, net
Non-cash compensation
Loss on extinguishment of debt
Net income (loss)
Year Ended December 31,
2006
2005
2007
$95,826(1) $46,858(3) $ 30,690
42,010
4,848
4,659(3)
85,922(2)
9,904
9,391(2)
56,607(2)
(25,917)
(25,971)(2)
22,005
3,824
(4,082)
221
—
220
4,983
152
—
(2,304)
(513)
(1,491)
—
(6,694)
(1,833)
9,391
(499)
(189)
(754)
(41)
(2,885)
—
4,659
(1,027)
(54)
(811)
(62)
(728)
(19,359)
(25,971)
(1) Includes $12,191 of revenue from Investacorp (acquired October 19, 2007).
(2) Includes losses on extinguishment of debt of $1,833 in 2007 and $19,359 in 2005.
(3) Includes $4,983 net gain in 2006 on NYSE Euronext common stock, including NYSE merger
transaction, and sale of our CBOE membership.
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 the 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 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.
Our EBITDA, as adjusted, increased $18,181 in 2007 compared to 2006 and increased $7,906 in 2006
compared to 2005.
As a result of the Investacorp acquisition on October 19, 2007, we had two operating segments. For
periods prior to October 19, 2007, we operated in 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 the independent registered representative
community.
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Revenues:
Ladenburg
Investacorp(1)
Corporate
Total revenues
Operating Income:
Ladenburg
Investacorp(1)
Corporate
Total operating income
Year Ended
December 31,
2007
83,313
12,191
322
95,826
24,729
1,158
(3,882)
22,005
(1) Includes Investacorp from the date of its acquisition on October 19, 2007.
Year ended December 31, 2007 compared to year ended December 31, 2006
For the fiscal year ended December 31, 2007, we had net income of $9,391 compared to net income of
$4,659 for the fiscal year ended December 31, 2006. Net income for 2007 was reduced by a $1,833 loss on
extinguishment of debt and $6,694 of non-cash compensation expense. Net income for 2006 included a gain
of $4,859 from the NYSE merger, offset by losses of $1,001 on the sale and decline in fair value of NYSE
Euronext common stock, a $1,125 gain from the sale of our CBOE membership and $2,885 of non-cash
compensation expense.
Our total revenues for 2007 increased $48,968, or 105%, from 2006 primarily as a result of increased
investment banking of $36,870, increased commissions and fees of $16,178, and increased asset management
of $647 offset by a net gain of $4,983 on the sale of exchange memberships in 2006. The 2007 revenues also
included $12,191 of revenue from Investacorp from the date of acquisition (October 19, 2007), which were not
included in 2006.
Excluding non-cash compensation expense of $6,694 in 2007 and $2,885 in 2006 and loss on
extinguishment of debt of $1,833 in 2007, our expenses increased $38,270, or 98%, from 2006 primarily as a
result of an increase in compensation and benefits of $22,183, an increase in other expense of $3,011, an
increase in interest expense of $1,805, an increase in professional fees of $1,386, an increase in brokerage,
communication and clearance fees of $1,053 and an increase in depreciation and amortization of $737, offset
by a decrease in rent and occupancy expense of $876. The 2007 period included expenses of $11,780
attributable to Investacorp’s operations commencing with its acquisition on October 19, 2007. These
expenses consisted primarily of commissions and fees expense of $9,012.
The $36,870 (199%) increase in investment banking fees was primarily the result of an increase in the size
and number of public offerings, primarily SPACs, where Ladenburg acted as either a lead or co-manager from
16 offerings in 2006 to 29 offerings in 2007, and an increase in advisory and valuation work resulting from
the addition of the Capitalink investment banking group in October 2006.
The $16,178 (103%) increase in commissions and fees revenue is attributable to an additional $11,077
from Investacorp and an increase in the number of institutional sales representatives at Ladenburg.
The $647 (27%) increase in asset management revenue was primarily the result of an increase in assets
under management.
The $22,183 (83%) increase in compensation and benefits expense was primarily due to a $17,774
increase in producers’ compensation which is directly correlated to revenue production, a $3,059 increase in
salaries, payroll taxes and employee benefits, an increase of $705 in discretionary bonuses which vary with
revenue, and $645 representing amortization of cash held in escrow for former Telluride shareholders. (See
Note 3 to our consolidated
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financial statements). The increase in salaries and bonuses is due to an increase in the average headcount for
salaried Ladenburg employees and $1,202 is attributable to the additional employees from Investacorp.
The $3,809 (132%) increase in non-cash compensation expense is primarily a result of an increase of
$2,482 for the amortization of unearned compensation for our warrants and common stock held in escrow for
the principal shareholders of Capitalink which is being amortized over 15 months beginning on October 18,
2006, the date of acquisition, an increase in employee compensation expense of $1,915 attributable to option
grants to employees and directors, and an increase of $125 for options granted to the members of our former
advisory board and consultants. These amounts were offset by a $713 decrease in the amortization of
unearned compensation from stock issued to employees in 2005 at below market prices.
The $1,053 (36%) increase in brokerage, communication and clearance fee expense is primarily
attributable to an increase in clearing and execution charges of $536 and an increase in third party trading
platforms of $91, which corresponds to the increase in institutional transactions, increased news and quotes
subscriptions of $339 and increased communications of $87 attributable to new institutional sales and
investment banking personnel.
The $1,386 (54%) increase in professional services expense during 2007 is primarily due to an increase in
legal, audit and consulting fees and corporate development activities.
Interest expense increased to $2,304 in the 2007 period from $499 in the 2006 period as a result of debt
incurred in connection with the Investacorp acquisition and subordinated loans in connection with
underwritings, offset by the debt exchange described herein. We expect interest expense to continue at an
increased level in future periods due to the debt relating to the Investacorp acquisition.
Depreciation and amortization expense increased $737 in the 2007 period from the 2006 period,
primarily from increased amortization of intangible assets of $960 offset by decreased depreciation of fixed
assets and amortization of leasehold improvements of $223. Of this expense, $285 is attributable to
Investacorp’s operations.
The $3,011 (88%) increase in other expense is primarily due to an $1,228 increase in travel and
entertainment and office expense, $159 increase in license, dues and regulatory fees, $686 increase in reserve
for legal settlements, $166 increase in stock and bond errors, and a $283 increase in write-off of receivables.
Travel and entertainment expense primarily consists of business development costs for our investment
banking business, and costs for our research analysts to visit the companies they cover. In 2007 the average
number of investment bankers and research analysts increased significantly over the prior year. In addition,
$391 of other expenses is attributable to the addition of Investacorp’s operations.
The $876 (40%) decrease in rent and occupancy, net of sublease revenue is primarily due to Ladenburg
entering into an agreement with the landlord at its former NYC office space to amend the lease and surrender a
third floor which had been subleased by it. In consideration, the landlord gave up an option to require
Ladenburg to occupy additional space and agreed to an annual rent abatement of approximately $79 through
June 2015, the expiration of the lease term, with respect to the remaining leased floors. As a result thereof, in
2007, the liability with respect to the lease obligation, which amounted to $589 at December 31, 2006, was
reduced by $439 with a corresponding reduction of occupancy expense.
We incurred income tax expense of $513 in 2007 as compared to $189 in 2006. After consideration of all
the evidence, both positive and negative, management has determined that a valuation allowance at
December 31, 2007 was necessary to fully offset the deferred tax assets based on the likelihood of future
realization. The income tax rate for the 2007 and 2006 periods does not bear a customary relationship to
effective tax rates primarily as a result of the decrease in the valuation allowance in the 2007 and 2006 period
and recognized tax benefits from net operating loss carryforwards from prior years utilized to offset taxable
income in the 2007 and 2006 periods.
Year ended December 31, 2006 compared to year ended December 31, 2005
For the fiscal year ended December 31, 2006, we had net income of $4,659, compared to a net loss of
$25,971 for the fiscal year ended December 31, 2005. The net income for 2006 included a $4,859 gain from
the NYSE Merger, $1,001 realized and unrealized losses on the NYSE Group shares, and a $1,125 gain from
the sale of our CBOE membership. In addition, $2,885 of non-cash compensation expense was included in the
2006 net income,
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including $823 relating to the Capitalink acquisition. The net loss for 2005 included $19,359 of non-cash
debt conversion expense and $728 of non-cash compensation expense. (See Note 10 to our consolidated
financial statements.)
Our revenues for 2006 increased $16,168 or 53% from 2005, primarily as a result of increased investment
banking revenues of $10,544 and increased asset management revenues of $1,116, In addition we had a net
gain on the sale of exchange memberships of $4,983 in 2006.
Excluding the debt conversion expense of $19,359 in 2005 and non-cash compensation of $2,885 in
2006 and $728 in 2005, our expenses for 2006 increased $2,605 or 7% from 2005 primarily as a result of
increased variable costs, which corresponds with the increase in revenues.
The $10,544 (132%) increase in investment banking revenues was primarily the result of an increase in
the number of public offerings, primarily SPACs, where Ladenburg acted as either a lead or co-manager from
five offerings in 2005 to 16 offerings in 2006.
The $1,116 (88%) increase in asset management revenues was due to an increase in assets under
management, primarily relating to customers associated with the employees we hired in the second and third
quarters of 2005.
The $3,979 (17%) increase in compensation expense was primarily due to an increase in producers
compensation as a result of the net increase in revenues.
The $536 (22%) increase in brokerage, communication and clearance fees is primarily due to an increase
in telephone and data service charges of $262, which is a result of increased headcount and the expansion of
our offices, as well as higher costs to upgrade our information technology infrastructure. In addition,
execution fees that we pay to floor brokers and electronic communication networks increased $211. These
expenses are the result of an increase in our institutional desk transactions.
The $452 (17%) decrease in rent and occupancy, net of sublease revenue was primarily due to the
subletting of the entire 34th floor of Ladenburg’s former New York City office during the first quarter of 2006
and moving to its current New York City office.
We incurred income tax expense of $189 in 2006 as compared to $54 in 2005. After consideration of all
the evidence, both positive and negative, management determined that a valuation allowance at December 31,
2006 was necessary to fully offset the deferred tax assets based on the likelihood of future realization. The
income tax rate for the 2006 and 2005 periods does not bear a customary relationship to effective tax rates
primarily as a result of unrecognized tax benefits from net operating losses.
Liquidity and Capital Resources
Approximately 56% of our total assets at December 31, 2007 consisted of cash and cash equivalents,
securities owned and receivables from our clearing brokers and other broker-dealers, all of which fluctuate,
depending upon the levels of customer business and trading activity. Receivables from broker-dealers, which
are primarily from our clearing brokers, turn over rapidly. As a securities dealer, we may carry significant
levels of securities inventories to meet customer needs. A relatively small percentage of our total assets are
fixed. The total assets or the individual components of total assets may vary significantly from period to
period because of changes relating to economic and market conditions, and proprietary trading strategies.
Each of Ladenburg and Investacorp is subject to the net capital rules of the SEC. Ladenburg is also
subject to the net capital rules of the CFTC. Therefore, they are subject to certain restrictions on the use of
capital and their related liquidity. At December 31, 2007, Ladenburg’s regulatory net capital, as defined, of
$26,659, exceeded minimum capital requirements of $500, by $26,159. At December 31, 2007, Investacorp’s
regulatory net capital, as defined, of $2,496, exceeded minimum capital requirements of $333, by $2,163.
Failure to maintain the required net capital may subject Ladenburg and Investacorp to suspension or
expulsion by FINRA, the SEC and other regulatory bodies and ultimately may require its liquidation. The net
capital rule also prohibits the payment of dividends, redemption of stock and prepayment or payment of
principal of subordinated indebtedness if net capital, after giving effect to the payment, redemption or
prepayment, would be less than specified percentages of the minimum net capital requirement. Compliance
with the net capital rule could limit the operations of Ladenburg and
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Investacorp that requires the intensive use of capital, such as underwriting and trading activities, and also
could 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 also is 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 Zwigard note and $5,000. At December 31, 2007, the outstanding
principal balance of the Zwigard note was $14,214.
Each of Ladenburg and Investacorp, as guarantor of its customer accounts to its clearing brokers, is
exposed to off-balance-sheet risks in the event that its customers do not fulfill their obligations with the
clearing broker. In addition, to the extent Ladenburg and Investacorp maintains a short position in certain
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 includes borrowings under the Frost Gamma credit agreement.
Net cash used in operating activities for 2007 was $2,860 as compared to $8,997 for the 2006 period. The
decrease in net cash used in operating activities was primarily due to a decrease in receivables from clearing
brokers of $9,749 in 2007 compared to a decrease of $3,904 in 2006, a decrease in receivables from other
broker-dealers of $9,559 in 2007 compared to a decrease of $4,249 in 2006, a decrease in securities sold, but
not yet purchased of $1,096 in 2007 compared to a decrease of $6,820 in 2006, net of net income and
adjustments to reconcile net income of $20,209 in 2007 as compared to $6,048 in 2006.
Net cash used in investing activities for the year ended December 31, 2007 was $24,393 compared to net
cash provided by investing activities of $440 for 2006. These investing activities relate principally to the
acquisition of Investacorp.
Net cash flows provided by financing activities amounted to $28,865 for the year ended December 31,
2007 compared to net cash flows provided of $4,604 in 2006. The increase in financing activities related
primarily to borrowings of $30,000 under the Frost Gamma credit agreement to finance the Investacorp
acquisitions, $407 provided by the issuance of our common stock through our Employee Stock Purchase Plan,
$977 provided by the exercise of employee stock options, $1,122 used to pay withholding taxes related to the
exercise of options, and $612 used to repurchase shares for retirement under our stock repurchase plan. Cash
provided by financing activities for the year ended December 31, 2006, reflected $3,675 of cash provided by
our private equity offering and $929 provided by the issuance of our common stock other than private equity
offering.
At December 31, 2007, we were obligated under several non-cancelable lease agreements for office space,
which provide for future minimum lease payments aggregating approximately $37,411 through 2015,
exclusive of escalation charges. We have subleased vacant space under subleases which entitle us to receive
rents aggregating approximately $28,041 through such date.
In 2002, we borrowed a total of $5,000 from New Valley, our former parent. The notes, which bore interest
at 1% above the prime rate, were due on March 31, 2007, as subsequently extended. In February 2007, we
entered into a debt exchange agreement with New Valley, where New Valley agreed to exchange the principal
amount of the notes for shares of our common stock at an exchange price of $1.80 per share, representing the
average closing price of our common stock for the 30 trading days ending on the date of the agreement.
On June 29, 2007 after our shareholders approved the debt exchange, we issued 2,777,778 shares for the
principal amount of the notes and paid $1,732 to New Valley for accrued interest on the notes. The exchange
resulted in extinguishment of debt expense of $1,833 representing the excess of the quoted market value of
the 2,777,778 shares of stock at the date of the debt exchange agreement ($2.46 per share) over the carrying
amount of the notes.
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.
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The repurchase program is being funded using approximately 15% of our EBITDA, as adjusted. As of
December 31, 2007, 332,529 shares had been repurchased for $612 under the program.
In October 2007, Ladenburg received a temporary cash subordinated loan in the amount of $72,000 from
an affiliate of Dr. Frost to provide additional regulatory capital required for additional underwriting
participations. The loan was repaid during the following month, with the interest at the rate of LIBOR plus
2%, which amounted to $354. In addition, we paid the lender a commitment fee of $420.
As discussed above under “Recent Developments — Investacorp Acquisition” and “— Frost Gamma
Revolving Credit Agreement”, in connection with the Investacorp acquisition, we entered into the Frost
Gamma credit agreement and issued the Zwigard note. During the first quarter 2008, we repaid $8,000 of the
$30,000 of outstanding borrowings under the Frost Gamma credit agreement.
Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes information about our contractual obligations as of December 31, 2007 and
the effects these obligations are expected to have on our liquidity and cash flow in the future years.
Contractual Obligations
Note payable to former principal shareholder
Payments Due By Period
Total
Less than
1 year
1-3 years
4-5 years
5 years
After
of Investacorp(1)
$15,082 $ 5,323 $ 9,759 $ — $ —
Revolving credit agreement with affiliate of
principal shareholder of LTS(2)
Operating leases(3)
Total
45,675
37,411
—
6,600
10,883
10,995
$98,168 $14,556 $27,354 $45,375 $10,883
3,300
5,933
35,775
9,600
(1) Note bears interest at 4.11% per annum and is payable in 36 equal monthly installments. See Note 10 to
our consolidated financial statements.
(2) Revolving credit agreement has a five-year term and bears interest at a rate of 11% per annum, payable
quarterly. Assumes no payments of principal prior to maturity. See Note 10 to our consolidated financial
statements.
(3) Excludes sublease rentals of $28,041. See Note 11 to our consolidated financial statements.
Market Risk
Market risk generally represents the risk of loss that may result from the potential change in the value of a
financial instrument as a result of fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rates, foreign exchange rates, equity and commodity prices
and also changes in the credit ratings of either the issuer or its related country of origin. Market risk is inherent
to both derivative and non-derivative financial instruments, and accordingly, the scope of our market risk
management procedures extends beyond derivatives to include all market risk sensitive financial instruments.
Current and proposed underwriting, corporate finance, merchant banking and other commitments are
subject to due diligence reviews by our senior management, as well as professionals in the appropriate
business and support units involved. Credit risk related to various financing activities is reduced by the
industry practice of obtaining and maintaining collateral. We monitor our exposure to counterparty risk
through the use of credit exposure information, the monitoring of collateral values and the establishment of
credit limits.
We maintain inventories of trading securities. At December 31, 2007, the fair market value of our
inventories was $3,139 in long positions and $946 in short positions. We performed an entity-wide analysis of
our financial instruments and assessed the related risk. Based on this analysis, in the opinion of management,
the market risk associated with our financial instruments at December 31, 2007 will not have a material
adverse effect on our consolidated financial position or results of operations.
37
Table of Contents
Special Note Regarding Forward-Looking Statements
We and our representatives may from time to time make oral or written “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995, including any statements that
may be contained in the foregoing discussion in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, in this report and in other filings with the Securities and Exchange
Commission and in our reports to shareholders, which reflect our expectations or beliefs with respect to future
events and financial performance. These forward-looking statements are subject to certain risks and
uncertainties and, in connection with the “safe-harbor” provisions of the Private Securities Litigation Reform
Act, we have identified under “Risk Factors” in Item 1A above, important factors that could cause actual
results to differ materially from those contained in any forward-looking statement made by or on behalf of us.
Results actually achieved may differ materially from expected results included in these forward-looking
statements as a result of these or other factors. Due to such uncertainties and risks, readers are cautioned not to
place undue reliance on such forward-looking statements, which speak only as of the date on which such
statements are made. We do not undertake to update any forward-looking statement that may be made from
time to time by or on behalf of us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information under the caption “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Market Risk” is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements and Notes thereto, together with the report thereon of Eisner
LLP dated March 13, 2008, beginning on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is accumulated and communicated to its management, including our
principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding
disclosure.
Under the supervision and with the participation of our management, including our principal executive
officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report, and, based on that evaluation, our principal
executive officer and principal financial officer have concluded that these controls and procedures are
effective.
Management’s Report on Internal Control Over Financial Reporting
Our internal control over financial reporting is a process designed by, or under the supervision of, our
chief executive officer and chief financial officer and effected by our board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of our financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes policies and procedures that pertain
to the maintenance of records that in
38
Table of Contents
reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; provide
reasonable assurance that transactions are recorded as necessary to permit preparation of our financial
statements in accordance with generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with the authorization of our board of directors and
management; and provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on our financial statements.
We acquired Investacorp in October 2007. We have excluded Investacorp from the scope of our annual
report on internal control over financial reporting as of December 31, 2007. These operations represent
approximately 44% of our total assets at December 31, 2007 and approximately 13% and 3% of our revenues
and net income for the year ended December 31, 2007, respectively.
Under the supervision and with the participation of our management, including our chief executive
officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the
criteria established in Internal Control – Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 31, 2007.
Our internal control over financial reporting as of December 31, 2007 has been audited by Eisner LLP, an
independent registered certified public accounting firm, as stated in their report which is included below.
Attestation Report of the Company’s Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Ladenburg Thalmann Financial Services Inc.
We have audited Ladenburg Thalmann Financial Services Inc. and its subsidiaries (the “Company”)
internal control over financial reporting as of December 31, 2007, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over Financial Reporting under
Item 9A. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States of
America. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
39
Table of Contents
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our audit did not include the internal controls over financial reporting of Investacorp, Inc. and related
companies (collectively “Investacorp”) because they were acquired by the Company in October 2007.
Investacorp is included in the 2007 consolidated financial statements and constituted $50,643,799 of total
assets as of December 31, 2007 and $12,191,344 of total revenues and $322,608 of net income for the year
then ended.
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control- Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of December 31, 2007 and 2006,
and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2007, and our report dated March 13, 2008 expressed an
unqualified opinion thereon.
/s/ Eisner LLP
New York, New York
March 13, 2008
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
This information will be contained in our definitive Proxy Statement for our 2008 Annual Meeting of
Shareholders, to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this
report pursuant to Regulation 14A under the Securities Exchange Act of 1934, and incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
This information will be contained in the Proxy Statement and incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
This information will be contained in the Proxy Statement and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
This information will be contained in the Proxy Statement and incorporated herein by reference.
40
Table of Contents
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
This information will be contained in the Proxy Statement and incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)(1): Index to 2007 Consolidated Financial Statements
The consolidated financial statements and the notes thereto, together with the report thereon of Eisner
LLP dated March 13, 2008, appear beginning on page F-1 of this report.
(a)(2): Financial Statement Schedules
Financial statement schedules not included in this report have been omitted because they are not
applicable or the required information is shown in the consolidated financial statements or the notes thereto.
(a)(3): Exhibits Filed
The following is a list of exhibits filed herewith as part of this annual report on Form 10-K.
EXHIBIT INDEX
Incorporated
By Reference
from
No. in
Exhibit No.
Description
Document
Document
Page
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
10.1
10.2
10.2.1
10.3
10.4
10.4.1
10.5
10.6
10.6.1
Articles of Incorporation
Articles of Amendment to the Articles of Incorporation, dated
August 24, 1999
Articles of Amendment to the Articles of Incorporation, dated April 3,
2006
Amended and Restated Bylaws
Form of common stock certificate
Credit Agreement, dated as of October 19, 2007, by and between the
Company and Frost Gamma Investments Trust, including the form of
note thereto
Non-Negotiable Promissory Note, dated as of October 19, 2007, made
by the Company in favor of Bruce A. Zwigard
Pledge Agreement, dated as of October 19, 2007, by and between the
Company and Bruce A. Zwigard
Amended and Restated 1999 Performance Equity Plan*
Form of Stock Option Agreement, dated as of May 7, 2001, between the
Company and certain directors*
Schedule of Stock Option Agreements in the form of Exhibit 10.2,
including material detail in which such documents differ from
Exhibit 10.2*
Stock Option Agreement, dated as of January 10, 2002, between the
Company and Richard J. Lampen*
Form of Stock Option Agreement, dated January 10, 2002, between the
Company and each of Richard J. Rosenstock and Mark Zeitchick*
Schedule of Stock Option Agreements in the form of Exhibit 10.4,
including material detail in which such documents differ from
Exhibit 10.4*
Ladenburg Thalmann Financial Services Inc. Qualified Employee Stock
Purchase Plan*
Form of Stock Option Agreement, dated November 15, 2002, between
the Company and each of Bennett S. LeBow, Howard M. Lorber, Henry
C. Beinstein, Robert J. Eide and Richard J. Lampen*
Schedule of Stock Option Agreements in the form of Exhibit 10.6,
including material detail in which such documents differ from
Exhibit 10.6*
41
A
B
C
D
A
E
E
E
F
G
G
H
H
H
I
J
J
3.1
3.2
3.1
3.2
4.1
4.1
4.2
4.3
—
—
—
—
—
—
—
—
4.1
10.3
—
—
10.3.1
—
10.2
10.3
10.3.1
Exhibit A
10.48
—
—
—
—
—
10.48.1
—
Table of Contents
Exhibit No.
Description
Document
Document
Page
Incorporated
By Reference
from
No. in
10.7
10.7.1
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
21
Form of Stock Option Agreement, dated September 17, 2003, between
the Company and each of Howard M. Lorber, Henry C. Beinstein and
Richard J. Lampen*
Schedule of Stock Option Agreements in the form of Exhibit 10.7,
including material detail in which such documents differ from
Exhibit 10.7*
Office Lease dated March 30, 2007 between the Company and Frost
Real Estate Holdings, LLC
Stock Option Agreement, dated July 13, 2006, issued to Dr. Phillip
Frost*
Warrant issued to BroadWall Capital LLC
Form of Stock Option Agreement issued to employees of BroadWall
Letter Agreement, dated September 14, 2006, between Ladenburg
Thalmann Financial Services Inc. and Vector Group Ltd. (“Vector
Agreement”)
First Amendment to Vector Agreement dated as of December 20, 2007
Agreement and Plan of Merger, dated as of September 6, 2006, between
Ladenburg Thalmann Financial Services Inc., Telluride Acquisition,
Inc., Telluride Holdings, Inc. and the stockholders of Telluride
Holdings, Inc.
Form of Warrant to be issued to the stockholders of Telluride Holdings,
Inc.
Amendment to Employment Agreement between Ladenburg Thalmann
Financial Services Inc., Ladenburg Thalmann & Co. Inc. and Mark
Zeitchick.*
Stock Purchase Agreement, dated as of October 19, 2007, by and
among Ladenburg Thalmann Financial Services Inc., the Investacorp
Companies, the VIA Companies, Bruce A. Zwigard and the Bruce A.
Zwigard Grantor Retained Annuity Trust dated June 20, 2007
Non-Plan Option Agreement, dated as of October 19, 2007, by and
between Ladenburg Thalmann Financial Services Inc. and Bruce A.
Zwigard
Warrant, dated as of October 19, 2007, issued to Frost Gamma
Investments Trust pursuant to Credit Agreement
List of Subsidiaries
23.1
Consent of Eisner LLP
31.1
31.2
32.1
32.2
Certification of Chief Executive Officer, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Chief Financial Officer, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
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
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
K
K
L
M
N
N
O
P
Q
Q
R
E
E
E
—
—
—
—
—
—
10.1
10.1.1
10.1
10.2
10.1
10.2
10.1
—
—
—
—
—
—
—
10.1
10.1
—
—
10.2
10.3
10.1
10.2
10.3
—
—
—
—
—
—
—
—
—
—
—
Filed
Herewith
Filed
Herewith
Filed
Herewith
Filed
Herewith
Filed
Herewith
Filed
Herewith
A.
Registration statement on Form SB-2 (File No. 333-31001).
B. Annual report on Form 10-K for the year ended August 24, 1999.
C. Quarterly report on Form 10-Q for the quarter ended June 30, 2006.
D.
E.
F.
Current report on Form 8-K, dated September 20, 2007 and filed with the SEC on September 21, 2007.
Current report on Form 8-K, dated October 19, 2007 and filed with the SEC on October 22, 2007.
Registration statement on Form S-8 (File No. 333-139254).
G. Quarterly report on Form 10-Q for the quarter ended June 30, 2001.
H.
Registration statement on Form S-3 (File No. 333-81964).
42
Table of Contents
I.
J.
Definitive proxy statement filed with the SEC on October 3, 2002 relating to the annual meeting of
shareholders held on November 6, 2002.
Annual report on Form 10-K for the year ended December 31, 2002.
K. Quarterly report on Form 10-Q for the quarter ended September 30, 2003.
L.
Current report on Form 8-K, dated March 30, 2007 and filed with the SEC on April 2, 2007.
M. Current report on Form 8-K, dated July 10, 2006 and filed with the SEC on August 3, 2006.
N.
O.
P.
Q.
R.
Current report on Form 8-K, dated September 11, 2006 and filed with the SEC on September 12, 2006.
Current report on Form 8-K, dated September 21, 2006 and filed with the SEC on September 27, 2006.
Current report on Form 8-K, dated December 20, 2007 and filed with the SEC on December 20, 2007.
Current report on Form 8-K, dated September 6, 2006 and filed with the SEC on September 7, 2006.
Current report on Form 8-K/A, dated September 6, 2006 and filed with the SEC on October 24, 2006.
* Management Compensation Contract
43
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
LADENBURG THALMANN FINANCIAL
SERVICES INC.
(Registrant)
Dated: March 14, 2008
By: /s/ Diane Chillemi
Name: Diane Chillemi
Title: Vice President and Chief Financial Officer
POWER OF ATTORNEY
The undersigned directors and officers of Ladenburg Thalmann Financial Services Inc. hereby constitute
and appoint Diane Chillemi, Richard J. Lampen and Mark Zeitchick, and each of them, with full power to act
without the other and with full power of substitution and resubstitution, our true and lawful attorneys-in-fact
with full power to execute in our name and behalf in the capacities indicated below, this annual report on
Form 10-K and any and all amendments thereto and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission, and hereby ratify and
confirm all that such attorneys-in-fact, or any of them, or their substitutes shall lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below
by the following persons on behalf of the registrant and in the capacities indicated on March 14, 2008.
Signatures
Title
/s/ Richard J. Lampen
Richard J. Lampen
/s/ Diane Chillemi
Diane Chillemi
/s/ Henry C. Beinstein
Henry C. Beinstein
/s/ Robert J. Eide
Robert J. Eide
/s/ Phillip Frost, M.D.
Phillip Frost, M.D.
/s/ Brian S. Genson
Brian S. Genson
/s/ Saul Gilinski
Saul Gilinski
/s/ Dr. Richard M. Krasno
Dr. Richard M. Krasno
/s/ Howard M. Lorber
Howard M. Lorber
/s/ Jeffrey S. Podell
Jeffrey S. Podell
44
President and Chief Executive Officer
(Principal Executive Officer)
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer
Director
Director
Director
Director
Director
Director
Director
Director
Table of Contents
Signatures
/s/ Richard J. Rosenstock
Richard J. Rosenstock
/s/ Mark Zeitchick
Mark Zeitchick
45
Title
Director
Director
LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2007
ITEMS 8 and 15(a) (1) AND (2)
INDEX TO FINANCIAL STATEMENTS
Financial Statements of the Registrant and its subsidiaries required to be included in Items 8 and 15(a) (1) and
(2) are listed below:
FINANCIAL STATEMENTS:
Ladenburg Thalmann Financial Services Inc. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2007 and 2006
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2007,
2006 and 2005
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
Notes to the Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-8
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Ladenburg Thalmann Financial Services Inc.
We have audited the accompanying consolidated statements of financial condition of Ladenburg
Thalmann Financial Services Inc. and its subsidiaries (the “Company”) as of December 31, 2007 and 2006,
and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each
of the three years in the period ended December 31, 2007. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Ladenburg Thalmann Financial Services Inc. and its subsidiaries as of
December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of
accounting for stock-based compensation effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based
on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated March 13, 2008 expressed an unqualified
opinion thereon.
/s/ Eisner LLP
New York, New York
March 13, 2008
F-2
Table of Contents
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share amounts)
ASSETS
Cash and cash equivalents
Securities owned:
Marketable, at fair value
NYSE Euronext common stock, not readily marketable
Receivables from clearing brokers
Receivables from other broker-dealers
Accounts receivable, net
Exchange memberships owned, at historical cost
Investment in fund manager
Furniture, equipment and leasehold improvements, net
Restricted assets
Intangible assets
Goodwill
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Securities sold, but not yet purchased, at market value
Accrued compensation
Commissions and fees payable
Accounts payable and accrued liabilities
Deferred rent
Accrued interest
Notes payable, including $5,000 to former parent in 2006
Total liabilities
Commitments and contingencies (Note 11)
Shareholders’ equity:
Preferred stock, $.0001 par value; 2,000,000 shares authorized; none issued
Common stock, $.0001 par value; 400,000,000 shares authorized; shares
issued and outstanding, 161,698,071 in 2007 and 155,972,805 in 2006
Additional paid-in capital
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2007
2006
$
8,595
$
6,983
3,139
1,158
35,881
15,511
1,528
120
386
791
545
19,927
23,546
3,005
$114,132
204
1,228
24,851
4,249
170
120
448
706
1,398
3,035
—
3,951
$ 47,343
$
946
6,693
4,641
5,644
1,566
671
39,868
60,029
—
$
2,037
3,764
—
5,152
1,552
1,504
5,000
19,009
—
—
—
16
148,723
(94,636)
54,103
$114,132
15
132,346
(104,027)
28,334
$ 47,343
See accompanying notes to consolidated financial statements
F-3
Table of Contents
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
2007
Year Ended December 31,
2006
2005
Revenues:
Investment banking
Commissions and fees
Asset management
Principal transactions, net
Interest and dividends
Gain on NYSE merger transaction
Realized and unrealized loss on NYSE Euronext
restricted common stock
Gain on sale of CBOE membership
Other income
Total revenues
Expenses:
Compensation and benefits
Commissions and fees
Non-cash compensation
Brokerage, communication and clearance fees
Rent and occupancy, net of sublease revenue
Professional services
Interest
Depreciation and amortization
Write-off of furniture, fixtures and leasehold
improvements, net
Loss on extinguishment of debt
Other
Total expenses
Income (loss) before income taxes
Income tax expense
Net income (loss)
Net income (loss) per common share (basic and diluted)
Number of shares used in computation:
$
55,401 $
31,958
3,028
251
2,970
—
18,531 $
15,780
2,381
326
2,790
4,859
—
—
2,218
95,826
48,918
9,012
6,694
3,976
1,307
3,944
2,304
1,491
(1,001)
1,125
2,067
46,858
26,735
—
2,885
2,923
2,183
2,558
499
754
—
1,833
6,443
85,922
9,904
513
9,391 $
41
—
3,432
42,010
4,848
189
4,659 $
0.06 $
0.03 $
$
$
7,987
16,694
1,265
265
2,082
—
—
—
2,397
30,690
22,756
—
728
2,387
2,635
3,054
1,027
811
62
19,359
3,788
56,607
(25,917)
54
(25,971)
(0.24)
Basic
Diluted
157,355,540
148,693,521
108,948,623
168,484,469
153,087,961
108,948,623
See accompanying notes to consolidated financial statements
F-4
Table of Contents
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY
(Dollars in thousands)
purchase plan
248,298
—
267
equity plan
580,000
—
374
(113)
Balance, December 31, 2004
Issuance of common stock under employee stock
purchase plan
Exercise of stock options
Issuance of common stock under performance
Issuance of common stock to employees pursuant
to stock purchase agreements
Stock options granted to Advisory Board
Amortization of unearned employee stock-based
compensation
Conversion of senior convertible notes
Issuance of common stock to former debtholders
pursuant to private equity offering, net of
expenses of $87
Issuance of common stock to unrelated parties
pursuant to private equity offering, net of
expenses of $56
Repurchase and retirement of common stock
Net loss
Balance, December 31, 2005
Issuance of common stock under employee stock
Exercise of stock options, net of 451,585 shares
tendered in payment of exercise price
Stock options granted to Advisory Board
Elimination of unearned employee stock-based
compensation to additional paid-in capital upon
adoption of SFAS No. 123R
Amortization of unearned employee stock-based
compensation issued in 2005
Stock-based compensation to employees in 2006
Issuance of common stock to affiliates pursuant to
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Unearned
Employee
Stock-based
Compensation
Accumulated
Deficit
Total
46,683,270 $
5 $ 58,674 $
— $ (82,715) $(24,036)
686,096
44,767
—
—
307
21
—
—
10,391,666
—
1
—
6,149
34
(1,474)
—
—
51,778,678
—
5
—
42,053
694
—
—
—
694
42,058
22,222,222
2
9,911
—
—
9,913
13,824,331
(4,620,501)
—
141,590,529
1
—
—
14
6,164
(1,155)
—
122,532
—
—
—
(893)
—
—
(25,971)
(108,686)
6,165
(1,155)
(25,971)
12,967
—
—
—
—
—
307
21
261
4,676
34
1,469,607
—
—
—
489
312
—
—
(893)
893
—
—
—
—
803
1,770
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
267
489
312
—
803
1,770
—
3,676
—
—
698
399
—
2,122
private equity offering, net of expenses of $103
8,397,891
1
3,675
Warrants issued for acquisition of customer
accounts
Warrants issued for interest in fund manager
Warrants and common stock issued for acquisition
—
—
—
—
698
399
of Capitalink
4,000,000
—
2,122
Issuance of common stock to employees pursuant
to stock purchase agreements
Net income
Balance, December 31, 2006
Issuance of shares of common stock under
employee stock purchase plan
Exercise of stock options, net of 400,702 shares
tendered in payment of exercise price and
355,355 options used in cashless exercise
Shares acquired from an employee in satisfaction
of withholding taxes on exercise of options
Stock options granted to members of former
Advisory Board and consultants
Stock-based compensation to employees
Stock retired under stock repurchase plan
Issuance of shares of common stock in exchange
for promissory notes payable to former parent
Warrant issued in connection with credit
266,480
—
155,972,805
—
—
15
172
—
132,346
—
—
—
—
4,659
(104,027)
172
4,659
28,334
183,308
—
407
—
—
407
3,618,420
1
977
(521,711)
—
(1,122)
—
—
(332,529)
—
—
—
437
6,257
(612)
2,777,778
—
6,833
—
—
—
—
—
—
—
978
—
(1,122)
—
—
—
437
6,257
(612)
—
6,833
agreement
Net income
Balance, December 31, 2007
—
—
—
—
3,200
—
161,698,071 $ 16 $148,723 $
3,200
—
—
9,391
9,391
—
— $ (94,636) $ 54,103
See accompanying notes to consolidated financial statements
F-5
Table of Contents
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization
Write-off of furniture, fixtures and leasehold improvements, net
Adjustment to deferred rent
Amortization of debt discount
Amortization of intangible assets
Amortization of investment in fund manager
Accrued interest
Forgiveness of promissory note payable
Non-cash compensation expense
Gain on NYSE merger transaction in excess of proceeds of sale of $3,128
Realized and unrealized loss on NYSE Euronext common stock
Gain on sale of CBOE membership
Loss on extinguishment of debt
Other
(Increase) decrease in operating assets:
Securities owned
Receivables from clearing brokers
Receivables from other broker-dealers
Accounts receivable, net
Other assets
Increase (decrease) in operating liabilities:
Securities sold, but not yet purchased
Accrued compensation
Commission and fees payable
Accounts payable and accrued liabilities
Net cash used in operating activities
Cash flows from investing activities:
Acquisition of relationships and customer accounts
Payment for acquisition, net of cash received
Purchases of furniture, equipment and leasehold improvements
Proceeds from sales of exchange memberships
Decrease (increase) in restricted assets
Other
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Private equity offerings
Issuance of common stock other than private equity offerings
Shares acquired for withholding taxes on exercise of stock options
Repurchase of common stock
Issuance of subordinated notes payable
Repayment of subordinated notes payable
Issuance of other notes payable
Principal payments on other notes payable
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
F-6
Year Ended December 31,
2006
2005
2007
$ 9,391 $ 4,659 $(25,971)
298
115
14
304
1,104
89
671
—
6,694
—
—
—
1,833
—
(2,386)
(9,749)
(9,559)
(1,358)
1,352
(1,096)
2,929
646
(4,152)
(2,860)
(92)
(25,044)
(395)
—
1,135
3
(24,393)
591
41
(149)
—
144
19
448
(666)
2,885
(1,732)
1,001
(1,125)
—
(68)
811
62
(1,305)
—
—
—
681
(667)
728
—
—
—
19,359
88
1,735
(3,904)
(4,249)
(100)
(521)
(1,751)
(10,599)
—
(39)
2,202
(6,820)
1,276
—
(2,462)
(8,997)
(1,026)
—
(369)
1,920
(85)
—
440
8,829
479
—
221
(6,872)
—
—
(237)
—
(253)
—
(490)
—
1,385
(1,122)
(612)
72,000
(72,000)
30,000
(786)
28,865
1,612
6,983
8,968
3,675
5,265
929
—
—
(1,155)
—
15,000
20,000
(15,000)
(20,000)
3,500
—
—
—
16,578
4,604
9,216
(3,953)
1,720
10,936
$ 8,595 $ 6,983 $ 10,936
Table of Contents
Supplemental cash flow information:
Interest paid
Taxes paid
Non-cash financing transactions:
Year Ended December 31,
2006
2007
2005
$ 2,766 $ 139 $
193
344
323
26
Warrant issued for acquisition of customer accounts
Warrant issued for interest in fund manager
Warrant and common stock issued for Capitalink acquisition
Lease commitment capitalized as part of Capitalink acquisition
Issuance of shares of common stock in exchange for $5,000 of promissory notes payable to
$
former parent
Warrant issued in connection with credit agreement
Conversion of senior convertible notes ($18,010) and accrued interest ($4,689) into
common stock
Common stock purchased pursuant to private placement by exchanging notes payable
($7,000) and accrued interest ($110)
Acquisition of Investacorp and affiliates:
Assets acquired
Liabilities assumed ($6,676) and note payable issued to former principal shareholder
($13,550)
Cash paid for acquisition
Cash acquired in acquisition
Net cash paid for acquisition
— $ 698 $
—
—
463
399
2,122
—
6,833
3,200
—
—
—
—
—
—
—
—
—
—
22,699
—
—
7,110
$ 50,849
—
(20,226)
30,623
(5,579)
$ 25,044
—
—
—
—
—
—
—
—
—
See accompanying notes to consolidated financial statements
F-7
Table of Contents
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Description of Business
The consolidated financial statements include the accounts of Ladenburg Thalmann Financial Services
Inc. (“LTS” or the “Company”), a holding company, and its subsidiaries, all of which are wholly-owned.
The principal operating subsidiaries of LTS are Ladenburg Thalmann & Co. Inc. (“Ladenburg”) and, since
October 19, 2007, the date of acquisition, Investacorp, Inc., which are registered broker-dealers in
securities.
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, investment 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 6.)
Investacorp, Inc. is a registered broker-dealer in securities, serving the independent registered
representative community. Investacorp, Inc. clears its customers’ transactions through correspondent
clearing brokers on a fully disclosed basis. Investacorp, Inc. derives revenue from commissions primarily
from the sale of variable annuity products, mutual funds and other financial products and services.
Investacorp, Inc. is subject to regulation by, among others, the SEC, FINRA and the MSRB. (See Note 6.)
All significant intercompany balances and transactions have been eliminated.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of these financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 2005 and 2006 financial statements were reclassified to conform with the 2007
financial statement classifications.
Cash Equivalents
The Company considers all highly liquid financial instruments with an original maturity of three months
or less to be cash equivalents.
Securities
Securities owned and securities sold, but not yet purchased, which are traded on a national securities
exchange or over-the-counter are valued at the last reported sales prices of the year. Futures contracts are
also valued at their last reported sales price. Securities owned, which have exercise or holding period
restrictions, are valued at fair value as determined by the Company’s management. Securities that contain
resale restrictions are stated at a discount to the value of readily marketable securities. Stock warrants are
carried at a discount to fair value as determined by using the Black-Scholes option pricing model due to
illiquidity. Unrealized gains and losses
F-8
Table of Contents
resulting from changes in valuation are reflected in principal transactions. See Note 5 for valuation of
NYSE Euronext common stock.
Revenue Recognition
Investment banking revenue consists of underwriting revenue, strategic advisory revenue and private
placement fees. Underwriting revenues arise from securities offerings in which the Company acts as an
underwriter and include management fees, selling concessions and underwriting fees, net of related
syndicate expenses. Underwriting revenues are recorded at the time the underwriting is completed and the
income is reasonably determined. Management estimates the Company’s share of the transaction-related
expenses incurred by the syndicate, and recognizes revenues net of such expense. On final settlement,
typically 90 days from the trade date of the transaction, these amounts are adjusted to reflect the actual
transaction-related expenses and the resulting underwriting fee. Strategic advisory revenue primarily
consists of success fees on completed merger and acquisition transactions, as well as retainer and periodic
fees, earned in connection with advising on both buyers’ and sellers’ transactions. Fees are also earned for
related advisory work and other services such as providing fairness opinions and valuation analyses.
Strategic advisory revenues are recorded when the transactions or the services (or, if applicable, separate
components thereof) to be performed are substantially complete, the fees are determinable and collection
is reasonably assured. Private placement fees are recorded on the closing date of the transaction. Expenses
associated with strategic advisory and private placement transactions, net of client reimbursements, are
recorded as non-compensation expense.
Commissions and fees revenue results from transactions in equity securities, mutual funds, variable
annuities, and other financial products and services. Revenue from such transactions, executed as agent or
principal, and related expenses are recorded on a trade-date basis.
Asset management revenue consists of base management fees and incentive fees. The Company
recognizes base management fees on a monthly basis over the period in which the investment services are
performed. Base management fees earned by the Company are generally based on the fair value of assets
under management. Base management fees are calculated at the investor level and, depending on the
program, use their monthly, average monthly or quarter-ending capital balances adjusted for any
contributions or withdrawals. Since base management fees are based on assets under management,
significant changes in the fair value of these assets will have an impact on the fees earned by the
Company in future periods. The Company also earns incentive fees that are based upon the performance
of investment funds and accounts. Incentive fees are either a specified percentage of the total investment
return of a fund or account or a percentage of the excess of an investment return over a specified
highwater mark or hurdle rate over a defined performance period. For most funds, the highwater mark is
calculated using the greatest value of a partner’s capital account as of the end of any performance period,
adjusted for contributions and withdrawals. Incentive fees are recognized as revenue at the end of the
specified performance period.
Principal transactions revenue includes realized and unrealized net gains and losses resulting from the
Company’s investments in equity securities for the Company’s account and equity-linked warrants
received from certain investment banking assignments. Profit and loss arising from all securities
transactions entered into for the account and risk of the Company are recorded on a trade-date basis.
Dividends are recorded on an ex-dividend date basis and interest is recorded on an accrual basis.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are carried at cost net of accumulated depreciation and
amortization. Depreciation is provided by the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized on a straight-line basis over the lease term, or their
estimated useful lives, whichever is shorter.
F-9
Table of Contents
Share-Based Compensation
Effective January 1, 2006, the Company has adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123 (Revised 2004), Share-Based Payment (“SFAS No. 123R”), which requires an entity to
measure the cost of employee, officer and director services received in exchange for an award of equity
instruments, including stock options, based on the grant-date fair value of the award. The cost is
recognized as compensation expense over the service period, which would normally be the vesting period
of the options. SFAS No. 123R supersedes the Company’s previous accounting under SFAS No. 123,
Accounting for Stock-Based Compensation (“SFAS No. 123”), which permitted the Company to account
for such compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (“APB No. 25”). Pursuant to APB No. 25, and related interpretations, no compensation cost
had been recognized in connection with the issuance of stock options, as all options granted under the
Company’s 1999 Performance Equity Plan and all options granted outside this option plan had an
exercise price equal to or greater than the market value of the underlying common stock on the date of
grant. The Company adopted SFAS No. 123R using the modified prospective transition method, which
requires that compensation cost be recorded as earned, (i) for all unvested stock options outstanding at the
beginning of the first fiscal year of adoption of SFAS No. 123R based upon the grant-date fair value
estimated in accordance with the original provisions of SFAS No. 123 and (ii) for all share-based
payments granted subsequent to the adoption, based on the grant-date fair value estimated in accordance
with the provisions of SFAS No. 123R. In addition, balances of unearned compensation attributable to
awards granted prior to the adoption of SFAS No. 123R were netted against additional paid-in capital. As
a result of adopting SFAS No. 123R, the Company’s income before income taxes and net income for the
year ended December 31, 2006 were $1,047, or $0.01 per share, lower than if it had continued to account
for share-based compensation under APB No. 25.
The table below illustrates the effect on the Company’s net loss for the year ended December 31, 2005
had the Company elected to recognize compensation expense for stock options, consistent with the
method prescribed by SFAS No. 123. For purposes of the pro forma disclosure, the value of options is
estimated using the Black-Scholes option pricing formula and amortized to expense over the options’
vesting periods. (See Note 15.)
Net loss, as reported
Stock-based employee compensation determined under the fair
value based method
Pro forma net loss
Net loss per common share (basic and diluted), as reported
Pro forma net loss per common share (basic and diluted)
2005
$(25,971)
(2,314)
$(28,285)
$
$
(0.24)
(0.26)
Intangible Assets
Intangible assets are being amortized over their estimated useful lives generally on a straight-line basis.
Intangible assets subject to amortization are tested for recoverability whenever events or changes in
circumstances indicate that the carrying amount may be not recoverable. The Company assesses the
recoverability of its intangible assets by determining whether the unamortized balance can be recovered
over the assets’ remaining life through undiscounted forecasted cash flows. If undiscounted forecasted
cash flows indicate that the unamortized amounts will not be recovered, an adjustment will be made to
reduce such amounts to an amount consistent with forecasted future cash flows discounted at a rate
commensurate with the risk associated with achieving future discounted cash flows. Future cash flows are
based on trends of historical performance and the Company’s estimate of future performances, giving
consideration to existing and anticipated competitive and economic conditions.
Goodwill
Goodwill, which was recorded in connection with the acquisition of Investacorp (see Note 3), is not
subject to amortization and is tested for impairment annually, or more frequently if events or changes in
circumstances
F-10
Table of Contents
indicate that the asset may be impaired. The impairment test consists of a comparison of the fair value of
the reporting unit with its carrying amount. Fair value is typically based upon future cash flows
discounted at a rate commensurate with the risk involved or market based comparables. If the carrying
amount of the reporting unit exceeds its fair value then an analysis will be performed to compare the
implied fair value of goodwill with its carrying amount of goodwill. An impairment loss will be
recognized in an amount equal to the excess of the carrying amount over the implied fair value. After an
impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis.
Recently Issued Accounting Pronouncements
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement
No. 109)” (“FIN 48”). This interpretation was issued in July 2006 to clarify the accounting for uncertainty
in income taxes recognized in the financial statements by prescribing a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. As required by FIN 48, the Company applied the “more-likely-than-
not” recognition threshold to all tax positions, commencing at the adoption date, which resulted in no
unrecognized tax benefits as of such date or December 31, 2007. Accordingly, the adoption of FIN 48 had
no effect on the Company’s 2007 financial statements. Pursuant to FIN 48, the Company has opted to
classify interest and penalties that would accrue according to the provisions of relevant tax law as interest
and other expense, respectively, on the consolidated statement of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements.
SFAS No. 157 clarifies that fair value should be based on assumptions that market participants would use
when pricing an asset or liability and establishes a fair value hierarchy of three levels that prioritizes the
information used to develop those assumptions. The provisions of SFAS No. 157 became effective for the
Company beginning January 1, 2008. Generally, the provisions of this statement are to be applied
prospectively. Certain situations, however, require retrospective application as of the beginning of the
year of adoption through the recognition of a cumulative effect adjustment to the opening balance of
retained earnings. Such retrospective application is required for positions in a financial instrument that
trades in an active market held by a broker-dealer that was measured at fair value using a blockage factor
which is no longer permitted upon application of this statement. The Company will adopt SFAS No. 157
in the first quarter of 2008. Management expects that the adoption of SFAS No. 157 will not have a
material effect on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities.” SFAS No. 159 permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently required to be measured at fair value. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted
provided the entity also elects to apply the provisions of SFAS No. 157. Management expects that the
adoption of SFAS No. 159 will not have a material effect on the Company’s consolidated financial
statements.
3. Acquisitions
Investacorp
On October 19, 2007, the Company acquired all of the outstanding shares of privately-held Investacorp,
Inc. and related companies (collectively, “Investacorp”), an independent broker-dealer and investment
adviser serving the independent registered representative community, for approximately $30 million in
cash and a promissory note in the aggregate principal amount of $15,000. The note, which is
collateralized by the stock of Investacorp, bears interest at 4.11% and is payable in 36 monthly
installments, was valued at $13,550 based on an imputed interest rate of 11%. In addition, the Company
paid the sellers an additional amount of approximately $5,000. subject to adjustment post-closing,
representing Investacorp’s retained earnings plus paid-in capital.
F-11
Table of Contents
In connection with financing the acquisition, the Company entered into a $30,000 revolving credit
agreement with Frost Gamma. (See Note 10.)
The purchase price of $44,173, including acquisition costs, was allocated to Investacorp’s tangible and
identifiable intangible assets acquired and liabilities assumed based on their estimated fair values with
the amount exceeding the fair values being recorded in goodwill. The Company obtained third party
valuations in determining fair value for the intangibles.
The allocation of the purchase price is as follows:
Cash and cash equivalents
Securities owned
Receivables from brokers
Intangible assets(1)
Goodwill(2)
Other assets
Total assets acquired
Commissions and fees payable
Accounts payable and accrued liabilities
Total liabilities
Purchase price
$ 5,579
478
2,984
17,441
23,546
821
50,849
3,995
2,681
6,676
$44,173
(1) Intangible assets have a weighted average useful life of 18 years and are expected to be deductible
for tax purposes over 15 years. (See Note 8.)
(2) Goodwill is expected to be deductible for tax purposes over a 15 year period.
The acquisition agreement provides that Investacorp’s selling shareholders shall join with the Company
in making a Section 338(h)(10) election and the Company shall reimburse the shareholders for any
additional tax liability imposed upon them as a result of the election. Any amounts paid by the Company
in connection therewith will be accounted for as additional purchase price and reflected as additional
goodwill.
In connection with his continued employment with Investacorp, the Company granted the former
principal shareholder stock options to purchase a total of 3,000,000 shares of the Company’s common
stock at $1.91 per share, the closing price of the Company’s common stock on the acquisition date. The
options, which were valued at a total of $5,130, using the Black-Scholes option pricing model, vest over a
three-year period (subject to certain exceptions). Additionally, the Company issued to certain other
Investacorp employees options to purchase 1,150,000 shares of common stock under the Option Plan at
$1.91 per share, which were valued at a total of $1,967, and vest in four equal annual installments.
BroadWall
On September 11, 2006, Ladenburg acquired substantially all of the securities brokerage accounts,
registered representatives and employees of BroadWall Capital LLC (“BroadWall”). In connection with
this acquisition, the Company issued to BroadWall ten-year warrants to purchase 1,500,000 shares of the
Company’s common stock at an exercise price of $0.94 per share. At December 31, 2007, the warrants are
exercisable as to 487,500 shares and will become exercisable as to 337,500 shares on each of
September 11, 2008, 2009 and 2010, contingent upon the continued employment of two former
employees of BroadWall, both of whom have entered into two-year employment agreements with
Ladenburg. Such individuals had a 40% ownership interest in BroadWall. Accordingly, the Company has
valued 825,000 of the warrants that vest over the two-year term of the employment agreements at $698
representing consideration for the acquisition. The value of the warrants, together with legal costs related
to the acquisition, has been assigned to customer accounts (included in intangible assets, net), which is
being amortized to expense over an estimated life of 10 years. The remaining warrants, which were valued
at $571, representing contingent consideration, will be recorded as
F-12
Table of Contents
additional purchase price and increase the carrying value of the acquired customer accounts if and when
Ladenburg renews the employees’ employment agreements.
Capitalink
On October 18, 2006, the Company, for an aggregate consideration amounting to $7,392, acquired
Telluride Holdings, Inc. (“Telluride”) through a merger into a newly-formed subsidiary of the Company.
Telluride owned 100% of Capitalink L.C. (“Capitalink”), a registered broker-dealer providing investment
banking services. The consideration consisted of $1,000 in cash, 4,000,000 shares of the Company’s
common stock valued at $3,840 and ten-year warrants to purchase 2,900,000 shares of the Company’s
common stock at an exercise price of $0.96 per share valued at $2,552. Warrants to purchase
966,666 shares of common stock are immediately exercisable and the remaining warrants will become
immediately exercisable upon their release from escrow as described below. In connection with the
merger, Ladenburg entered into three-year employment agreements with each of Telluride’s three
shareholders.
In connection with the transaction, 2,666,667 of the shares of common stock, warrants to purchase
1,933,333 shares of common stock and $667 in cash were placed in escrow contingent upon continued
employment of the selling shareholders, one-half of which was released to the shareholders on June 3,
2007 and the balance was released on January 18, 2008. Accordingly, the fair value of the consideration
placed in escrow of $4,937 is being accounted for as compensation over the 15 month escrow period.
Compensation expense of $3,948 and $823 was recognized in 2007 and 2006, respectively, with an
additional $166 to be recognized in 2008. The remaining consideration of $2,455 has been accounted for
as purchase price, of which $173 has been allocated to trade name with an estimated 10 year life and
$2,282 has been allocated to relationships with an estimated 4 year life. The transaction resulted in an
increase of $2,122 to additional paid-in capital resulting from the issuance of 4,000,000 shares of
common stock and 966,666 vested warrants. The shares of common stock placed in escrow have been
considered outstanding as the former Telluride shareholders are entitled to voting rights.
In February 2007, the former Capitalink office was vacated and the employees moved into the Company’s
Miami office, as planned. The present value of the lease commitment and additional acquisition related
expenses amounting to $538 has been accounted for as purchase price, of which $38 has been allocated to
trade name and $500 has been allocated to relationships.
The consolidated financial statements include the results of operations of Investacorp, Broadwall and
Capitalink from the dates of acquisition. The following unaudited pro forma information represents the
Company’s consolidated results of operations as if the acquisitions of Investacorp, Broadwall and
Capitalink had occurred at the beginning of 2006. The pro forma amounts of net loss reflect amortization
of the amounts ascribed to intangibles acquired in the acquisitions, amortization of unearned employee
stock-based compensation and interest expense on debt used to finance the Investacorp acquisition.
Total revenue
Net loss
Basic loss per share
Diluted loss per share
Weighted average shares outstanding —
$
$
$
$
Year Ended December 31,
2007
150,440
(2,594)(1)
(0.02)
(0.02)
$
$
$
$
2006
111,973
(450)
0.00
0.00
basic
160,424,033
150,560,187
Weighted average shares outstanding —
diluted
171,721,283
156,306,354
(1) Includes a non-recurring charge of $9,200 for special bonuses paid to Investacorp employees prior to
the closing of the acquisition.
The unaudited proforma financial information is not intended to represent or be indicative of the
Company’s consolidated results of operations that would have been reported had the acquisitions been
completed as of the
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beginning of the periods presented, nor should it be taken as indicative of the Company’s future
consolidated results of operations.
4. Securities Owned and Securities Sold, But Not Yet Purchased
The components of marketable securities owned and securities sold, but not yet purchased as of
December 31, 2007 and 2006 were as follows:
December 31, 2007
Common stock and warrants
Corporate bonds
December 31, 2006
Common stock and warrants
U.S. Government obligations
Corporate bonds
Securities
Owned
Securities
Sold, But Not
Yet Purchased
$ 3,138 $
1
$ 3,139 $
$
$
197 $
6
1
204 $
946
—
946
2,032
—
5
2,037
As of December 31, 2007 and 2006, approximately $3,112 and $167, respectively, of securities owned are
deposited with the Company’s subsidiaries’ clearing brokers. Pursuant to the clearing agreements with
such clearing brokers, the securities may be sold or hypothecated by the clearing brokers.
5. Sales of Exchange Memberships
NYSE
As of December 31, 2005, Ladenburg owned one membership on the NYSE, which had been accounted
for at a cost of $868 in accordance with industry practice. On April 20, 2005, the NYSE and Archipelago
Holdings, Inc. entered into a definitive merger agreement, as amended and restated on July 20, 2005 (as so
amended, the “NYSE Merger Agreement”), pursuant to which Archipelago and NYSE agreed to combine
their businesses and become wholly-owned subsidiaries of NYSE Group, Inc. (“NYSE Group”), a newly-
created, for-profit and publicly-traded holding company (collectively, the “NYSE Merger”).
In March 2006, the NYSE Merger was consummated, and Ladenburg’s NYSE membership was converted
into $371 in cash and 80,177 shares of NYSE Group common stock. The shares of NYSE Group common
stock received in the NYSE Merger were subject to a three-year restriction on transfer. The restriction was
scheduled to expire in three equal installments on each of March 7, 2007, 2008 and 2009, unless removed
earlier by the NYSE Group in its sole discretion. Ladenburg accounted for its investment in the NYSE
Group restricted common stock at the estimated fair value with changes in fair value reflected in
operations. The shares were valued at a discount from the published market value as a result of the transfer
restrictions.
In May 2006, Ladenburg sold in a secondary underwriting 51,900 shares of its restricted NYSE Group
common stock for an aggregate amount of $3,128, or average net proceeds of $60.27 per share, which was
$440 less than the carrying value of such shares. After the sale, Ladenburg’s investment in NYSE Group
common stock consisted of 1,552 shares restricted through March 7, 2008 and 26,725 shares restricted
through March 7, 2009.
On June 20, 2006, Ladenburg transferred its 28,277 remaining restricted shares to LTS at the estimated
fair value of $1,228 at such date. LTS, in accordance with SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities”, accounts for such restricted investments at cost based on the
value on the date of transfer adjusted for any other than temporary impairment. Restricted investments
whose restriction lapses within one year from the balance sheet date will be valued at quoted market price.
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Included in revenues for the year ended December 31, 2006 is a gain on the NYSE Merger of $4,859,
representing the difference between the estimated fair value of consideration received in the merger of
$5,727 and Ladenburg’s carrying value of its membership of $868, and losses of $1,001, consisting of a
loss of $440 on the sale of 51,900 shares and a loss of $561 representing the decline in the fair value of
the 28,277 remaining NYSE Group restricted common shares on June 20, 2006 as compared to March 7,
2006.
On March 7, 2007, 1,552 of the 28,277 shares began the last year of the restriction and in June 2007, the
transfer restrictions on the 1,552 shares were removed by the issuer. Accordingly, at December 31, 2007
such shares are being classified as trading securities and valued at quoted market price as opposed to cost,
resulting in an unrealized gain of $66 for the twelve months ended December 31, 2007, which is included
in principal transactions.
In April 2007, in connection with its acquisition of Euronext N.V., NYSE Group was merged into a
subsidiary of NYSE Euronext, a newly-formed corporation, pursuant to which each share of NYSE Group
was converted into one share of NYSE Euronext. The newly-issued NYSE Euronext shares are subject to
the same transfer restrictions which applied to the NYSE Group shares prior to the merger. As NYSE Group
was considered the acquiring entity for accounting purposes, the Company continues to carry its
investment in the restricted NYSE Euronext shares at cost. As of December 31, 2007, the estimated fair
value of the 26,725 restricted NYSE Euronext shares which are classified as not readily marketable on the
consolidated statement of financial condition was $2,010.
CBOE
On October 24, 2006, Ladenburg sold its membership on the Chicago Board of Options Exchange
(“CBOE”). The membership cost $425 and was sold for $1,550, resulting in a gain of $1,125.
6. Net Capital Requirements
As a registered broker-dealer, Ladenburg is subject to the SEC’s Uniform Net Capital Rule 15c3-1 and the
CFTC’s Regulation 1.17, which require the maintenance of minimum net capital. Ladenburg has elected
to compute its net capital under the alternative method allowed by these rules. At December 31, 2007,
Ladenburg had net capital, as defined, of $26,659, which exceeded its minimum capital requirement, as
defined, of $500, by $26,159.
Investacorp, Inc. is also subject to the SEC’s Uniform Net Capital Rule 15c3-1, which require the
maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 15 to 1. At December 31, 2007, Investacorp, Inc., had net capital of
$2,496, which was $2,163 in excess of its required net capital of $333. Investacorp, Inc’s net capital ratio
was 2 to 1.
Ladenburg and Investacorp, Inc. claim exemptions from the provisions of the SEC’s Rule 15c3-3 pursuant
to paragraph (k)(2)(ii) as they clear their customer transactions through correspondent brokers on a fully
disclosed basis.
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7. Furniture, Equipment and Leasehold Improvements
Components of furniture, equipment and leasehold improvements included in the consolidated
statements of financial condition were as follows at December 31, 2007 and 2006:
December 31,
2007
2006
Cost:
Leasehold improvements
Computer equipment
Furniture and fixtures
Other
Less accumulated depreciation and amortization
Total
567 $
$
1,573
821
1,381
4,342
(3,551)
$
606
1,179
602
1,388
3,775
(3,069)
706
791 $
8. Intangible Assets
At December 31, 2007 and 2006, intangible assets subject to amortization consisted of the following:
2007
2006
Gross
Estimated Gross
Useful
Life (years) Amount
Carrying Accumulated Carrying Accumulated
Amortization Amount Amortization
Technology
Relationships with
registered
representatives
Relationships with
vendors
Covenants not to compete
Customer accounts
Relationships-Capitalink
Trade name
1 $
285 $
59 $ — $
—
20 14,921
155 —
—
7 1,881
354
5
740
10
4 2,783
211
$21,175 $
10
56 —
15 —
724
96
841 2,282
173
1,248 $3,179 $
26
—
—
22
119
3
144
Aggregate amortization expense amounted to $1,103 and $144 for the years ended December 31, 2007
and 2006, respectively. The weighted-average amortization period for total amortizable intangibles is
16.01 years. Estimated amortization expense for each of the five succeeding years is as follows:
2008
2009
2010
2011
2012
2013 — 2027
$ 2,102
$ 1,876
$ 1,731
$ 1,181
$ 1,166
$11,871
9. Income Taxes
The Company files a consolidated federal income tax return and certain combined state and local income
tax returns with its subsidiaries. The Company is on a fiscal tax year ending September 30th.
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Income taxes consists of the following:
2007:
Current
Deferred
2006:
Current
Deferred
2005:
Current
Deferred
Federal
State and
Local
Total
$ 356 $
—
$ 356 $
157 $513
—
157 $513
—
$ 100 $
—
$ 100 $
89 $189
—
—
89 $189
$ — $
—
$ — $
54 $ 54
—
—
54 $ 54
The provision for income taxes differs from the amount of income tax determined by applying the
applicable U.S. statutory federal income tax rate (34%) to pretax income (loss) as a result of the following
differences:
Income (loss) before income taxes
Provision (benefit) under statutory U.S. tax
2007
2006
2005
$ 9,904 $ 4,848 $(25,917)
rates
3,367
1,648
(8,812)
Increase (decrease) in taxes resulting from:
Nondeductibility of loss on conversion of
debt
Unrecognized net operating losses
Utilization of net operating loss
carryforward
Other nondeductible items
State taxes
Other, net
Income tax provision
844
—
—
—
6,582
2,012
(5,744)
564
104
352
513 $
(1,346)
—
89
(202)
189 $
$
—
236
36
—
54
The Company accounts for taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”,
which requires the recognition of tax benefits or expense on the temporary differences between the tax
basis and book basis of its assets and liabilities. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which those differences are expected
to be recovered or settled.
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Deferred tax amounts are comprised of the following at December 31:
2007
2006
Deferred tax assets (liabilities):
Net operating loss carryforwards
AMT credit carryforward
Accrued expenses
Compensation and benefits
Depreciation and amortization
Other
Unrealized gains
Goodwill
Intangibles
Valuation allowance
Net deferred taxes
$ 13,257 $ 22,213
100
1,554
510
151
219
(340)
—
(613)
23,794
(23,794)
—
356
1,514
3,398
194
178
(455)
(143)
(249)
18,050
(18,050)
$
— $
After consideration of all the evidence, both positive and negative, management has determined that a
valuation allowance at December 31, 2007 and 2006 was necessary to offset fully the deferred tax assets
based on the likelihood of future realization.
At December 31, 2007, the Company has an aggregate net operating loss carryforward of approximately
$34,000, expiring in various years from 2015 through 2026.
The Company’s tax years 2004 through 2007 remain open to examination for most taxing authorities.
10. Notes Payable
The components of notes payable are as follows:
Note payable to former principal shareholder of
Investacorp, net of $1,277 of unamortized discount
Note payable to affiliate of principal shareholder of LTS,
December 31,
2007
2006
$12,937 $ —
net of $3,069 of unamortized discount
Notes payable to former parent due March 31, 2007
Total
—
26,931
5,000
—
$39,868 $5,000
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 Investacorp’s
principal shareholder. The note bears interest at 4.11% per annum and is payable in 36 equal monthly
installments. The note has been 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 Investments Trust (“Frost Gamma”), an entity
affiliated with
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Dr. Phillip Frost, the Chairman of the Board and the principal shareholder of the Company and borrowed
$30,000. 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 common stock. The warrant is exercisable for a ten-year period and the exercise price
is $1.91, the closing price of the Company’s common stock on the acquisition date. The warrant was
valued at $3,200 based on the Black-Scholes option pricing model, resulting in a discount on the Frost
note and an effective interest rate of 14.52%.
In February 2008, the Company repaid $8,000 of the $30,000 of outstanding borrowings under the Frost
Gamma credit agreement. The Company may prepay outstanding amounts prior to the maturity date of
October 19, 2012 without penalties.
Notes Payable to Former Parent
In 2002, the Company borrowed a total of $5,000 from New Valley Corporation (“New Valley”), the
Company’s former parent. The notes, which bore interest at 1% above the prime rate, were due on
March 31, 2007, as subsequently extended. In February 2007, the Company entered into a debt exchange
agreement with New Valley, where New Valley agreed to exchange the principal amount of the notes for
shares of the Company’s common stock at an exchange price of $1.80 per share, representing the average
closing price of the Company’s common stock for the 30 trading days ending on the date of the
agreement.
On June 29, 2007, after the Company’s shareholders approved the debt exchange, the Company
exchanged 2,777,778 shares for the principal amount of the notes and paid $1,732 to New Valley for
accrued interest on the loans. The exchange resulted in a loss on extinguishment of debt of $1,833
representing the excess of the quoted market value of the 2,777,778 shares of stock at the date of the
exchange agreement ($2.46 per share) over the carrying amount of the notes.
The Company estimates that, at December 31, 2007, the fair value of fixed interest notes payable to the
former principal shareholder of Investacorp and to Frost Gamma approximates their carrying values based
on anticipated current rates at which similar amounts of debt could currently be borrowed.
The carrying amount of notes payable to New Valley at December 31, 2006 and to the clearing broker
(described below) approximate fair value because of their variable interest rates which periodically adjust
to reflect changes on overall market interest rates.
Other Notes Payable
In November 2004, the Company entered into an amended debt conversion agreement with Frost-Nevada
Investments Trust, Limited Partnership (“Frost Trust”), an entity affiliated with Dr. Frost, and New Valley,
to convert the senior convertible notes payable of the Company held by such holders, with an aggregate
principal amount of $18,010, together with accrued interest, into common stock of the Company.
Pursuant to the agreement, the conversion price of notes held by Frost Trust was reduced from the prior
conversion price of $1.54 to $0.40 per share, and the conversion price of the notes held by New Valley
was reduced from the prior conversion price of $2.08 to $0.50 per share. As part of the agreement, each of
Frost Trust and New Valley purchased $5,000 of the Company’s common stock for $0.45 per share. The
debt conversion transaction was approved by the Company’s shareholders on January 12, 2005 and
closed on March 11, 2005. The Company recorded a pre-tax charge of $19,359 in 2005 reflecting the
expense attributable to the reduction in the conversion price of the notes that were converted.
In December 2002, an affiliate of Ladenburg’s clearing broker loaned the Company an aggregate of
$3,500. The clearing loans and related accrued interest were forgivable over a four-year period, provided
Ladenburg continued to clear its transactions through this primary clearing broker. As scheduled, $667 of
principal, together with accrued interest of $97, was forgiven in November 2005, and the remaining $666
of principal and
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$146 of accrued interest were forgiven in November 2006. Upon the forgiveness of the clearing loans, the
forgiven amount was accounted for as other revenues.
Temporary Subordinated Loans
In December 2005, Ladenburg received a $15,000 temporary subordinated loan from Dr. Frost to provide
additional regulatory capital required for an underwriting participation. The loan was repaid during the
same month, with a $300 fixed amount of interest.
In August 2006, Ladenburg received a $3,500 temporary subordinated loan from LTS to provide
additional regulatory capital required for an underwriting participation. The loan was repaid in September
2006 with interest at the rate of 9%, which amounted to $22.
In December 2006, Ladenburg received a temporary subordinated loan in the amount of $2,000 from LTS,
$12,000 from Dr. Frost and $8,000 from its clearing firm to provide additional regulatory capital required
for an underwriting participation. The temporary subordinated loan from LTS and Dr. Frost was
subordinated by its terms to the loan from the clearing broker. The loan was repaid during the same
month, with interest at the rate of LIBOR plus 2%, which amounted to $49. In addition, Dr. Frost was paid
a commitment fee of $50.
In October 2007, Ladenburg received a temporary subordinated loan in the amount of $72,000 from an
affiliate of Dr. Frost to provide additional regulatory capital required for additional underwriting
participations. The loan was repaid during the following month, with interest at the rate of LIBOR plus
2%, which amounted to $354. In addition, the Company paid the lender a commitment fee of $420.
11. Commitments and Contingencies
Operating Leases
The Company and certain of its subsidiaries are obligated under several non-cancelable lease agreements
for office space, expiring in various years through June 2015. Certain leases have provisions for
escalation based on specified increases in costs incurred by the landlord. The Company is a sublessor to
third parties for a portion of its office space as described below. The subleases expire at various dates
through June 2015. Minimum lease payments (net of lease abatement and exclusive of escalation charges)
and sublease rentals are as follows:
Year Ending
December 31,
2008
2009
2010
2011
2012
Thereafter
Total
Lease
Sublease
Commitments Rentals Net
$
$
5,933 $ 4,695 $1,238
878
4,695
5,573
1,405
4,017
5,422
1,843
3,340
5,183
1,077
3,340
4,417
10,883
2,929
7,954
37,411 $28,041 $9,370
SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” requires that a cost
associated with an exit or disposal activity be recognized and measured initially at its fair value in the
period in which the liability is incurred. For operating leases, a liability for costs that will continue to be
incurred under the lease for its remaining term without economic benefit to the entity shall be recognized
and measured at its fair value when the entity ceases using the right conveyed by the lease (the “cease-use
date”). The fair value of the liability at the “cease-use date” shall be determined based on the remaining
lease rentals, reduced by estimated sublease rentals that could be reasonably obtained for the property.
In September 2004 and December 2005, the Company subleased two of the floors it had occupied in its
former New York City office for the remaining term of its lease. In accordance with SFAS No. 146, a
liability was recorded for the fair value of the Company’s obligation with respect to the lease of both
floors. In November
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2007, the Company entered into an agreement with the landlord to amend the lease and surrender a third
floor which had been subleased by the Company. In consideration therefore, the landlord gave up an
option to require the Company to occupy additional space and agreed to an annual rent abatement of
approximately $79 through June 2015, the expiration of the lease term, with respect to the remaining
leased floors. As a result thereof, in 2007, the liability with respect to the lease obligation, which
amounted to $589 at December 31, 2006, was reduced by $439 with a corresponding reduction of
occupancy expense. As of December 31, 2007, after reduction for rent paid under the lease ($3,256), net of
sublease income ($3,039) received during the year, a prepaid asset balance of $57 resulted which is
included in other assets. Such balance results from the payment in a prior year of certain costs incurred in
connection with the sublease.
Deferred rent shown in the consolidated statements of financial condition represents the difference
between rent payable calculated over the life of the leases on a straight-line basis (net of lease incentives)
and rent payable on a cash basis.
In February 2006, the Company’s subsidiary, Ladenburg Capital Management Inc. (“Ladenburg
Capital”), entered into a settlement agreement with the landlord of its office space in New York City
which Ladenburg Capital was forced to vacate during 2001 due to the events of September 11, 2001.
Under the terms of the settlement, the subsidiary paid the landlord $1,900 in March 2006. The Company
recognized $240 in rent expense in 2005 to increase the liability provided in a prior year to reflect the
settlement agreement.
At December 31, 2006, Ladenburg had utilized a letter of credit in the amount of $1,000 which was
collateralized by $1,094 of Ladenburg’s investment in a money market fund that was classified as
restricted assets on the consolidated statement of financial condition. The letter of credit was used as
collateral for the lease of the Company’s former New York City office space. Pursuant to the lease
agreement, the requirement to maintain this letter of credit facility expired on December 31, 2006, and the
restriction was removed from the investment in February 2007.
Litigation and Claims
In May 2003, a suit was filed in the U.S. District Court for the Southern District of New York by Sedona
Corporation against the Company, former employees of 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 punitive damages of $2,000,000. In August 2005, Ladenburg’s
motion to dismiss was granted in part and denied in part; in July 2006, Ladenburg’s 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 plaintiff’s 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 plaintiff’s 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 Company employee and another individual. The plaintiff alleges,
among other things, that in connection with plaintiff’s retention of Ladenburg to assist it in its efforts to
obtain financing through a private placement of its securities, Ladenburg committed fraud and breach of
fiduciary duty and
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breach of contract. The plaintiff seeks compensatory damages in excess of $100,000. In November 2006,
Ladenburg’s motion to dismiss was granted in part and denied in part. The Company believes that the
plaintiff’s claims are without merit and intends to vigorously defend against them.
In the ordinary course of business, the Company’s subsidiaries are defendants in other litigation and
arbitration proceedings and may be subject to unasserted claims or arbitrations primarily in connection
with their activities as a securities broker-dealer and 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 provided a liability. Such liability
amounted to approximately $768 at December 31, 2007 and $483 at December 31, 2006 (included in
accounts payable and accrued liabilities). During the fiscal years ended December 31, 2007, 2006 and
2005, various settlements resulted in a net charge to operations of $722, $35, and $1,221 (included in
other expenses), respectively. With respect to other pending matters, the Company is unable to estimate a
range of possible loss; however, in the opinion of management, after consultation with counsel, the
ultimate resolution of these matters should not have a material adverse effect on the Company’s
consolidated financial position, results of operations or liquidity.
Deferred Underwriting Compensation
Ladenburg is entitled to receive deferred investment banking and underwriting fees from certain clients
whose initial public offerings Ladenburg managed or participated in. These clients are 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
Company’s 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 fourth quarter of 2007, Ladenburg received deferred
fees of $9,700 (included in investment banking revenues) and incurred commissions and related expenses
of $3,500. As of December 31, 2007, Ladenburg had unrecorded potential deferred fees for SPAC-related
transactions of $39,500, which, net of commissions and related expenses, amounted to approximately
$23,500.
12. Off-Balance-Sheet Risk and Concentrations of Credit Risk
The Company’s two principal broker-dealer subsidiaries, Ladenburg and Investacorp, Inc., 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 such transactions. Additionally, the clearing
brokers provide the clearing and depository operations for proprietary securities transactions. These
activities may expose the Company to off-balance-sheet risk in the event that customers do not fulfill
their obligations with the clearing brokers, as each of Ladenburg and Investacorp, Inc. has agreed to
indemnify their clearing brokers for any resulting losses. Each of Ladenburg and Investacorp, Inc.
continually assesses risk associated with each customer who is on margin credit and records an estimated
loss when management believes collection from the customer is unlikely.
The clearing operations for the Ladenburg and Investacorp, Inc. securities transactions are primarily
provided by one clearing broker, a large financial institution. At December 31, 2007 and 2006,
substantially all of the securities owned and the amounts due from clearing brokers reflected in the
consolidated statements of financial condition are positions held at and amounts due from this one
clearing broker. The Company is subject to credit risk should this clearing broker be unable to fulfill its
obligations.
In the normal course of its business, Ladenburg and Investacorp, Inc. 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
December 31, 2007 and 2006, Ladenburg and Investacorp, Inc. were not contractually obligated for any
equity index or financial futures contracts; however, Ladenburg sold securities that it does not own and
will therefore be obligated to
F-22
Table of Contents
purchase such securities at a future date. These obligations have been recorded in the 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 December 31, 2007. (See Note 4.)
The Company and its subsidiaries maintain cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on cash.
13. Shareholders’ Equity
Repurchase Program
In March 2007, the Company’s board of directors authorized the repurchase of up to 2,500,000 shares of
the Company’s common stock from time to time on the open market or in privately negotiated
transactions depending on market conditions. The repurchase program is be funded using approximately
15% of the Company’s EBITDA, as adjusted. As of December 31, 2007, 332,529 shares had been
repurchased for $612 under the program.
Warrants
As of December 31, 2007, outstanding warrants to acquire the Company’s common stock were as follows:
Expiration Date
2013
2016
2016
2017
Exercise Number
of Shares
Price
$
.95
.94
.96
1.91
500,000(a)
825,000(b)
1,933,334(c)
2,000,000
5,258,334
(a) Does not include unvested warrant to acquire 500,000 shares held by one individual, the
exercisability of which is contingent upon the sole discretion of the Company’s Executive
Committee. The Company’s Executive Committee has not yet made a determination on the
exercisability of such warrant. (See Note 16.)
(b) Does not include unvested warrants to acquire 675,000 shares, the exercisability of which is
contingent upon the renewal of certain employment contracts. (See Note 3.)
(c) Does not include unvested warrants to acquire 966,666 shares placed in escrow, the exercisability of
which is contingent upon continued employment by certain employees. (See Note 3.)
F-23
Table of Contents
14. Earnings Per Share
Basic net income (loss) per share is computed using the weighted-average number of common shares
outstanding. The dilutive effect of potential common shares outstanding is included in diluted net
earnings per share. The computations of basic and diluted per share data for 2007, 2006 and 2005 were as
follows:
Net income (loss)
$
9,391 $
4,659 $
(25,971)
2007
2006
2005
Basic weighted-average shares 157,355,540 148,693,521 108,948,623
Effect of dilutive securities:
Common stock options
Warrants to purchase
common stock
1,354,148
3,826,008
8,343,776
127,754
—
—
Common stock held in
escrow (see Note 3)
Dilutive potential common
1,431,185
440,678
—
shares
168,484,469 153,087,961 108,948,623
Net income (loss) per share:
Basic
Diluted
$
$
0.06 $
0.06 $
0.03 $
0.03 $
(0.24)
(0.24)
During 2007, 2006 and 2005, options and warrants to purchase 10,569,166, 4,976,583, and 22,837,770
common shares, respectively, and in 2005, 1,640,350 common shares issuable upon the conversion of
notes payable were not included in the computation of diluted income (loss) per share as the effect would
have been anti-dilutive.
15. Stock Compensation Plans
Employee Stock Purchase Plan
Under the Company’s Qualified Employee Stock Purchase Plan (the “Purchase Plan”), a total of
10,000,000 shares of common stock are available for issuance. As currently administered by the
Company’s compensation committee, all full-time employees may use a portion of their salary to acquire
shares of the Company’s common stock under the Purchase Plan at a 5% discount from the market price of
the Company’s common stock at the end of each option period. Option periods have been set at three
month periods and commence on January 1, April 1, July 1, and October 1 of each year and end on
March 31, June 30, September 30 and December 31 of each year. The Purchase Plan is intended to qualify
as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. During 2007,
183,308 shares of the Company’s common stock were issued to employees under this plan, at prices
ranging from $1.862 to $2.537; during 2006, 248,298 shares were issued at prices ranging from $0.95 to
$1.368 per share; and during 2005, 686,096 shares were issued at prices ranging from $0.39 to $0.50,
resulting in a capital contribution of $407, $267 and $307, for 2007, 2006 and 2005, respectively.
Amended and Restated 1999 Performance Equity Plan
In 1999, the Company adopted the Performance Equity Plan (the “Option Plan”) which, as amended,
provides for the grant of stock options and stock purchase rights to certain designated employees, officers
and directors and certain other persons performing services for the Company and its subsidiaries, as
designated by the board of directors. On November 1, 2006, the Company’s shareholders approved an
amendment to the Option Plan to increase the number of shares of common stock available for issuance
under the plan from 10,000,000 to 25,000,000 and to increase the annual limit on grants to any
individual from 1,000,000 shares to 1,500,000 shares. Awards include stock options, stock appreciation
rights, restricted stock, deferred stock, stock reload options and/or other stock-based awards. Dividends, if
any, are not paid on unexercised stock options. The Option Plan is administered by the compensation
committee of the Board of Directors of LTS. Stock options granted under the Option Plan may be
incentive stock options and non-qualified stock options. An incentive stock option may be granted only
through May 27, 2009 and may only be exercised within ten
F-24
Table of Contents
years of the date of grant (or five years in the case of an incentive stock option granted to an optionee
(“10% Shareholder”) who at the time of the grant possesses more than 10% of the total combined voting
power of all classes of stock of LTS). The exercise price of both incentive and non-qualified options may
not be less than 100% of the fair market value of LTS’s common stock at the date of grant, provided, that
the exercise price of an incentive stock option granted to a 10% Shareholder shall not be less than 110%
of the fair market value of LTS’s common stock at the date of grant. Options granted under the Option
Plan generally vest in equal amounts on each of the anniversaries over three or four years. As of
December 31, 2007, there were options to purchase 8,558,850 shares of common stock available for
issuance under the Option Plan.
A summary of the status of the Option Plan at December 31, 2007 and changes during the years ended
December 31, 2007, 2006 and 2005, are presented below:
Weighted-
Average
Weighted- Remaining
Average Contractual Aggregate
Intrinsic
Term
Exercise
Value
(Years)
Price
Shares
7,437,431 $
3,524,500
(44,767)
(2,279,394)
—
8,637,770
3,775,000
(721,192)
(648,267)
—
11,043,311
4,735,000
(1,874,477)
(820,418)
—
13,083,416
11,886,430
1.09
0.56
0.47
0.69
—
0.97
0.95
0.68
0.86
—
0.99
2.23
0.70
1.55
—
1.44
1.43
7.33 $
253
7.98
43
7.92
4,458
8.01
7.91
10,332
9,571
Options outstanding,
December 31, 2004
Granted
Exercised
Forfeited
Expired
Options outstanding,
December 31, 2005
Granted
Exercised
Forfeited
Expired
Options outstanding,
December 31, 2006
Granted
Exercised
Forfeited
Expired
Options outstanding,
December 31, 2007
Vested or expected to vest
Options exercisable,
December 31, 2007
4,543,350
1.21
6.16
4,903
Non-Plan Options
The Company has granted stock options to newly-hired employees in conjunction with their employment
agreements or in connection with acquisitions, which are outside of the Option Plan. A summary of the
status
F-25
Table of Contents
of these options granted outside the Option Plan at December 31, 2007, and changes during the years
ended December 31, 2007, 2006 and 2005, are presented below:
Weighted-
Average
Weighted- Remaining
Average Contractual Aggregate
Intrinsic
Term
Exercise
Value
(Years)
Price
Shares
1,500,000 $
14,000,000
—
(1,500,000)
—
14,000,000
1,500,000
(1,200,000)
(5,800,000)
—
8,500,000
3,000,000
(2,500,001)
(1,249,999)
—
7,750,000
5,936,321
0.75
0.58
—
0.75
—
0.58
1.05
0.50
0.63
—
0.63
1.91
0.52
0.64
—
1.16
1.16
9.19 $
0
9.32
0
8.50
5,008
8.52
8.53
7,434
5,708
487,501
1.05
8.70
522
Options outstanding, December 31,
2004
Granted
Exercised
Forfeited
Expired
Options outstanding, December 31,
2005
Granted
Exercised
Forfeited
Expired
Options outstanding, December 31,
2006
Granted
Exercised
Forfeited
Expired
Options outstanding, December 31,
2007
Vested or expected to vest
Options exercisable, December 31,
2007
The weighted-average grant date fair value of employee options granted during the years ended
December 31, 2007, 2006 and 2005 was $1.70, $0.86 and $0.45, respectively. The fair value of each
option award was estimated on the date of grant using the Black-Scholes option pricing model using the
following weighted-average assumptions:
Year Ended December 31,
2006
2007
2005
Dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)
0.00%
127.34%
4.34%
6.2
0.00%
125.83%
4.85%
6
0.00%
74.71%
3.78%
10
During 2007 and 2006, the Company took into consideration guidance contained in SFAS No. 123R and
SAB No. 107 when reviewing and developing assumptions for the 2007 and 2006 grants. The weighted
average expected life for the 2007 and 2006 grants of 6.2 and 6 years, respectively, reflects the alternative
simplified method permitted by SAB No. 107, which defines the expected life as the average of the
contractual term of the options and the weighted-average vesting period for all option tranches. Expected
volatility for the 2007 and 2006 option grants is based on historical volatility over the same number of
years as the expected life, prior to the option grant date.
As of December 31, 2007, there was $13,703 of total unrecognized compensation cost related to non-
vested share-based compensation arrangements. This cost is expected to be recognized over the vesting
periods of the options, which on a weighted-average basis is approximately 1.51 years.
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Table of Contents
The total intrinsic value of options exercised during the years ended December 31, 2007, 2006, and 2005
amounted to $5,828, $1,277 and $4, respectively. Tax benefits related to option exercise were not deemed
to be realized as net operating loss carryforwards are available to offset taxable income computed without
giving effect to the deductions related to option exercises and the deferred tax assets related to those net
operating losses have been fully reserved.
Non-cash compensation expense relating to stock options was calculated using the Black-Scholes option
pricing model, amortizing the value calculated over the vesting period and applying a forfeiture
percentage as estimated by the Company’s management, using historical information. The Company has
elected to recognize compensation cost for option awards that have graded vesting schedules on a straight
line basis over the requisite service period for the entire award. For the years ended December 31, 2007
and 2006, the non-cash compensation expense relating to stock option agreements granted employees
amounted to $2,862 and $762, respectively. In addition, the non-cash compensation expense related to
warrants granted to employees in connection with the Capitalink acquisition amounted to $854 and $285
in 2007 and 2006, respectively. (See Note 3.)
On September 1, 2005, the Company granted to certain advisors options to purchase an aggregate of
1,200,000 shares of the Company’s common stock at an exercise price of $0.51 per share under the Option
Plan. The options, which expire on August 31, 2015, vest 25% on each of the first four anniversaries of
the date of grant. The Company recorded a charge of $397, $312 and $34 for the fair value of the options
for the years ended December 31, 2007, 2006 and 2005, respectively, based on the Black-Scholes option
pricing model. The Company will record additional expense relating to these options during their vesting
period with a final adjustment based on the options’ fair value on the vesting date.
Employee Stock Purchase Agreements
In 2005, the Company had entered into several employment agreements with newly hired employees,
pursuant to which the Company sold common stock to the employees. Where the sales price was below
the fair market value of the stock on the effective date of the agreements, the Company recorded unearned
stock-based compensation expense aggregating $1,587, representing the difference between fair market
value of the common stock and the sales price. Such compensation was amortized over the initial term of
the employees’ employment agreements, which were generally one to two years. During the years ended
December 31, 2007, 2006 and 2005, the Company recorded amortization of non-cash compensation
expense of $90, $803 and $694, respectively, relating to these sales of its common stock to new
employees at prices below fair market value. At December 31, 2007, such compensation was fully
amortized.
16. Investment in Fund Manager
On August 31, 2006, the Company issued to an individual seven-year warrants (“FVF Warrants”) to
purchase 1,500,000 shares of the Company’s common stock at an exercise price of $0.95 per share. The
FVF Warrants were issued in connection with the Company’s acquisition of a 10% interest in FVF
Partners, LLC (“FVF”), the general partner of the Florida Value Fund LLP, a private equity fund formed by
this individual focused on mid-market companies in Florida. FVF, in exchange for management services,
is entitled to a percentage of profits of the fund. The FVF Warrants are exercisable as to 500,000 shares
immediately and were scheduled to become exercisable as to 500,000 shares on each of August 31, 2007
and 2008 provided that the second and third installments of shares shall not vest if the Company’s
Executive Committee determines, in its sole discretion, that the Company’s investment was not
economically beneficial to the Company. Accordingly, the Company has valued its investment in FVF at
$399 based on the value of the 500,000 vested warrants. Upon the vesting of the contingent warrants, the
Company will increase the cost of its investment in FVF by the value of such warrants. In addition, the
Company earned an additional 1.7% interest in FVF valued at $68 as compensation for introducing
investors to FVF. In 2007 the Company’s Executive Committee determined that the warrant scheduled to
become exercisable into 500,000 shares on August 31, 2007 shall not vest. The investment in FVF is
accounted for under the equity method. The excess of the carrying value of the investment over the
Company’s share of the underlying book value of FVF is being amortized over an estimated life of seven
years.
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Table of Contents
17. Segment Information
As a result of the Investacorp acquisition on October 19, 2007, the Company had two operating segments.
For periods prior to October 19, 2007, the Company operated in 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 the independent
registered representative community.
Segment information for the year ended December 31, 2007 follows:
2007
Ladenburg Investacorp Corporate
Total
Revenues
Operating income (loss)
Identifiable assets
Depreciation and amortization
Capital expenditures
$ 83,313 $ 12,191 $
1,158
24,729
50,644
61,309
285
1,109
—
395
322 $ 95,826
(3,882) 22,005
2,179 114,132
1,491
395
97
—
Reconciliation of net income to segment information for the year ended December 31, 2007:
Net income
Net of interest income and expense
Income tax expense
Depreciation and amortization
Non-cash compensation
Loss on extinguishment of debt
Operating income
$ 9,391
2,083
513
1,491
6,694
1,833
$ 22,005
18. Related Party Transactions
Commencing in 2006, the Company leased office space from an entity affiliated with Dr. Frost, the
Company’s Chairman of the Board, under a month-to-month lease. In 2007, the Company entered into a
lease with the affiliated entity which expires in January 2012 and which provides for minimum annual
payments of $464. Rent expense under such leases amounted to $392 and $33 in 2007 and 2006,
respectively.
In September 2006, the Company entered into an agreement with Vector Group Ltd. (“Vector”), where
Vector agreed to make available to the Company the services of Vector’s Executive Vice President to
serve as the President and Chief Executive Officer of the Company and to provide certain other financial
and accounting services, including assistance with complying with Section 404 of the Sarbanes-Oxley
Act of 2002. Various executive officers and directors of Vector and its subsidiary New Valley serve as
members of the Board of Directors of the Company, and Vector and its subsidiaries own approximately
8.6% of the Company’s common stock. In consideration for such services, the Company agreed to pay
Vector an annual fee of $250 plus reimbursement of expenses and to indemnify Vector. The agreement is
terminable by either party upon 30 days’ prior written notice. In December 2007, the Company and
Vector amended the agreement to increase the fees payable thereunder as follows: (i) a special
management fee payment of $150 for 2007 (resulting in a total payment of $400 for 2007), (ii) an increase
in the annual fee from $250 to $400, effective January 1, 2008, and (iii) an increase in the annual fee from
$400 to $600, effective July 1, 2008 (payment of $500 for 2008).
Howard Lorber, Vice Chairman of the Company’s Board of Directors, is a consultant to (and, prior to
January 2005, was the chairman of) Hallman & Lorber Associates, Inc., a private consulting and actuarial
firm, and related entities, which receive commissions from insurance policies written for the Company.
These commissions amounted to approximately $61, $23 and $92 in 2007, 2006 and 2005, respectively.
See Note 10 with respect to loans from related parties.
F-28
Table of Contents
19. Quarterly Financial Data (Unaudited)
1st
2nd
3rd
4th
Quarters
15,920
$
14,979(a)
18,527
$
18,416(a)(b)
10,452
$
12,665(a)
50,927(c) (d)
39,862(a) (d)
941
111
(2,213)
11,065
874
$
17
$
(2,098)
$
10,598
0.01
$
0.00
$
(0.01)
$
0.06
2007:
Revenues
Expenses
Income (loss)
$
before
income
taxes
Net income
(loss)
Basic income
(loss) per
common
share(d)
Diluted
$
$
income
(loss) per
common
share(d)
Basic
weighted
average
common
shares
Diluted
weighted
average
common
shares
$
0.01
$
0.00
$
(0.01)
$
0.07
154,092,696
155,103,973
159,826,786
160,303,297
167,542,100
167,742,762
159,826,786
169,016,762
(a) Includes $1,318, $1,406, $1,715 and $2,255 charge for non-cash compensation in the first, second,
third and fourth quarters 2007, respectively.
(b) Includes loss on extinguishment of debt of $1,833 in the second quarter 2007.
(c) Includes $12,191 of Investacorp revenues in the fourth quarter 2007.
(d) Includes $9,700 of revenue and $3,500 of expenses resulting from deferred fees from SPAC
transactions in the fourth quarter 2007. (See Note 11.)
(e) The sum of the quarterly income (loss) per share does not equal the income (loss) per share for the
year, because per share data for each quarter and for the year are independently computed.
1st
2nd
3rd
4th
Quarters
$
14,794(a) $
10,048(b)
7,457(a) $
8,757(b)
10,179
$
9,595(b)
14,428(a)
13,610(b)
2006:
Revenues
Expenses
Income (loss)
before income
taxes
Net income (loss)
$
Basic and diluted:
Income (loss) per
4,746
4,732
$
(1,300)
(1,325)
$
584
570
$
818
682
common
share(c)
Basic weighted
average common
shares
Diluted weighted
average common
shares
$
0.03
$
(0.01)
$
0.00
$
0.00
141,591,068
150,043,231
150,559,806
152,440,248
142,289,965
150,043,231
154,110,421
160,710,680
(a) Includes $3,858 gain on sale of NYSE membership in the first and second quarters of 2006 ($4,859
gain in first quarter 2006 and $1,001 loss in second quarter 2006) and $1,125 gain on sale of CBOE
membership in the fourth quarter 2006.
(b) Includes $678, $463, $303, and $1,441 charge for non-cash compensation in the first, second, third
and fourth quarters of 2006, respectively.
(c) The sum of the quarterly income (loss) per share does not equal the income (loss) per share for the
year, because per share data for each quarter and for the year are independently computed.
F-29
Exhibit 21
All subsidiaries below are directly or indirectly 100% owned by registrant.
SUBSIDIARIES OF REGISTRANT
NAME
Ladenburg Thalmann & Co. Inc.
Ladenburg Thalmann Asset Management Inc.*
Investacorp, Inc.
Investacorp Advisory Services Inc.
STATE OF ORGANIZATION
Delaware
New York
Florida
Florida
* Wholly-owned by Ladenburg Thalmann & Co. Inc.
Not included above are other subsidiaries which, if considered in the aggregate as a single subsidiary,
would not constitute a significant subsidiary, as such term is defined by Rule 1-02(w) of Regulation S-X.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of Ladenburg Thalmann
Financial Services Inc. on Form S-8 (Nos. 333-82688, 333-101360, 333-101361, 333-124366, 333-130024,
333-139246, 333-139247, 333-139254 and 333-147381) and on Form S-3 (Nos. 333-141517, 333-37934,
333-71526, 333-81964, 333-88866, 333-122240, 333-117952, 333-130026, 333-130028 and 333-139244) of
our reports dated March 13, 2008, with respect to the consolidated financial statements and internal control
over financial reporting of Ladenburg Thalmann Financial Services Inc. included in this Annual Report
(Form 10-K) for the year ended December 31, 2007.
/s/ Eisner LLP
New York, New York
March 13, 2008
Exhibit 31.1
SECTION 302 CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES ACT OF 1934, AS AMENDED
I, Richard J. Lampen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Ladenburg Thalmann Financial Services Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and to the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 14, 2008
By: Richard J. Lampen
Name: Richard J. Lampen
Title:
President and Chief Executive Officer
Exhibit 31.2
SECTION 302 CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES ACT OF 1934, AS AMENDED
I, Diane Chillemi, certify that:
1. I have reviewed this Annual Report on Form 10-K of Ladenburg Thalmann Financial Services Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and to the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 14, 2008
By: Diane Chillemi
Name: Diane Chillemi
Title: Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Ladenburg Thalmann Financial Services Inc. (the “Company”) on
Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on
the date hereof (the “Report”), I, Richard J. Lampen, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to my knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operation of the Company.
Dated: March 14, 2008
By: Richard J. Lampen
Richard J. Lampen
President and Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Ladenburg Thalmann Financial Services Inc. (the “Company”) on
Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on
the date hereof (the “Report”), I, Diane Chillemi, Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to my knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operation of the Company.
Dated: March 14, 2008
By: Diane Chillemi
Diane Chillemi
Vice President and Chief Financial Officer