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, 2008
Commission File Number 1-15799

 

 

 

 

LADENBURG THALMANN FINANCIAL SERVICES INC.

(Exact Name Of Registrant As Specified In Its Charter)

 

 

 

(212) 409-2000

(Registrant’s telephone number, including area code)

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

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 a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

                    (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, 2008 (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 NYSE Amex on that date) held by non-affiliates of the registrant was approximately $133,124,925.

 

As of March 11, 2009, there were 171,715,854 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 2009 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

 

 

 

General

 

We are engaged in investment banking, equity research, institutional sales and trading, independent brokerage and advisory services and asset management services through our principal subsidiaries, Ladenburg Thalmann & Co. Inc. (“Ladenburg”), Investacorp, Inc. (collectively with related companies, “Investacorp”) and Triad Advisors, Inc. (“Triad”). 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, headquartered in Miami Lakes, Florida, is an independent broker-dealer and registered investment advisor that has been serving the independent registered representative community since 1978. Investacorp’s national network of independent registered representatives primarily serves retail clients. We acquired Investacorp in October 2007.

 

Triad, headquartered in Norcross, Georgia, is an independent broker-dealer and registered investment advisor that offers a broad menu of products, services and total wealth management solutions to independent contractor registered representatives located nationwide. Triad’s independent registered representatives primarily serve retail clients. In August 2008, we acquired Triad, which was founded in 1998.

 

Through our acquisitions of Investacorp and Triad, we have become a significant presence in the independent broker-dealer space. During the past decade, this has been one of the fastest growing segments of the financial services industry. With combined pro forma revenues of approximately $122 million for 2008 for Investacorp and Triad, we have become one of the approximately 25 largest firms in the independent broker-dealer space. We believe that, as a result of the current market turmoil, we have the opportunity through acquisition and recruiting to significantly expand our market position in this segment over the next several years. Our goal remains as a public financial services company to marry the more recurring and predictible revenue and cash flows of the independent broker-dealer business with Ladenburg’s traditional investment banking, capital markets, institutional equity and related businesses. These Ladenburg businesses are generally more volatile and subject to the cycles of the capital markets, but historically have enjoyed strong operating margins in good market conditions.

 

Each of Ladenburg, Investacorp and Triad 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 is also subject to regulation by the Commodities Futures Trading Commission (“CFTC) and National Futures Association (“NFA”).

 

Ladenburg’s private client services and institutional sales departments serve approximately 12,000 accounts nationwide and its asset management area provides investment management services to numerous individuals and institutions. At December 31, 2008, Investacorp’s 500 registered representatives served approximately 172,000 accounts nationwide and Investacorp had more than $6.1 billion in client assets. Triad’s 400 registered representatives served approximately 123,000 accounts nationwide and had more than $9.0 billion in client assets at December 31, 2008.

 

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 520 Madison Avenue, New York, New York 10022. Ladenburg has branch offices located in Melville, New York, Miami and Boca Raton, Florida, Lincolnshire, Illinois, Los Angeles, California and Princeton, New Jersey. 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 326 offices in 41 states. Triad’s principal executive offices are located at 5185 Peachtree Parkway, Suite 280, Norcross, GA 30092. Triad’s independent registered representatives are located in approximately 233 offices in 42 states.

 

Available Information

 

Our corporate filings, including our annual reports 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. We will provide to any person, without charge, a copy of our code of ethics. 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 in this report 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 about our operations, see Item 1A, “Risk Factors,” and “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Special Note Regarding Forward-Looking Statements” below. We are not required (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

 

Difficult Market Conditions

 

During 2008 and continuing in the first quarter of 2009, the U.S. and global economies have deteriorated into a recession, which could be long-term. We, like other companies in the financial services sector, are exposed to volatility and trends in the general securities markets and the economy. The significant market downturn and poor economic conditions have reduced significantly investment banking, capital markets and retail and institutional client activity levels. It is difficult to predict when conditions will change. Given the difficult market and economic conditions, we have focused on reducing redundancies and unnecessary expense, including implementing headcount reductions. However, we also continue to seek to selectively upgrade our talent pool given the availability of experienced professionals.

 

Sale of American Stock Exchange and Boston Stock Exchange Membership Interests

 

On October 1, 2008, NYSE Euronext acquired the American Stock Exchange. In exchange for its American Stock Exchange membership, Ladenburg received 8,138 shares of NYSE Euronext stock valued at $328,000 resulting in a $214,000 gain in the fourth quarter of 2008. Ladenburg may receive additional amounts from the sale of this membership if NYSE Euronext sells the former American Stock Exchange headquarters building.

 

Ladenburg also owned a Boston Stock Exchange membership. On August 29, 2008, the Nasdaq OMX Group, Inc. acquired the Boston Stock Exchange. Ladenburg received a cash payment of $310,000 for its interest, resulting in a gain of $305,000 in the third quarter of 2008.

 

Triad Advisors Acquisition

 

On August 13, 2008, we acquired Triad by way of merger. We believe that the Triad acquisition significantly expands our presence in the independent broker-dealer area.

All outstanding shares of Triad’s common stock were converted into an aggregate of $6,826,000 in cash (net of a post-closing adjustment of $674,000), 7,993,387 shares of our common stock subject to certain transfer restrictions valued at $10,427,000 and a $5,000,000 promissory note (the “Triad Note”) valued at $4,384,000. If Triad meets certain cumulative profit targets during the three-year period following completion of the merger, we will also pay to Triad’s former shareholders up to $7,500,000 in cash and up to 4,134,511 shares of common stock (“Additional Contingent Consideration”). We also pledged the stock of Triad to Triad’s shareholders under a pledge agreement as security for the payment of the Triad Note. The Triad Note contains customary events of default, which if uncured, entitle the Triad Note holders to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the Triad Note. We are entitled to setoff for indemnification claims against the Triad Note and any Additional Contingent Consideration.

 

Punk, Ziegel Acquisition

 

On May 2, 2008, Punk, Ziegel & Company, L.P., a specialty investment bank based in New York City, was merged into Ladenburg. As a result, Ladenburg offers Punk Ziegel’s full range of research, equity market making, corporate finance, retail brokerage and asset management services focused on high growth sectors within the healthcare, healthcare technology, biotechnology and life sciences industries.

 

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 complete any such potential acquisitions on acceptable terms or at all or, if we do, that any acquired business will be profitable. Also we may not be able to integrate successfully acquired businesses into our existing business and operations.

 

Business Segments

 

Effective as of October 19, 2007 (the date we acquired Investacorp), we have two operating segments which correspond to our Ladenburg subsidiary and our independent brokerage and advisory services business conducted by Investacorp and Triad. Financial and other information by segment for the years ended December 31, 2008 and 2007 is set forth in Note 18 to our consolidated financial statements.

 

Ladenburg

 

Ladenburg’s principal business areas are: investment banking, retail and institutional brokerage, equity research, asset management and investing activities.

 

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 12%, 58%, and 40% of our total revenues in 2008, 2007 and 2006, respectively. Our investment banking professionals maintain relationships with businesses, private equity firms, and other financial institutions, as well as high net worth individuals. Our bankers provide them with extensive corporate finance and investment banking services. At March 11, 2009, we had approximately 20 professionals in Ladenburg’s investment banking group, located in Miami, Florida and New York, New York.

In addition to general investment banking and corporate finance consulting services, Ladenburg provides the following services:

 

Underwriting of public equity and debt offerings, including SPAC underwritings.  Ladenburg has been active as lead and co-managing underwriter, general underwriter and/or a selling group member in numerous public equity transactions.

 

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 2006. 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, declined significantly during 2008. Since 2006, Ladenburg had lead or co-managed 40 SPAC offerings raising approximately $8 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 completed during such time period. SPACs are experiencing significant difficulty in recent periods in obtaining shareholder approval of business combination transactions because, among other things, many of their shareholders hold common stock trading at a discount to the cash amount per share held in trust. During 2008, Ladenburg received deferred fees of $5,300,000 (included in investment banking revenues) and incurred commissions and related expenses of $2,100,000. As of December 31, 2008, we had unrecorded potential deferred fees for our SPAC-related transactions of approximately $36,250,000, which, net of commissions and related expenses, amounted to approximately $21,400,000.

 

Private placement of debt and equity, including PIPES and registered direct 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 expanded its private placement activities to include PIPE (private investment in public equity) and registered direct offering 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 and registered direct 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.  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 40 members that focus primarily on mid-market acquisitions that have offices in 37 countries.

 

Rendering fairness and solvency opinions.  Ladenburg has developed a proven expertise in the fairness and solvency opinion market, including 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 possible risks and associated litigation. A fairness opinion from a qualified financial advisor is one of the most effective risk management tools available to assure sound business judgment has been exercised in varying types of corporate transactions.

Ladenburg provides both fairness and solvency opinions and analyses to boards of directors, independent committees of boards of directors and shareholders. The firm also provides objective advice on the valuation of businesses and securities in connection with 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, recapitalizations, tax planning and accounting compliance. Ladenburg has extensive valuation expertise. Ladenburg’s professionals are well 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.

 

Retail and Institutional Brokerage Business

 

Historically, Ladenburg’s retail and institutional brokerage business generated a significant percentage of our revenues. This is no longer true due to the growth of our independent brokerage and advisory services. Ladenburg’s private client services and institutional sales departments currently serve a total of approximately 12,000 accounts nationwide. Ladenburg charges commissions to its individual and institutional clients for executing securities trading orders.

 

Our sales and trading operation distributes our equity research product and communicates our proprietary investment recommendations to our growing base of institutional investors. Also, our sales and trading staff executes equity trades on behalf of our clients and sells the securities of companies for which we act as an underwriter.

 

We have established a broad institutional client base through a consistent focus on the investment and trading objectives of our clients. Our sales and trading professionals work closely with our equity research staff to provide insight and differentiated investment advice to institutional clients nationwide.

 

We believe that our sales and trading clients turn to us for timely, differentiated investment advice. Our equity research features proprietary themes and actionable ideas about industries and companies that are not widely evaluated by many other investment banks without our middle-market emphasis. In recent years, many investment banks have reduced equity research coverage and market making activities for companies with market capitalizations below certain thresholds. However, we continue to commit research and sales and trading resources to smaller-capitalization companies with the belief that institutional investors will value such specialized knowledge and service.

 

Our sales and trading personnel are also central to our ability to market equity offerings and provide after-market support. Our equity capital markets group manages the syndication, marketing, execution and distribution of equity offerings. Our syndicate activities include managing the marketing and order-taking process for underwritten transactions and conducting after-market stabilization and initial market making. Our syndicate staff is also responsible for developing and maintaining relationships with the syndicate departments of other investment banks.

 

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 that ignore the demand for unbiased research. Ladenburg provides a branded in-depth research product. 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, healthcare, healthcare technology and on a special situations basis and may expand to

additional sectors in the future. Ladenburg recently initiated research coverage on numerous Florida-based companies and intends to increase its coverage in this geographic area. Research is provided on a fee basis to certain institutional accounts.

 

Our research department:

 

 

Asset Management

 

Ladenburg Thalmann Asset Management

 

Ladenburg Thalmann Asset Management Inc. (“LTAM”) is a registered investment advisor and sister company to Ladenburg. LTAM offers various asset management products utilized by Ladenburg clients as well as clients of Investacorp and Triad’s financial advisors.

 

Ladenburg Asset Management Program

 

The Ladenburg Asset Management Program (“LAMP”) provides 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. The LAMP program is available to financial advisors of each of our broker-dealers.

 

Investment Consulting Services

 

LTAM’s Investor Consulting Services (“ICS”) provides clients with access to professional money managers usually only available to large institutions, across the spectrum of major asset classes. Whether the client requires a complete asset allocation strategy or an investment manager for a single asset class, each of our managers has been thoroughly examined for inclusion in the ICS program. Once a manager has been added to the platform, they are regularly reviewed in order to ensure that they represent a suitable solution.

 

Private Investment Management

 

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 an annual asset-based fee, certain customers also are charged an incentive fee, if earned, at the end of each calendar year.

 

Retirement Plan Sponsor Services

 

LTAM provides investment consulting services to sponsors of 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 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 detailed quarterly performance report for the purpose of meeting the plan fiduciary’s obligation to monitor plan assets. Certain plan participants also may 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. The program features quarterly performance monitoring, check writing, a debit card and online account access.

 

Third Party Advisory Services

 

Together with its affiliates, LTAM may also provide advisory services, ranging from proprietary investment solutions to access to professional money managers for the clients of Triad and Investacorp Advisory Services, Inc. (“IAS”), Investacorp’s registered investment advisor.

 

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 investment banking activities, Ladenburg regularly receives shares or warrants that entitle it to purchase securities of the corporate issuers for which it raises capital or provides advisory services.

 

Independent Brokerage and Advisory Services

 

Overview

 

Investacorp and Triad are independent broker-dealers, whose non-employee registered representatives offer securities brokerage services to their clients and may 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 become independent registered representatives. These independent registered representatives need client and back office support services and access to technology and typically become affiliated with an independent broker-dealer. We expect this trend to continue and possibly accelerate in the future.

 

A registered representative who becomes affiliated with Investacorp or Triad 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 or Triad. Because an independent registered representative bears the responsibility for these expenses, the registered representative receives 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 sales force costs, including providing employee benefits, office space, sales assistants, telephone service and supplies. The independent brokerage model permits Investacorp and Triad to expand their respective base of revenue and retail distribution network 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 and Triad’s registered representatives must possess a sufficient level of business experience to enable the individual to independently operate his or her own office. Insurance agents, financial planners, accountants and other financial professionals, who already provide financial services to their clients, often affiliate

with independent broker-dealers. These professionals then offer financial products and services to their clients through Investacorp and Triad and earn commissions and fees for these transactions and services. Investacorp’s and Triad’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 and Triad’s supervisory procedures as well as compliance with all applicable regulatory requirements.

 

Many of Investacorp’s and Triad’s financial advisors 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 or Triad, for which Investacorp or Triad earns either a commission or a fee. Representatives may be permitted to conduct other approved businesses unrelated to their Investacorp or Triad activities such as offering fixed insurance products, accounting, estate planning and tax services, among others.

 

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. Each of Investacorp and Triad 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 or Triad’s registered representatives.

 

Many of Investacorp’s and Triad’s financial advisors are also authorized agents of insurance companies. Investacorp and Triad process insurance business through subsidiaries or sister companies which are licensed insurance brokers, as well as through other licensed insurance brokers. We do not act as an insurance company and therefore retain no insurance risk related to insurance and annuity products.

 

Investacorp and Triad financial advisors also may provide consultation and financial planning services including: estate planning, retirement and financial goal planning, educational funding, asset allocation and insurance needs analysis, as well as general analysis and planning. These financial advisors may prepare a written financial plan based upon the client’s stated goals, needs and investment profile.

 

Strategy for our Independent Brokerage and Advisory Services Business

 

Investacorp and Triad are focused on increasing their networks of registered representatives, revenues and client assets as described below.

 

 

 

Investacorp

 

Investacorp supports approximately 500 independent contractor registered representatives in providing products and services to their clients in approximately 326 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 15. Revenues generated from Investacorp’s business represented 48% of our total revenues in 2008.

 

Triad

 

Triad supports approximately 400 independent contractor registered representatives in providing products and services to their clients in approximately 233 branch offices located in 42 states. Approximately 15% of the registered representatives are located in Georgia. A significant number of Triad’s registered representatives also are located in Michigan. The number of registered representatives in these offices ranges from one to seven. Revenues generated from the business of Triad, acquired in August 2008, represented 18% of our total revenues in 2008.

 

Investacorp’s and Triad’s Brokerage Business

 

Each of Investacorp and Triad 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.

 

While an increasing number of clients are electing asset-based fee platforms rather than the traditional commission schedule, in most cases Investacorp and Triad charge commissions on variable annuity, mutual fund, equity and fixed income transactions. Investacorp and Triad primarily derive revenue from commissions from the sale of variable annuity products and mutual funds by their independent registered representatives. Investacorp and Triad continue to focus on growing asset-based fee platforms.

 

Investacorp’s Asset Management Business

 

Advisor Managed Accounts

 

IAS offers five account structures for advisor managed accounts, based on National Financial Services LLC (“NFS”) technologies, allowing its advisors and their clients to determine the best structure for their needs. These accounts consist of:

 

 

IAS currently offers other account structures for advisor managed accounts, based on the technologies of each of its three clearing firms, allowing its advisors and their clients to determine the best structure for their needs across multiple clearing options. The accounts in this series are titled Target. The services may include advisory, administrative and processing functions.

 

Third Party Programs

 

For advisors who prefer not to act as portfolio manager, IAS offers third party management options. These options employ managers who select diversified, fee-based asset management investment portfolios based on a client’s needs. The types of portfolios may include separately managed portfolios, multi-managed accounts, and mutual fund model portfolios. These portfolios may also include portfolio analytics, performance reporting and position-specific reporting.

 

Triad’s Asset Management Business

 

Advisor Managed Accounts

 

Triad offers four account structures for advisor managed accounts allowing its advisors and their clients to determine the best structure for their needs. These accounts consist of:

 

 

Third Party Managed Accounts

 

For advisors that prefer not to act as portfolio manager, Triad offers the following third party management options:

 

 

Administration, Operations, Securities Transactions Processing and Customer Accounts

 

Our broker-dealer subsidiaries do not hold funds or securities for their customers. Instead, Ladenburg and Triad use the services of NFS, and Investacorp uses the services of NFS, J.P. Morgan Clearing 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. SIPC coverage protects client accounts up to $500,000 per customer, including up to $100,000 for cash. Our clearing agents (except for J.P. Morgan Clearing Corp.) also maintain excess securities bonds, “Excess SIPC”, providing additional protection. 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, Investacorp’s and Triad’s brokerage activities. The clearing agent also lends funds to Ladenburg’s, Investacorp’s and Triad’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 agents for losses they may incur on these credit arrangements.

 

Seasonality and Cyclical Factors

 

Historically, our revenues were affected by U.S. vacation seasons, such as July, August and December. However, the growth of our independent brokerage and advisory services business has reduced the impact of seasonality on our results. Our revenues may be 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 results in fewer investment banking transactions and less investing by institutional and retail investors, 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 advisors, 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 financial, technical, marketing and other resources than we do. Also, many firms offer discount brokerage services 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. Ladenburg, Investacorp and Triad currently do not offer any online trading services to their customers, although they offer on-line account access to their customers to review their account balances and activity. Competition also 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.

 

There is significant competition for qualified personnel in the financial services industry. Our ability to compete effectively depends on attracting, retaining and motivating 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 MSRB. 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. Each of Investacorp and Triad is a registered broker-dealer with the SEC. Each of Ladenburg, Investacorp and Triad is licensed to conduct activities as a broker-dealer in all 50 states.

 

The regulations to which broker-dealers are subject cover all aspects of the securities industry, including:

 

 

 

As registered investment advisors under the Investment Advisers Act of 1940, as amended, Triad, LTAM and IAS are subject to the regulations under both the Investment Advisers Act and certain state securities laws and regulations. Such requirements relate to, among other things:

 

 

Additional legislation, changes in rules promulgated by the SEC and by self-regulatory bodies and 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, 2008, Ladenburg had net capital, as defined, of approximately $5,226,000, which exceeded its minimum capital requirement of $500,000 by $4,726,000. Each of Ladenburg, Investacorp and Triad 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 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, 2008, Investacorp had net capital of approximately $1,709,000, which was $1,417,000 in excess of its required net capital of $292,000. At December 31, 2008, Investacorp’s net capital ratio was 2.57 to 1.

 

Triad is also subject to SEC Rule 15c3-1. At December 31, 2008, Triad had net capital of approximately $775,000, which was $525,000 in excess of its required net capital of $250,000. At December 31, 2008, Triad’s net capital ratio was 2.92 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 to supplement the capital of our broker-dealers to facilitate underwriting transactions.

Also, funds invested as equity capital may not be withdrawn, nor may any unsecured advances or loans be made to any stockholder of a registered broker-dealer, if, after giving effect to the withdrawal, advance or loan and to any other withdrawal, advance or loan as well as to any scheduled payments of subordinated debt which are scheduled to occur within six months, the net capital of the broker-dealer would fall below 120% of the minimum dollar amount of net capital required or the ratio of aggregate indebtedness to net capital would exceed 10 to 1. Further, any funds invested in the form of subordinated debt generally must be invested for a minimum term of one year and repayment of such debt may be suspended if the broker-dealer fails to maintain certain minimum net capital levels. For example, scheduled payments of subordinated debt are suspended in the event that the ratio of aggregate indebtedness to net capital of the broker-dealer would exceed 12 to 1 or its net capital would be less than 120% of the minimum dollar amount of net capital required. The net capital rule also prohibits payments 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 percentage (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 is contractually restricted from declaring a dividend to us that would result in its retained earnings and paid-in capital falling below the lesser of $5,000,000 or the then outstanding principal balance of the $15,000,000 promissory note we issued to Investacorp’s former principal shareholder. At December 31, 2008, this note had an outstanding principal balance of $9,384,996.

 

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, 2008, Ladenburg had a total of approximately 176 employees, of which 108 are producers and 68 are other full time employees; Investacorp had approximately 500 non-employee registered representatives and 62 full time employees; and Triad had approximately 400 non-employee registered representatives and 41 full time employees. No employees are covered by a collective bargaining agreement. We consider our relationship with our employees and independent contractors to be good.

 

 

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

 

Our business has been materially adversely affected by the recent severe downturn in the financial markets.

 

Our business has been materially adversely affected by the recent severe downturn in the financial markets and economic conditions generally, both in the United States and globally. 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 have been adversely affected by the recent significant downturn in the securities markets. Additionally, the downturn in market conditions has led to a decline in assets under management and 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. Also, market uncertainty may cause clients to transfer assets out of funds, other products and brokerage accounts, thereby reducing revenues. To the extent that clients do not withdraw funds, they may invest in products that generate less fee income. The extent and duration of the current adverse market condition is not clear, and while these adverse financial and economic conditions persist, we may continue to incur a further decline in transactions and revenues that we receive from commissions, fees and spreads.

 

We have incurred, and may continue to incur, significant operating losses.

 

Although we had net income for the years ended December 31, 2007 and 2006, we incurred significant losses from operations during the year ended December 31, 2008 and during each of the four years ended December 31, 2005. We cannot assure you that we will be able to achieve 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, 2009, 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 will continue to suffer if the market for SPAC offerings does not resume.

 

The number of new SPAC offerings, as well as the equity capital markets generally, have declined significantly during the past year. A continuation of the significant downturn in the market for SPAC transactions will adversely affect our results of operations. Underwritings for SPAC transactions have been an important source of revenues for us since 2006. 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.

 

At December 31, 2008, we were owed deferred fees from SPAC underwritings that Ladenburg participated in of approximately $36,250,000, or $21,400,000 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 are experiencing significant difficulty in recent periods in obtaining shareholder approval of business combination transactions because, among other things, many of their shareholders hold common stock trading at a discount to the cash amount per share held in trust. Since August 2003, based upon publicly available information, approximately 161 SPACs have completed initial public offerings as of March 2, 2009. Of these companies, only 63 companies have consummated a business combination, while 17 other companies have announced they have entered into a definitive agreement for a business combination, but have not consummated such business combination and 36 companies have failed to complete business combinations and are being dissolved or 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.

 

Our quarterly operating results may fluctuate substantially due to the nature of our business and therefore we 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 impairs our ability to obtain financing and limits cash flow available for operations.

 

Our indebtedness:

 

 

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 depends on commissions and fees generated from the distribution of financial products.

 

An important portion of our revenues is generated from commissions and fees related to the distribution of financial products such as mutual funds and variable annuities by the Investacorp and Triad 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 materially adversely affect our revenues and results of operation.

 

Also, regulatory agencies and other industry participants have suggested 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.

 

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:

 

 

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 use 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 a positive return 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. Also, we maintain trading positions that can be adversely affected by the level of volatility in the financial markets, i.e., the degree to which trading prices fluctuate over a particular period, in a particular market, regardless of market levels.

 

We may 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 our broker-dealer subsidiaries. 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.

 

Our investment advisory clients generally may terminate their contracts 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.

 

Systems failures could significantly disrupt our business.

 

Our business depends on our and our clearing firms’ ability to process, on a daily basis, many 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 we maintain and 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. Also, 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.

 

A relatively small number of institutional customers generate a significant portion of our institutional trading revenue.

 

A relatively small number of our institutional investor customers generate a substantial portion of our institutional trading revenue. If any key customers depart or reduce their business with us and we fail to attract new customers that are capable of generating significant trading volumes, our business and results of operations will be adversely affected.

 

Our expenses may increase due to real estate commitments.

 

We have subleased office space in various locations to subtenants, some of whom are engaged in the financial services industry. Should any of the sub-tenants experience financial difficulty, or otherwise 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

 

We rely on clearing brokers and the termination of the agreements with any one of these clearing brokers could disrupt our business.

 

Each of Ladenburg and Triad 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, Investacorp and Triad depend on the operational capacity and ability of the clearing brokers for the orderly processing of transactions. By engaging the processing services of a clearing firm, each of Ladenburg, Investacorp and Triad 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. Also, 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, Investacorp and Triad 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, Investacorp and Triad 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:

 

 

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:

 

 

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.

 

Errors and omissions claims may negatively affect our business and results of operations.

 

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 Ladenburg subsidiary and its registered representatives do not carry errors and omissions insurance coverage and some of Investacorp’s 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:

 

 

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 about 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 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 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 MSRB. 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, Investacorp and Triad 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:

 

 

Compliance with many of these regulations 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 SEC approval, 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:

 

 

The imposition of any of these or other penalties could have a material adverse effect on our operating results and financial condition.

 

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 (“IRS”) regulations. Each of Investacorp and Triad classifies its registered representatives as independent contractors for all purposes, including employment tax and employee benefit purposes. We cannot assure you 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 and Triad’s registered representatives. The costs associated with potential changes, if any, 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.

 

Our broker-dealer subsidiaries are 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 CFTC Regulation 1.17. At December 31, 2008, each of our broker-dealer subsidiaries 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. The regulations also require that certain assets, such as a broker-dealer’s position in securities, be valued in a conservative manner to avoid over-inflation of the broker-dealer’s net capital. The net capital rule requires a broker-dealer to maintain a minimum level of net capital. The particular levels vary 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 net capital deficiency, FINRA may immediately restrict or suspend

some or all of the broker-dealer’s activities, including its ability to make markets. Our broker-dealer subsidiaries 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 and Triad’s registered representatives depends on the favorable tax treatment, including the tax-free build up of cash values and the tax-free nature of death benefits 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. Also, the IRS periodically 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 two acquisitions in 2008, one acquisition in 2007 and two acquisitions in 2006. 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 successfully complete 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 $0.36 and $2.59 per share for the 52 week period ended March 11, 2009. We expect that the market price of our common stock will continue to fluctuate.

 

The market price of our common stock may fluctuate in response to numerous factors, many of which are beyond our control. These factors include:

 

 

Many of these factors are beyond our control. Any one of these factors 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 such companies’ operating performance. These market fluctuations have adversely impacted the price of our common stock in the past and may do so in the future. Also, 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 divert our management’s time and attention. 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.

 

At March 11, 2009, our executive officers, directors and companies that these individuals are affiliated with beneficially owned approximately 45% our common stock. Accordingly, these individuals and entities can significantly influence most, if not all, of our corporate actions, including the election of directors and the appointment of officers. Also, 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, 2008, we had outstanding 171,715,514 shares of common stock and options and warrants to purchase a total of 28,862,415 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 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 do not anticipate paying cash dividends in the foreseeable future. Accordingly, you must rely on sales of your common stock after price appreciation, which may never occur, as the only way to realize any future gains on your investment. Net capital requirements imposed on our broker-dealer subsidiaries by the SEC and covenants contained in our outstanding debt agreements may also restrict our ability to pay future dividends.

 

 

Not applicable.

 

 

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 520 Madison Avenue, 9th Floor, New York, New York 10022, where it subleases approximately 15,400 square feet of office space under a lease that expires in September 2014. Ladenburg previously leased office space at 590 Madison Avenue, New York, New York and has subleased all of this space to various unrelated parties at various terms and lease periods. The lease, under which Ladenburg is still obligated as the main lessor, expires in June 2015. Ladenburg also operates branch offices located in California, Illinois, Florida, New Jersey and New York.

 

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.

 

Triad’s principal executive offices are located at 5185 Peachtree Parkway, Suite 280 Norcross, Georgia, 30092, where it leases approximately 11,300 square feet of office space under a lease that expires in June 2012. Triad’s independent registered representatives are responsible for the leases for office space they occupy.

 

 

The information under the heading “Litigation and Regulatory Matters” contained in Note 12 to our consolidated financial statements included in Part II, Item 8 of this annual report on Form 10-K is incorporated by reference in this Item 3.

 

 

None.

 

 

Our common stock trades on the NYSE Amex under the symbol “LTS.” The following table sets forth the high and low sales prices of our common stock for the periods specified:

 

 

Holders

 

At March 11, 2009, there were approximately 4,100 record holders of our common stock.

 

Dividends

 

We have never paid or declared any dividends on our common stock. The payment of future dividends, if any, will be at our board of director’s discretion after taking into account our financial condition, operating results, anticipated cash needs and any other factors that our board of directors may deem relevant. The net capital requirements imposed on our broker-dealer subsidiaries by the SEC and covenants contained in our outstanding debt agreements also restrict our ability to pay dividends.

 

Recent Sales of Unregistered Securities

 

We did not effect the sale of any unregistered securities during the fourth quarter of 2008.

 

Issuer Purchases of Equity Securities

 

Our purchases of our common stock during the fourth quarter of 2008 were as follows:

 

 

 

 

 

The selected financial data set forth below is derived from our audited consolidated financial statements. You should read this selected financial data together 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:

 

 

 

 

 

Overview

 

We are engaged in investment banking, equity research, institutional sales and trading, independent brokerage and advisory services and asset management services through our principal subsidiaries, Ladenburg, Investacorp and Triad. 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 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, declined significantly during 2008. Since 2006, Ladenburg had lead or co-managed 40 SPAC offerings raising approximately $8,000,000, 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 completed during such time period. SPACs are experiencing significant difficulty in recent periods in obtaining shareholder approval of business combination transactions because, among other things, many of their shareholders hold common stock trading at a discount to the cash amount per share held in trust. During 2008, Ladenburg received deferred fees of $5,300 (included in investment

banking revenues) and incurred commissions and related expenses of $2,100. As of December 31, 2008, we had unrecorded potential deferred fees for our SPAC-related transactions of approximately $36,250, which, net of commissions and related expenses, amounted to approximately $21,400.

 

We have two operating segments which correspond to our Ladenburg subsidiary and our independent brokerage and advisory services business conducted by Investacorp and Triad.

 

Recent Developments

 

Difficult Market Conditions

 

During 2008 and continuing in the first quarter of 2009, the U.S. and global economies have deteriorated into a recession, which could be long-term. We, like other companies in the financial services sector, are exposed to volatility and trends in the general securities markets and the economy. The significant market downturn and poor economic conditions have reduced significantly investment banking, capital markets and retail and institutional client activity levels. It is difficult to predict when conditions will change. Given the difficult market and economic conditions, we have focused on reducing redundancies and unnecessary expense, including implementing headcount reductions. However, we also continue to seek to selectively upgrade our talent pool given the availability of experienced professionals.

 

Sale of American Stock Exchange and Boston Stock Exchange Membership Interests

 

On October 1, 2008, NYSE Euronext acquired the American Stock Exchange. In exchange for its American Stock Exchange membership, Ladenburg received 8,138 shares of NYSE Euronext stock valued at $328 resulting in a $214 gain in the fourth quarter of 2008. Ladenburg may receive additional amounts from the sale of this membership if NYSE Euronext sells the former American Stock Exchange headquarters building.

 

Ladenburg also owned a Boston Stock Exchange membership. On August 29, 2008, the Nasdaq OMX Group, Inc. acquired the Boston Stock Exchange. Ladenburg received a cash payment of $310 for its interest, resulting in a gain of $305 for the third quarter of 2008.

 

Triad Advisors Acquisition

 

On August 13, 2008, we acquired Triad by way of merger. We believe that the Triad acquisition significantly expands our presence in the independent broker dealer area, one of the fastest growing segments of the financial services industry.

 

All outstanding shares of Triad’s common stock were converted into an aggregate of $6,826 in cash (net of a post-closing adjustment of $674), 7,993,387 shares of our common stock subject to certain transfer restrictions valued at $10,427 and a $5,000 promissory note valued at $4,384 (the “Triad Note”). If Triad meets certain cumulative profit targets during the three-year period following completion of the merger, we will also pay to Triad’s former shareholders up to $7,500 in cash and up to 4,134,511 shares of common stock (“Additional Contingent Consideration”). We also pledged the stock of Triad to Triad’s former shareholders under a pledge agreement as security for the payment of the Triad Note. The Triad Note contains customary events of default, which if uncured, entitle the Triad Note holders to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the Triad Note. We are entitled to setoff for indemnification claims against the Triad Note and any Additional Contingent Consideration.

 

Punk, Ziegel Acquisition

 

On May 2, 2008, Punk, Ziegel & Company, L.P., a specialty investment bank based in New York City, was merged into Ladenburg for $2,700 in cash (including acquisition costs) plus 250,000 shares of our common stock valued at $435. As a result, Ladenburg offers Punk Ziegel’s full range of research, equity market making, corporate

finance, retail brokerage and asset management services focused on high growth sectors within the healthcare, healthcare technology, biotechnology and life sciences industries.

 

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”.

 

Option Grants

 

On October 31, 2008, we granted ten-year stock options to purchase 600,000, 600,000, 600,000 and 300,000 shares of our common stock at an exercise price of $1.58 per share to Dr. Phillip Frost, Richard Lampen, Mark Zeitchick and Howard Lorber, respectively. Dr. Frost and Mr. Lorber serve as directors of our company and Messrs. Lampen and Zeitchick serve as executive officers and directors of our company. The options vest over four years and the exercise price was 25% in excess of the fair value ($1.26) of our common stock on the grant date, subject to earlier vesting upon the recipient’s death or disability or if we undergo a change of control.

 

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.  Our broker-dealer subsidiaries do not carry accounts for customers or perform custodial functions related to customers’ securities. Each of Ladenburg, Investacorp and Triad 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. Also, 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 $74, $58 and $18 for the years ended December 31, 2008, 2007 and 2006, respectively.

 

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 $460 at December 31, 2008 and $768 at December 31, 2007 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. The adoption of SFAS No. 157 did not have a material impact on our consolidated 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 temporary differences between the tax basis and book basis of our assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax amounts as of December 31, 2008, which consist principally of the tax benefit of net operating loss carryforwards and compensation charges related to equity instruments, amount to $31,754. After consideration of all the evidence, both positive and negative, especially the fact we sustained a cumulative pre-tax loss for the periods 2006 through 2008, we have determined that a valuation allowance at December 31, 2008 was necessary to fully offset the deferred tax assets based on the likelihood of future realization. At December 31, 2008, we had net operating loss carryforwards of approximately $53,500, 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 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 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), Triad (since August 13, 2008) and our other wholly-owned subsidiaries.

 

 

 

 

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, decreased $27,896 in 2008 compared to 2007 and increased $18,181 in 2007 compared to 2006.

 

As a result of the Investacorp acquisition on October 19, 2007, we have 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 independent brokerage and advisory services segment includes the broker-dealer and investment advisory services provided by Investacorp and Triad to its independent contractor registered representatives.

 

 

 

 

 

For the fiscal year ended December 31, 2008, we had a net loss of $20,263 compared to net income of $9,391 for the fiscal year ended December 31, 2007. Net loss for 2008 included $6,265 of non-cash compensation expense and was reduced by a $519 gain on the sale of exchange memberships. Net income for 2007 was reduced by a $1,833 loss on extinguishment of debt and $6,694 of non-cash compensation expense.

 

Our total revenues for 2008 increased $25,144 (26%) from 2007, primarily as a result of increased commissions and fees of $65,657 generated by Investacorp and Triad, offset by decreased investment banking revenue of $40,687. 2008 revenues include $58,000 of revenues from Investacorp and $21,190 of revenues from Triad from the date of acquisition (August 13, 2008). 2007 revenue did not include Triad and only included Investacorp revenue of $12,191 from October 19, 2007 to year end.

 

Excluding non-cash compensation expense of $6,265 in 2008 and $6,694 in 2007 and loss on extinguishment of debt of $1,833 in 2007, our expenses increased in 2008 by $56,554 (73%) from 2007 primarily as a result of an increase in commissions and fees of $51,994 primarily from Investacorp and Triad, an increase in interest expense of $2,230, an increase in professional services of $2,032, an increase in brokerage, communication and clearance fees of $2,011, an increase in rent and occupancy of $1,915, an increase in depreciation and amortization of $1,801, and an increase in other expenses of $1,111, offset by a decrease in compensation and benefits of $6,540. The 2008 expenses included $20,858 of expenses attributable to Triad’s operations commencing August 13, 2008 and the 2008 and 2007 periods included expenses for Investacorp of $55,976 and $11,246, respectively, attributable to Investacorp’s operations commencing with its acquisition on October 19, 2007. We expect 2009 expenses to increase from 2008 levels primarily due to commissions and fees expense for Triad, which in 2009 will reflect the full year period.

 

The $40,687 (73%) decrease in 2008 investment banking revenue was primarily due to unfavorable market conditions, a decrease in the number of SPAC offerings in which Ladenburg participated and a decrease in the number of completed SPAC business combinations. Ladenburg led or co-managed five SPAC offerings in 2008 compared to 29 offerings in 2007. This reduction in the number of new SPAC offerings caused a $35,796 decline in revenues in 2008. The reduction in the number of completed SPAC business combinations resulted in a $4,420 decrease in investment banking revenue. Revenues from advisory services and private placement transaction fees decreased $471 from the prior year period. Due to current market conditions, we expect similar trends in investment banking revenue for at least the first quarter of 2009.

 

The $65,657 (205%) increase in commissions and fees revenue in 2008 as compared to 2007 is attributable to an additional $63,101 from the operations of Triad and Investacorp and an increase in the number of institutional sales representatives at Ladenburg.

The $307 (10%) decrease in asset management revenue in 2008 as compared to 2007 was primarily due to unfavorable market conditions resulting in decreased assets under management. If current market conditions continue, we expect that asset management revenue will decrease. Revenues associated with Triad and Investacorp client assets are included in commissions and fees revenue, rather than asset management revenue, which relates to Ladenburg and LTAM.

 

The $2,987 (1,190%) decrease in principal transactions revenue in 2008 as compared to 2007 was primarily due to unfavorable market conditions, partially offset by realized gains in sales of Ladenburg’s Boston Stock Exchange and American Stock Exchange memberships.

 

The $1,004 (34%) increase in interest and dividends in 2008 as compared to 2007 is primarily attributable to the addition of Investacorp and Triad, which combined had an increase of $1,343 in interest and dividends. Ladenburg interest and dividends decreased due to lower interest rates.

 

The $2,464 (111%) increase in other income in 2008 as compared to 2007 is primarily attributable to the addition of Investacorp and Triad which together contributed $3,669 and $804 in 2008 and 2007, respectively. Ladenburg’s other income decreased $397, primarily due to a decrease of $294 in transaction fee rebates.

 

The $6,540 (13%) decrease in compensation and benefits expense in 2008 as compared to 2007 was primarily due to a $18,092 decrease in producers’ compensation which is directly correlated with a decrease in Ladenburg’s revenue production, a $12,174 increase in salaries, bonuses, payroll taxes and employee benefits, and a $622 decrease in amortization of cash held in escrow as security for obligations under a prior acquisition agreement. The increase in salaries, bonuses and benefits resulted from an increase in the average headcount for salaried Ladenburg employees primarily resulting from the Punk Ziegel acquisition, and an increase of $6,807 for Investacorp’s and Triad’s employees in the 2008 period. During the fourth quarter of 2008 and the first quarter of 2009, Ladenburg reduced the size of its workforce. We expect this workforce reduction will result in lower compensation and benefits expense in 2009.

 

The $429 (6%) decrease in non-cash compensation expense in 2008 as compared to 2007 is primarily due to a decrease of $3,162 for the amortization of unearned compensation for our warrants and common stock held in escrow for the principal shareholders of Capitalink which was amortized over 15 months beginning on October 18, 2006, the date of acquisition, and a decrease of $90 for the amortization of unearned compensation from stock issued to employees in 2005 at below market prices, partially offset by increased compensation expense of $2,823 attributable to option grants to employees, directors and consultants (including $1,619 to Investacorp employees).

 

The $2,011 (51%) increase in brokerage, communication and clearance fees expense is primarily attributable to increased institutional trading and the addition of Investacorp and Triad expense of $1,562.

 

The $1,915 (147%) increase in rent and occupancy, net of sublease revenue in 2008 as compared to 2007 is primarily attributed to an increase of $1,371 for Ladenburg’s additional leased property and Investacorp and Triad expense of $551.

 

The $2,032 (52%) increase in professional services expense during 2008 is primarily due to an increase of $1,569 in legal, $414 for audit, tax and 404 compliance and $49 in consulting fees and corporate development activities. We expect similar levels of professional services expense for the near future.

 

The $2,230 (97%) increase in interest expense in 2008 as compared to 2007 is a result of borrowings under our credit facility which we entered into 2007 and promissory notes issued in connection with the Investacorp and Triad acquisitions. An approximate $35,000 average balance was outstanding for the 2008 period, as compared with an average debt outstanding of $6,000 for the 2007 period. We expect interest expense to continue at an increased level in future periods due to our outstanding debt.

 

The $1,801 (121%) increase in depreciation and amortization expense is primarily attributable to the addition of Triad and Investacorp expense of $1,524 and the additional expense related to Punk Ziegel.

 

The $1,111 (17%) increase in other expense in 2008 as compared to 2007 is primarily attributable to the addition of Investacorp for the full year in 2008 and Triad expense of $2,381, partially offset by a decrease of $1,136 in Ladenburg’s bad debt and settlement expense.

We incurred income tax expense of $1,019 in 2008 as compared to $513 in 2007. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at December 31, 2008 was necessary to fully offset the deferred tax assets based on the likelihood of future realization. Our current deferred income tax liabilities increased by approximately $780 during 2008 due to goodwill amortization for tax purposes. The income tax rates for the 2008 and 2007 periods do not bear a customary relationship to effective tax rates primarily as a result of the increase in the valuation allowance in the 2008 period and recognized tax benefits from net operating loss carryforwards from prior years utilized to offset taxable income in the 2007 and 2006 periods.

 

 

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 Ladenburg’s 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 revenues in 2007 as compared to 2006 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 in 2007 as compared to 2006 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 in 2007 as compared to 2006 was primarily the result of an increase in assets under management.

 

The $22,183 (83%) increase in compensation and benefits expense in 2007 as compared to 2006 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. 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 in 2007 as compared to 2006 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 in 2007 as compared to 2006 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 in 2007 as compared to 2006 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.

 

Liquidity and Capital Resources

 

Approximately 26% of our total assets at December 31, 2008 consisted of cash and cash equivalents, securities owned and receivables from clearing brokers and other broker-dealers, all of which fluctuate, depending upon the levels of customer business and trading activity. Receivables from broker-dealers, which are primarily from clearing brokers, turn over rapidly. As a securities dealer, our broker-dealer subsidiaries 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, Investacorp and Triad is subject to the SEC’s net capital rules. Ladenburg is also subject to the CFTC’s net capital rules. Therefore, they are subject to certain restrictions on the use of capital and their related liquidity. At December 31, 2008, Ladenburg’s regulatory net capital, as defined, of $5,226, exceeded minimum

capital requirements of $500, by $4,726. At December 31, 2008, Investacorp’s regulatory net capital, as defined, of $1,709, exceeded minimum capital requirements of $292, by $1,417. At December 31, 2008, Triad’s regulatory net capital, as defined, of $775, exceeded minimum net capital requirements of $525. Failure to maintain the required net capital may subject Ladenburg, Investacorp and Triad 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, Investacorp and Triad 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 promissory note issued to Investacorp’s former principal shareholder and $5,000. At December 31, 2008, the outstanding principal balance of the promissory note issued to Investacorp’s former principal shareholder was $9,385.

 

Each of Ladenburg, Investacorp and Triad, 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. Also, if Ladenburg, Investacorp or Triad maintains a short position in certain securities, it is exposed to future off-balance-sheet market risk, since its ultimate obligation may exceed the amount recognized in the financial statements.

 

Our primary sources of liquidity include our cash flow from operations, the sale of our securities and other financing activities, including borrowings under our $30,000 revolving credit agreement. We believe that we have sufficient funds from operations and, to the extent necessary, from borrowings under our revolving credit agreement, to fund our ongoing operating requirements through at least December 31, 2009.

 

Net cash provided by operating activities for 2008 was $23,765 as compared to $2,860 used in the 2007 period. The increase in net cash provided by operating activities was primarily due to a decrease in receivables from clearing brokers of $24,562 in 2008 compared to an increase of $9,749 in 2007, a decrease in receivables from other broker-dealers of $15,511 in 2008 compared to an increase of $9,559 in 2007, a decrease in securities sold, but not yet purchased of $865 in 2008 compared to a decrease of $1,096 in 2007, a decrease in accrued compensation of $3,876 in 2008 compared to an increase of 2,929 in 2007, net of net income and adjustments to reconcile net income of ($8,319) in 2008 as compared to $20,513 in 2007.

 

Net cash used in investing activities for the year ended December 31, 2008 was $8,259 compared to $24,393 for 2007. These investing activities relate principally to the acquisition of Investacorp, Triad and Punk Ziegel.

 

Net cash flows used in financing activities amounted to $17,480 for the year ended December 31, 2008 compared to net cash flows provided by financing activities of $28,865 in 2007. Cash flows used in financing activities in 2008 resulted from loan repayments of $17,232 and $1,060 used to repurchase shares for retirement under our stock repurchase program. Cash provided by financing activities for the year ended December 31, 2007, resulted primarily from borrowings of $30,000 under our $30,000 credit agreement to finance the Investacorp acquisition.

 

At December 31, 2008, we were obligated under several non-cancelable lease agreements for office space, which provide for future minimum lease payments aggregating approximately $39,178 through 2015, exclusive of escalation charges. We have subleased vacant space under subleases which entitle us to receive rents aggregating approximately $23,575 through such date.

 

In connection with the Investacorp acquisition, we entered into the $30,000 credit agreement and issued a $15,000 promissory note to Investacorp’s former principal shareholder. During 2008, we repaid $12,000 of the $30,000 of outstanding borrowings under the $30,000 credit agreement. Under the revolving credit facility, we may prepay outstanding amounts without penalties, and reborrow amounts up to the credit limit, prior to the October 19,

2012 maturity date. The $15,000 promissory note bears interest at 4.11% per annum and is payable in 36 monthly installments. At December 31, 2008, the outstanding balance of this note was $9,759.

 

In connection with the Triad acquisition, we issued a $5,000 promissory note to Triad’s former shareholders. The note bears interest at a rate of 2.51% per annum and is payable quarterly. The outstanding balance of this note at December 31, 2008 was $4,772.

 

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 debt extinguishment 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. The repurchase program is being funded using approximately 15% of our EBITDA, as adjusted. As of December 31, 2008, 916,424 shares had been repurchased for $1,673 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. We also paid the lender a commitment fee of $420.

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

The table below summarizes information about our contractual obligations as of December 31, 2008 and the effects these obligations are expected to have on our liquidity and cash flow in the future years.

 

 

 

 

We have subleased office space in various locations to subtenants, some of whom are engaged in the financial services industry. Should any of the sub-tenants experience financial difficulty, or otherwise not pay their rent for an extended period of time, it may have a material adverse effect on our results of operations.

 

Market Risk

 

Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest and currency exchange rates, equity and commodity prices, changes in the implied volatility of interest rates, foreign exchange rates, equity and commodity prices and also changes in the credit ratings of either the issuer or its related country of origin. Market risk is inherent to both derivative and non-derivative financial instruments, and accordingly, the scope of our market risk management procedures extends beyond derivatives to include all market risk sensitive financial instruments.

 

Current and proposed underwriting, corporate finance, merchant banking and other commitments are subject to due diligence reviews by our senior management, as well as professionals in the appropriate business and support units involved. Credit risk related to various financing activities is reduced by the industry practice of obtaining and maintaining collateral. We monitor our exposure to counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits.

 

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.

 

 

The information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk” is incorporated herein by reference.

 

 

See the Consolidated Financial Statements and Notes thereto, together with the report thereon of Eisner LLP dated March 13, 2009, beginning on page F-1 of this report.

 

 

None.

 

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 SEC’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 our 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 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 Triad in August 2008. We have excluded Triad from the scope of our annual report on internal control over financial reporting as of December 31, 2008. These operations represent approximately 23% of our total assets at December 31, 2008 and approximately 18% of our revenues for the year ended December 31, 2008. Triad’s net income represented approximately 1% of our net loss for the year ended December 31, 2008.

 

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, 2008.

 

Our internal control over financial reporting as of December 31, 2008 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, 2008, 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.

 

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 Triad Advisors, Inc. and subsidiaries (“Triad”) because they were acquired by the Company in August 2008. Triad is included in the 2008 consolidated financial statements and constituted $23,190,000 of total assets as of December 31, 2008 and $21,190,441 of total revenues and $332,000 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, 2008, 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, 2008 and 2007, 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, 2008, and our report dated March 13, 2009 expressed an unqualified opinion thereon.

 

/s/ Eisner LLP

New York, New York

March 13, 2009

 

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.

 

 

None.

 

 

This information will be contained in our definitive proxy statement for our 2009 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, and incorporated herein by reference.

 

 

This information will be contained in our proxy statement and incorporated herein by reference.

 

 

This information will be contained in our proxy statement and incorporated herein by reference.

 

 

This information will be contained in our proxy statement and incorporated herein by reference.

 

 

This information will be contained in our proxy statement and incorporated herein by reference.

 

 

(a)(1): Index to 2008 Consolidated Financial Statements

 

The consolidated financial statements and the notes thereto, together with the report thereon of Eisner LLP dated March 13, 2009, 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 exhibits are filed as part of this annual report on Form 10-K.

 

EXHIBIT INDEX

 

 

 

 

 

 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

LADENBURG THALMANN FINANCIAL SERVICES INC.

(Registrant)

 

Dated: March 16, 2009

 

Name:     Brett H. Kaufman

 

POWER OF ATTORNEY

 

The undersigned directors and officers of Ladenburg Thalmann Financial Services Inc. hereby constitute and appoint Brett H. Kaufman, Richard J. Lampen and Mark Zeitchick, and each of them, with full power to act without the other and with full power of substitution and resubstitution, our true and lawful attorneys-in-fact with full power to execute in our name and behalf in the capacities indicated below, this annual report on Form 10-K and any and all amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and hereby ratify and confirm all that such attorneys-in-fact, or any of them, or their substitutes shall lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 16, 2009.

 

LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008
ITEMS 8 and 15(a) (1) AND (2)

 

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:

 

 

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, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

 

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, 2008, 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, 2009 expressed an unqualified opinion thereon.

 

/s/ Eisner LLP

New York, New York

March 13, 2009