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, 2012
Commission File Number 1-15799
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Exact Name Of Registrant As Specified In Its Charter)
Florida
(State or other jurisdiction of
incorporation or organization)
4400 Biscayne Boulevard, 12th Floor
Miami, Florida
(Address of principal executive offices)
65-0701248
(I.R.S. Employer
Identification Number)
33137
(Zip Code)
(212) 409-2000
(Registrant’s telephone number, including area code)
Title of each class
Common stock, par value $.0001 per share
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which registered
NYSE MKT
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 whether the registrant has submitted electronically and posted on it’s corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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.
Large accelerated filer o
Smaller reporting company o
Accelerated filer þ
Non-accelerated filer o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of June 30, 2012 (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 MKT on that date) held by non-affiliates of the
registrant was approximately $183,664,661.
As of March 1, 2013, there were 183,478,872 shares of the registrant’s common stock outstanding.
Documents Incorporated by Reference:
Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K is incorporated by reference from the definitive Proxy
Statement for the 2013 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.
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
Form 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
Page
1
13
24
24
24
24
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
25
Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Statements and Supplementary Data
Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
26
27
40
40
40
40
42
43
43
43
43
43
44
48
i
TABLE OF CONTENTS
ITEM 1. BUSINESS.
General
PART I
We are engaged in independent brokerage and advisory services, investment banking, equity research, institutional sales and
trading, asset management services and trust services through our principal subsidiaries, Securities America, Inc. (collectively with
related companies, “Securities America”), Triad Advisors, Inc. (“Triad”), Investacorp, Inc. (collectively with related companies,
“Investacorp”), Ladenburg Thalmann & Co. Inc. (“Ladenburg”), Ladenburg Thalmann Asset Management Inc. (“LTAM”) and
Premier Trust, Inc. (“Premier Trust”). We are committed to establishing a significant presence in the financial services industry by
meeting the varying investment needs of our clients.
Through our acquisitions of Securities America in November 2011, Triad in August 2008 and Investacorp in October 2007, we
have established a leadership position in the independent broker-dealer industry. During the past decade, this has been one of the
fastest growing segments of the financial services industry. With approximately 2,700 financial advisors located in 50 states, we have
become one of the approximately 10 largest independent broker-dealer networks. We believe that we have the opportunity through
acquisitions, recruiting and internal growth to continue expanding our market share in this segment over the next several years. Since
2007, our plan has been to marry the more stable and recurring revenue and cash flows of the independent broker-dealer business
with Ladenburg’s traditional investment banking, capital markets, institutional, sales and trading and related businesses. Ladenburg’s
traditional businesses are generally more volatile and subject to the cycles of the capital markets than our independent broker-dealer
subsidiaries, but historically have enjoyed strong operating margins in good market conditions. Our goal has been to build sufficient
scale in our independent brokerage business, with the accompanying more steady cash flows it can produce, so regardless of capital
market conditions, we as a firm can generate significant operating cash to create value for our shareholders.
The appealing growth profile of the independent brokerage and advisory business has been a key factor in setting our strategic
path. The independent brokerage channel has expanded significantly over the past decade, driven in large part by demographic trends,
including the graying of America, the retirement of the baby boomer generation and the rollover of retirement assets from corporate
401(k) and other pension plans to individual IRA accounts. The increasing responsibility of individuals to plan for their own
retirement has created demand for the financial advice provided by financial advisors in the independent channel, who are not tied to a
particular firm’s proprietary products. These developments have been occurring against a backdrop of the steady migration of client
assets and advisors from the wirehouse, insurance and bank channels to the independent channel.
We operate each of our independent broker-dealers separately under their own management teams, which reflects our recognition
that each firm has its own unique culture and strengths. We believe this is an important part of the glue that helps bind the advisors to
the firm. At the same time, we have taken advantage of the scale we have created across the multiple firms by spreading costs in areas
that are not directly visible to the advisors and their clients, such as technology, accounting and other back office functions. We
believe the Securities America acquisition provided opportunities that add value to our existing businesses. We offer Securities
America’s industry best practice development and coaching tools to our other advisors, while at a firm-wide level we have benefitted
from adding its management expertise and systems. In turn, Securities America’s advisors have gained additional resources to
enhance their practices, including access to Ladenburg’s proprietary research, investment banking and capital markets services, fixed
income trading and syndicate product, Premier Trust’s trust services and LTAM’s wealth management solutions.
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.
LTAM is a registered investment advisor. LTAM offers various asset management products utilized by Ladenburg clients as well
as clients of our independent financial advisors.
1
TABLE OF CONTENTS
Premier Trust, a Nevada trust company, provides trust administration of personal and retirement accounts, estate and financial
planning, wealth management and custody services. We acquired Premier Trust in September 2010 to provide our network of
independent financial advisors with access to a broad array of trust services. This was another important strategic step in our efforts
to meaningfully differentiate our independent broker-dealer platform by the breadth of the products and services we offer to our
advisors.
Each of Ladenburg, Securities America, 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”). Securities America is also subject to
regulation by the Commodities Futures Trading Commission (“CFTC”) and the National Futures Association. Premier Trust is
subject to regulation by the Nevada Department of Business and Industry Financial Institutions Division.
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, the incurrence of material amounts of debt, which may increase our leverage, or the issuance of significant amounts of our
equity securities, which may be dilutive to our existing shareholders. We cannot assure you that we will be able to complete any such
potential acquisitions on acceptable terms or at all or, if we do, that any acquired business will be profitable. We also may not be able
to integrate successfully acquired businesses into our existing business and operations.
We were incorporated under the laws of the State of Florida in February 1996.
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 of
1934, as amended (the “Exchange Act”), and any amendments to those filings, are available, free of charge, on our Web site,
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 Web site, 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: Secretary.
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 views expressed in the forward-looking
statements 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 Item 7. “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.
Business Segments
We have two operating segments: our independent brokerage and advisory services business segment, which includes Premier
Trust’s trust services, and the investment banking, sales and trading and asset management services and investment activities
conducted by Ladenburg and LTAM, which we refer to as the Ladenburg segment. Financial and other information by segment for
the years ended December 31, 2012, 2011 and 2010 is set forth in Note 18 to our consolidated financial statements included in this
report.
2
TABLE OF CONTENTS
Independent Brokerage and Advisory Services
Overview
Securities America, Investacorp and Triad are independent broker-dealers and registered investment advisors, whose independent
contractor financial advisors offer securities brokerage and advisory services to their clients, which may include packaged products
such as mutual funds, variable annuities and advisor managed accounts. Revenues generated by our independent brokerage and
advisory services segment represented approximately 92%, 84% and 78% of our total revenues for 2012, 2011 and 2010,
respectively.
We believe that the financial services industry is experiencing an increase in the percentage of retail client assets held at
independent broker-dealers and registered investment advisors as financial advisors are leaving large national and regional firms.
New independent financial advisors require 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. Also, financial
advisors at banks and credit unions often affiliate with independent broker-dealers. Securities America’s Financial Institutions
Division delivers a diverse selection of investment and insurance products, detailed, hands-on professional development, and a fully
integrated technology platform customized to meet the unique reporting needs of financial advisors located within banks and credit
unions.
A financial advisor who becomes affiliated with one of our independent broker-dealers generally 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, quotation systems, employee wages and benefits and general office supplies). The size of each branch office is
typically between one and 15 advisors, but may be substantially larger. All of a branch’s revenues from securities brokerage
transactions and from advisory services conducted through our broker-dealers accrue to our broker-dealers. Because an independent
financial advisor bears the responsibility for his or her operating expenses, the financial advisor receives a significant percentage of
the commissions or advisory fees he or she generates, typically at least 80%. This compares with a payout rate of approximately 30%
to 50% to financial advisors working in a traditional wirehouse brokerage setting where the brokerage firm bears substantially all of
the sales force costs, including providing employee benefits, office space, sales assistants, telephone service and supplies. The
independent brokerage model permits our independent broker-dealer subsidiaries to expand their revenue base and retail distribution
network of investment products and services 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.
Independent financial advisors 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 an independent broker-dealer and earn commissions and fees for these transactions and services.
These financial advisors have the ability to structure their own practices and to focus in different areas of the investment business,
subject to supervisory procedures as well as compliance with all applicable regulatory requirements.
Many independent 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 a broker-dealer, for which such broker-dealer earns either a commission or a fee.
Representatives may be permitted to conduct other approved businesses unrelated to their brokerage or advisory activities, such as
offering fixed insurance products and accounting, estate planning and tax services, among others.
3
TABLE OF CONTENTS
Each financial advisor is required to obtain and maintain in good standing each license required by the SEC and FINRA to
conduct the type of securities or advisory business in which he or she engages, and to register in the various states in which he or she
has customers. Each of our independent broker-dealers is responsible for supervising all of its financial advisors wherever they are
located. We can incur substantial liability from improper actions of any of Securities America’s, Investacorp’s or Triad’s financial
advisors.
Many of our independent financial advisors are also authorized agents of insurance companies. Our independent broker-dealers
process non-registered insurance business through subsidiaries or sister companies that 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.
Our independent 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
We are focused on increasing our independent broker-dealer networks of financial advisors, revenues and client assets as
described below.
•
Provide technological solutions to independent financial advisors and home-office employees. We believe that it is
imperative that our independent broker dealers possess state-of-the-art technology so their employees and independent
financial advisors can effectively transact, facilitate, measure and record business activity in a timely, accurate and efficient
manner. By continuing our commitment to provide a highly capable technology platform to process business, we believe our
independent broker-dealers can achieve economies of scale and potentially reduce the need to hire additional back-office
personnel.
• Assist financial advisors to expand their business. Our independent broker-dealers are aligned with their financial
advisors in seeking to increase their revenues and improve efficiency. Each of our broker-dealers undertakes initiatives to
assist their financial advisors with client recruitment, education, compliance and product support. Our practice management
programs speed our advisors' efforts to grow their businesses by providing customized coaching and consulting services,
study groups and conferences, educational workshops, publications and web resources and other productivity tools. Our
independent broker-dealers also focus on improving back-office support to allow financial advisors more time to focus on
serving their clients, rather than attending to administrative matters.
•
Build recurring revenue. We have recognized the trend toward increased investment advisory business and are focused on
providing fee-based investment advisory services, which may better suit certain clients. While these fee-based accounts
generate substantially lower first year revenue than accounts invested in most commission-based products, the recurring nature
of these fees provides a platform that generates recurring revenue.
• Recruit experienced financial professionals. Each of our independent broker-dealers actively recruits experienced financial
professionals. These efforts are supported by advertising, targeted direct mail and outbound telemarketing. Our independent
broker-dealers’ recruitment efforts are enhanced by their ability to serve a variety of independent advisor models, including
independent financial advisors, registered investment advisors and independent registered investment advisors.
• Acquire other independent brokerage firms. We may also pursue the acquisition of other independent brokerage firms and
groups of financial advisors. The ability to realize growth through acquisitions, however, will depend on the availability of
suitable candidates and our ability to successfully negotiate favorable terms. There can be no assurance that we will be able to
consummate any such acquisitions. Further, there are costs associated with the integration of new businesses and personnel,
which may be greater than anticipated.
4
TABLE OF CONTENTS
Brokerage Business
Each of our independent broker-dealers provides full support services to its financial advisors, including: access to stock, bond
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 advisory fee platforms rather than the traditional commission
schedule, our independent broker-dealers primarily derive their revenue from commissions charged on variable annuity, mutual fund,
equity and fixed income transactions.
Asset Management Business
Our independent broker-dealers offer various accounts, some of which are managed by our financial advisors, and others that are
managed by third parties. The advisor managed accounts offer various account structures, including fee-based and “wrap fee”
accounts. For financial advisors who prefer not to act as portfolio managers, third party management options are available. These
options employ managers who select diversified, fee-based asset management investment portfolios based on a client’s needs and risk
profile. The types of portfolios may include separately managed portfolios, multi-managed accounts, and mutual fund and exchange-
traded fund (“ETF”) model portfolios. These portfolios may also include portfolio analytics, performance reporting and position-
specific reporting.
Premier Trust
Founded in 2001, Premier Trust is a Nevada-chartered trust company headquartered in Las Vegas, Nevada, with more than $618
million in assets under administration at December 31, 2012. Premier Trust provides trust administration of personal and retirement
accounts, estate and financial planning, wealth management and custody services. Working in combination with a client’s legal and
other professional advisors, Premier Trust’s professionals assist with every aspect of planning, including income and estate taxes,
retirement, succession of the family business, transferring assets to future generations and asset protection.
Ladenburg
Ladenburg is a full-service broker-dealer that provides investment banking, sales and trading and equity research to its corporate
and institutional clients and high net-worth individuals.
Investment Banking Activities
Ladenburg's investment banking professionals provide corporate finance and strategic and financial advisory services to public
and private companies, primarily those companies with market capitalizations below $500 million, which we refer to as middle-
market companies. Ladenburg provides these middle-market companies with capital raising and strategic advisory services
throughout their growth cycles. Ladenburg offers its clients a high level of attention from senior personnel and has designed its
organizational structure so that the investment bankers who are responsible for securing and maintaining client relationships also
actively participate in providing all related transaction execution services to those clients. Ladenburg's 17 investment banking
professionals serve clients nationwide and worldwide from its offices in New York, New York, Houston, Texas and Miami, Florida.
5
TABLE OF CONTENTS
Corporate Finance
Ladenburg's corporate finance group provides capital origination services primarily to middle-market companies. Ladenburg's
investment bankers develop financing strategies, transaction structures and financing instruments for its corporate clients. Ladenburg
offers a broad range of financing options including underwritten public offerings, registered direct offerings, at-the-market offerings,
PIPEs (private investment in public equity) and other private placements. Ladenburg's ability to effectively structure offerings and to
identify likely buyers of such offerings makes it a valuable advisor to small and middle-market companies. Although the initial public
offering market may not be consistently favorable, we expect that Ladenburg will participate in follow-on offerings, registered direct
offerings, PIPEs and other private placements to generate corporate finance revenues. We believe there is a significant opportunity for
continued growth in the registered direct and PIPEs areas given issuers’ desire to identify and pursue faster and less costly financing
alternatives to traditional follow-on offerings and institutional investors’ continuing interest in these financing transactions. Further,
we believe the establishment of relationships with issuers through our capital raising efforts will lead to additional investment banking
services, including further capital raising, and other advisory services. In 2012, we participated in 89 underwritten offerings that
raised an aggregate of approximately $19 billion. In 2012, Ladenburg placed 13 registered direct and PIPE offerings, that raised an
aggregate of approximately $166 million for clients in the healthcare, biotechnology, energy and other industries.
Ladenburg seeks to capitalize on its distribution network by focusing on yield-oriented equities, which have been attractive to
both institutional and retail investors. The yield-oriented equity business has developed in recent years in response to the low interest
rate environment. Our analysts and bankers focus on three specific verticals: agency, mortgage and property real estate investment
trusts (REITs), business development companies (BDCs) and master limited partnerships (MLPs). Ladenburg has become a leader in
syndicating these products to institutional investors as well as other retail and independent firms. Since 2010, Ladenburg has
participated as a manager in 101 offerings of these products, which raised over $11.7 billion. Similarly, Ladenburg also has dedicated
investment bankers focused on the healthcare and biotechnology companies, as well as the energy and utilities sector.
Strategic and Financial Advisory Services
Ladenburg advises clients on a wide range of strategic and financial issues. When Ladenburg advises a company in the potential
acquisition of another company, business or assets, its services include evaluating potential acquisition targets, providing valuation
analyses, evaluating and proposing financial and strategic alternatives and rendering, if appropriate, fairness opinions. Ladenburg also
may provide advice regarding the timing, structure, financing and pricing of a proposed acquisition and may assist in negotiating and
closing the acquisition. Ladenburg's buy-side and sell-side mandates often require that it leverage its extensive relationships and
capital markets expertise. These mandates generally have a limited duration so Ladenburg seeks to develop new engagements from
existing and prior clients, as well as their legal and other advisors.
Ladenburg has extensive expertise in providing fairness opinions that often are necessary or requested in a variety of situations,
including mergers, acquisitions, restructurings, financings and privatizations. Ladenburg provides fairness opinions and analyses to
boards of directors, independent committees of boards of directors and shareholders. The firm also provides independent, third-party
advice in connection with mergers, acquisitions, leveraged buyouts and restructurings, going-private transactions and certain other
market activities.
Sales and Trading
Ladenburg’s private client services and institutional sales departments charge commissions to their individual and institutional
clients for executing securities trading orders.
Ladenburg’s 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.
6
TABLE OF CONTENTS
In 2012, Ladenburg added a fixed income trading desk. This trading desk works with advisors at our broker-dealer subsidiaries
to develop fixed income solutions for clients based on individualized client needs. We believe this strategic addition further
strengthens the value proposition of our broker-dealer platform and is a natural complement to Ladenburg’s efforts in the yield-
oriented equities space where many of the companies Ladenburg provides investment banking services to are also potential fixed
income issuers.
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 equity research features proprietary themes and actionable ideas about industries and companies that are not
widely evaluated by many other investment banks that do not have 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
We believe that 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 for small and mid-cap companies. 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 provides research coverage on
approximately 180 companies and closed-end funds, specializing in small- to mid-cap companies in the power and electric utilities,
energy exploration and production, sustainable infrastructure, biotechnology, personalized medicine, medical devices, specialty
pharmaceutical, healthcare services, medical technology and internet and software services industries; MLPs, BDCs and mortgage
and property REITs; and other companies on a special situations basis. Ladenburg’s research coverage may expand to additional
sectors in the future. Ladenburg provides its research on a fee basis to certain institutional accounts and makes it available to the
financial advisors at all of our broker-dealer subsidiaries.
Our research department:
•
•
•
•
reviews and analyzes general market conditions and industry groups;
issues written reports on companies;
furnishes information to retail and institutional customers; and
responds to inquires from customers and account executives.
Asset Management
Ladenburg Thalmann Asset Management
LTAM is a registered investment advisor offering various asset management products utilized by Ladenburg clients, as well as
clients of Securities America’s, Investacorp’s and Triad’s financial advisors. LTAM serves as our internal wealth management group
and plays an important role in supporting the growth of the advisory businesses at our independent firms.
7
TABLE OF CONTENTS
Ladenburg Asset Management Program
The Ladenburg Asset Management Program 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,
low minimum account size, risk analysis, customized investment policy statements and comprehensive performance reporting.
Investment Consulting Services
LTAM’s Investment Consulting Services (“ICS”) provides clients with access to professional money managers usually available
only 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, it is regularly reviewed in order to ensure that it represents a suitable solution.
Through ICS, LTAM services high net worth clients and institutions, such as universities, foundations and hospitals.
Ladenburg Thalmann Alternative Strategies Fund
LTAM has created a closed-end interval fund, the Ladenburg Thalmann Alternative Strategies Fund, that includes alternative
investment products and allows clients to access these investments with low minimums and without being required to be accredited
investors. LTAM’s mutual fund is comprised of a portfolio of alternative investments in more than ten asset classes, including,
among others, REITs, MLPs, managed futures and equipment leasing.
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.
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 and ETF’s 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 of, and participating in, enrollment and communication meetings; and
providing to the plan sponsor quarterly performance reports of the funds 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
customers to maintain control over the management of the account and choose from a diverse group of securities.
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 Ladenburg’s, Triad’s, Investacorp’s and Securities America’s registered investment
advisors.
Investment Activities
Ladenburg may from time to time seek to realize investment gains by purchasing, selling and holding securities for its own
account. 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. Also, 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.
8
TABLE OF CONTENTS
Administration, Operations, Securities Transactions Processing and Customer Accounts
Our broker-dealer subsidiaries do not hold funds or securities for their customers. Instead, each of Ladenburg, Triad and
Investacorp use the services of National Financial Services LLC (“NFS”), a Fidelity Investments® company, as its clearing agent on
a fully disclosed basis. Securities America uses the services of NFS and Pershing LLC, a subsidiary of the Bank of New York
Mellon Corporation, as its 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
$250,000 for cash. Each of NFS and Pershing also maintains 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 the brokerage activities of our
broker-dealer subsidiaries. The clearing agent also lends funds to customers of our broker-dealer subsidiaries 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 each clearing agent for losses it may incur on these credit
arrangements.
Seasonality and Cyclical Factors
Seasonality generally does not impact our results. Our revenues may be adversely affected by cyclical factors, such as financial
market downturns, low interest rates, as well as problems or recessions in the United States or global economies. These downturns
may cause investor concern, which results in fewer investment banking transactions, lower asset values 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 financial advisors. We compete directly with many national and regional full service financial services
firms, other independent broker-dealers, investment advisors, discount brokers, broker-dealer subsidiaries of major commercial bank
holding companies, insurance companies and other companies offering financial services in the United States, 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 financial planning, 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 retail brokerage
customers. Our broker-dealer subsidiaries currently do not offer any online trading services to their customers, although they offer
on-line account access so their customers can 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 financial advisors
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 financial advisors, investment bankers, trading professionals, portfolio
managers and other revenue-producing or specialized personnel.
9
TABLE OF CONTENTS
Government Regulation
The securities industry, including 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 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. 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. Each of
Securities America, Ladenburg, Investacorp and Triad is a registered broker-dealer with the SEC. Each of Securities America,
Ladenburg, Investacorp and Triad is licensed to conduct activities as a broker-dealer in all 50 states. Ladenburg is a member firm of
the NYSE.
The regulations to which broker-dealers are subject cover many aspects of the securities industry, including:
•
•
•
•
•
•
•
sales methods and supervision;
trading practices among broker-dealers;
use and safekeeping of customers’ funds and securities;
capital structure of securities firms;
record keeping;
conduct of directors, officers and employees; and
advertising, including regulations related to telephone solicitation.
As registered investment advisors under the Investment Advisers Act of 1940, as amended, our investment advisory subsidiaries
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:
•
•
•
•
•
limitations on the ability of investment advisors to charge clients performance-based or non-refundable fees;
record-keeping and reporting requirements;
disclosure requirements;
limitations on principal transactions between an advisor or its affiliates and advisory clients; and
general anti-fraud prohibitions.
Additionally, our investment advisory subsidiaries are subject to the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”), administered by the Employee Benefits Security Administration (“EBSA”) of the U.S. Department of Labor,
for accounts that are ERISA-covered pension plans. ERISA imposes certain duties on persons who are fiduciaries (as defined in
Section 3(21) of ERISA) and prohibits certain transactions involving ERISA plans and fiduciaries or other service providers to such
plans.
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 financial advisors. Premier Trust is subject to regulation by the Nevada Department of
Business and Industry Financial Institutions Division.
10
TABLE OF CONTENTS
The USA PATRIOT Act of 2001 (the “PATRIOT Act”) contains anti-money laundering and financial transparency laws and
mandates the implementation of various regulations applicable to broker-dealers and other financial services companies. Financial
institutions subject to the PATRIOT Act generally must have anti-money laundering procedures in place, implement specialized
employee training programs, designate an anti-money laundering compliance officer and are audited periodically by an independent
party to test the effectiveness of such compliance. We have established policies, procedures and systems designed to comply with
these regulations.
Regulation regarding privacy and data protection continues to increase worldwide and is generally being driven by the growth of
technology and related concerns about the rapid and widespread dissemination and use of information. To the extent applicable to us,
we must comply with these global, federal, and state information-related laws and regulations, including, for example, those in the
United States, such as the 1999 Gramm-Leach-Bliley Act, SEC Regulation S-P and the Fair Credit Reporting Act of 1970, as
amended.
Net Capital Requirements
Our registered broker-dealer subsidiaries are subject to the SEC’s Uniform Net Capital Rule 15c3-1, which we refer to as the Net
Capital Rule. The Net Capital Rule requires that broker-dealers maintain minimum net capital and 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, and may be calculated in one of two ways. In computing net capital, various adjustments are made to net worth which
exclude assets not readily convertible into cash. Also, the regulations require that certain assets, such as a broker-dealer’s position in
securities, be valued in a conservative manner to avoid inflation of the broker-dealer’s net capital.
Each of Ladenburg and Securities America has elected to compute its net capital under the alternative method allowed by the Net
Capital Rule. At December 31, 2012, Ladenburg had net capital of $4,358,000, which exceeded its minimum capital requirement of
$250,000, by $4,108,000 and Securities America had net capital of $7,941,000, which was $7,691,000 in excess of its required net
capital of $250,000.
Investacorp and Triad have elected to compute net capital using the Net Capital Rule's traditional method, which requires a ratio of
aggregate indebtedness to net capital that must not exceed 15 to 1. At December 31, 2012, Investacorp had net capital of $3,542,000,
which was $3,232,000 in excess of its required net capital of $310,000, and had a net capital ratio of 1.3 to 1. At December 31, 2012,
Triad had net capital of $3,214,000, which was $2,462,000 in excess of its required net capital of $752,000, and had a net capital ratio
of 3.5 to 1.
Ladenburg, Securities America, Investacorp and Triad claim exemptions from the provisions of the SEC’s Rule 15c3-3 (generally
relating to the physical possession and control of securities) pursuant to paragraph (k)(2)(ii) of such rule as they clear their customer
transactions through a correspondent broker on a fully disclosed basis.
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.
11
TABLE OF CONTENTS
Premier Trust, chartered by the state of Nevada, is subject to regulation by the Nevada Department of Business and Industry
Financial Institutions Division. Under Nevada law, Premier Trust must maintain minimum stockholder’s equity of at least
$1,000,000, including at least $250,000 in cash. At December 31, 2012, Premier Trust had stockholder’s equity of approximately
$1,448,000, including at least $250,000 in cash.
Failure to maintain the required net capital may subject a firm to fines, suspension or expulsion by FINRA, the SEC and other
regulatory bodies and ultimately may require its liquidation. During the fourth quarter of 2009, one of our broker-dealer subsidiaries
had a short-term net-capital deficiency and could face disciplinary action including a fine, a suspension of its operations and/or
rescission of revenues relating to the period of non-compliance. 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 our subsidiaries, which could limit our ability to pay dividends and repay debt.
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 brokers to supplement the capital of our
broker-dealers to facilitate underwriting transactions.
Financial Information about Geographic Areas
We are domiciled in the United States and substantially 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, 2012, we had 686 full-time employees. No employees are covered by a collective bargaining agreement. We
consider our relationship with our employees to be good.
12
TABLE OF CONTENTS
ITEM 1A. RISK FACTORS.
You should carefully consider all of the 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
Damage to our reputation could adversely impact our business.
Maintaining our reputation is critical to our our ability to attract and retain financial advisors, clients and employees. If we fail to
deal with, or appear to fail to deal with, various issues that may give rise to reputational risk, we could significantly harm our
business prospects. These issues include, but are not limited to, any of the risks discussed in this Item 1A, appropriately dealing with
legal and regulatory requirements, money-laundering, privacy, record keeping, sales and trading practices, failure to sell securities we
have underwritten at the anticipated price levels, and the proper identification of the legal, reputational, credit, liquidity, and market
risks inherent in financial products. A failure to deliver appropriate standards of service and quality, or a failure or perceived failure to
treat clients fairly, can result in customer dissatisfaction, litigation and heightened regulatory scrutiny, all of which can lead to lost
revenue, higher operating costs and harm to our reputation. Further, negative publicity regarding us, whether or not true, may also
harm our business.
Changing conditions in financial markets and the economy could adversely affect our financial condition and results of
operation.
Our financial results have been adversely affected by the turmoil in the financial markets, such as during the economic downturn
that particularly characterized the period commencing in late 2008 through 2010, and the economy in general. As a financial services
firm, changes in the financial markets or economic conditions in the United States and elsewhere in the world could materially
adversely affect our business in many ways, including the following:
•
•
•
•
•
•
•
a market downturn could lead to a decline in the volume of transactions executed for customers and, therefore, to a decline in
the revenues we receive from commissions and spreads;
low interest rates adversely impact interest sharing revenues received from our clearing firms and other cash sweep programs;
adverse changes in the market could lead to a reduction in revenues from asset management fees. Even in the absence of a
market downturn, below-market investment performance by portfolio managers could reduce asset management revenues and
assets under management and result in reputational damage that might make it more difficult to attract new investors;
unfavorable financial or economic conditions could reduce the number and size of transactions in which we provide
underwriting, financial advisory and other services. Our investment banking revenues, in the form of financial advisory and
underwriting or placement fees, are directly related to the number and size of the transactions in which we participate and
therefore could be adversely affected by unfavorable financial or economic conditions;
increases in credit spreads, as well as limitations on the availability of credit, can affect our ability to borrow on a secured or
unsecured basis, which may adversely affect our liquidity and results of operations;
adverse changes in the market could lead to losses from principal transactions. To the extent that we own assets, i.e., have long
positions, a downturn in the market 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, an upturn in the market could expose us to
potentially unlimited losses as we attempt to cover our short positions by acquiring assets in a rising market; and
new or increased taxes on compensation payments such as bonuses or securities transactions may adversely affect our
financial results.
13
TABLE OF CONTENTS
We have incurred, and may continue to incur, significant losses.
We incurred significant losses before income taxes for each of the years in the five-year period ended December 31, 2012. We
cannot assure you that we will be able to achieve 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, 2013,
if we are unable to attain and sustain profitability, it would have a material adverse effect on our business and results of operations.
We have a high degree of financial leverage which limits cash flow available for operations and may impair our ability to obtain
additional financing.
Our total debt, as of December 31, 2012, was approximately $205 million. Our substantial amount of indebtedness:
•
•
•
requires us to dedicate a substantial portion of cash flows from operations to the payment of debt service, resulting in less cash
available for operations and other purposes;
limits our ability to obtain additional financing for working capital, regulatory capital requirements, acquisitions or general
corporate purposes; and
increases our vulnerability to downturns in our business or in general economic conditions.
Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance. Also, there can be
no assurance that we will satisfy the requirements for forgiveness of our forgivable loans from our principal clearing firm. 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 sales of equity or debt securities in public or
private transactions may not be available to provide sufficient net proceeds, to meet these obligations, which would have a material
adverse effect on our business, profitability and results of operations.
We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our
subsidiaries to meet our debt service and other obligations.
We have no direct operations and derive all of our cash flow from our subsidiaries. Because we conduct our operations through
our subsidiaries, we depend on those entities for dividends and other payments or distributions to meet any existing or future debt
service and other obligations. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason
could limit or impair their ability to pay dividends or other distributions to us. Also, FINRA regulations restrict dividends in excess
of 10% of a member firm’s excess net capital without FINRA’s prior approval. Compliance with this regulation may impede our
ability to receive dividends from our broker-dealer subsidiaries.
We face significant competition for financial advisors and professional employees.
From time to time, financial advisors and individuals we employ may choose to leave our company to pursue other opportunities.
We have experienced losses of financial advisors and 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 financial advisors and key personnel will not
occur again in the future. We expend significant resources in recruiting, training and retaining our financial advisors. The loss of a
financial advisor or a trading or investment banking professional, particularly a senior professional with a broad range of contacts in
an industry, or the failure to recruit productive financial advisors could materially and adversely affect our results of operations.
Misconduct by our employees and independent financial advisors is difficult to detect and deter and could harm our business,
results of operations or financial condition.
Misconduct by our employees and independent financial advisors could result in violations of law by us, regulatory sanctions
and/or serious reputational or financial harm.
Misconduct could include:
•
recommending transactions that are not suitable for the client or in the client’s best interests;
14
TABLE OF CONTENTS
•
•
•
•
•
•
engaging in fraudulent or otherwise improper activity;
binding us to transactions that exceed authorized limits;
hiding unauthorized or unsuccessful activities, resulting in unknown and unmanaged risks or losses;
improperly using or disclosing confidential information;
engaging in unauthorized or excessive trading to the detriment of customers; or
otherwise not complying with laws or our control procedures.
We cannot always deter misconduct by our employees and independent financial advisors, and the precautions we take to prevent
and detect this activity may not be effective in all cases. Prevention and detection among our independent financial advisors, who are
not employees of our company and tend to be located in small, decentralized offices, present additional challenges. Misconduct by our
employees and independent financial advisors may have a material adverse effect on our business and 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 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. Also, because our independent
financial advisors work in small, decentralized offices, additional risk management challenges may exist.
We seek to monitor and control our risk exposure through a variety of separate but complementary financial, credit, operational
and legal reporting systems. 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.
Poor performance of the investment products and services recommended or sold to our clients may have a material adverse effect
on our business.
Clients of our advisors control their assets maintained with us. 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.
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 our senior executives and employees, including the management 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.
15
TABLE OF CONTENTS
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 and fines 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, cyber attacks,
unauthorized access, viruses, 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 default by any of Ladenburg’s subtenants may have a material adverse effect on our liquidity, cash flows, and results of
operations.
Ladenburg has subleased office space at 590 Madison Avenue, New York, New York to three unrelated subtenants, some of
whom are engaged in the financial services industry. The subleases provide for sublease payments to Ladenburg of approximately
$12 million through June 2015. Should any of the sub-tenants not pay their respective sublease payments to Ladenburg or otherwise
default under a sublease. our results of operations may be materially adversely affected. For additional information regarding these
subleases, see Note 13 to our consolidated financial statements included in this report.
We rely on two clearing brokers and the termination of our clearing agreements could disrupt our business.
Each of Ladenburg, Triad and Investacorp uses one clearing broker to process securities transactions and maintain customer
accounts on a fee basis. Securities America uses this same clearing broker and an additional clearing broker to perform the same
functions. Each clearing broker also provides billing services, extends credit and provides for control and receipt, custody and
delivery of securities. Each of our broker-dealer subsidiaries depends on the operational capacity and ability of its clearing broker for
the orderly processing of transactions. By engaging the processing services of a clearing firm, each of our broker-dealer subsidiaries
is exempt from some capital reserve requirements and other regulatory requirements imposed by federal and state securities laws. If
these clearing agreements were terminated for any reason, we would be forced to find alternative clearing arrangements. We cannot
assure you that we would be able to find alternative clearing arrangements on acceptable terms to us or at all. Also, the loss of a
clearing firm could hamper the ability of our independent broker-dealers to recruit and retain their respective independent financial
advisors.
Our business depends on commissions and fees generated from the distribution of financial products, and adverse changes in
the structure or amount of fees or marketing allowances paid by the sponsors of these products could materially adversely affect
our cash flows, revenues and results of operations.
We generate an important portion of our revenues from commissions and fees related to the distribution of financial products,
such as mutual funds and variable annuities, by our independent financial advisors, and to a lesser extent, Ladenburg’s financial
advisors. Changes in the structure or amount of the fees or marketing allowances paid by the sponsors of these products could
materially adversely affect our cash flows, revenues and results of operations.
16
TABLE OF CONTENTS
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.
Our clearing firms extend credit to our clients and we are liable if the clients do not pay.
Each of our broker-dealer subsidiaries permits its clients to purchase securities on a margin basis or sell securities short, which
means that the applicable clearing firm extends the client credit that is secured by cash and securities in the client’s account. Market
conditions, general economic conditions and issues affecting the particular securities held by a client, among other factors, could
cause the value of the collateral held by the clearing firm to 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 our broker-dealer subsidiaries has agreed to indemnify its clearing brokers for losses they may incur while
extending credit to its clients.
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
underwrite offerings, generate profits, recruit financial consultants and retain existing customers.
Risk Factors Relating to Our Industry
Credit risk exposes us to losses caused by third parties’ financial or other problems.
We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These
parties include:
•
•
•
•
•
•
•
trading counterparties;
customers;
clearing agents;
other broker-dealers;
exchanges;
clearing houses; and
other financial intermediaries as well as issuers whose securities we hold.
These parties may default on their obligations owed to us due to bankruptcy, lack of liquidity, operational failure or other reasons.
This risk may arise, for example, from:
•
•
•
holding securities of third parties;
executing securities trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by
clearing agents, exchanges, clearing houses or other financial intermediaries; and
extending credit to clients through bridge or margin loans or other arrangements.
Significant failures by third parties to perform their obligations owed to us could adversely affect our revenues, results of
operations and perhaps our ability to borrow in the credit markets.
17
TABLE OF CONTENTS
Intense competition from existing and new entities may adversely affect our revenues and results of operations.
The securities industry is rapidly evolving and intensely competitive. 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 have greater name recognition and a larger base of financial advisors and clients. 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 marketing activities, offer more attractive terms to clients and financial advisors, 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 and may adversely affect our revenues and results of operations.
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 effecting securities transactions, rendering investment advice and placing insurance. These activities involve substantial
amounts of money. Since errors and omissions claims against our subsidiaries or their financial advisors 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 financial advisor 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 financial advisors do not carry errors
and omissions insurance coverage. 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, any of which could have a materially adverse effect on
our business, cash flows and results of operations.
We are subject to uncertainties that are common in the securities industry. These uncertainties include:
the volatility of domestic and international financial, bond and stock markets;
extensive governmental regulation;
litigation;
intense competition;
poor performance of investment products our advisors recommend or sell;
substantial fluctuations in the volume and price level of securities; and
dependence on the solvency of various third parties.
•
•
•
•
•
•
•
As a result, revenues and earnings may vary significantly from quarter to quarter and from year to year. In periods of low retail
and institutional brokerage volume and reduced investment banking activity, profitability is impaired because certain expenses remain
relatively fixed. We are smaller and have less capital than many of our 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.
18
TABLE OF CONTENTS
Legal liability may harm our business.
Many aspects of our business subject us to substantial risks of liability to customers and to regulatory enforcement proceedings
by state and federal regulators. We face significant legal risks in our businesses and, in recent years, the volume of claims and amount
of damages sought in litigation and regulatory proceedings against financial institutions have been increasing. In the normal course of
business, our operating subsidiaries have been, and continue to be, the subject of numerous civil actions, regulatory proceedings 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. Dissatisfied clients often make claims against securities firms and their brokers and investment advisers for,
among others, negligence, fraud, unauthorized trading, suitability, churning, failure to conduct adequate due diligence on products
offered, failure to address issues arising from product due diligence, failure to supervise, breach of fiduciary duty, employee errors,
intentional misconduct, unauthorized transactions, improper recruiting activity, and failures in the processing of securities
transactions. These types of claims expose us to the risk of significant loss. Also, an underwriter, such as Ladenburg, 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. Therefore, Ladenburg's activities may subject it to the risk of
significant legal liabilities to its clients and aggrieved third parties, including stockholders of its clients who could bring securities
class actions against Ladenburg. As a result, Ladenburg may incur significant legal and other expenses in defending against litigation
and may be required to pay substantial damages for settlements and adverse judgments. Ladenburg's 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.
While we do not expect the outcome of any pending claims against us to have a material adverse impact on our business, financial
condition, or results of operations, we cannot assure you that these types of proceedings, which may generate losses that significantly
exceed our reserves, will not materially and adversely affect us. Also, legal or regulatory actions could cause significant reputational
harm, which could in turn seriously harm our business prospects.
Risk Factors Relating to the Regulatory Environment
We are subject to extensive 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 Securities America, Ladenburg, Investacorp and Triad is a registered broker-dealer with the SEC and FINRA. Premier
Trust is subject to regulation by the Nevada Department of Business and Industry Financial Institutions Division. Broker-dealers are
subject to regulations which cover all aspects of the securities business, including:
•
•
•
sales methods and supervision;
trading practices among broker-dealers;
use and safekeeping of customers’ funds and securities;
19
TABLE OF CONTENTS
•
•
•
capital structure of securities firms;
record keeping; and
conduct of directors, officers and employees.
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:
•
•
•
•
•
•
•
censure;
fine;
civil penalties, including treble damages in the case of insider trading violations;
the issuance of cease-and-desist orders;
the deregistration or suspension of our broker-dealer activities;
the suspension or disqualification of our officers or employees; or
other adverse consequences.
The imposition of any of these or other penalties could have a material adverse effect on our operating results and financial
condition.
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 Securities America, Investacorp and Triad classifies its financial
advisors 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 Securities America’s, Investacorp’s and
Triad’s financial advisors. 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.
20
TABLE OF CONTENTS
Failure to comply with capital requirements could subject us to suspension, revocation or fines by the SEC, FINRA or other
regulators.
Our broker-dealer subsidiaries are subject to the SEC’s Net Capital Rule, which requires the maintenance of minimum net capital.
Also, Securities America is subject to the net capital requirements of CFTC Regulation 1.17. Under Nevada law, Premier Trust must
maintain minimum stockholders’ equity of at least $1,000,000, including at least $250,000 in cash. At December 31, 2012, each of
our broker-dealer subsidiaries exceeded its minimum net capital requirement and Premier Trust exceeded its minimum stockholder's
equity 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 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. During the fourth quarter of 2009, one of our
broker-dealer subsidiaries had a short-term net-capital deficiency and could face disciplinary action including a fine, a suspension of
its operations and/or rescission of revenues relating to the period of non-compliance.
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, which may adversely
affect our cash flows, liquidity and results of operations.
We have completed numerous acquisitions since 2006, including our acquisition of Securities America in 2011, which is our
largest acquisition to date. 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,
incurrence of a material amount of debt or the issuance of significant amounts of our equity securities, which may increase our
leverage and/or 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 liquidity, cash flows and 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 financial advisors 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.
21
TABLE OF CONTENTS
We face numerous risks and uncertainties as we expand our business.
We expect the growth of our business to come primarily from organic growth 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, cash flows and results of
operations.
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, as reported by the NYSE MKT, has ranged from a low of $1.14 to a high of $2.65 per
share for the 52 week period ended December 31, 2012. We expect that the market price of our common stock will continue to
fluctuate significantly.
The market price of our common stock may fluctuate in response to numerous factors, many of which are beyond our control.
These factors include:
•
•
•
•
•
•
•
•
•
•
•
variations in quarterly operating results;
general economic and business conditions, including conditions in the securities brokerage and investment banking markets;
our announcements of significant contracts, milestones or acquisitions;
our relationships with other companies;
our ability to obtain needed capital;
additions or departures of key personnel;
the initiation or outcome of litigation or arbitration proceedings;
sales of common stock, conversion of securities convertible into common stock, exercise of options and warrants to purchase
common stock or termination of stock transfer restrictions;
legislation or regulatory policies, practices or actions
changes in financial estimates by securities analysts; and
fluctuation in stock market price and volume.
Any one of these factors could have an adverse effect on the market price of our common stock.
Also, the stock market in recent years has experienced significant price and volume fluctuations that have materially 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.
22
TABLE OF CONTENTS
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 1, 2013, our named executive officers, directors and companies with which these individuals are affiliated with
beneficially owned approximately 43.8% of 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.
Our quarterly operating results may fluctuate substantially due to the nature of our business and therefore we may fail to meet
profitability expectations.
Our operating results may fluctuate from quarter to quarter and from year to year due to a combination of factors, including:
fluctuations in capital markets, which may affect trading activity in commission-based accounts and asset values in fee-based
accounts, the level of underwriting and advisory transactions completed by Ladenburg and attrition of financial advisors.
Accordingly, our results of operations may fluctuate significantly due to an increased or decreased number of transactions in any
particular quarter or year.
Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could
adversely affect our stock price and trading volume.
Research analysts publish their own quarterly projections regarding our operating results. These projections may vary widely
from one another and may not accurately predict the results we actually achieve. Our stock price may decline if we fail to meet
securities research analysts’ predications. Similarly, if one or more of the analysts who covers us downgrades our stock or publishes
inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage
of us or fails to publish reports on us regularly, our stock price or trading volume could decline.
Possible additional issuances will cause dilution.
At December 31, 2012, we had outstanding 183,478,872 shares of common stock and options and warrants to purchase a total of
54,837,515 shares of common stock. We are authorized to issue up to 400,000,000 shares of common stock and are able to issue a
significant number of additional shares without obtaining shareholder approval. If we issue additional shares, or if our existing
shareholders exercise their outstanding options and warrants are exercised, our other shareholders may find their holdings drastically
diluted, which means that they would 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.
We intend to retain any future earnings to fund the development and growth of our business. We do not anticipate paying cash
dividends on our common stock 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 positive return on your investment in our common stock. Net
capital requirements imposed on our broker-dealer subsidiaries by the SEC restrict our ability to pay dividends.
23
TABLE OF CONTENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our principal executive offices are located at 4400 Biscayne Boulevard, 12th Floor, Miami, Florida 33137, where we have leased
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 was renewed in March 2013 and now expires in February
2018, and the amount of office space leased was increased to approximately 18,150 square feet.
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
occupied office space at 590 Madison Avenue, New York, New York and has subleased all of this space to three unrelated parties on
various terms providing for sublease payments to Ladenburg of approximately $12 million. The lease, under which Ladenburg is still
obligated as the main lessor, expires in June 2015. See Item 1A. “Risk Factors — A default by any of Ladenburg’s subtenants may
have a material adverse effect on our liquidity, cash flows and results of operations” above. Ladenburg also operates branch offices in
leased office space. Such branch offices are located in Miami, Naples and Boca Raton, Florida, Princeton, New Jersey, Boston,
Massachusetts, Houston, Texas, Calabasas, California, Melville, New York and New York, New York.
Our independent financial advisors are responsible for the office space they occupy, whether by lease or otherwise. Information
regarding the principal executive offices used in our independent brokerage and advisory services segment is listed below. Securities
America's principal executive offices are located at 12325 Port Grace Boulevard, La Vista, NE 68128, where it leases approximately
80,000 square feet of office space under a lease that expires in January 2018. Investacorp’s principal executive offices are located at
4400 Biscayne Boulevard, 11th Floor, Miami, Florida 33137, where it leases from Frost Real Estate Holdings, LLC approximately
11,475 square feet of office space under a lease that expires in September 2015. 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 2017. Premier Trust’s principal executive offices are located at 4465 S. Jones Boulevard, Las Vegas, NV
89103 where it leases approximately 12,400 square feet of office space under a lease that expires in February 2016.
We believe that our existing properties are adequate for the current operating requirements of our business and that additional
space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS.
The information under the heading “Litigation and Regulatory Matters” contained in Note 13 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.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
24
TABLE OF CONTENTS
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
PART II
Our common stock trades on the NYSE MKT under the symbol “LTS.” The following table sets forth the high and low sales
prices of our common stock for the periods specified:
2012
2011
Period
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
High
Low
$ 2.65 $ 1.78 $ 1.30 $
1.47
1.92
2.94
1.83
1.66
1.44
1.33
1.25
1.14
Low
0.96
1.08
1.05
1.35
At March 1, 2013, there were approximately 3,789 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.
Issuer Purchases of Equity Securities
Period
This table shows information regarding our purchases of our common stock during the fourth quarter of 2012.
Maximum Number of Shares that
May Yet Be Purchased Under the
Plans or Programs(1)
Total Number
of Shares
Purchased
Average
Price Paid
per Share
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
127,600
127,600 $
1.33
41,336
1.25
32,194
1.24
October 1 to
October 31,
2012
November 1 to
November 30,
2012
December 1 to
December 31,
2012
Total
201,130 $
1.30
201,130
41,336
32,194
4,591,563
4,550,227
4,518,033
(1) In March 2007, our board of directors authorized the repurchase of up to 2,500,000 shares of our common stock from time to time
on the open market or in privately negotiated transactions depending on market conditions. In October 2011, our board amended
this repurchase program to permit the purchase of up to an additional 5,000,000 shares. As of December 31, 2012, 2,981,967
shares have been repurchased for $4,653,023 under the program.
25
TABLE OF CONTENTS
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below is derived from our audited consolidated financial statements. You should read this
selected financial data together with Item 7, “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:
Year Ended December 31,
2012
2011
2010
2009
2008
(In thousands, except share and per share amounts)
Operating Results:
Total revenues
Total expenses
Loss before item shown
$
$
650,111
672,114
(22,003)
273,600(a) $
285,902
(12,302)
$
194,526
204,616
(10,090)
$
150,675
168,279
(17,604)
120,970(b)
140,214
(19,244)
below
Change in fair value of
7,111
—
—
—
—
contingent
consideration
Loss before income
taxes
Net (loss) income
Per common and
equivalent share:
Basic and diluted:
(Loss) income per
common share
(14,892)
(12,302)
(10,090)
(17,604)
(19,244)
(16,354)
3,893
(10,951)
(18,673)
(20,263)
$
(0.09) $
0.02
$
(0.06) $
(0.11) $
(0.12)
Basic weighted average
183,572,582
183,023,590
175,698,489
168,623,375
165,812,495
common shares
Diluted weighted
average common
shares
Balance Sheet Data:
Total assets
Total liabilities
Shareholders’ equity
Other Data:
Book value per share
183,572,582
189,014,028
175,698,489
168,623,375
165,812,495
$
$
338,129
286,908
51,221
347,145
283,702
63,443
$
$
101,825
54,906
46,919
$
94,637
56,843
37,794
101,668
50,378
51,290
$
0.28
$
0.34
$
0.26
$
0.22
$
0.30
(a) Includes $57,090 of revenue from Securities America (acquired November 4, 2011).
(b) Includes $21,190 of revenue from Triad (acquired August 13, 2008).
26
TABLE OF CONTENTS
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
(Dollars in thousands, except share and per share amounts)
Overview
We are engaged in independent brokerage and advisory services, investment banking, equity research, institutional sales and
trading, asset management services and trust services through our principal subsidiaries, Securities America, Triad, Investacorp,
Ladenburg, LTAM and Premier Trust. We are committed to establishing a significant presence in the financial services industry by
meeting the varying investment needs of our clients.
We have two operating segments, consisting of the independent brokerage and advisory services business conducted by
Securities America, Investacorp and Triad, which includes the trust services provided by Premier Trust, and the investment banking,
sales and trading and asset management services and investment activities conducted by Ladenburg and LTAM.
Acquisition Strategy
We continue to explore opportunities to grow our businesses, including through potential acquisitions of other financial services
firms, both domestically and internationally. These acquisitions may involve payments of material amounts of cash, the incurrence of
material amounts of debt, which may increase our leverage, or the issuance of significant amounts of our equity securities, which may
be dilutive to our existing shareholders. We cannot assure you that we will be able to complete any such potential acquisitions on
acceptable terms or at all or, if we do, that any acquired business will be profitable. We also may not be able to integrate successfully
acquired businesses into our existing business and operations.
Recent Developments
Ladenburg Fixed Income Trading Desk
In 2012, Ladenburg added a fixed income trading desk. This trading desk works with advisors at our broker-dealer subsidiaries
to develop fixed income solutions for clients based on individualized client needs. We believe this strategic addition further
strengthens the value proposition of our broker-dealer platform and is a natural complement to Ladenburg’s efforts in the yield-
oriented equities space where many of the companies Ladenburg provides investment banking services to are also potential fixed
income issuers.
NFS Forgivable Loans
Our principal clearing firm, NFS, provided us with a seven-year, $15,000 forgivable loan in November 2011. We used the
forgivable loan proceeds to fund expenses related to the acquisition of Securities America. Interest on the loan accrues at the average
annual Federal Funds effective rate plus 6% per annum, subject to the maximum rate of 11% per annum. If Securities America meets
certain annual clearing revenue targets set forth in the loan agreement, the principal balance of the loan will be forgiven in seven equal
yearly installments of $2,143. Interest payments due with respect to each such year will also be forgiven if the annual clearing
revenue targets are met. The first year’s principal and interest of $3,062 was forgiven on November 4, 2012. Any principal amounts
not forgiven will be due in November 2018, and any interest payments not forgiven are due annually. If during the loan term any
principal amount is not forgiven, we may have such principal forgiven in future years if Securities America exceeds subsequent
annual clearing revenue targets. We expect to expense interest under this loan agreement until such time as such interest is forgiven.
Also, we and NFS amended the terms of the 2009 forgivable loan made by NFS to us such that the remaining principal balance
of $7,143 and the related accrued interest will be forgiven, subject to the terms and conditions of the loan, in four equal annual
installments commencing in November 2012 without us being required to satisfy the annual clearing revenue targets previously
established. The first year’s interest and principal at $2,232 was forgiven on November 4, 2012.
27
TABLE OF CONTENTS
Critical Accounting Policies
General. The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America, referred to as GAAP, 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 Securities America, Ladenburg, Investacorp and Triad introduces all of its customer
transactions, which are not reflected in these financial statements, to its clearing brokers, which maintain the customers’ accounts and
clear such transactions. Also, the clearing brokers provide the clearing and depository operations for Securities America’s,
Ladenburg’s, Investacorp’s and Triad’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 brokers, as we have agreed to indemnify our 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 financial advisors, of $8, $36 and $4 for the years ended December 31, 2012, 2011 and 2010, respectively.
Customer Claims, Litigation and Regulatory Matters. In the ordinary course of business, our operating subsidiaries have been
and are 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 financial advisors 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 had accruals of $27 at December 31, 2012 and $650 at December 31, 2011 for potential losses. However, in the past we have
been assessed damages that exceeded our reserves. If we misjudge 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 and liquidity would be reduced. Such costs may have a
material adverse effect on our future financial position, results of operations and liquidity.
Fair Value. “Trading securities owned” and “Securities sold, but not yet purchased” on our consolidated statements of financial
condition are recorded at 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.
28
TABLE OF CONTENTS
The Financial Accounting Standards Board, which we refer to as the FASB, has issued authoritative accounting guidance that
defines fair value, establishes a framework for measuring fair value and establishes a fair value hierarchy which prioritizes the inputs
to valuation techniques. The guidance clarifies that fair value should be based on assumptions that market participants would use
when pricing an asset or liability and became effective for us on January 1, 2008. The adoption of this standard did not have a
material impact on our consolidated financial statements.
Valuation of Deferred Tax Assets. We account for income taxes under the asset and liability method, 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
as well as tax loss carryforwards. 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. Net deferred tax amounts as
of December 31, 2012, which consist principally of the tax benefit of net operating loss carryforwards, compensation charges related
to equity instruments and deferred compensation liabilities, amounted to $34,007. After consideration of all the evidence, both
positive and negative, especially the fact that we sustained a cumulative pre-tax loss for each of the fiscal years in the 2009 through
2012 period, we have determined that a valuation allowance at December 31, 2012 was necessary to fully offset the deferred tax
assets based on the likelihood of future realization. At December 31, 2012, we had net operating loss carryforwards of approximately
$106,000, expiring in various years from 2015 through 2032.
Stock-Based Compensation. Our stock based compensation uses a fair value-based method to recognize non-cash compensation
expense for share-based transactions. The accounting guidance 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. Compensation expense for share-based awards granted to independent contractors is measured at their vesting date fair
value. The compensation expense recognized each period is based on the awards' estimated value at the most recent reporting date.
Intangible Assets. We amortize intangible assets 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 the 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. We did not identify any impairment of goodwill for the year
ended December 31, 2012.
29
TABLE OF CONTENTS
Results of Operations
The following discussion provides an assessment of our consolidated 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, Triad, Premier Trust (since
September 1, 2010), Securities America (since November 4, 2011) and our other wholly-owned subsidiaries.
The following table presents a reconciliation of EBITDA, as adjusted, to net (loss) income as reported:
Year Ended December 31,
Total revenues
Total expenses
Pre-tax loss
Net (loss) income
EBITDA, as adjusted
Add:
$ 650,111
672,114
2012
2011
$273,600(1) $
285,902
(14,892) (12,302)
3,893
(16,354)
8,422
$
$
$ 30,504
Interest income
Income tax benefit
Change in fair value of contingent consideration
185
—
7,111
70
16,195
—
Less:
Interest expense
Income tax expense
Depreciation and amortization
Non-cash compensation expense
Clearing conversion expense
Acquisition-related expense
Amortization of retention loans
Net (loss) income
(24,541)
(1,462)
(16,061)
(4,744)
—
—
(7,346)
$ (16,354) $
(6,543)
—
(5,632)
(4,014)
—
(2,971)
(1,634)
3,893
$
2010
194,526
204,616
(10,090)
(10,951)
2,701
(14)
—
—
(3,241)
(861)
(3,978)
(5,439)
(119)
—
—
(10,951)
(1) Includes $57,090 of revenue from Securities America (acquired November 4, 2011).
Earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for acquisition-related expense, amortization
of retention loans and change in fair value of contingent consideration related to the Securities America acquisition, gains or losses on
sales of assets, non-cash compensation expense, and clearing conversion expense is a key metric we use in evaluating our financial
performance. EBITDA, as adjusted, 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-cash and non-recurring items, EBITDA, as
adjusted, enables the Company’s 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
indicative of our core operating performance, such as amortization of retention loans for the Securities America acquisition and
expenses related to Investacorp’s conversion to a single clearing firm as part of a new seven-year clearing agreement, or do not
involve a cash outlay, such as stock-related compensation. EBITDA, as adjusted, should be considered in addition to, rather than as a
substitute for, pre-tax income, net income and cash flows from operating activities.
30
TABLE OF CONTENTS
We have two operating segments. The independent brokerage and advisory services segment includes the broker-dealer and
investment advisory services provided by Securities America, Investacorp and Triad to their independent contractor financial advisors
and the trust services provided by Premier Trust. The Ladenburg segment includes the investment banking, sales and trading and
asset management services and investment activities conducted by Ladenburg and LTAM.
Revenues:
Independent Brokerage and Advisory Services(1)
Ladenburg
Corporate
Total revenues
Pre-tax (loss) income:
Independent Brokerage and Advisory Services(1)
Ladenburg
Corporate(2)
Total pre-tax loss
Year Ended December 31,
2012
2011
2010
$ 598,851
45,701
5,559
$ 650,111
$ 230,897
41,459
1,244
$ 273,600
$
$
151,379
41,194
1,953
194,526
$
(6,087) $
65
(8,870)
$
1,787
(3,131)
(10,958)
$ (14,892) $ (12,302) $
1,086
(4,364)
(6,812)
(10,090)
(1) Includes Premier Trust since its September 1, 2010 acquisition and Securities America since its November 4, 2011 acquisition.
(2) Includes interest on revolving credit and forgivable loan notes, compensation, acquisition-related expenses, professional fees and
other general and administrative expenses.
Year ended December 31, 2012 compared to year ended December 31, 2011
2012 results include Securities America for the full year. 2011 results include Securities America from November 4, 2011, the
date we completed the acquisition. Accordingly, comparative results presented herein were significantly impacted by the inclusion of
Securities America for a full twelve month period in 2012.
For the fiscal year ended December 31, 2012, we had a net loss of $16,354 compared to a net profit of $3,893 for the fiscal year
ended December 31, 2011. The decrease was primarily due to an income tax benefit of $16,195 in 2011 caused by a reduction of the
deferred tax asset valuation allowance in connection with the Securities America acquisition and increased interest, depreciation and
amortization expenses and non-cash compensation expense in the 2012 period arising from the Securities America acquisition,
partially offset by a decrease in the fair value of contingent consideration related to the Securities America acquisition. 2012 included
$24,541 of interest expense, $16,061 of depreciation and amortization expense and $4,744 of non-cash compensation expense as
compared to $6,543 of interest expense, $5,632 of depreciation and amortization expense and $4,014 of non-cash compensation
expense in 2011.
Our total revenues for 2012 increased $376,511 (138%) from 2011, primarily due to the Securities America acquisition.
Revenues for 2012 included increased commissions of $186,583, advisory fees of $145,807, service fees and other income of
$38,481, interest and dividends of $3,747, investment banking revenue of $1,764 and principal transactions of $129. The increase in
revenues for 2012 included a $342,021 increase from Securities America. Excluding Securities America, revenues in our independent
brokerage and advisory services segment increased $25,930 (11%) from 2011, primarily due to improved market conditions,
recruitment of higher-producing advisors and increased advisory assets under management.
Our total expenses for 2012 increased by $386,212 (135%) from 2011, primarily as a result of an increase in commissions and
fees expense of $294,642, compensation and benefits expense of $28,108, interest expense of $17,998, other expense of $22,406,
depreciation and amortization of $10,429 and amortization of retention loans made in connection with the Securities America
acquisition of $5,712. The increases in expenses for 2012 included $361,074 attributable to Securities America.
31
TABLE OF CONTENTS
The $186,583 (134%) increase in commissions revenue in 2012 as compared to the 2011 period was primarily attributable to an
increase of $169,325 from Securities America and successful recruitment of higher-producing financial advisors in our independent
brokerage and advisory services segment. Excluding Securities America, commissions revenue in our independent brokerage and
advisory services and Ladenburg segments increased $13,612 (14%) and $3,647 (30%), respectively, from 2011.
The $145,807 (166%) increase in advisory fees revenue in 2012 as compared to 2011 was primarily due to an increase of
$135,872 from Securities America. Average advisory assets under management increased by 17.8% at December 31, 2012 as
compared to December 31, 2011 at Securities America, LTAM, Triad and Investacorp on a consolidated basis. Advisory revenue for
a particular period is primarily affected by the level of advisory assets and market fluctuations. For 2012, we experienced an increase
in net new advisory assets resulting from strong new business development and the continued shift by our existing advisors toward
more advisory business. We expect asset management revenue to increase in the near term due to newly-added advisory assets and
the continued shift by our advisors toward the advisory business.
The $1,764 (6%) increase in investment banking revenue for 2012 as compared to 2011 was primarily due to an increase in
capital raising fees. Capital raising revenue increased $2,200, resulting primarily from an increase in offerings of yield-oriented
equities while strategic advisory services revenue decreased $436 in 2012. We derive investment banking revenue from Ladenburg’s
capital raising activities, including underwritten public offerings and private placements, and strategic advisory services. Revenue
from capital raising activities was $28,094 for 2012, as compared to $25,894 for 2011. Strategic advisory services revenue was
$1,184 for 2012, as compared to $1,620 for 2011.
The $129 (11%) increase in principal transactions revenue in 2012 as compared to 2011 was primarily attributable to the addition
of a fixed income trading group in the fourth quarter of 2012 at our Ladenburg subsidiary.
The $3,747 (365%) increase in interest and dividends revenue for 2012 as compared to 2011 was primarily due to an increase of
$3,679 from Securities America. Continued increases in interest and dividends revenue are dependent upon changes in prevailing
interest rates and asset levels.
The $38,481 (204%) increase in service fees and other income in 2012 as compared to 2011 was primarily attributable to $33,146
of service fees and other income earned by Securities America, which included marketing allowances received from product sponsor
programs and administrative service fees. Excluding Securities America, service fees and other income increased in our independent
brokerage and advisory services segment by $1,942, primarily due to marketing allowances received from product sponsor programs
of $1,404, increased conference revenue of $530 and an increase in our corporate segment. The increase in our corporate segment is
primarily due to increased income of $3,415, representing principal and interest forgiven on the NFS loans, partially offset by a
decrease due to $287 received in settlement of a claim by Ladenburg against a former broker in 2011.
The $294,642 (161%) increase in commissions and fees expense for 2012 as compared to 2011 was directly correlated to the
increase in commissions and advisory fees revenue in our independent brokerage and advisory services segment, including an
increase of $273,001 from the addition of Securities America. Excluding Securities America, commission and fees revenue increased
$21,045 (12%) for 2012 as compared to 2011. Commissions and fees expense comprises compensation payments earned by the
registered representatives who serve as independent contractors in our independent brokerage and advisory services segment. These
payments to the independent contractor registered representatives are calculated based on a percentage of revenues generated by such
persons and vary by product. Accordingly, when the independent contractor registered representatives increase their business, both
our revenues and expenses increase as our representatives earn additional compensation based on the revenue produced.
The $28,108 (54%) increase in compensation and benefits expense for 2012 as compared to 2011 was primarily due to an
increase of $23,371 from the addition of Securities America. The increase in compensation and benefits expense for 2012 excluding
Securities America, was $4,737.
32
TABLE OF CONTENTS
The $730 (18%) increase in non-cash compensation expense for 2012 as compared to 2011 was primarily attributable to an
increase of $878 from stock option grants to Securities America employees and financial advisors.
The $2,247 (29%) increase in brokerage, communication and clearance fees expense for 2012 as compared to 2011 was primarily
due to an increase of $2,166 from the addition of Securities America and an increase of $356 from Triad and Investacorp, which was
directly related to the increase in revenue. This was partially offset by a decrease of $193 in our Ladenburg and Corporate segments.
Clearing expense for the 2012 period at Ladenburg and Securities America was reduced by clearing expense credits provided by our
primary clearing firm, which we expect to continue to benefit from in 2013.
The $2,787 (73%) increase in rent and occupancy, net of sublease revenue for 2012 as compared to 2011 was primarily
attributable to an increase of $2,940 increase from the addition of Securities America, partially offset by a decrease of $108 at our
Ladenburg segment.
The $4,124 (98%) increase in professional services expense for 2012 as compared to 2011 was primarily due to an increase of
$4,105 from Securities America.
The $17,998 (275%) increase in interest expense for 2012 as compared to 2011 resulted from increased average debt balances
following the Securities America acquisition and increased average interest rates. An average debt balance of approximately $209,066
was outstanding for the 2012 period, as compared to an average outstanding debt balance of approximately $58,075 for the 2011
period. The average interest rate was 11.7% and 10.5% for the 2012 and 2011 periods, respectively.
The $10,429 (185%) increase in depreciation and amortization expense for 2012 as compared to 2011 was primarily due to an
increase of $10,595 of depreciation and amortization from Securities America fixed assets and amortization of intangible assets
acquired in the Securities America acquisition. This was partially offset by a decrease of $162 in our Ladenburg segment.
The $5,712 in amortization of retention loans expense for 2012 relates to the amortization of retention loans made to Securities
America financial advisors in connection with the acquisition. The amounts in the prior-year period were from November 4, 2011, the
date we completed the Securities America acquisition.
The $22,406 (151%) increase in other expense in 2012 as compared to 2011 was primarily attributable to the addition of $21,288
in other expense from Securities America, which consisted of forgiveness of financial advisor loans, insurance, travel, advertising,
bad debt and other office expenses. Excluding Securities America, the increase in other expense was primarily attributable to a $487
increase in conference and related expenses, a $436 increase in travel, meals and entertainment, a $334 increase in insurance expense
and a $212 increase in other office expenses, partially offset by a decrease in settlements expense of $681.
We had an income tax expense of $1,462 in 2012 as compared to an income tax benefit of $16,195 in 2011. After consideration
of all the evidence, both positive and negative, management has determined that a valuation allowance at December 31, 2012 was
necessary to fully offset the deferred tax assets based on the likelihood of future realization. The income tax rates for 2012 and 2011
did not bear a customary relationship to effective tax rates primarily as a result of the change in the valuation allowance in 2012 and
2011.
Year ended December 31, 2011 compared to year ended December 31, 2010
For the fiscal year ended December 31, 2011, we had a net profit of $3,893 compared to a net loss of $10,951 for the fiscal year
ended December 31, 2010. The improvement was primarily due to increased revenues and an income tax benefit of $16,195 caused
by a reduction of the deferred tax asset valuation allowance in connection with the Securities America acquisition.
Our total revenues for 2011 increased $79,074 (41%) from 2010, primarily as a result of increased commissions of $36,059,
advisory fees of $33,496 and other income of $8,386 generated by our independent brokerage and advisory services segment and
increased investment banking revenue of $5,133, partially offset by decreased commissions revenue of $3,470 at our Ladenburg
segment. 2011 revenues included $57,090 from Securities America from the date of acquisition (November 4, 2011). Excluding
Securities America, revenues in our independent brokerage and advisory services segment increased $22,428 (15%) in 2011 from
2010.
33
TABLE OF CONTENTS
Our total expenses increased in 2011 by $81,286 (40%) from 2010, primarily as a result of an increase in commissions and fees
of $60,342, an increase in compensation and benefits of $8,734, an increase in other expense of $4,455, an increase in interest
expense of $3,302 and acquisition-related expenses of $2,971, partially offset by a decrease in non-cash compensation expense of
$1,425. Expenses for 2011 included $61,831 from Securities America from the date of acquisition (November 4, 2011).
The $32,589 (30%) increase in commissions revenue in 2011 as compared to 2010 was primarily attributable to $27,753 from the
addition of Securities America, improved market conditions and recruitment of higher-producing financial advisors in our
independent brokerage and advisory services segment, partially offset by a decrease in commissions revenue of $3,470 at our
Ladenburg segment.
The $34,238 (64%) increase in advisory fees revenue in 2011 as compared to 2010 was primarily attributable to $22,315 from the
addition of Securities America and a 10% increase in the average assets under management at LTAM, Triad and Investacorp.
The $5,133 (23%) increase in 2011 investment banking revenue was primarily due to an increase in capital raising fees of $6,622,
resulting from an increase in offerings of yield-oriented equities and PIPE offerings, partially offset by a decrease in strategic
advisory services of $1,488. Revenue from capital raising activities was $25,893 for 2011, as compared to $19,272 for 2010.
Strategic advisory services revenue was $1,621 for 2011, as compared to $3,109 for 2010.
The $1,341 (1,024%) decrease in principal transactions revenue in 2011 as compared to 2010 was primarily attributable to losses
in the fair value of securities received as underwriting compensation.
The $502 (96%) increase in interest and dividends revenue in 2011 as compared to 2010 was primarily due to $473 earned on the
acquired assets of Securities America.
The $7,953 (73%) increase in other income in 2011 as compared to 2010 was primarily attributable to service fees and other
income earned by Securities America of $6,549. Excluding Securities America, other income also increased in our independent
brokerage and advisory services segment, which had a $684 increase in marketing allowances received from product sponsor
programs, conference revenue of $165, transaction-related fees of $188 and miscellaneous trading services revenue of $377.
The $60,342 (49%) increase in commissions and fees expense in 2011 as compared to 2010 was directly correlated to the
increase in commissions and advisory fees revenue in our independent brokerage and advisory services segment, including $44,042
from the addition of Securities America.
The $8,734 (20%) increase in compensation and benefits expense in 2011 as compared to 2010 was primarily due to a $5,559
increase from the addition of Securities America and Premier Trust and a $5,373 increase in compensation at Ladenburg, Investacorp
and Triad, which is attributed to the increase in revenues, partially offset by a $2,303 decrease in producers’ compensation at our
Ladenburg segment, which is directly correlated to revenue production by such persons.
The $1,425 (26%) decrease in non-cash compensation expense in 2011 as compared to 2010 was primarily attributable to stock
option grants in 2006 and 2007 which fully vested in 2010 and 2011. The resulting decrease in expense related to these grants was
$2,122, partially offset by an increase of $583 due to stock option grants to Securities America employees and financial advisors.
The $504 (15%) increase in rent and occupancy, net of sublease revenue in 2011 as compared to 2010 was primarily attributable
to an additional $593 from the addition of Securities America.
The $1,138 (21%) decrease in professional services expense for 2011 was primarily due to a decrease of $1,884 in legal, audit,
tax and consulting expense, partially offset by the additional expense from Securities America of $664.
The $3,302 (102%) increase in interest expense in 2011 as compared to 2010 was a result of an increased average debt balance of
approximately $58,000 outstanding for 2011, as compared with an average debt balance outstanding of approximately $31,000 for
2010. The increase was primarily attributable to the promissory notes in the aggregate amount of $160,700 that we issued in
connection with the Securities America acquisition and the 2011 $15,000 forgivable loan from NFS.
34
TABLE OF CONTENTS
The $1,654 (42%) increase in depreciation and amortization expense for 2011 as compared to 2010 was primarily due to an
additional $1,119 of depreciation and amortization of Securities America assets and additional corporate expense of $1,347, which is
attributed to the amortization of intangible assets acquired in the acquisition, partially offset by a decrease in amortization of intangible
assets at our Ladenburg segment of $491.
The $4,455 (43%) increase in other expense in 2011 as compared to 2010 is primarily attributable to, the addition of Securities
America’s other expense of $3,643. Excluding Securities America, the increase in other expense is attributable to an increase in travel,
meals and entertainment of $99, an increase in registration fees of $98, an increase in insurance expense of $305, an increase in bad
debt, errors and settlement expense of $449, which were partially offset by a decrease in advertising of $176.
We had an income tax benefit of $16,195 in 2011 as compared to income tax expense of $861 in 2010. After consideration of all
the evidence, both positive and negative, management has determined that a valuation allowance at December 31, 2011 was necessary
to fully offset the deferred tax assets based on the likelihood of future realization. A net deferred tax liability of approximately
$19,604 was recorded on the acquisition of Securities America for the excess financial statement basis over tax basis of the acquired
assets and assumed liabilities. As Securities America will be included in our consolidated federal and certain combined state and local
income tax returns, deferred federal and a substantial portion of state and local tax liabilities assumed in the acquisition are able to
offset the reversal of our pre-existing deferred tax assets. Accordingly, our deferred tax valuation allowance has been reduced to the
extent of $18,329 of deferred tax liability recorded in the acquisition and recorded as a deferred tax benefit in the accompanying
statements of operations for the year ended December 31, 2011. The income tax rates for 2011 and 2010 did not bear a customary
relationship to effective tax rates primarily as a result of the change in the valuation allowance in 2011 and 2010.
Liquidity and Capital Resources
Approximately 17% of our total assets at December 31, 2012 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. 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.
Each of Securities America, Ladenburg, Investacorp and Triad is subject to the Net Capital Rule. Therefore, they are subject to
certain restrictions on the use of capital and their related liquidity. At December 31, 2012, Securities America’s regulatory net capital
of $7,941, exceeded minimum net capital requirements of $250 by $7,691. At December 31, 2012, Ladenburg’s regulatory net capital
of $4,358 exceeded minimum net capital requirements of $250, by $4,108. At December 31, 2012, Investacorp’s regulatory net
capital of $3,542, exceeded minimum net capital requirements of $310, by $3,232. At December 31, 2012, Triad’s regulatory net
capital of $3,214 exceeded minimum net capital requirements of $752 by $2,462. Failure to maintain the required net capital may
subject our broker-dealer subsidiaries to suspension or expulsion by FINRA, the SEC and other regulatory bodies and ultimately
may require their liquidation. The Net Capital Rule also prohibits the payment of dividends, redemption of stock and prepayment or
payment of principal of subordinated indebtedness if net capital, after giving effect to the payment, redemption or prepayment, would
be less than specified percentages of the minimum net capital requirement. Compliance with the Net Capital Rule could limit
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 our subsidiaries, which in turn, could limit our ability to pay dividends and repay debt. See Item 1A.
“Risk Factors — Failure to comply with capital requirements could subject us to suspension, revocation or fines by the SEC, FINRA
or other regulators” above.
Premier Trust, chartered by the state of Nevada, is subject to regulation by the Nevada Department of Business and Industry
Financial Institutions Division. Under Nevada law, Premier Trust must maintain stockholders’ equity of at least $1,000, including
cash of at least $250. At December 31, 2012, Premier Trust had stockholders’ equity of $1,448, including at least $250 in cash.
35
TABLE OF CONTENTS
Our primary sources of liquidity include cash flows from operations, sales of equity or debt securities in public or private
transactions and borrowings under our revolving credit agreement with an affiliate of Dr. Phillip Frost, our chairman and principal
shareholder; however during the last three fiscal years the Company has used cash from operations. In connection with the Securities
America acquisition, on August 16, 2011, we entered into a second amendment to the revolving credit agreement, under which
available borrowings were increased by $10,000 to an aggregate of $40,000. Borrowings under the $40,000 revolving credit
agreement bear interest at a rate of 11% per annum, payable quarterly. At December 31, 2012, $25,500 was outstanding under the
revolving credit agreement, a net increase of $2,950 from December 31, 2011. We may repay outstanding amounts or re-borrow
amounts under our revolving credit facility at any time prior to the maturity date of August 25, 2016, without penalty. We believe our
existing assets, sales of equity and debt securities and funds available under our $40,000 revolving credit facility will provide
adequate funds for continuing operations at current activity levels. We are currently in compliance with all debt covenants in our debt
agreements.
Cash provided by operating activities for 2012 was $7,648, which primarily consisted of our net loss of $16,354 adjusted for
non-cash expenses, increases in receivables from other broker-dealers, notes receivable, net and other receivables, net, partially offset
by increases in accrued interest, accrued compensation and commissions and fees. In 2011, cash used in operating activities was
$33,349, primarily due to our net loss adjusted for non-cash expenses, an increase in other receivables, net, receivables from other
broker-dealers and other assets, and a decrease in securities sold, but not yet purchased, partially offset by a decrease in securities
owned at fair value, and receivables from clearing brokers and an increase in accrued compensation and commissions and fees
payable.
Investing activities used $5,930 for 2012, primarily due to the purchase of furniture, equipment and leasehold improvements and
$552 used for asset acquisition by Securities America. In 2011, investing activities used $127,074, primarily due to the purchase of
Securities America.
Financing activities provided $2,119 for 2012, primarily due to loan re-borrowings under our revolving credit agreement and the
issuance of common stock upon option exercise and under the employee stock purchase plan, partially offset by common stock
repurchases and repayment of notes payable. In 2011, financing activities provided $178,997, primarily due to proceeds from
$160,700 of notes issued in connection with the Securities America acquisition, a new NFS forgivable loan agreement of $15,000,
loan re-borrowings under our revolving credit agreement and the issuance of common stock upon option exercises and under the
employee stock purchase plan, partially offset by repayments of notes payable and common stock repurchases.
At December 31, 2012, we were obligated under several non-cancelable lease agreements for office space, which provide for
future minimum lease payments aggregating approximately $30,379 through 2018, exclusive of escalation charges. We have
subleased vacant space under subleases which entitle us to receive rents aggregating approximately $11,739 through such date. See
Item 1A. “Risk Factors — A default by any of Ladenburg’s subtenants may have a material adverse effect on our liquidity, cash
flows, and results of operations”.
36
TABLE OF CONTENTS
In connection with the Securities America acquisition, we entered into a senior loan agreement with various lenders, under which
the lenders loaned us $160,700, a portion of which we used to fund the acquisition. Interest on this loan is payable quarterly at 11%
per year. Interest is payable in cash; however, (i) from December 31, 2011 until November 4, 2013, we may, without the consent of
any lender, satisfy our interest obligations by adding such amount to the outstanding principal balance of the note, in an amount of up
to approximately 36% of accrued and unpaid interest on each payment date, and (ii) after November 4, 2013 until maturity, we may
also pay interest-in-kind with the consent of certain lenders. This payment-in-kind feature increases the principal sum outstanding on
the note that is due at maturity by the amount of such payment-in-kind. All interest payments through December 31, 2012 have been
paid in cash. Ten percent (10%) of the principal amount of the November 2011 loan, together with accrued and unpaid interest
thereon, is due on each of December 31, 2014 and December 31, 2015, and the balance of this loan, together with accrued and unpaid
interest thereon, is due on November 4, 2016. We may voluntarily repay the November 2011 loan at any time without premium or
penalty. In connection with this loan, we issued to the lenders warrants to purchase an aggregate of 10,713,332 shares of our
common stock. These warrants are exercisable at any time prior to their expiration on November 4, 2016 at $1.68 per share, which
was the closing price of our common stock on the acquisition closing date.
The lenders included Frost Nevada Investments Trust (“Frost Nevada”), an affiliate of our Chairman of the Board and principal
shareholder, Dr. Phillip Frost, M.D., Vector Group, Ltd. (“Vector Group”), a principal shareholder, and our President and Chief
Executive Officer and a director. The principal amounts initially loaned by Frost Nevada, Vector Group and our President were
$135,000 $15,000 and $200, respectively. A special committee of our Board of Directors was formed to review and consider the
terms of the November 2011 loan, the notes issued thereunder and the warrants. Upon such review and consideration, which
included the advice of the committee’s independent financial advisor, the committee determined that the financing was fair from a
financial point of view to us and our unaffiliated shareholders.
On November 4, 2011, NFS provided us with a seven-year, $15,000 forgivable loan. We used the proceeds to fund expenses
related to the Securities America acquisition. Interest on the loan accrues at the average annual Federal Funds effective rate plus 6%
per annum, subject to the maximum rate of 11% per annum. If Securities America meets certain annual clearing revenue targets set
forth in the loan agreement, the principal balance of the loan will be forgiven in seven equal yearly installments of $2,143
commencing on November 4, 2012 and continuing on an annual basis through November 2018. Interest payments due with respect
to each such year will also be forgiven if the annual clearing revenue targets are met. Any principal amounts not forgiven will be due
in November 2018, and any interest payments not forgiven are due annually. If during the loan term any principal amount is not
forgiven, we may have such principal forgiven in future years if Securities America exceeds subsequent annual clearing revenue
targets. We will expense interest under this loan agreement until such time as such interest is forgiven. Securities America met the
annual clearing revenue target for the period ending November 4, 2012.
The 2011 forgivable loan agreement contains other covenants including limitations on the incurrence of additional indebtedness,
maintaining minimum adjusted shareholders’ equity levels and a prohibition on the termination of our $40,000 revolving credit
agreement prior to its current maturity. Upon the occurrence of an event of default, the outstanding principal and interest under the
loan agreement may be accelerated and become due and payable. If the clearing agreements are terminated prior to the loan maturity
date, all amounts then outstanding must be repaid on demand. The loan agreement is secured by our, but not our subsidiaries’,
deposits and accounts held at NFS or its affiliates.
37
TABLE OF CONTENTS
In connection with the entering into the new forgivable loan in 2011, Securities America and our other broker-dealer subsidiaries
amended their respective clearing agreements with NFS to, among other things, extend the term of those agreements through
November 2018. Also, we and NFS amended the terms of the 2009 forgivable loan made by NFS to us such that the remaining
principal balance of $7,143 and the related accrued interest will be forgiven, subject to the terms and conditions of the loan, in four
equal annual installments commencing in November 2012 without us being required to satisfy the annual clearing revenue targets
previously established. The second annual clearing revenue target under the 2009 forgivable loan was met in August 2011. We have
expensed, and will continue to expense, interest under the 2009 NFS agreement until such interest is forgiven. The required
conditions to forgiveness were met in November 2012 for the 2009 and 2011 forgivable loans. Accordingly, we recognized income
in 2012 of $3,929 and $1,365 and in 2011 of $1,429 and $450 from the forgiveness of principal and interest, respectively, and the
outstanding balances under the 2009 and 2011 forgivable loans were reduced to $18,214.
In November 2011, as part of the amendment of Ladenburg’s clearing agreement with NFS, NFS will provide an annual credit of
$1,000 to Ladenburg for a five year period. The first such payment occurred on November 4, 2012. Such expense reduction must be
repaid pro-rata if the clearing agreement is terminated prior to the end of the term. We have reflected the expense reduction ratably in
our financial statements.
In connection with the Premier Trust acquisition in 2010, we issued a $1,161 promissory note to a subsidiary of Premier Trust’s
former shareholder. The note bears interest at 6.5% per annum and is payable quarterly and matures in September 2015. The
outstanding balance of this note at December 31, 2012 was $685.
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. In October 2011, our board amended
the repurchase program described above to permit the purchase of up to an additional 5,000,000 shares. As of December 31, 2012,
2,981,967 shares had been repurchased for $4,653 under the program, including 912,667 shares in 2012.
Off-Balance Sheet Arrangements
Each of Securities America, Ladenburg, Investacorp and Triad, as guarantor of its customer accounts to its clearing broker, is
exposed to off-balance-sheet risks in the event that its customers do not fulfill their obligations with the clearing broker. Also, if
Securities America, 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.
Please see Note 14 to our consolidated financial statements included elsewhere in this annual report on Form 10-K.
38
TABLE OF CONTENTS
Contractual Obligations
The table below summarizes information about our contractual obligations as of December 31, 2012 and the effect these
obligations are expected to have on our liquidity and cash flow in the future years.
Notes payable under November 2011 financing(1)
Revolving credit agreement with affiliate of our principal
$228,285 $17,677 $50,098 $160,510 $ —
—
35,742 2,805 5,610 27,327
Payments Due By Period
Total
Less than
1 year
1 – 3
years
4 – 5 years After 5
years
shareholder(2)
Notes payable to clearing firm under forgivable loans(3)
Note payable to a subsidiary of Premier Trust’s former
shareholder(4)
Operating leases(5)
Deferred compensation plan(6)
Total
21,549 2,859 5,041
479
274
753
660 12,989
—
—
351
5,917
30,379 9,435 14,676
17,955
1,481 14,012
958 1,504
$334,663 $34,008 $77,408 $195,895 $27,352
(1) Notes bear interest at 11% per annum and are payable quarterly. See Note 12 to our consolidated financial statements.
(2) Revolving credit agreement has an August 25, 2016 maturity date and bears interest at a rate of 11.0% per annum, payable
quarterly. Assumes no payments of principal prior to maturity. See Note 12 to our consolidated financial statements.
(3) The 2009 NFS forgivable loan ($5,357 at December 31, 2012) bears interest at prime plus 2% per annum and the 2011 NFS
forgivable loan ($12,857 at December 31, 2012) bears interest at federal funds rate plus 6% per annum and is payable in 7 annual
installments if not forgiven. See Note 12 to our consolidated financial statements.
(4) Note bears interest at 6.5% per annum and is payable in 20 quarterly installments. See Note 12 to our consolidated financial
statements.
(5) Excludes sublease revenues of $11,739. See Note 13 to our consolidated financial statements.
(6) See Note 10 to our consolidated financial statements.
We have subleased office space to subtenants, some of whom are engaged in the financial services industry. Should any of the
sub-tenants not pay their sublease payments or otherwise default under a sublease, 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.
39
TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements
We and our representatives may from time to time make oral or written “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995, including any statements that may be contained in the foregoing discussion in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in this report and in other filings with
the Securities and Exchange Commission and in our reports to shareholders, which reflect our expectations or beliefs with respect to
future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties and, in
connection with the “safe-harbor” provisions of the Private Securities Litigation Reform Act, we have identified under “Risk Factors”
in Item 1A above, important factors that could cause actual results to differ materially from those contained in any forward-looking
statement made by or on behalf of us.
Results actually achieved may differ materially from expected results included in these forward-looking statements as a result of
these or other factors. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date on which such statements are made. We do not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information in Item 7 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Market Risk” is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements and Notes thereto, together with the report thereon of EisnerAmper LLP dated March
14, 2013 beginning on page F-1 of this report which are incorporated by reference in this Item 8.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) 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 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 were effective as of such date.
40
TABLE OF CONTENTS
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Our internal control over financial reporting is designed to provide
reasonable assurance to management and to our Board of Directors regarding the reliability of financial reporting and the preparation
and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles. Our
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
our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance
with authorizations of our management and directors; and
(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
In connection with this annual report on Form 10-K, our chief executive officer and chief financial officer evaluated, with the
participation of our management, the effectiveness of our internal control over financial reporting as of the end of the period covered
by this report. Based on management’s evaluation, our chief executive officer and chief financial officer each concluded that our
internal control over financial reporting was effective as of December 31, 2012.
EisnerAmper LLP, an independent registered public accounting firm, has audited our consolidated financial statements and the
effectiveness of internal controls over financial reporting as of December 31, 2012 as stated in its report which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2012 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
41
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Ladenburg Thalmann Financial Services Inc.
We have audited Ladenburg Thalmann Financial Services Inc.’s (the “Company”) internal control over financial reporting as of
December 31, 2012, 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 Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on 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 generally accepted
accounting principles. 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 generally accepted accounting principles, 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.
In our opinion, Ladenburg Thalmann Financial Services Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2012, 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 Ladenburg Thalmann Financial Services Inc. as of December 31, 2012 and 2011, and the related
consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the years in the three-year period
ended December 31, 2012, and our report dated March 14, 2013 expressed an unqualified opinion thereon.
/s/ EisnerAmper LLP
New York, New York
March 14, 2013
ITEM 9B. OTHER INFORMATION.
None.
42
TABLE OF CONTENTS
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
This information will be contained in our definitive proxy statement for our 2013 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.
ITEM 11. EXECUTIVE COMPENSATION.
This information will be contained in our definitive proxy statement for our 2013 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
This information will be contained in our definitive proxy statement for our 2013 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
This information will be contained in our definitive proxy statement for our 2013 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
This information will be contained in our definitive proxy statement for our 2013 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.
43
TABLE OF CONTENTS
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1): Index to 2012 Consolidated Financial Statements
PART IV
The consolidated financial statements and the notes thereto, together with the report thereon of EisnerAmper LLP dated March 14,
2013, 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.
44
TABLE OF CONTENTS
EXHIBIT INDEX
Description
Articles of Incorporation
Articles of Amendment to the Articles of Incorporation, dated August 24, 1999
Articles of Amendment to the Articles of Incorporation, dated April 3, 2006
Amended and Restated Bylaws
Form of common stock certificate
Form of Promissory Note, dated as of November 4, 2011, issued under the November
4, 2011 Loan Agreement
Exhibit
No.
3.1
3.2
3.3
3.4
4.1
4.2
4.3
Form of Warrant, dated as of November 4, 2011, issued under the November 4, 2011
Loan Agreement
10.1
10.2
Amended and Restated 1999 Performance Equity Plan*
2009 Incentive Compensation Plan.*
10.3
Ladenburg Thalmann Financial Services Inc. Amended and Restated Qualified
Employee Stock Purchase Plan*
10.4
Office Lease dated March 30, 2007 between Ladenburg Thalmann & Co., Inc. and
Frost Real Estate Holdings, LLC
10.5
10.6
10.7
Warrant issued to BroadWall Capital LLC
Form of Stock Option Agreement issued to employees of BroadWall
Letter Agreement, dated February 8, 2012, between Ladenburg Thalmann Financial
Services Inc. and Vector Group Ltd.
10.8
10.9
Form of Warrant issued to the stockholders of Telluride Holdings, Inc.
Amendment to Employment Agreement, dated as of Sept. 1, 2006 between the
Company, Ladenburg Thalmann & Co. Inc. and Mark Zeitchick.*
10.10 Letter Agreement, dated as of January 19, 2011, between the Company and Mark
Zeitchick.*
10.11 Letter Agreement dated as of December 15, 2011, between the Company and Mark
Zeitchick*
10.12 Non-Plan Option Agreement, dated as of October 19, 2007, by and between the
Company and Bruce A. Zwigard
10.13 Warrant, dated as of October 19, 2007, issued to Frost Gamma Investments Trust
pursuant to Credit Agreement
10.14 Employment Letter dated as of February 8, 2008 between the Company and Brett
Kaufman*
10.15 Stock Purchase Agreement, dated August 16, 2011, by and between the Company and
Ameriprise Financial, Inc.
10.16 Lease, dated as of August 13, 2010, between Investacorp Group, Inc. and Frost Real
Estate Holdings, LLC.
10.17 Employment Letter, dated as of December 15, 2011, between the Company and Adam
Malamed*
10.18 Credit Agreement, dated as of October 19, 2007, by and between the Company and
Frost
Gamma Investments Trust, including the form of note thereto
10.19 Amendment No. 1 to Credit Agreement by and between the Company and Frost
Nevada
Investments Trust, as assignee, dated as of August 25, 2009
45
Incorporated By
Reference from Document
A
B
C
D
A
S
No. in
Document
3.1
3.2
3.1
3.2
4.1
10.2
S
F
O
G
H
I
I
J
K
L
Q
T
E
E
M
R
P
T
E
N
4.1
4.1
Exhibit
A
Exhibit
A
10.1
10.1
10.2
10.1
10.2
10.3
10.1
10.21
10.2
10.3
10.1
2.1
10.1
10.27
4.1
4.2
TABLE OF CONTENTS
Exhibit No.
Description
10.20
Amendment No. 2 to Credit Agreement, dated August 16, 2011, by and
between the
Company and Frost Nevada Investments Trust
10.21
Forgivable Loan Agreement, dated as of August 25, 2009, between the
Company and
National Financial Services LLC. (Certain portions of this agreement have
been omitted
under a request for confidential treatment pursuant to Rule 24b-2 of the
Securities
Exchange Act of 1934 and filed separately with the United States
Securities and
Exchange Commission.)
10.22
First Amendment, dated November 4, 2011, to Forgivable Loan
Agreement between the
Company and National Financial Services LLC.
10.23
Forgivable Loan Agreement, dated as of November 4, 2011, between the
Company and
National Financial Services LLC. (Certain portions of this agreement have
been omitted
under a request for confidential treatment pursuant to Rule 24b-2 of the
Securities
Exchange Act of 1934 and filed separately with the United States
Securities and
Exchange Commission.)
10.24
Loan Agreement, dated November 4, 2011, by and among the Company
and the lenders
party thereto
21
23.1
24
31.1
List of Subsidiaries
Consent of EisnerAmper LLP
Power of Attorney
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
46
Incorporated By Reference from
Document
R
No. in
Document
10.1
N
T
T
S
**
**
***
**
**
****
****
****
****
****
****
****
****
4.1
10.32
10.33
10.1
—
—
—
—
—
—
—
—
—
—
—
—
—
TABLE OF CONTENTS
* Management Compensation Contract
** Filed herewith
***Contained on the signature page hereto
****Furnished herewith
A. Registration statement on Form SB-2 (File No. 333-31001).
B. Annual report on Form 10-K for the year ended August 24, 1999.
C. Quarterly report on Form 10-Q for the quarter ended June 30, 2006.
D. Current report on Form 8-K, dated September 20, 2007 and filed with the SEC on September 21, 2007.
E. Current report on Form 8-K, dated October 19, 2007 and filed with the SEC on October 22, 2007.
F. Registration statement on Form S-8 (File No. 333-139254).
G. Definitive proxy statement filed with the SEC on August 27, 2012 relating to the annual meeting of shareholders held on
September 28, 2012.
H. Current report on Form 8-K, dated March 30, 2007 and filed with the SEC on April 2, 2007.
I. Current report on Form 8-K, dated September 11, 2006 and filed with the SEC on September 12, 2006.
J. Current report on Form 8-K, dated February 8, 2012 and filed with the SEC on February 10, 2012.
K. Current report on Form 8-K, dated September 6, 2006 and filed with the SEC on September 7, 2006.
L. Current report on Form 8-K/A dated September 6, 2006 and filed with the SEC on October 24, 2006.
M. Current report on Form 8-K, dated March 27, 2008 and filed with the SEC on March 28, 2008.
N. Quarterly report on Form 10-Q for the quarter ended September 30, 2009.
O. Definitive proxy statement filed with the SEC on July 20, 2009 relating to the annual meeting of shareholders held on August 27,
2009.
P. Current report on Form 8-K, dated August 10, 2010 and filed with the SEC on August 13, 2010.
Q. Current report on Form 8-K, dated January 19, 2011 and filed with the SEC on January 25, 2011.
R. Current report on Form 8-K, dated August 16, 2011 and filed with the SEC on August 18, 2011.
S. Current report on Form 8-K, dated November 4, 2011 and filed with the SEC on November 9, 2011.
T. Annual report on Form 10-K, for the year ended December 31, 2011.
47
TABLE OF CONTENTS
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 14, 2013
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Registrant)
By:
/s/ Brett H. Kaufman
Name: Brett H. Kaufman
Title: Senior Vice President and Chief Financial Officer
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
President, Chief Executive Officer and Director
Title
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
(Principal Executive Officer)
on behalf of the registrant and in the capacities indicated on March 14, 2013.
Signatures
/s/ Richard J. Lampen
Richard J. Lampen
/s/ Brett H. Kaufman
Brett H. Kaufman
/s/ Henry C. Beinstein
Henry C. Beinstein
/s/ Phillip Frost, M.D.
Phillip Frost, M.D.
/s/ Brian S. Genson
Brian S. Genson
/s/ Saul Gilinski
Saul Gilinski
/s/ Dmitry Kolosov
Dmitry Kolosov
/s/ Dr. Richard M. Krasno
Dr. Richard M. Krasno
/s/ Howard M. Lorber
Howard M. Lorber
/s/ Jeffrey S. Podell
Jeffrey S. Podell
/s/ Richard J. Rosenstock
Richard J. Rosenstock
/s/ Jacqueline M. Simkin
Jacqueline M. Simkin
/s/ Mark Zeitchick
Mark Zeitchick
Director
Director
Director
Director
Director
Director
Director
Director
48
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2012
ITEMS 8 and 15(a) (1) AND (2)
INDEX TO FINANCIAL STATEMENTS
Financial Statements of the Registrant and its subsidiaries required to be included in Items 8 and 15(a) (1) and (2) are listed
below:
FINANCIAL STATEMENTS:
Ladenburg Thalmann Financial Services Inc. Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2012 and 2011
Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012,
2011 and 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
Notes to the Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-8
F-1
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Ladenburg Thalmann Financial Services Inc.
We have audited the accompanying consolidated balance sheets of Ladenburg Thalmann Financial Services, Inc., (the
“Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in shareholders’
equity and cash flows for each of the years in the three-year period ended December 31, 2012. 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., as of December 31, 2012 and 2011, and the consolidated results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with accounting principles
generally accepted in the United States of America.
We have also 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, 2012, 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 14, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ EisnerAmper LLP
New York, New York
March 14, 2013
F-2
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share amounts)
ASSETS
Cash and cash equivalents
Securities owned, at fair value
Receivables from clearing brokers
Receivables from other broker-dealers
Notes receivable from financial advisors, net
Other receivables, net
Fixed assets, net
Restricted assets
Intangible assets, net
Goodwill
Unamortized debt issue cost
Cash surrender value of life insurance
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Securities sold, but not yet purchased, at fair value
Accrued compensation
Commissions and fees payable
Accounts payable and accrued liabilities
Deferred rent
Deferred income taxes
Deferred compensation liability
Accrued interest
Notes payable, net of $7,120 and $9,113 unamoritized discount in 2012 and 2011,
respectively
Total liabilities
Commitments and contingencies (Notes 3 and 13)
Shareholders’ equity:
December 31,
2012
2011
$ 35,434
2,078
16,973
2,149
39,148
20,534
13,199
320
87,988
90,578
1,768
11,207
16,753
$ 338,129
$ 31,597
2,014
18,399
513
44,308
18,873
12,011
320
98,829
91,161
2,246
12,161
14,713
$ 347,145
$
292
12,017
31,570
13,735
1,977
6,545
17,955
4,838
197,979
$
78
10,499
25,891
19,203
2,333
6,548
18,701
3,265
197,184
286,908
283,702
Preferred stock, $.0001 par value; 2,000,000 shares authorized; none issued
Common stock, $.0001 par value; 400,000,000 shares authorized; shares issued and
—
18
—
18
outstanding, 183,478,872 in 2012 and 183,253,068 in 2011
Additional paid-in capital
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
208,187
204,055
(156,984) (140,630)
63,443
$ 347,145
51,221
$ 338,129
See accompanying notes to consolidated financial statements
F-3
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
Revenues:
Commissions
Advisory fees
Investment banking
Principal transactions
Interest and dividends
Service fees and other income
Total revenues
Expenses:
Commissions and fees
Compensation and benefits
Non-cash compensation
Brokerage, communication and clearance fees
Rent and occupancy, net of sublease revenue
Professional services
Interest
Depreciation and amortization
Acquisition-related expense
Amortization of retention loans
Other
Total expenses
Loss before item shown below
Change in fair value of contingent consideration
Loss before income taxes
Income tax expense (benefit)
Net (loss) income
Net (loss) income per common share (basic and diluted)
Weighted average common shares used in computation of per
share data:
Basic
Diluted
Year Ended December 31,
2012
2011
2010
$
$
$
$
326,132
233,672
29,278
(1,081)
4,773
57,337
650,111
477,104
80,151
4,744
9,939
6,600
8,347
24,541
16,061
—
7,346
37,281
672,114
(22,003)
7,111
(14,892)
1,462
(16,354) $
(0.09) $
$
139,549
87,865
27,514
(1,210)
1,026
18,856
273,600
182,462
52,043
4,014
7,692
3,813
4,223
6,543
5,632
2,971
1,634
14,875
285,902
(12,302)
—
(12,302)
(16,195)
$
3,893
$
0.02
106,960
53,627
22,381
131
524
10,903
194,526
122,120
43,309
5,439
7,439
3,309
5,361
3,241
3,978
—
—
10,420
204,616
(10,090)
—
(10,090)
861
(10,951)
(0.06)
183,572,582
183,572,582
183,023,590
189,014,028
175,698,489
175,698,489
See accompanying notes to consolidated financial statements
F-4
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except share amounts)
Common Stock
Shares
Amount
Balance, December 31, 2009
Issuance of common stock in private equity
167,907,038
14,050,000
17
1
offering, net of expenses of $122
Additional
Paid-in
Capital
171,349
13,927
Accumulated
Deficit
Total
(133,572) 37,794
13,928
—
Issuance of common stock under employee stock
62,274
—
63
purchase plan
Exercise of stock options
Stock options granted to consultants
Stock-based compensation to employees
Issuance of restricted stock grants (net of 2,500
1,345,050
—
—
197,500
—
—
—
—
710
49
5,390
—
—
—
—
—
—
63
710
49
5,390
—
shares forfeited)
Repurchase and retirement of common stock
Net loss
Balance, December 31, 2010
Issuance of common stock under employee stock
(65,370) —
—
18
—
—
183,496,492
58,884
purchase plan
Exercise of stock options (net of 58,474 shares
626,298
—
tendered in payment of exercise price)
Exercise of warrants
Stock options granted to consultants and
independent financial advisors
132,500
—
—
—
Stock-based compensation to employees
Cancellation of restricted stock
Repurchase and retirement of common stock
Warrants issued to lenders
Net income
Balance, December 31, 2011
Issuance of common stock under employee stock
—
—
(5,000) —
(1,056,106) —
—
—
—
—
$ 18
183,253,068
—
98,513
purchase plan
Exercise of stock options (net of 187,542 shares
693,958
—
tendered in payment of exercise price)
Exercise of warrants
Stock options granted to consultants
and independent financial advisors
Stock-based compensation to employees
Cancellation of restricted stock
Repurchase and retirement of common stock
Net loss
Balance, December 31, 2012
358,500
—
—
—
—
—
(12,500) —
(912,667) —
—
$ 18
—
183,478,872
—
(64)
—
191,424
83
(64)
(10,951) (10,951)
(144,523) 46,919
83
—
473
126
688
—
—
—
473
126
688
3,266
60
(1,493)
9,428
—
$204,055
138
—
—
—
—
3,893
3,266
60
(1,493)
9,428
3,893
$(140,630) $ 63,443
138
—
319
338
—
—
319
338
1,317
3,427
—
(1,407)
—
$208,187
1,317
3,427
—
(1,407)
(16,354) (16,354)
$(156,984) $ 51,221
—
—
—
—
See accompanying notes to consolidated financial statements
F-5
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2011
2010
2012
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating
$ (16,354) $
3,893
$ (10,951)
activities:
Change in fair value of contingent consideration
Adjustment to deferred rent
Amortization of intangible assets
Amortization of debt discount
Amortization of debt issue cost
Amortization of retention loans
Depreciation and other amortization
Deferred income taxes
Benefit attributable to reduction of goodwill
Non-cash interest expense on forgivable loan
Gain on forgiveness of accrued interest under forgivable loans
Gain on forgiveness of principal of note payable under forgivable loans
Non-cash compensation expense
Write-off of furniture, fixtures and leasehold improvements, net
(Increase) decrease in operating assets, net of effects of acquisitions:
Securities owned, at fair value
Receivables from clearing brokers
Receivables from other broker-dealers
Other receivables, net
Notes receivable from financial advisors, net
Cash surrender value of life insurance
Other assets
Increase (decrease) in operating liabilities, net of effects of acquisitions:
Securities sold, but not yet purchased, at fair value
Accrued compensation
Accrued interest
Commissions and fees payable
Deferred compensation liability
Accounts payable and accrued liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Payment for business acquisition
Payment for Premier Trust acquisition, net of cash received
Payment for Securities America acquisition, net of cash received
Purchases of fixed assets
Decrease in restricted assets
Other
Net cash used in investing activities
Cash flows from financing activities:
Issuance of common stock in private equity offering, net of offering expenses of $122
Issuance of common stock other than private equity offerings
Repurchases of common stock
Issuance of notes payable and warrants
Principal borrowings (payments) under revolving
credit facility, net
Principal payments on notes payable
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
(7,111)
(356)
11,683
1,993
478
7,346
4,378
877
71
1,258
(1,365)
(3,929)
4,744
7
(64)
1,426
(1,636)
(1,661)
(2,186)
954
(2,081)
214
1,518
1,680
5,679
(746)
831
7,648
—
(595)
4,060
39
642
1,634
1,572
(16,590)
84
423
(450)
(1,429)
4,014
—
669
(8,203)
851
(6,209)
(19,634)
924
25
58
653
2,964
912
(833)
(2,823)
(33,349)
—
—
(552)
—
—
(5,477)
—
99
(125,685)
(1,439)
50
—
(5,930) (127,074)
—
795
(1,407)
—
2,950
—
682
(1,493)
175,700
5,600
(1,492)
(219)
2,119
3,837
31,597
35,434
178,997
18,574
13,023
$ 31,597
$
—
(450)
2,941
289
282
—
1,037
693
35
337
(525)
(1,429)
5,439
24
136
(555)
(1,036)
(2,888)
(71)
—
229
1
964
150
3,307
—
941
(1,100)
—
(162)
—
(608)
150
—
(620)
13,928
773
(64)
—
(1,500)
(6,080)
7,057
5,337
7,686
13,023
See accompanying notes to consolidated financial statements
F-6
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)
(Dollars in thousands)
Year Ended December 31,
2011
2010
2012
Supplemental cash flow information:
Interest paid
Taxes paid
Noncash investing and financing transactions:
Warrants issued to lenders in connection with 2011
$
22,968
488
$
$
2,461
372
2,162
87
—
$
9,428
—
notes payable
Acquisition of Premier Trust:
Assets acquired
Liabilities assumed
Net assets acquired
Note issued in acquisition
Cash paid in acquisition
Cash acquired in acquisition
Net cash paid in acquisition
Acquisition of Securities America:
Assets acquired
Liabilities assumed
Net assets acquired
Fair value of contingent earnout
Cash paid in acquisition
Cash acquired in acquisition
Net cash paid in acquisition
Acquisition of business:
Assets acquired
Liabilities assumed
Net assets acquired
Fair value of contingent earnout
Cash paid in acquisition
—
—
—
—
—
—
—
$
$
2,565
(205)
2,360
(1,161)
1,199
(1,037)
162
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 232,059
(74,948)
157,111
(7,111)
150,000
(24,315)
$ 125,685
—
—
—
—
—
—
—
—
—
—
—
—
$
$
1,364
—
1,364
(812)
552
—
—
—
—
—
See accompanying notes to consolidated financial statements
F-7
TABLE OF CONTENTS
1. Description of Business
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Ladenburg Thalmann Financial Services Inc. (the “Company”) is a holding company. Its principal operating subsidiaries are
Securities America, Inc. (collectively with related companies, “Securities America”), which the Company acquired on November
4, 2011, Investacorp, Inc. (collectively with related companies, “Investacorp”), Triad Advisors, Inc. (“Triad”), Ladenburg
Thalmann & Co. Inc. (“Ladenburg”), Ladenburg Thalmann Asset Management Inc. (“LTAM”) and Premier Trust, Inc. (“Premier
Trust”).
Securities America, Investacorp and Triad are registered broker-dealers and investment advisors that have been serving the
independent financial advisor community since 1984, 1978 and 1998, respectively. The independent financial advisors of
Securities America, Investacorp and Triad primarily serve retail clients. Securities America, Investacorp and Triad derive revenue
from advisory fees and commissions, primarily from the sale of mutual funds, variable annuity products and other financial
products and services.
Ladenburg is a full service registered broker-dealer that has been a member of the New York Stock Exchange since 1879. Broker-
dealer activities include sales and trading and investment banking. Ladenburg provides its services principally to middle-market
and emerging growth companies and high net worth individuals through a coordinated effort among corporate finance, capital
markets, brokerage and trading professionals.
LTAM is a registered investment advisor. It offers various asset management products utilized by Ladenburg and Premier Trust’s
clients, as well as clients of Securities America’s, Investacorp’s and Triad’s financial advisors.
Premier Trust, a Nevada trust company, provides wealth management services, including administration of personal trusts and
retirement accounts, estate and financial planning and custody services.
Ladenburg, Securities America, Investacorp and Triad customer transactions are cleared through clearing brokers on a fully-
disclosed basis. Each of Ladenburg, Securities America, Investacorp and Triad is subject to regulation by, among others, the
Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority, the Municipal Securities Rulemaking
Board and is a member of the Securities Investor Protection Corporation. Securities America is also subject to regulation by the
Commodities Futures Trading Commission and the National Futures Association. Premier Trust is subject to regulation by the
Nevada Department of Business and Industry Financial Institutions Division.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned,
after elimination of all significant intercompany balances and transactions.
Use of Estimates
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
F-8
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies – (continued)
Reclassifications
Certain amounts in the prior year financial statements were reclassified to conform with the current year financial statement
presentation including an increase in cash and cash equivalents and a decrease in receivables from clearing brokers of $8,969,
$6,096 and $1,984 at December 31, 2011, 2010 and 2009, respectively, to conform to the classification shown on the consolidated
statement of financial condition at December 31, 2012, in which cash in money market funds held by clearing brokers were
reclassified as cash equivalents. The reclassification resulted in a reduction of cash used in operating activities of $2,873 and
$4,112 with corresponding increases in the net increase in cash and cash equivalents from amounts previously reported in the
consolidated statements of cash flows for the years ended December 31, 2011 and 2010, respectively.
Cash Equivalents
The Company considers all highly liquid financial instruments with an original maturity of three months or less to be cash
equivalents. Cash equivalents at December 31, 2012 and 2011 consist of money market funds which are carried at fair value of
$8,882 and $8,969, respectively, Fair value is based on quoted prices in active markets (Level 1).
Revenue Recognition
Commissions revenue results from transactions in equity securities, mutual funds, variable annuities, and other financial products
and services. Revenue from such transactions, executed as agent for clients, and related expenses are recorded on a trade-date
basis. The Company also earns revenue in the form of 12b-1 fees which are recognized on an accrual basis.
Advisory fee revenue represent fees charged by registered investment advisors to their clients based upon the value of advisory
assets. Advisory fees are recorded as earned. Since advisory fees are based on assets under management, significant changes in
the fair value of these assets will have an impact on the fees earned in future periods. The Company also earns incentive fees that
are based upon the performance of investment funds and accounts.
Investment banking revenue consists of underwriting revenue, strategic advisory revenue 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. Underwriting revenues are recorded at the time the
underwriting is completed and the income is reasonably determined. Strategic advisory revenue primarily consists of success fees
on completed mergers and acquisitions transactions, and retainer and periodic fees earned by advising buyers’ and sellers in
transactions. Fees are also earned for related strategic advisory work and other services such as providing fairness opinions and
valuation analyses. Strategic advisory revenues are recorded when the transactions or the services (or, if applicable, separate
components thereof) to be performed are substantially complete, the fees are determinable and collection is reasonably assured.
Private placement fees, net of expenses, are recorded on the closing date of the transaction.
Principal transactions revenue includes realized and unrealized net gains and losses resulting from investments in equity securities
and equity-linked warrants received from certain investment banking assignments.
Interest is recorded on an accrual basis and dividends are recorded on an ex-dividend date basis.
Service fees result from amounts collected from independent financial advisors for processing of securities trades and from
amounts collected for administrative and compliance services provided to independent financial advisors.
F-9
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies – (continued)
Fixed Assets
Fixed assets are carried at cost net of accumulated depreciation and amortization. Depreciation is provided by the straight-line
method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the
lease term, or their estimated useful lives, whichever is shorter.
Share-Based Compensation
The Company measures 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 equity instruments.
Compensation expense for share-based awards granted to independent contractors is measured at their vesting date fair value. The
compensation expense recognized each period is based on the awards' estimated value at the most recent reporting date.
Intangible Assets
Intangible assets are 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 not
be recoverable. The Company assesses the recoverability of its intangible assets by determining whether the unamortized balance
can be recovered over the assets’ remaining life through undiscounted forecasted cash flows. If undiscounted forecasted cash
flows indicate that the unamortized amounts will not be recovered, an adjustment will be made to reduce such amounts to fair value
determined based on forecasted future cash flows discounted at a rate commensurate with the risk associated with achieving such
cash flows. Future cash flows are based on trends of historical performance and the Company’s estimate of future performance,
giving consideration to existing and anticipated competitive and economic conditions. See Note 7.
Goodwill
Goodwill, which was recorded in connection with acquisitions of subsidiaries (see Notes 3 and 8), 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 forecasted 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 the carrying amount of goodwill. An impairment loss will be recognized in an amount equal to
the excess of the carrying amount over the implied fair value. After an impairment loss is recognized, the adjusted carrying amount
of goodwill is its new accounting basis.
Recently Issued Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance which amends fair value disclosures for
fiscal years beginning on or after December 15, 2011 (early adoption is prohibited). Such amendments include a consistent
definition of fair value, enhanced disclosure requirements for Level 3 fair value adjustments and other changes to required
disclosures. The Company adopted the disclosure enhancements of this amendment effective as of January 1, 2012.
F-10
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies – (continued)
In September 2011, the FASB issued new accounting guidance which will allow entities to first assess qualitative factors to
determine whether it is necessary to perform the two-step quantitative goodwill impairment testing. Under these amendments, an
entity would not be required to calculate the fair value of a reporting unit unless the entity determines based on a qualitative
assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance, which changes how
goodwill impairment testing is performed, does not change the timing or measurement of goodwill impairment. This guidance,
which is effective for annual and interim goodwill impairment tests performed after January 1, 2012, did not have any impact on
the Company’s 2012 financial statements. See Note 8.
In July 2012, the FASB issued amendments to the indefinite-lived intangible asset impairment guidance which provides an option
for companies to use a qualitative approach to test indefinite-lived intangible assets for impairment if certain conditions are met.
The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years
beginning after September 15, 2012 (early adoption is permitted). The implementation of the amended accounting guidance is not
expected to have a material impact on the Company’s financial statements.
3. Acquisitions
Securities America Acquisition
On November 4, 2011, the Company completed its acquisition from Ameriprise Financial, Inc. (“Ameriprise”) of the outstanding
capital stock of Securities America Financial Corporation (“SAFC”), which is a holding company and the sole owner of Securities
America, Inc. (“SAI”), Securities America Advisors, Inc. (“SAA”), and Brecek & Young Advisors, Inc. (“BYA”). SAI is a
registered broker-dealer which conducts securities brokerage services and markets insurance products nationally through a
network of independent contractor financial advisors. SAA and BYA are registered investment advisors which provide investment
advisory services through a network of independent contractor financial advisors. The acquisition was made to expand the
Company’s presence in the independent broker-dealer business.
The Company paid Ameriprise $150,000 in cash at closing and will also pay to Ameriprise, if earned, a cash earn-out over two
years, subject to a maximum of $70,000, calculated based on a percentage of the amount, if any, by which SAFC’s consolidated
gross revenue and cash spread, as defined, for the years ending December 31, 2012 and 2013 exceed certain levels. A cash earn-
out was not paid for the year ended December 31, 2012. The purchase price, together with related cash requirements, was financed
through various loans (see Note 12).
The total acquisition date fair value of the consideration transferred (“Purchase Price”) was $157,111, which included $7,111 for
the estimated acquisition date fair value of the earn-out. Also, the stock purchase agreement provided for a purchase price
adjustment based on the working capital of Securities America at the date of acquisition. As of December 31, 2012, such
adjustment was finalized and resulted in the Company receiving an additional $99. Legal and other acquisition related costs of
approximately $2,971 were incurred and charged to expense during 2011.
F-11
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
3. Acquisitions – (continued)
The acquisition date fair value of consideration transferred (the “purchase price”) was allocated to tangible and identifiable
intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining
unallocated purchase price recorded as goodwill. The following table summarizes the fair values of assets acquired and liabilities
assumed:
Cash
Receivables
Identifiable intangible assets
Goodwill
Cash surrender value of life insurance
Other assets
Total assets acquired
Commissions and fees payable
Accounts payable and accrued liabilities
Deferred compensation liability
Deferred taxes payable, net
Deferred fees payable
Total liabilities assumed
Total purchase price
$
24,315
34,083
76,458
60,493*
13,085
22,591
231,025
(15,714)
(14,267)
(19,534)
(19,604)*
(4,894)
(74,013)
$ 157,012
* During 2012, the Company reduced goodwill attributable to the Securities America acquisition by $935 to correct the
overstatement of the deferred tax liability originally recorded, and by $99 to reflect the working capital purchase price
adjustment.
A deferred tax liability has been recorded for the excess of financial statement basis over tax basis of the acquired assets and
assumed liabilities with a corresponding increase to goodwill. Goodwill, most of which is non-deductible for income tax purposes,
was assigned to the Independent Brokerage and Advisory Services segment. Factors that contributed to a purchase price resulting
in the recognition of goodwill include Securities America’s strategic fit into the Company’s Independent Brokerage and Advisory
Services segment and the resulting synergies and economies of scale expected from the acquisition when combined with the
Company’s other independent broker-dealers and Ladenburg’s traditional investment banking, capital markets, institutional equity
and related businesses.
Identifiable intangible assets as of the acquisition date consist of:
Technology
Relationships with independent contractor financial advisors
Trade names
Non-solicitation agreement
Total identifiable intangible assets
Useful Life
(years)
7.7
9.2
7.2
2.2
$
$
20,996
43,188
12,267
7
76,458
Fair value amounts were determined using an income approach for relationships with advisors and trade names and a cost
approach for technology.
F-12
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
3. Acquisitions – (continued)
A liability of $7,111 was recognized based on the estimated acquisition date fair value of the potential earn-out. The liability was
valued using an income based approach based on discounting to present value the earn-out’s probability weighted expected payoff
using four earn-out scenarios for both earn-out periods. The fair value measurement of the earn-out is based on unobservable
inputs (Level 3) and reflects the Company’s own assumptions. The significant unobservable inputs used in the fair value
measurement of the earn-out are: probability of outcomes; projected revenues; and weighted average cost of capital. Significant
increases or decreases in any of these inputs in isolation would result in either a significantly lower or higher fair value
measurement.
In connection with the acquisition, the Company made loans and granted stock options to SAI’s financial advisors. The loans,
which aggregated $20,000, mature in four years and are ratably forgivable over the term of the loans provided the advisors meet
certain production requirements and remain affiliated with SAI. The stock options for 8,020,743 common shares have an exercise
price of $1.68 and vest ratably over a period of four years as long as the advisors remain affiliated with SAI. In addition, the
Company granted to SAI employees options for 920,000 common shares which have an exercise price of $1.68 and vest ratably
over a period of four years.
The accompanying consolidated financial statements include the results of operations of Securities America from the date of
acquisition. The following unaudited pro forma information represents the Company’s consolidated results of operations as if the
acquisition of Securities America had occurred at the beginning of 2010. The pro forma net loss reflects amortization of the
amounts ascribed to intangible assets acquired in the acquisition, compensation related to forgivable loans and stock option grants
to independent financial advisors referred to above and interest expense on debt used to finance the acquisition and related cash
requirements.
Total revenue
Net loss
Basic and diluted loss per share
Weighted average common shares outstanding – basic and
$
$
$
diluted
Year Ended
December 31, 2011
658,104
$
(45,133) $
(0.25) $
183,023,590
Year Ended
December 31, 2010
656,913
(42,773)
(0.24)
175,698,489
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated results
of operations that would have been reported had the acquisition been completed as of the beginning of 2010, nor should it be taken
as indicative of the Company’s future consolidated results of operations.
Revenues and net loss for Securities America for the period from November 5, 2011 to December 31, 2011 included in the
accompanying statements of operations were $57,090 and $4,533, respectively.
Premier Trust
On September 1, 2010, the Company acquired all the outstanding shares of Premier Trust, a Nevada trust company, which
provides trust administration and wealth management services. The acquisition was made due to the complementary nature of
Premier Trust’s operations to those of the Company’s independent broker-dealer subsidiaries. The consideration for the
transaction was $2,360, consisting of cash of $1,199 and a note in the aggregate principal amount of $1,161. Results of operations
of Premier Trust are included in the accompanying consolidated statements of operations from the date of acquisition and were not
material. In addition, based on materiality, pro forma results were not presented.
F-13
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
3. Acquisitions – (continued)
Other
In December 2012, Securities America purchased certain assets of a broker-dealer having independent financial advisors that was
deemed to be a business acquisition. The consideration for the transaction was $1,364, consisting of cash of $552 and contingent
consideration having a fair value of $812 for which a liability was recognized based on the estimated acquisition date fair value of
the potential earn-out. The liability was valued using an income based approach based on discounting to present value the earn-
out’s probability weighted expected payoff using three earn-out scenarios. The fair value measurement of the earn-out which
relates to a four-year period, is based on unobservable inputs (Level 3) and reflects the Company’s own assumptions. Results of
operations of the acquired broker-dealer are included in the accompanying consolidated statements of operations from the date of
acquisition and were not material. In addition, based on materiality, pro forma results were not presented.
Set forth below are changes in the carrying value of contingent consideration included in accounts payable and accrued liabilities.
Year Ended December 31, 2012:
Fair value of contingent consideration as of December 31, 2011
Change in fair value of contingent consideration
Fair value of contingent consideration in connection with 2012 acquisition
Fair value of contingent consideration as of December 31, 2012
$
$
7,111
(7,111)
812
812
As a result of decreases in projected revenues based on actual revenues generated by Securities America for the year ended
December 31, 2012, the estimated fair value of the earn-out decreased by $7,111 which is included in the results of operations for
the year ended December 31, 2012.
4. Securities Owned and Securities Sold, But Not Yet Purchased
The components of securities owned and securities sold, but not yet purchased as of December 31, 2012 and 2011 are as follows:
December 31, 2012
Certificates of deposit
Debt securities
U.S. Treasury notes
Common stock and warrants
Restricted common stock and warrants
December 31, 2011
Common stock and warrants
Restricted common stock and warrants
Securities
Owned
Securities Sold, But Not Yet
Purchased
$
$
14 $
1,098
—
384
582
2,078 $
—
(123)
(99)
(70)
—
(292)
$
$
191 $
1,823
2,014 $
(78)
—
(78)
F-14
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
4. Securities Owned and Securities Sold, But Not Yet Purchased – (continued)
As of December 31, 2012 and 2011, approximately $1,787 and $542, respectively, of securities owned were deposited with the
Company’s subsidiaries’ clearing brokers. Under the clearing agreements with such clearing brokers, the securities may be sold or
hypothecated by the clearing brokers. Securities sold, but not yet purchased, at fair value represents obligations of the Company’s
subsidiaries to purchase the specified financial instrument at the then current market price. Accordingly, these transactions result in
off-balance-sheet risk as the Company’s subsidiaries’ ultimate obligation to repurchase such securities may exceed the amount
recognized in the consolidated statements of financial condition.
Authoritative accounting guidance defines fair value, establishes a framework for measuring fair value, and establishes a fair value
hierarchy which prioritizes the inputs to valuation techniques. Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement
assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the
absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or
cost approach are used to measure fair value.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and
liabilities carried at fair value are classified and disclosed in one of the following three categories:
•
•
•
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available.
Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed
based on market data obtained from sources independent of the Company.
Level 3 — Unobservable inputs. Unobservable inputs reflect the assumptions that the Company develops based on available
information about what market participants would use in valuing the asset or liability.
Securities are recorded at fair value and classified as follows:
Securities owned, at fair value
Debt securities
Certificates of deposit
Common stock and warrants
Total
Level 1
—
$
14
384
398
$
$
$
Securities sold, but not yet purchased, at fair value
Debt securities
U.S. Treasury notes
Common stock and warrants
Total
Level 1
—
$
—
70
70
$
Level 2
123
$
99
—
222
$
Level 2
December 31, 2012
Level 3
1,098 $ —
— —
582 —
1,680 $ —
December 31, 2012
Level 3
—
$
—
—
—
$
Total
1,098
14
966
2,078
Total
123
99
70
292
$
$
$
$
F-15
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
4. Securities Owned and Securities Sold, But Not Yet Purchased – (continued)
Securities owned, at fair value
Common stock and warrants
Level 1
191
$
$
Level 2
December 31, 2011
Level 3
—
1,823 $
December 31, 2011
Total
$
2,014
Securities sold, but not yet purchased, at fair value
Common stock and warrants
Level 1
68
$
Level 2
10
$
Level 3
Total
$
—
$
78
Debt securities and U.S. Treasury notes are valued based on recently executed transactions, market price quotation, and pricing
models that factor in, where applicable, interest rates and bond default risk spreads.
Warrants are carried at a discount to fair value as determined by using the Black-Scholes option pricing model due to illiquidity.
This model takes into account the underlying securities current market value, the underlying securities market volatility, the term of
the warrants, exercise price, and risk free return rate. As of December 31, 2012 and 2011, the fair value of the warrants are $160
and $1,005, respectively, and are included in common stock and warrants (level 2) above.
Common stock may be received as compensation for investment banking services. These securities are restricted and may be freely
traded only upon the effectiveness of a registration statement covering them or upon the satisfaction of the requirements of Rule
144, including the requisite holding period. Restricted common stock is classified as Level 2 securities.
5. Net Capital Requirements
The Company’s broker-dealer subsidiaries are subject to the SEC’s Uniform Net Capital Rule 15c3-1, which requires the
maintenance of minimum net capital. Each of Ladenburg and Securities America has elected to compute its net capital under the
alternative method allowed by this rule. At December 31, 2012, Ladenburg had regulatory net capital of $4,358, which exceeded
its minimum capital requirement of $250, by $4,108. At December 31, 2012, Securities America had regulatory net capital of
$7,941, which was $7,691 in excess of its required net capital of $250.
Investacorp and Triad have elected to compute net capital using the traditional method under the SEC’s Uniform Net Capital Rule
15c3-1, which requires the maintenance of minimum net capital and a ratio of aggregate indebtedness to net capital, that shall not
exceed 15 to 1. At December 31, 2012, Investacorp had net capital of $3,542, which was $3,232 in excess of its required net
capital of $310. Investacorp’s net capital ratio was 1.3 to 1. At December 31, 2012, Triad had net capital of $3,214, which was
$2,462 in excess of its required net capital of $752. Triad’s net capital ratio was 3.5 to 1.
Ladenburg, Securities America, Investacorp and Triad claim exemptions from the provisions of the SEC’s Rule 15c3-3 pursuant
to paragraph (k)(2)(ii) as they clear their customer transactions through correspondent brokers on a fully disclosed basis.
Premier Trust, chartered by the state of Nevada, is subject to regulation by the Nevada Department of Business and Industry
Financial Institutions Division. Under Nevada law, Premier Trust must maintain minimum stockholders’ equity of at least $1,000,
including at least $250 in cash. At December 31, 2012, Premier Trust had stockholders’ equity of $1,448, including at least $250
in cash.
F-16
TABLE OF CONTENTS
6. Fixed Assets
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Components of fixed assets, net included in the consolidated statements of financial condition were as follows:
December 31,
2012
2011
Cost:
Leasehold improvements
Computer equipment
Furniture and fixtures
Other
Less: accumulated depreciation and amortization
Total
7. Intangible Assets
$
$
4,763
10,009
1,658
7,446
23,876
(10,677)
$
$ 13,199
4,605
8,343
1,683
3,996
18,627
(6,616)
12,011
At December 31, 2012 and 2011, intangible assets subject to amortization consisted of the following:
Technology
Relationships with
Estimated
Useful Life
(years)
1 & 7.7
20, 10.2 &
December 31, 2012
December 31, 2011
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
21,422 $
68,688
3,621 $
11,523
21,422 $
67,895
financial advisors
Vendor relationships
Covenants not-to-compete
Customer accounts
Trade names
Relationships with
9.2
7
5 & 2.2
10 & 6.9
7.2 & 10
4
3,613
1,773
2,029
12,290
2,586
2,482
1,551
1,017
2,002
2,586
3,613
1,724
2,029
12,290
2,586
882
5,576
1,966
1,219
767
288
2,586
investment banking
clients
Leases
Referral agreement
Other
Total
6
6.6
6
1,004
124
67
$ 113,596 $
730
43
53
1,004
124
67
25,608 $ 112,754 $
574
25
42
13,925
Aggregate amortization expense amounted to $11,683, $4,060 and $2,941 for the years ended December 31, 2012, 2011 and
2010, respectively. The weighted-average amortization period for total amortizable intangibles at December 31, 2012 is 8.84 years.
Estimated amortization expense for each of the five succeeding years and thereafter is as follows:
2013
2014
2015
2016
2017
2018 – 2027
$
$
11,613
11,336
10,910
10,711
10,551
32,867
87,988
F-17
TABLE OF CONTENTS
8. Goodwill
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Changes to the carrying amount of goodwill during the years ended December 31, 2012 and 2011 are as follows:
Ladenburg
Independent Brokerage and
Advisory Services
Total
Balance as of January 1, 2011
Acquisition of Securities America
Benefit applied to reduce goodwill
Balance as of December 31, 2011
Benefit applied to reduce goodwill
Business acquisition
Adjustment related to allocation of Securities
America purchase price
Reduction of purchase price for Securities
America acquisition
$
$
$
$
301
—
—
301
—
—
—
—
29,418
61,526
(84)
90,860
(71)
522
(935)
$ 29,719
61,526
(84)
$ 91,161
(71)
522
(935)
(99)
(99)
Balance as of December 31, 2012
$
301
$
90,277
$ 90,578
The annual impairment tests performed at December 31, 2012 and 2011 based on quantitative assessments (see Note
B — “Goodwill” and “Recently Issued Accounting Pronouncement”) did not indicate that the carrying value of goodwill had been
impaired. However, changes in circumstances or business conditions could result in an impairment of goodwill. As required, the
Company will continue to perform impairment testing on an annual basis or when an event occurs or circumstances change that
would more likely than not reduce the fair value of the Company’s reporting units below the carrying amount of their net assets.
During 2012, the Company reduced goodwill by $935, to correct an overstatement of the deferred tax liability recorded upon
acquisition of Securities America, increased goodwill by $522 due to a business acquisition and reduced goodwill by $99 related
to a working capital purchase price adjustment for the Securities America acquisition. For 2012 and 2011, the carrying amount of
goodwill was reduced by $71 and $84, respectively, representing state tax benefit realized for the excess of tax deductible goodwill
over goodwill recognized for reporting purposes with respect to the Company’s subsidiaries.
9. Notes Receivable from Financial Advisors
From time to time, the Company’s broker-dealer subsidiaries may make loans to their financial advisors. These loans are primarily
given to newly recruited brokers to assist in the transition process. As described in Note 3, in connection with the Securities
America acquisiton, the Company made retention loans aggregating $20,000 to Securities America’s financial advisors. The notes
receivable balance is comprised of unsecured non-interest-bearing and interest-bearing loans (interest ranging from 0.0% to 8.0%)
to the financial advisors. These notes have various schedules for repayment or forgiveness and mature at various dates through
2021. The notes are amortized over the forgiveness period which generally ranges from 3 to 5 years. Receivables are continually
evaluated for collectability and possible write-offs and an allowance for doubtful accounts is provided where a loss is considered
probable. As of December 31, 2012 and 2011, the allowance amounted to $628 and $339, respectively.
The net carrying value of notes receivable, which are recorded at cost, as of December 31, 2012 and 2011 was $39,148 and
$44,308, respectively, which approximates fair value. Fair value is determined based on a valuation technique to convert future
cash payments or forgiveness transactions to a single discounted present value amount (Level 2 inputs).
F-18
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
10. Deferred Compensation Plan
Securities America has a deferred compensation plan which allowed certain members of management and qualified, financial
advisors to defer a portion of their compensation and commissions. Participants were able to elect various distribution options, but
must be a plan participant for five years before any distributions can be made. Securities America has purchased variable life
insurance contracts with cash surrender values that are designed to replicate the gains and losses of the deferred compensation
liability and are held in a consolidated Rabbi Trust. The cash surrender values of the life insurance contracts held in the Rabbi
Trust are intended to informally fund a portion of the deferred compensation liability. Securities America is the owner and
beneficiary of these policies, for which the aggregated cash surrender value totaled $11,207 and $12,161 as of December 31, 2012
and 2011, respectively. The deferred compensation liability of $17,955 and $18,701 as of December 31, 2012 and 2011,
respectively, reflects the current value of the deferred compensation benefits, which is subject to change with market value
fluctuations. The deferred compensation liability is equal to the theorized value of the underlying employee investment fund
elections in the plan. Changes in the value of the assets or liabilities are recognized in the consolidated statements of operations.
11. Income Taxes
The Company files a consolidated federal income tax return and certain combined state and local income tax returns with its
subsidiaries. The Company is on a tax year ending September 30th. The Company is electing to change its tax year end to
December 31.
Income taxes consist of the following:
2012:
Current
Deferred
Benefit applied to reduce goodwill
2011:
Current
Deferred
Benefit applied to reduce goodwill
2010:
Current
Deferred
Benefit applied to reduce goodwill
Federal
State and
Local
Total
—
527
—
527
$
$
514
350
71
935
$
$
514
877
71
1,462
311
(2,524)
84
(2,129)
$
311
(16,590)
84
$ (16,195)
208
76
35
319
$
$
133
693
35
861
$
$
$
—
$
(14,066)
—
$ (14,066) $
$
$
(75) $
617
—
542
$
F-19
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
11. Income Taxes – (continued)
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal
income tax rate (34%) to pre-tax loss as a result of the following differences:
Loss before income taxes
Benefit under statutory U.S. tax rates
Increase (decrease) in taxes resulting from:
Increase (decrease) in valuation allowance
Change in fair value of contingent consideration not taxable
Other nondeductible items
State taxes
Other, net
Income tax expense (benefit)
$
2012
2011
$ (14,892) $ (12,302) $ (10,090)
(3,431)
(4,183)
(5,063)
2010
8,500
(2,844)
346
340
183
1,462
(12,600)
—
129
206
253
$ (16,195) $
3,615
—
319
137
221
861
The Company accounts for income taxes under the asset and liability method, which requires the recognition of tax benefits or
expense on the temporary differences between the tax basis and financial statement basis of its assets and liabilities as well as tax
loss carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income
in the years in which those differences are expected to be recovered or settled.
Deferred tax amounts are comprised of the following at December 31:
2012
2011
Deferred tax assets (liabilities):
Net operating loss carryforwards
AMT credit carryforward
Accrued expenses
Compensation and benefits
Deferred compensation liability
Depreciation and amortization
Other
Unrealized gain
Intangibles
Goodwill
Valuation allowance
Net deferred taxes
F-20
$
$ 37,619
303
1,697
12,934
6,877
(2,272)
18
936
(25,185)
(5,465)
27,462
(34,007)
(6,545) $
$
31,558
303
1,572
10,809
7,163
(2,438)
45
991
(25,760)
(5,284)
18,959
(25,507)
(6,548)
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
11. Income Taxes – (continued)
As discussed in Note 3, a net deferred tax liability of $19,604, as corrected, was recorded on the acquisition of Securities America
for the excess financial statement basis over tax basis of the acquired assets and assumed liabilities. As Securities America will be
included in the Company’s consolidated federal and certain combined state and local income tax returns, deferred federal and a
substantial portion of deferred state and local tax liabilities assumed in the acquisition are able to offset the reversal of the
Company’s pre-existing deferred tax assets. Accordingly, the Company’s deferred tax valuation allowance has been reduced to the
extent of $18,329 of the deferred tax liability recorded in the acquisition and recorded as a deferred tax benefit in the accompanying
statements of operations for the year ended December 31, 2011.
Realization of deferred tax assets is dependent on the existence of sufficient taxable income within the carryforward period,
including future reversals of taxable temporary differences. The taxable temporary difference related to goodwill, which is
amortized for tax purposes, will reverse when goodwill is disposed of or impaired. Because such period is not determinable and,
based on available evidence, management was unable to determine that realization of the deferred tax assets was more likely than
not, management has provided a valuation allowance at December 31, 2012 and 2011 to fully offset the deferred tax assets.
At December 31, 2012, the Company and its subsidiaries had a consolidated net operating loss carryforward of approximately
$106,000 for federal income tax purposes expiring in various years from 2015 through 2032. Goodwill for tax purposes
recognized in connection with the acquisition of Triad by the Company, all of which is tax deductible, exceeded the amount of
goodwill recognized in the financial statements. Authoritative accounting guidance in effect when the acquisition was
consummated requires the tax benefit for the excess goodwill to be recognized when realized and applied first to reduce goodwill
and thereafter reduce non-current intangible assets with the remaining benefit recognized as a reduction of income tax expense. The
federal net operating loss carryforward at December 31, 2012 includes $1,633 applicable to amortization of excess tax goodwill.
Upon utilization of the carryforward the related tax benefit will be applied to reduce goodwill. The Company applied the “more-
likely-than-not” recognition threshold to all tax positions taken or expected to be taken in a tax return, which resulted in no
unrecognized tax benefits as of December 31, 2012.
The Company has elected to classify interest and penalties that would accrue according to the provisions of relevant tax law as
interest and other expense, respectively.
The Company’s tax years 2008 through 2012 remain open to examination by most taxing authorities.
Securities America was included in consolidated federal and state income tax returns filed by Ameriprise. Accordingly, Securities
America is jointly, with other members of the consolidated group, and severally liable for any additional taxes that may be
assessed against the group. In connection with the acquisition, Ameriprise has agreed to indemnify the Company for any such
assessments imposed on any members of the group other than Securities America.
Ameriprise has disclosed that the IRS is currently auditing its U.S. income tax returns for 2008 and 2009 and will begin auditing
its U.S. income tax returns for 2010 and 2011 in the fourth quarter of 2012 and further that certain of its subsidiaries’ state income
tax returns are currently under examination by various jurisdictions for years ranging from 1999 through 2009. Ameriprise has
also disclosed that federal and state income tax returns remain open for the years after 2009.
F-21
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
12. Notes Payable
Notes payable consisted of the following:
Note payable under revolving credit agreement with principal shareholder
Notes payable to clearing firm under forgivable loans
Note payable to a subsidiary of Premier Trust’s former shareholder
Notes payable to finance Securities America acquisition, net of $7,120 and
$9,113 of unamortized discount in 2012 and 2011, respectively
Total
December 31,
2012
2011
$ 25,500 $ 22,550
18,214 22,143
904
685
153,580 151,587
$197,979 $197,184
The Company estimates that the fair value of notes payable approximated $187,385 at December 31, 2012 and $184,883 at
December 31, 2011 based on anticipated current rates at which similar amounts of debt could then be borrowed (Level 2 inputs).
As of December 31, 2012, the Company is in compliance with all debt covenants in its debt agreements.
Revolving Credit Agreement
On October 19, 2007, in connection with the Investacorp acquisition, the Company entered into a $30,000 revolving credit
agreement with Frost Gamma Investments Trust (“Frost Gamma”), an affiliate of the Company’s chairman of the board and
principal shareholder, and borrowed $30,000. Borrowings under the Frost Gamma credit agreement bear interest at a rate of 11%
per annum, payable quarterly. Frost Gamma received a one-time funding fee of $150. On August 25, 2009, the revolving credit
agreement was amended to extend the maturity date to August 25, 2016. In connection with the Securities America acquisition, on
August 16, 2011, the Company entered into a second amendment to the revolving credit agreement, under which available
borrowings were increased by $10,000 to an aggregate of $40,000.
The note issued under the credit agreement contains customary events of default, which, if uncured, entitle the holder to accelerate
the due date of the unpaid principal amount of, and all accrued and unpaid interest on, such note. Under the revolving credit
agreement, Frost Gamma received a warrant to purchase 2,000,000 shares of LTS common stock. The warrant is exercisable at
any time during its ten-year term at an exercise price of $1.91 per share, the closing price of the Company’s common stock on the
Investacorp acquisition date. The warrant, which is classified as debt issue cost, was valued at $3,200 based on the Black-Scholes
option pricing model, and is being amortized under the straight-line method over the remaining term of the revolving credit
agreement. The Company may repay outstanding amounts at any time prior to the maturity date of August 25, 2016, without
penalty, and may re-borrow up to the full amount of the agreement.
F-22
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
12. Notes Payable – (continued)
NFS Forgivable Loans
On November 4, 2011, the primary clearing firm of the Company's subsidiaries, National Financial Services LLC (“NFS”), a
Fidelity Investments® company, provided the Company with a seven-year, $15,000 forgivable loan. The Company used the
forgivable loan proceeds to fund expenses related to the Securities America acquisition. Interest on the loan accrues at the average
annual Federal Funds effective rate plus 6% per annum, subject to the maximum rate of 11% per annum (6.25% at December 31,
2012). If Securities America meets certain annual clearing revenue targets set forth in the loan agreement, the principal balance of
the loan will be forgiven in seven equal yearly installments of $2,143 commencing on November 4, 2012 and continuing on an
annual basis through November 2018. Interest payments due with respect to each such year will also be forgiven if the annual
clearing revenue targets are met. Any principal amounts not forgiven will be due in November 2018, and any interest payments not
forgiven are due annually. If during the loan term any principal amount is not forgiven, the Company may have such principal
forgiven in future years if Securities America exceeds subsequent annual clearing revenue targets. Upon meeting annual revenue
targets in 2012, principal and interest of $2,143 and $919, respectively, were forgiven and included in other income.
In connection with the entering into the new forgivable loan, Securities America and the Company’s other broker-dealer
subsidiaries amended their clearing agreements with NFS to, among other things, extend the term of those agreements through
November 2018. Also, the Company and NFS amended the terms of the 2009 forgivable loan made by NFS to the Company such
that the remaining principal balance of $7,143 and the related accrued interest will be forgiven, subject to the terms and conditions
of the loan, in four equal annual installments commencing in November 2012 without the Company being required to satisfy the
annual clearing revenue targets previously established. Interest on the 2009 loan accrues at the prime rate plus 2% (5.25% at
December 31, 2012). In 2012, principal and interest of $1,786 and $446, respectively, were forgiven. Upon meeting annual
revenue targets, principal and interest of $1,429 and $450, respectively, in 2011 and $1,425 and $525, respectively, in 2010, were
forgiven and included in other income.
The Company has expensed, and will continue to expense, interest under the loan agreements prior to forgiveness.
The forgivable loan agreements contain other covenants including limitations on the incurrence of additional indebtedness,
maintenance of minimum adjusted shareholders’ equity levels and a prohibition on the termination of the Company’s $40,000
revolving credit agreement prior to its current maturity. Upon the occurrence of an event of default, the outstanding principal and
interest under the loan agreements may be accelerated and become due and payable. If the clearing agreements are terminated prior
to the loan maturity date, all amounts then outstanding must be repaid on demand. The loan agreements are secured by the
Company’s, but not its subsidiaries’, deposits and accounts held at NFS or its affiliates, which amounted to $213 at December 31,
2012.
Premier Trust Note
On September 1, 2010, as part of the consideration paid for Premier Trust, the Company issued a four-year, non-negotiable
promissory note in the aggregate principal amount of $1,161 to a subsidiary of Premier Trust’s former shareholder. The note bears
interest at 6.5% per annum and is payable in 15 equal quarterly installments.
F-23
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
12. Notes Payable – (continued)
Securities America Notes
On November 4, 2011 (the “Closing Date”), in connection with the Securities America acquisition, the Company entered into a
loan agreement with various lenders (the “Lenders”), under which the Lenders provided a loan to the Company in an aggregate
principal amount of $160,700, a portion of which was used to fund the cash purchase price payable on the Closing Date. Interest
on the November 2011 Loan is payable quarterly at 11% per annum. Interest is payable in cash; provided that (i) from December
31, 2011 until November 4, 2013, the Company may, without the consent of any Lender, elect to satisfy its interest obligations by
adding such amount to the outstanding principal balance of the note, in an amount of up to approximately 36% of accrued and
unpaid interest on each payment date, and (ii) after November 4, 2013 until maturity, the Company may also pay interest-in-kind
with the consent of certain Lenders. This payment-in-kind feature increases the principal sum outstanding on the note that is due at
maturity by the amount of such payment-in-kind. During 2012, the Company paid the interest in cash and did not elect to make a
payment-in-kind. Ten percent (10%) of the principal amount of the loan, together with accrued and unpaid interest thereon, is due
on each of December 31, 2014 and December 31, 2015, and the balance of the loan, together with accrued and unpaid interest
thereon, is due on November 4, 2016. The Company may voluntarily repay the loan at any time without premium or penalty. The
notes issued under the loan rank senior in right of payment to all of the Company's indebtedness incurred after the Closing Date
and will rank at least equal in right of payment with the claims of all of the Company's existing unsecured and unsubordinated
creditors. Also, so long as amounts remain outstanding and unpaid under such notes, the Company may not, without the consent
of the Lenders, create, incur or suffer to exist any indebtedness for borrowed money (other than existing indebtedness as the same
may be amended or extended, or trade payables incurred in the ordinary course of business) that is not subordinated in all respects
to the indebtedness under such notes. The notes contain customary events of default, which, if uncured, permit the Lenders to
accelerate the maturity date of the loan. On the Closing Date, the Company paid a one-time aggregate funding fee of $804 to the
Lenders and issued warrants to purchase an aggregate of 10,713,332 shares of the Company's common stock. The Warrants are
exercisable at any time prior to their expiration on November 4, 2016 at $1.68 per share, which was the closing price of the
Company’s common stock on the Closing Date. The Warrants may be exercised in cash, by net exercise or pursuant to a Lender’s
surrender of all or a portion of the principal amount of such Lender’s note.
The warrants were valued at $9,428 utilizing the Black-Scholes option pricing model using the following inputs:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)
0.00%
62.19%
0.88%
5
The value of the warrants were credited to Additional Paid-in Capital with a corresponding reduction in the carrying value of the
notes as debt discount, which is being amortized over the term of the notes by the interest method.
F-24
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
12. Notes Payable – (continued)
The Lenders include Frost Nevada Investments Trust (“Frost Nevada”), an affiliate of the Company's Chairman of the Board and
principal shareholder, Vector Group, Ltd. (“Vector Group”), a principal shareholder of the Company, and the Company's
President and Chief Executive Officer and a director. The principal amounts loaned by Frost Nevada, Vector Group and the
Company’s President were $135,000, $15,000 and $200, respectively. A special committee of the Company’s Board of Directors
was formed to review and consider the terms of the November 2011 Loan, the notes issued thereunder and the Warrants, and,
upon such review and consideration, which included the advice of the Committee’s independent financial advisor, the committee
determined that the financing is fair from a financial point of view to the Company and its unaffiliated shareholders.
13. Commitments and Contingencies
Operating Leases
The Company and certain of its subsidiaries are obligated under several non-cancelable lease agreements for office space, expiring
in various years through February 2018. Certain leases have provisions for escalation based on specified increases in costs
incurred by the landlord. The Company is a sublessor to third parties for a portion of its office space as described below. The
subleases expire at various dates through April 2016. As of December 31, 2012, minimum lease payments (net of lease abatement
and exclusive of escalation charges) and sublease rentals are as follows:
Year Ending December 31,
2013
2014
2015
2016
2017
2018
Total
Lease
Commitments
Sublease
Rentals
$
$
9,435
9,009
5,667
3,034
2,883
351
30,379
$
$
4,857 $
4,845
2,033
4
—
—
11,739 $
Net
4,578
4,164
3,634
3,030
2,883
351
18,640
Deferred rent of $1,977 and $2,333 at December 31, 2012 and 2011, respectively, represents lease incentives related to the value
of landlord financed improvements together with the difference between rent payable calculated over the life of the leases on a
straight-line basis (net of lease incentives), and rent payable on a cash basis.
Litigation and Regulatory Matters
In May 2003, a suit was filed in the U.S. District Court for the Southern District of New York by Sedona Corporation against
Ladenburg, former employees of Ladenburg and a number of other firms and individuals. The plaintiff alleged, among other
things, that certain defendants (other than Ladenburg) purchased convertible securities from plaintiff and then allegedly
manipulated the market to obtain an increased number of shares from the conversion of those securities. On July 9, 2009, plaintiff
filed its Third Amended Complaint, which contained only common law claims; the plaintiff sought compensatory damages from
the defendants of at least $660,000 and punitive damages of $400,000. On June 5, 2012, the parties entered into a settlement
agreement resolving all claims. The amount paid by Ladenburg in settlement was not material.
F-25
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
13. Commitments and Contingencies – (continued)
In January 2011, two former clients of Triad filed an arbitration claim concerning variable annuities purchased in 2008. The
customers asserted claims for breach of contract, fraud, negligence, misrepresentation, breach of fiduciary duty, unsuitability,
negligent supervision, and violations of state securities statutes, and sought approximately $442 in compensatory damages. On
August 3, 2012, the parties entered into a settlement agreement resolving all claims. Amounts paid in settlement were not material.
Between December 2010 and June 2012, eight arbitration claims and three lawsuits were filed against Triad by former clients
asserting that a former registered representative of Triad sold them, not through Triad, guaranteed investments that were
fraudulent. The clients asserted, among other claims, claims for fraud, theft, conversion, securities law violations, failure to
supervise, respondent superior, and breach of fiduciary and other duties. Most of the claims have been settled; amounts paid in
connection with these settlements were not material. The sole remaining lawsuit has been stayed pending an arbitration filing,
which plaintiff has not filed to date. The remaining three arbitration claims seek a total of $730 in compensatory damages, and
other relief. The Company believes the claims are without merit and intends to vigorously defend against them.
In March 2011, a former client of Triad filed an arbitration claim with FINRA concerning unit investment trusts and other
investments purchased in the client’s account; the total investment amount was $12,000. The client asserted claims for negligence,
breach of fiduciary duty, unsuitability, negligent supervision, and violations of state securities statutes, and sought an unspecified
amount of compensatory damages. On July 16, 2012, the arbitration panel issued an award against Triad, for $260 plus interest,
which was timely paid.
In August 2011 and May 2012, several former clients of Investacorp filed arbitration claims with FINRA asserting, among other
things, that a former registered representative of Investacorp invested the clients’ funds in unsuitable variable annuities; further, the
claims assert that the former registered representative sold the clients, not through Investacorp, investments in fraudulent
alternative business ventures. On August 10, 2012, the parties entered into a settlement agreement with one former client resolving
all claims; the settlement amount paid by Investacorp was not material. The remaining claimants seek compensatory damages
totaling $242. The Company believes the claims are without merit and intends to vigorously defend against them.
In October 2011, a suit was filed in the U.S. District Court for the District of Delaware by James Zazzali, as Trustee for the DBSI
Private Actions Trust, against fifty firms, including BYA and Triad, and their purported parent corporations, alleging liability for
purported fraud in the marketing and sale of DBSI securities. The plaintiff has alleged, among other things, that the defendants
failed to conduct adequate due diligence and violated securities laws. The plaintiff seeks an unspecified amount of compensatory
damages as well as other relief. The Company believes the claims are without merit and intends to vigorously defend against them.
In December 2011, a purported class action suit was filed in the U.S. District Court for the Southern District of Florida against
FriendFinder Networks, Inc. (“FriendFinder”), various individuals, Ladenburg and another broker-dealer as underwriters for the
May 11, 2011 FriendFinder initial public offering. The complaint alleges that the defendants, including Ladenburg, are liable for
violations of federal securities laws. On November 15, 2012, the court issued an order granting the defendants’ motion to dismiss,
with leave to replead on specified grounds; the plaintiff’s motion for reconsideration of that order is currently pending. The
Company believes that the claims are without merit and intends to vigorously defend against them.
F-26
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
13. Commitments and Contingencies – (continued)
In December 2011, a purported class action suit was filed in the U.S. District Court for the Western District of Washington against
HQ Sustainable Maritime Industries, Inc. (“HQS”), various individuals, Ladenburg and another broker-dealer as underwriters of
2009 and 2010 offerings of HQS common stock. The complaint alleges that the defendants, including Ladenburg, are liable for
violations of federal securities laws. The complaint seeks unspecified damages. On September 28, 2012, the parties entered into a
settlement agreement, which is pending court approval. The stipulated settlement provides for no contribution from Ladenburg.
In December 2012, a purported class action suit was filed in Superior Court of California for San Mateo County against
Worldwide Energy & Manufacturing, Inc. (“WEMU”), certain individuals, and Ladenburg as placement agent of a 2010 offering
of WEMU securities. The complaint alleges that the defendants, including Ladenburg, are liable for violations of state securities
laws relating to purported failure to disclose certain agreements. An amended complaint was filed in February 2013; the amount of
damages sought is unspecified. The Company believes the claims are without merit and intends to vigorously defend against them.
In August 2012, a former client of Triad filed an arbitration claim with FINRA concerning the suitability of five investments in
tenant-in-common interests purchased through Section 1031 tax-deferred exchanges; the claim asserts loss of the total investment
amount of approximately $3,900. The client has asserted claims for violations of federal and state securities laws, negligence,
breach of contract, fraud, breach of fiduciary duty, negligence, and gross negligence. The Company believes the claims are without
merit and intends to vigorously defend against them.
In February 2012, a former client of Securities America filed an arbitration claim with FINRA asserting lack of suitability,
excessive fees, forgery, misrepresentation, fraud, and failure to supervise concerning investments purchased in the client’s
account. The claim seeks $941 in damages. The Company believes the claims are without merit and intends to vigorously defend
against them.
In June 2012, two former Securities America clients filed an arbitration claim with FINRA asserting lack of suitability in
connection with their investments in two real estate investment trusts. The claim seeks $800 in damages. The Company believes
the claims are without merit and intends to vigorously defend against them.
In July 2012, eight former Securities America clients filed an arbitration claim with FINRA asserting lack of suitability,
misrepresentation, failure to disclose, breach of fiduciary duty and negligent supervision, in connection with their investments in
several real estate investment trusts. The claim seeks $3,800 in damages. The Company believes the claims are without merit and
intends to vigorously defend against them.
During the fourth quarter of 2009, one of the Company’s broker-dealer subsidiaries had a short-term net-capital deficiency,
discovered during a routine regulatory review, which was not disclosed properly on a monthly FOCUS report. Following
investigation of the matter, the Company implemented corrective actions with respect to the net capital issue, as well as other issues
that arose during the course of the investigation. These corrective actions included reporting the deficiency to governmental and
self-regulatory organizations, filing amended FOCUS reports for historical periods, implementing new procedures to monitor net
capital compliance, and terminating the employees who had primary responsibility for monitoring and reporting its net capital. The
Company is unable to determine whether and to what extent any governmental and/or self-regulatory organizations may seek to
discipline the subsidiary concerning this matter. Such disciplinary actions could include fines, a suspension of such subsidiary’s
operations and/or rescission of revenues relating to the period of non-compliance, any of which could have a material adverse
effect on the subsidiary's results of operations and financial condition.
F-27
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
13. Commitments and Contingencies – (continued)
In July 2009, the SEC instituted actions against two issuers of private placement interests (Medical Capital Holding, Inc./Medical
Capital Corporation and affiliated corporations and Provident Shale Royalties, LLC and affiliated corporations) sold by Securities
America. This resulted in several lawsuits, regulatory inquiries, state administrative complaints and a significant number of
FINRA arbitrations against Securities America and affiliated parties. These actions and arbitrations generally allege violations of
state and/or federal securities laws in connection with Securities America’s sales of these private placement interests. Except for an
administrative complaint filed by the state of Montana, substantially all of these actions were settled prior to the Company’s
acquisition of Securities America. On February 13, 2012, the state of New Hampshire commenced an action against Securities
America and two financial advisors in connection with the sales of Medical Capital interests; that matter was resolved on October
24, 2012, through a consent order and payment of a non-material fine and related administrative payments. Ameriprise has agreed
to indemnify the Company for any loss related to all pending and future actions involving the sale of these interests.
In the ordinary course of business, in addition to the above disclosed matters, the Company’s subsidiaries are defendants in other
litigation and arbitration proceedings and may be subject to unasserted claims or arbitrations primarily in connection with their
activities as securities broker-dealers or as a result of services provided in connection with securities offerings. Such litigation and
claims may involve substantial or indeterminate amounts and are in varying stages of legal proceedings. Insurance coverage and/or
indemnification may be available for certain litigation and claims. When the Company believes that it is probable that a liability has
been incurred and the amount of loss can be reasonably estimated, the Company includes an estimate of such amount in accounts
payable and accrued liabilities. Upon final resolution, amounts payable may differ materially from amounts accrued. The Company
had accrued liabilities in the amount of approximately $27 at December 31, 2012 and $650 at December 30, 2011 for certain
pending matters. For other pending matters, the Company is unable to estimate a range of possible loss; however, in the opinion of
management, after consultation with counsel, the ultimate resolution of these matters, after potential reimbursement from insurance
policies and indemnifications, should not have a material adverse effect on the Company’s consolidated financial position, results
of operations or liquidity.
14. Off-Balance-Sheet Risk and Concentrations of Credit Risk
Ladenburg, Securities America, Investacorp and Triad do not carry accounts for customers or perform custodial functions related
to customers’ securities. They introduce all of their customer transactions, which are not reflected in these financial statements, to
their clearing broker, which maintains cash and the customers’ accounts and clears such transactions. Also, the clearing brokers
provide the clearing and depository operations for proprietary securities transactions. These activities create exposure to off-
balance-sheet risk in the event that customers do not fulfill their obligations to the clearing broker, as each of these entities has
agreed to indemnify the clearing broker for any resulting losses. Each of these entities continually assesses risk associated with
each customer who is on margin credit and records an estimated loss when management believes collection from the customer is
unlikely.
The clearing operations for the Ladenburg, Securities America, Investacorp and Triad securities transactions are provided by two
clearing brokers who are large financial institutions. At December 31, 2012 and December 30, 2011, amounts due from these
clearing brokers was $16,973 and $18,399, respectively, which represents a substantial concentration of credit risk should these
clearing brokers be unable to fulfill their obligations.
F-28
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
14. Off-Balance-Sheet Risk and Concentrations of Credit Risk – (continued)
In the normal course of its business, Ladenburg, Investacorp, Triad and Securities America may enter into transactions in financial
instruments with off-balance sheet risk. As of December 31, 2012 and December 31, 2011, Ladenburg, Triad and Securities
America sold securities that they do not own and will therefore be obligated to purchase such securities at a future date. These
obligations have been recorded in the statements of financial condition at the market values of the related securities and such
entities will incur a loss if the market value of the securities increases subsequent to December 31, 2012.
The Company and its subsidiaries maintain cash in bank deposit accounts, which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
15. Shareholders’ Equity
Repurchase Program
In March 2007, the Company’s board of directors authorized the repurchase of up to 2,500,000 shares of the Company’s common
stock from time to time on the open market or in privately negotiated transactions, depending on market conditions. In October
2011, the board approved an amendment to the repurchase program to purchase up to an additional 5,000,000 shares. As of
December 31, 2012, 2,981,967 shares had been repurchased for $4,653 under the program.
Warrants
As of December 31, 2012, outstanding warrants to acquire the Company’s common stock were as follows:
Expiration Date
2013
2016
2016
2016
2016
2017
Exercise
Price
Number of
Shares
$
.95
.94
.96
.68
1.68
1.91
260,000
1,249,000
600,000
2,300,000
10,713,332
2,000,000
17,122,332
In April 2010, the Company entered into an agreement with former employees to reduce the exercise price of warrants to purchase
2,300,000 shares of common stock to $0.68 from $0.96 per share. This modification resulted in a charge to non-cash
compensation of $243, based on the excess of the fair value of the modified warrant over the fair value of the original warrant
immediately before the modification.
In connection with the Securities America acquisition, in November 2011, the Company issued to the Lenders five-year warrants
to purchase 10,713,332 shares of common stock at $1.68 per share (see Note 12).
F-29
TABLE OF CONTENTS
16. Per Share Data
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding. The dilutive
effect of incremental common shares potentially issuable under outstanding options, warrants and restricted shares is included in
diluted earnings per share in 2011 utilizing the treasury stock method. The computations of basic and diluted per share data were
as follows:
Net (loss) income
Weighted average common shares
outstanding – basic
Effect of dilutive securities:
Options to purchase common stock
Warrants to purchase common stock
Restricted shares
Dilutive potential common shares
Weighted average common shares
outstanding – dilutive
Net (loss) income per share:
Basic and diluted
2012
(16,354) $
$
183,572,582
2011
2010
(10,951)
183,023,590 175,698,489
3,893 $
—
—
—
—
183,572,582
3,616,816
2,313,636
59,986
5,990,438
—
—
—
—
189,014,028 175,698,489
$
(0.09) $
0.02 $
(0.06)
During 2012, 2011 and 2010, options, warrants and restricted stock to purchase 54,837,515, 13,337,994 and 30,012,740 common
shares, respectively, were not included in the computation of diluted income (loss) per share as the effect would be anti-dilutive.
17. Stock Compensation Plans
Employee Stock Purchase Plan
Under the Company’s amended and restated Qualified Employee Stock Purchase Plan, a total of 10,000,000 shares of common
stock are available for issuance. As currently administered by the Company’s compensation committee, all full-time employees
may use a portion of their salary to acquire shares of LTS common stock under this purchase plan at a 5% discount from the
market price of LTS’ common stock at the end of each option period. Option periods have been set at three month periods and
commence on January 1, April 1, July 1, and October 1 of each year and end on March 31, June 30, September 30 and December
31 of each year. The plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue
Code. During 2012, 98,513 shares of LTS common stock were issued to employees under this plan, at prices ranging from $1.25
to $1.69; during 2011, 58,884 shares of LTS common stock were issued to employees under this plan, at prices ranging from
$1.09 to $2.36; during 2010, 62,274 shares were issued to employees under the plan at prices ranging from $0.89 to $1.19 per
share; resulting in a capital contribution of $138, $83 and $63 for 2012, 2011 and 2010, respectively.
F-30
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
17. Stock Compensation Plans – (continued)
Amended and Restated 1999 Performance Equity Plan and 2009 Incentive Compensation Plan
In 1999, the Company adopted the 1999 Performance Equity Plan (as amended and restated, the “1999 Plan”) and in 2009 the
Company adopted the 2009 Incentive Compensation Plan (the “2009 Plan”), which provide for the grant of stock options and
other awards to designated employees, officers and directors and certain other persons performing services for the Company and
its subsidiaries, as designated by the board of directors. The plans each provide for the granting of up to 25,000,000 awards with
an annual limit on grants to any individual of 1,500,000. Awards under the plans include stock options, stock appreciation rights,
restricted stock, deferred stock, stock reload options and/or other stock-based awards. Dividends, if any, are not paid on
unexercised stock options. The compensation committee of the Company’s board of directors administers the plans. Stock options
granted under the 2009 Plan may be incentive stock options and non-qualified stock options. An incentive stock option may be
granted only through August 27, 2019 under the 2009 Plan and may only be exercised within ten years of the date of grant (or five
years in the case of an incentive stock option granted to an optionee who at the time of the grant possesses more than 10% of the
total combined voting power of all classes of stock of LTS (“10% Shareholder”). Incentive stock options may no longer be
granted under the 1999 Plan. The exercise price of both incentive and non-qualified options may not be less than 100% of the fair
market value of LTS’ common stock at the date of grant, provided, that the exercise price of an incentive stock option granted to a
10% Shareholder shall not be less than 110% of the fair market value of LTS’ common stock at the date of grant. As of December
31, 2012, 8,832,285 and 1,104,654 shares of common stock were available for issuance under the 2009 Plan and the 1999 Plan,
respectively.
F-31
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
17. Stock Compensation Plans – (continued)
A summary of the status of the 1999 Plan at December 31, 2012 and changes during the years ended December 31, 2012, 2011
and 2010 are presented below:
Shares
15,117,290
Weighted-
Average
Exercise Price
1.46
$
Weighted- Average
Remaining Contractual
Term (Years)
Aggregate
Intrinsic
Value
6.91
$
200
3,200,000
(706,050)
(416,000)
17,195,240
1,655,000
(634,772)
(65,000)
(385,000)
17,765,468
500,000
(881,500)
(35,000)
(46,500)
$
17,302,468
17,287,184
14,013,718
$
$
0.90
0.59
1.96
1.38
1.27
0.88
1.73
2.72
1.36
2,80
0.88
1.90
0.27
1.43
1.43
1.45
6.53
2,980
6.03
19,977
5.35
$
4,475
5.34
4.78
$
$
4,473
3,511
Options outstanding,
December 31, 2009
Granted
Exercised
Forfeited
Options outstanding,
December 31, 2010
Granted
Exercised
Forfeited
Expired
Options outstanding,
December 31, 2011
Granted
Exercised
Forfeited
Expired
Options outstanding,
December 31, 2012
Vested or expected to vest
Options exercisable,
December 31, 2012
A summary of the status of the 2009 Plan at December 31, 2012 and changes during the years ended December 31, 2012, 2011
and 2010 are presented below:
Shares
140,000
Weighted-
Average
Exercise Price
0.79
$
1,105,000
1,245,000
11,320,743
(50,000)
(11,749)
12,503,994
3,725,000
—
(291,279)
$
15,937,715
15,294,126
3,656,312
$
$
1.03
1.00
1.61
0.80
1.68
1.55
2.57
—
1.73
1.78
1.79
1.49
Options outstanding,
December 31, 2009
Granted
Options outstanding,
December 31, 2010
Granted
Exercised
Forfeited
Options outstanding,
December 31, 2011
Granted
Exercised
Forfeited
Options outstanding,
December 31, 2012
Vested or expected to vest
Options exercisable,
December 31, 2012
Weighted- Average
Remaining Contractual
Term (Years)
Aggregate
Intrinsic
Value
9.75
$
9.34
—
—
211
9.59
11,651
8.73
$
790
8.72
8.46
$
$
786
348
F-32
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
17. Stock Compensation Plans – (continued)
Non-Plan Options
The Company has granted stock options to newly-hired employees in conjunction with their employment agreements or in
connection with acquisitions, which are outside of the option plans. A summary of the status of these options at December 31,
2012 and changes during the years ended December 31, 2012, 2011 and 2010 are presented below:
Shares
Options outstanding, December
5,764,000
Weighted-
Average
Exercise Price
1.39
$
Weighted- Average
Remaining Contractual
Term (Years)
Aggregate
Intrinsic
Value
6.97
$
112
31, 2009
Exercised
Forfeited
Options outstanding, December
31, 2010, 2011 and 2012
(639,000)
(650,000)
$
4,475,000
Vested or expected to vest
Options exercisable, December
4,475,000
4,475,000
$
$
31, 2012
0.47
0.66
1.63
1.63
1.63
4.44
$
516
4.44
4.44
$
$
516
516
The weighted-average grant date fair value of employee and director options granted during the years ended December 31, 2012,
2011 and 2010 was $1.13, $0.82 and $0.58, respectively. The fair value of each option award was estimated on the date of grant
using the Black-Scholes option pricing model using the following weighted-average assumptions:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)
Year Ended December 31,
2012
0.00%
62.87%
1.00%
6.16
2011
0.00%
81.15%
2.28%
6.23
2010
0.00%
92.23%
2.77%
6.25
On November 4, 2011, in connection with the Securities America acquisition, the Company granted to independent financial
advisors ten-year options to purchase an aggregate of 8,020,743 shares of the Company’s common stock at an exercise price of
$1.68 per share. The options vest in four equal annual installments beginning on the first anniversary of the grant date. The
Company valued the options at $9,531 (fair value of $1.19 per option) on the date of grant using the Black-Sholes option pricing
model using the following weighted-average assumptions.
Dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)
Year Ended December 31,
2011
0.00%
62.16%
2.06%
10.0
F-33
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
17. Stock Compensation Plans – (continued)
The weighted average expected life for the 2012, 2011 and 2010 grants to employees and directors reflects the alternative
simplified method permitted by authoritative guidance, which defines the expected life as the average of the contractual term of the
options and the weighted-average vesting period for all option tranches. The Company estimates the expected term for stock
options awarded to independent financial advisors using the contractual term. Expected volatility for the option grants for 2010 and
2011, prior to the acquisition of Securities America, was based on the Company’ historical volatility over the same number of
years as the expected life prior to the option grant date. Expected volatility in 2011 after the Securities America acquisition and
2012 was based on blended volatility comprised of the historical volatility of the common stock of the Company and its peers over
the same number of years as the expected life, prior to the option grant date.
Compensation expense for share-based awards granted to independent financial advisors is measured at their vesting date fair
value. The compensation expense recognized each period is based on the awards' estimated value at the most recent reporting date.
As of December 31, 2012, there was $11,055 of total unrecognized compensation cost related to non-vested share-based
compensation arrangements. This cost is expected to be recognized over the vesting periods of the options, which on a weighted-
average basis is approximately 2.5 years.
The total intrinsic value of options exercised during the years ended December 31, 2012, 2011, and 2010 amounted to $1,267,
$762, and $960, respectively. Tax benefits related to option exercise were not deemed to be realized since net operating loss
carryforwards are available to offset taxable income computed without giving effect to the deductions related to option exercises
and the deferred tax assets related to those net operating losses have been fully reserved.
Non-cash compensation expense relating to stock options was calculated using the Black-Scholes option pricing model, amortizing
the value calculated over the vesting period and applying a forfeiture percentage as estimated by the Company’s management,
using historical information. The Company has elected to recognize compensation cost for option awards that have graded vesting
schedules on a straight line basis over the requisite service period for the entire award. For the years ended December 31, 2012,
2011 and 2010, non-cash compensation expense relating to stock option agreements granted to employees, consultants and
advisors amounted to $4,690, $3,909, and $5,411, respectively.
In September 2010, the Company granted 200,000 restricted shares of the Company’s common stock to employees pursuant to the
2009 Plan with vesting conditioned upon the employees continued employment at September 23, 2012. During 2012, 2011 and
2010, 12,500, 5,000 and 2,500 shares, respectively, were forfeited resulting in 180,000 outstanding restricted shares at December
31, 2012. For the years ended December 31, 2012, 2011 and 2010, the Company has recorded an expense of $54, $105 and $28,
respectively, associated with the grants.
18. Segment Information
The Company has two operating segments. The independent brokerage and advisory services segment includes the broker-dealer
and investment advisory services provided by Investacorp, Securities America and Triad to their independent contractor financial
advisors and Premier Trust which includes the wealth management services. The Ladenburg segment includes the investment
banking, sales and trading and asset management services and investment activities conducted by Ladenburg and LTAM. During
2011, the Premier Trust segment was reclassified into our independent brokerage and advisory services segment due to the
complementary nature of Premier Trust’s operations to those of the Company’s independent broker-dealer subsidiaries.
F-34
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
18. Segment Information – (continued)
Earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for acquisition-related expense, amortization
of retention loans and change in fair value of contingent consideration related to the Securities America acquisition, gains or losses
on sales of assets, non-cash compensation expense, and clearing conversion expense is the primary profit measure the Company’s
management uses in evaluating financial performance for its reportable segments. EBITDA, as adjusted, is considered a non-
GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities Act of 1933, as amended. The
Company considers EBITDA, as adjusted, important in evaluating its financial performance on a consistent basis across various
periods. Due to the significance of non-cash and non-recurring items, EBITDA, as adjusted, enables the Company’s Board of
Directors and management to monitor and evaluate the business on a consistent basis. The Company uses 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. The Company believes that EBITDA, as adjusted, eliminates items that are not indicative of
its core operating performance, such as amortization of retention loans for the Securities America acquisition and expenses related
to Investacorp’s conversion to a single clearing firm as part of a new seven-year clearing agreement, or do not involve a cash
outlay, such as stock-related compensation. EBITDA, as adjusted, should be considered in addition to, rather than as a substitute
for, pre-tax income, net income and cash flows from operating activities.
F-35
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
18. Segment Information – (continued)
Segment information for the years ended December 31, 2012, 2011 and 2010 is as follows:
Independent Brokerage and
Advisory Services(1)
Ladenburg Corporate
Total
$
$
$
2012
Revenues
Pre-tax (loss) income
EBITDA, as adjusted(3)
Identifiable assets
Depreciation and amortization
Interest
Capital expenditures
Non-cash compensation
2011
Revenues
Pre-tax income (loss)
EBITDA, as adjusted(3)
Identifiable assets
Depreciation and amortization
Interest
Capital expenditures
Non-cash compensation
2010
Revenues
Pre-tax income (loss)
EBITDA, as adjusted(3)
Identifiable assets
Depreciation and amortization
Interest
Capital expenditures
Non-cash compensation
598,851
(6,087)
30,566
318,005
15,158
19,803
5,356
1,640
230,897
1,787
12,181
322,245
4,567
3,191
1,381
1,072
151,379
1,086
5,287
78,306
2,290
26
498
1,735
$ 45,701
65
1,829
17,636
835
79
115
850
$ 5,559
$650,111
(8,870)(2) (14,892)
30,504
(1,891)
338,129
2,488
16,061
68
24,541
4,659
5,477
6
4,744
2,254
$ 1,244
$ 41,459
$273,600
(3,131) (10,958)(2) (12,302)
8,422
(2,727)
(1,032)
347,145
6,463
18,437
5,632
996
69
6,543
3,263
89
1,439
—
58
4,014
1,928
1,014
$ 1,953
$ 41,194
(4,364)
(1,264)
21,484
1,620
16
110
1,464
$194,526
(6,812)(2) (10,090)
2,701
(1,322)
101,825
2,035
3,978
68
3,241
3,199
608
—
5,439
2,240
(1) Includes Premier Trust from September 1, 2010 and Securities America from November 4, 2011.
(2) Includes interest on revolving credit and forgivable loan notes, compensation, acquisition-related expenses, professional fees
and other general and administrative expenses.
F-36
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
18. Segment Information – (continued)
(3) The following table reconciles EBITDA, as adjusted, to pre-tax loss for the years ended December 31, 2012, 2011 and 2010:
Year Ended December 31,
EBITDA, as adjusted
Independent Brokerage and Advisory Services
Ladenburg
Corporate
Total segments
Adjustments:
Interest income
Change in fair value of contingent consideration
Interest expense
Depreciation and amortization
Non-cash compensation expense
Clearing conversion expense
Acquisition-related expense
Amortization of retention loans
Pre-tax loss
19. Related Party Transactions
2012
2011
$ 30,566
1,829
(1,891)
30,504
$ 12,181
$
(1,032)
(2,727)
8,422
185
7,111
(24,541)
(16,061)
(4,744)
—
—
(7,346)
70
—
(6,543)
(5,632)
(4,014)
—
(2,971)
(1,634)
$ (14,892) $ (12,302) $
2010
5,287
(1,264)
(1,322)
2,701
(14)
—
(3,241)
(3,978)
(5,439)
(119)
—
—
(10,090)
On August 13, 2010, Investacorp entered into a five-year office lease with Frost Real Estate Holdings, LLC (“FREH”), an entity
affiliated with the Company’s chairman of the board and principal shareholder. The lease which commenced on October 1, 2010,
provides for aggregate payments during the five-year term of approximately $1,574 and minimum annual payments of $337. Rent
expense under such lease amounted to $293, $252 and $84 in 2012, 2011 and 2010, respectively.
Ladenburg’s principal executive offices are located at 4400 Biscayne Boulevard, 12th Floor, Miami, Florida 33137, where the
Company has leased approximately 15,800 square feet of office space with FREH. Rent expense under such lease amounted to
$560, $536 and $512 in 2012, 2011 and 2010, respectively. Ladenburg’s lease was renewed in March 2013 and now expires in
February 2018, and the amount of office space leased was increased to approximately 18,150 square feet. The lease provides for
aggregate payments during the five-year term of approximately $2,995 and minimum annual payments of $556.
The Company is a party to an agreement with Vector Group Ltd. (“Vector”), where Vector has agreed to make available to the
Company the services of Vector’s Executive Vice President to serve as the President and Chief Executive Officer of the Company
and to provide certain other financial, tax and accounting services, including assistance with complying with Section 404 of the
Sarbanes-Oxley Act of 2002 and assistance in the preparation of tax returns. Various executive officers and directors of Vector
and its subsidiary New Valley serve as members of the board of directors of the Company and Vector and its subsidiaries own
approximately 8.1% of the Company’s common stock at December 31, 2012. In consideration for such services, the Company
agreed to pay Vector an annual management fee plus reimbursement of expenses and to indemnify Vector. The agreement is
terminable by either party upon 30 days’ prior written notice. Beginning January 1, 2012, the agreement was amended to reflect
additional services to be provided as a result of the Securities America acquisition and to increase the annual fee from $600 to
$750. The Company paid Vector $750 in 2012 and $600 in each of 2011 and 2010 related to the agreement.
F-37
TABLE OF CONTENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
19. Related Party Transactions – (continued)
The vice-chairman of the Company’s board of directors, a firm he serves as a consultant to, and affiliates of that firm received
insurance commissions in 2011 and 2010 aggregating approximately $105 and $208, respectively, on various insurance policies
issued for the Company and its subsidiaries.
See Note 12 for information regarding loan transactions involving related parties.
20. Quarterly Financial Data (Unaudited)
2012:
Revenues
Expenses (a)(b)
Loss before item shown below
Change in fair value of contingent
consideration
Loss before income taxes
Net loss
Basic and diluted loss per common share
Basic and diluted weighted average common
shares
1st
2nd
3rd
4th
Quarters
$
154,715
162,641
$
(7,926)
5,555
163,385
168,971
$
(5,586)
647
159,834
166,372
$
(6,538)
909
172,177
174,130
(1,953)
—
(2,371) $
(2,979) $
(0.02) $
$
$
$
183,679,060
(4,939) $
(4,983) $
(0.03) $
(5,629) $
(6,037) $
(0.03) $
(1,953)
(2,355)
(0.01)
183,460,700
183,551,171
183,460,777
(a) Includes a $1,364, $1,227, $1,054 and $1,099 charge for non-cash compensation in the first, second, third and fourth quarters of
2012, respectively.
(b) Includes $1,792, $1,791, $1,712 and $2,051 of amortization of retention loans in the first, second, third and fourth quarters of
2012, respectively.
2011:
Revenues
Expenses (a)
Income (loss) before income taxes
$
$
Net income (loss)
Basic and diluted income (loss) per common
$
$
share (b)
1st
2nd
3rd
4th
Quarters
57,202 $
56,447
755 $
409 $
0.00 $
60,231 $
59,710
521 $
200 $
0.00 $
48,898
$
51,684(c)
$
(2,786)
(3,070)
(0.02)
$
$
107,269
118,061(c)
(10,792)
6,354(d)
0.03
Basic weighted average common shares
Diluted weighted average common shares
183,366,512 183,048,031 182,810,137
186,327,158 187,005,916 182,810,137
182,870,313
194,014,913
(a) Includes a $957, $1,127, $688 and $1,242 charge for non-cash compensation in the first, second, third and fourth quarters of
2011, respectively.
(b) Due to rounding, the sum of the quarters’ basic and diluted income (loss) per common share amounts does not equal the full fiscal
year amount.
(c) Includes $700 and $2,271, in acquisition-related expenses in the third and fourth quarters of 2011, respectively, and $1,634 of
amortization of retention loans in the fourth quarter of 2011.
(d) Includes deferred tax benefit of $18,329 resulting from reduction of valuation allowance (see Note 11).
F-38
Exhibit 21
The following are wholly-owned subsidiaries of the registrant:
SUBSIDIARIES OF REGISTRANT
NAME
Securities America Financial Corporation
Securities America, Inc.
Securities America Advisors, Inc.
Ladenburg Thalmann & Co. Inc.
Ladenburg Thalmann Asset Management Inc.
Investacorp, Inc.
Investacorp Advisory Services Inc.
Triad Advisors, Inc.
Premier Trust, Inc.
STATE OF ORGANIZATION
Nebraska
Delaware
Nebraska
Delaware
New York
Florida
Florida
Florida
Nevada
Not included above are other subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a significant
subsidiary, as such term is defined by Rule 1-02(w) of Regulation S-X.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of Ladenburg Thalmann Financial Services, Inc. on
Form S-8 (Nos. 333-82688, 333-101360, 333-101361, 333-124366, 333-130024, 333-139246, 333-139247, 333-139254, 333-
147386, and 333-163007) and on Form S-3 (Nos. 333-141517, 333-153373, 333-150851, 333-37934, 333-71526, 333-81964, 333-
88866, 333-122240, 333-117952, 333-130026, 333-130028 and 333-139244) of our reports dated March 14, 2013, with respect to
the consolidated financial statements and effectiveness of internal control over financial reporting of Ladenburg Thalmann Financial
Services Inc. included in this Annual Report on Form 10-K for the year ended December 31, 2012.
Exhibit 23.1
/s/ EisnerAmper LLP
New York, New York
March 14, 2013
Exhibit 31.1
SECTION 302 CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES ACT OF 1934, AS AMENDED
I, Richard J. Lampen, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Ladenburg Thalmann Financial Services Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Date: March 14, 2013
registrant’s internal control over financial reporting.
By:
/s/ Richard J. Lampen
Name: Richard J. Lampen
Title: President and Chief Executive Officer
Exhibit 31.2
SECTION 302 CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES ACT OF 1934, AS AMENDED
I, Brett H. Kaufman, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Ladenburg Thalmann Financial Services Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Date: March 14, 2013
registrant’s internal control over financial reporting.
By:
/s/ Brett H. Kaufman
Name: Brett H. Kaufman
Title: Senior Vice President and
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Ladenburg Thalmann Financial Services Inc. (the “Company”) on Form 10-K for the
year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard J.
Lampen, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of
the Company.
Dated: March 14, 2013
By:
/s/ Richard J. Lampen
Richard J. Lampen
President and Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Ladenburg Thalmann Financial Services Inc. (the “Company”) on Form 10-K for the
year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brett H.
Kaufman, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of
the Company.
Dated: March 14, 2013
By:
/s/ Brett H. Kaufman
Brett H. Kaufman
Senior Vice President and
Chief Financial Officer